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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, 1998
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 75653
Henderson, Texas (Zip Code)
(Address of principal executive offices)
(903) 657-8521
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
[Title of Each Class] [Name of Each Exchange on Which Registered]
None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
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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 February 13, 1999, was $16,830,774. 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 1,
1999: 2,016,074.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 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 1998 Annual Report to Shareholders is not deemed filed as
part of this report. (Index to Exhibits is located on page 27.)
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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"), a Delaware corporation, and one hundred percent (100%) of the
issued and outstanding shares of the common stock of Waskom Bancshares, Inc, a
Texas corporation. 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").
The Company's primary activity is to provide assistance to the Delaware BHC
and the Citizens Bank 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 Citizens Bank. The Delaware BHC
and the Citizens Bank 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 Citizens Bank. 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
Citizens Bank. The Company derives its revenues primarily from the operation of
the Citizens Bank in the form of dividends paid from the Citizens Bank 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 Citizens Bank.
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"). As of December
31, 1998, the Company had, on a consolidated basis, total assets of
approximately $386,919,000, total deposits of approximately $345,720,000, total
loans, (net of unearned discount and allowance for loan losses) of approximately
$129,263,000 and total stockholders' equity of approximately $35,911,000.
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.
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 Citizens Bank and will derive its revenues
primarily from the operation of the Citizens Bank in the form of dividends.
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Recent Developments
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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 First State Bank Waskom, Texas (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. As described
elsewhere herein, the Company has merged the Waskom Bank with and into the
Citizens Bank, which affiliate merger was completed during the third 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 Company's 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.
On March 30, 1998, the Citizens Bank and the Waskom Bank filed an
application with the Comptroller of the Currency to merge the Waskom Bank with
and into the Citizens Bank under the charter and title of the latter (the
"Affiliate Merger"). The Affiliate Merger was thereafter approved by the
Comptroller of the Currency and became effective on July 23, 1998.
On December 11, 1998, the Citizens Bank completed its acquisition of
Jefferson National Bank by merger with and into the Citizens Bank. The Citizens
Bank acquired certain assets and assumed certain liabilities of Jefferson
National Bank for a purchase price of $6,150,200 that was funded with a
combination of notes and cash.
During 1998, the Company purchased 1,120 shares of its common stock from
four shareholders at an average cost of $14.50 per share. These privately
negotiated transactions all occurred after expiration of the tender offer (see
above). 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.
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The Citizens Bank
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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, Chandler,
and Waskom, Texas. On March 24, 1997, the Citizens Bank opened a trust office in
Corsicana, Texas. The Citizens Bank opened a loan production office at the
Corsicana, Texas location in March of 1998. At December 31, 1998, the Citizens
Bank had approximately $386,907,000 in assets, $346,541,000 in deposits,
$129,263,000 in loans (net of unearned discount and allowance for loan losses),
and $35,869,000 in shareholder's equity. The Citizens Bank is regulated and
supervised by the Comptroller.
Services. The Citizens Bank is a full service bank offering a variety of
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services to satisfy the needs of the consumer and commercial customers in the
areas it serves. The Citizens Bank offer most types of loans, including
commercial, agribusiness, credit card, consumer, mortgage, home equity, and real
estate loans. The Citizens Bank also provide a wide range of consumer banking
services, including savings and checking accounts, Master Money 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. Saturday drive up banking has been offered in
Henderson at the Southside branch since November 1995 and Saturday full service
banking has been offered since April 1998. At the Chandler branch, Saturday
drive up banking has been offered since April 1996 and full service Saturday
banking has been offered since April 1998. Saturday drive up banking and full
service banking has been offered by the Waskom branch since September 1998 and
by the Jefferson branch since February 1999.
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, Malakoff and Chandler,
which includes Henderson County, Waskom which includes Harrison County and
Corsicana, which includes Navarro County. The activities in which the Citizens
Bank engages are competitive. Each engaged activity 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 Citizens Bank competes 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 Citizens Bank also competes with
suppliers of equipment in furnishing equipment financing and leasing services.
Year 2000. The Year 2000 ("Y2K") issue relates to the fact that many
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computer systems, hardware and software, use a two digit field for the year. The
concern is that on January 1, 2000, a computer system may incorrectly interpret
the year 2000 as 1900 causing various mathematical calculations to be wrong.
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Since 1996, the Company has been actively preparing for the entry to the
year 2000 in an effort to minimize the impact of the Y2K issue to the Company
and its customers. The Company established a Y2K committee headed by a senior
member of the staff. The Y2K committee reviewed a list of the Company's
equipment that might be affected by any glitch caused by the date rollover to
the year 2000 and developed a plan to test all mission critical systems and
remediate if necessary.
All information technology systems, such as the main computer system, check
sorter, LAN & WAN networks, ATMs, PCs and core system software, will be tested
by March 31, 1999. By mid March 1999, the testing of these systems was
substantially complete and all systems have either tested compliant or the
appropriate upgrade and enhancement has been installed to remediate the
identified problem. Additional testing will be performed by June 30,1999 to
provide an added comfort level that all systems are ready to operate in the new
millenium.
All the non-information technology systems, including security systems,
vaults, elevators and HVAC systems, have been listed and will be tested by June
30, 1999. Like the information technology systems, all of the systems reviewed
and tested to this point have been found to be Y2K compliant or an upgrade or
enhancement has been added to remediate the identified problem.
The Company has also assessed the Y2K risks related to outside companies
and businesses with whom it relies to provide service to the Company's
customers. Two of the primary concerns are electrical and telephone service.
Representatives of the Company have been in contact with the various companies
that provide these services in each of its locations and believe, based on
representations given by third parties, that they will be able to provide
continuous service to the Company in the new millennium. As the Company has
become more reliant on its information technology system, the installation of a
diesel generator to provide backup electrical power to the main bank location
has been approved. The generator has been purchased and is scheduled to be
operational by June 30, 1999.
The third principal Y2K concern is the Company's correspondent relationship
with the Federal Reserve Bank for the transmission of electronic funds and wire
transfers. Testing with the Federal Reserve has been completed and all tests
have been completed as Y2K compliant. The Company also maintains accounts with
several major correspondent banks that could be used as alternate source for
wire transfers and clearing checks.
The cost of replacing non-compliant Y2K hardware and software in 1998 was
approximately $57,000. This does not include the purchase of a check sorter and
a phone system for the main bank at a cost of approximately $220,000 since these
items were targeted for replacement before it was determined that they were not
Y2K compliant. The $57,000 does include the salary of a person who was hired in
mid year of 1998 to assist with the testing for Y2K, but does not include salary
expense for the personnel that were already on staff. In 1999, the Company
anticipates spending approximately $25,000 on systems and testing related to
Y2K.
The impact of the Y2K issues on the Company will depend not only on the
corrective steps the Company takes, but will also depend on the way governmental
agencies and other businesses react. Notwithstanding the Company's best efforts,
there can be no assurance that all customers and third party vendors with whom
the Company conducts business will adequately address their Y2K issues. With
this in mind, the bank is developing contingency plans for implementation in the
event a significant third party vendor does not adequately address the Y2K
issues. These plans primarily involve using backup sites, alternate vendors or
internal remediation.
The Company has questioned various loan and deposit customers regarding
their Y2K readiness and related issues to anticipate how the liquidity of the
bank may be affected. The primary concerns of the Company are the concern
depositors may have and how much additional cash will be required to be in the
vaults to fund liquidity needs of depositors. The Company has established credit
lines at several large correspondents in an abundance of caution. The Company
has reviewed its larger loan commitments to assess the Company's potential
exposure to any of its borrower's lack of Y2K readiness. This credit risk will
be used in calculating the provision for loan loss.
The Company has attempted to address all known Y2K issues in a timely and
correct manner. Despite the Company's best efforts to accurately plan for the
Year 2000, the results could vary from these estimates if the bank has
unforeseen difficulties in a mission critical system and its ultimate
remediation
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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 is collateral for 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 Citizens Bank is not a party to any pending
legal proceedings under any environmental statute, nor is the Company aware of
any instances that may give rise to such liability of the Citizens Bank.
Employees. At December 31, 1998, the Citizens Bank employed approximately
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168 full-time and 21 part-time employees.
Affiliate Merger. As previously described, during the third quarter of
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1998, the Waskom Bank merged with and into the Citizens Bank under the charter
and title of the Citizens Bank. The sole banking office of the former Waskom
Bank is now operated as a full-service branch of the Citizens Bank
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 as
amended (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.
The Comptroller, the Federal Reserve Board and the Federal Deposit
Insurance Corporation (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
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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
20.29% and a Tier 1 Capital Ratio of 19.24% at December 31, 1998.
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, 1998, the Company's
Leverage Capital Ratio was 8.83%.
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 Citizens Bank. The
ability of the Citizens Bank to pay dividends is restricted by provisions of the
National Bank Act. See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS -- Dividends."
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 majority
of the Citizens Bank' 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 Citizens Bank 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 Citizens Bank to pay dividends is restricted by
provisions of the National Bank Act. 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.
The ability of the Citizens Bank to pay dividends is also restricted by the
requirement that it 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 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, 1998, the Citizens Bank had capital ratios as
follows:
Tier 1 Total Leverage
Capital Ratio Capital Ratio Capital Ratio
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19.24% 20.29% 8.83%
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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 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 Citizens Bank. Among other things, FIRREA generally permits bank holding
companies to acquire healthy thrifts as well as failed or failing thrifts.
FIRREA also removed certain cross-marketing prohibitions previously applicable
to thrift and bank subsidiaries of a common holding company. Such changes could
increase the competition facing the Citizens Bank 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 Citizens Bank 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, indemnification 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. The Texas legislature is expected to
revisit the issue of interstate branching in the 1999 session. 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 owns its main banking office and seven branch offices,
and leases one facility for a trust and loan production office. 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. It is also the location where the Company's
offices are located. There is a six-lane drive-in facility located directly
behind the Citizens Bank's main office. An automated teller machine ("ATM") is
also located in a separate building at this address. The Citizens Bank has five
additional ATMs in Henderson, Texas, (i) located in a convenience store at 321
State Highway 64 West, (ii) in a convenience store at 1414 West Main Street,
(iii) in the local hospital at 300 Wilson, (iv)in a convenience store at 2404
Highway 79 South, and (v) in a convenience store at the traffic star which is
located at the intersection of U.S. Highways 79 and 259 and State Highways 64
and 43.
The Citizens Bank has seven 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 109 East
Broadway, Jefferson, Texas. The Jefferson branch office contains approximately
7,000 square feet and three drive-in lanes. The Jefferson branch also maintains
an ATM located at a convenience store at 105 South Walcott and in a grocery
store at 404 E. Broadway, 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 with three drive-in
lanes and one drive up ATM is located at 230 Highway 31 East, Chandler, Texas.
The Waskom branch is located at 745 Spur 156, Waskom, Texas. The Waskom branch
office contains approximately 6,000 square feet with one drive-in lane attached
to the building. One remote drive-in lane and one drive up ATM are also located
on the same property. The trust and loan production office is located at 400 W.
Collin Street, Corsicana, Texas. This office is in a leased building that has
approximately 4,000 square feet.
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 Citizens
Bank.
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 1998.
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 1, 1999, (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
1999 LOW HIGH REPRESENTED REPRESENTED
- ----------- -------------- -------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
First Quarter
(Through March
1, 1999) 14.50 14.50 4 663
1998
- ----
First Quarter 14.50 14.50 - -
Second Quarter 14.50 14.50 3 28
Third Quarter 14.50 14.50 3 600
Fourth Quarter 14.50 14.50 7 3,500
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
</TABLE>
As of March 1, 1999, there were 404 shareholders of record.
9
<PAGE>
DIVIDENDS
The Company declared four quarterly dividends on the Company Stock during
1998. The Company declared quarterly dividends on the Company Stock during 1998
that approximated $323,000 (or $0.16 per share) for the first quarter of 1998,
$323,000 (or $0.16 per share) for the second quarter of 1998, $323,000 (or $0.16
per share) for the third quarter of 1998, and $323,000 (or $0.16 per share) for
the fourth quarter of 1998. The Company paid four quarterly dividends on the
Company stock during 1998. On January 2, 1998, the Company paid a dividend on
the Company stock that approximated $450,000. On March 31, 1998, the Company
paid a dividend on the Company stock that approximated $323,000 (or $0.16 per
share). On June 30, 1998 the Company paid a dividend on the Company stock that
approximated $323,000 (or $0.16 per share). On September 30, 1998 the Company
paid a dividend on the Company stock that approximated $323,000 (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 Citizens Bank.
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 Citizens Bank to pay
dividends. The ability of the Citizens Bank to pay dividends is restricted by
provisions of the National Bank Act.
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.
The ability of the Company, the Delaware BHC, and the Citizens Bank 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, 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 risk-based 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, 1998 were 19.24%, 20.29% and 8.83%,
respectively, and thus were above the regulatory minimums. See "ITEM 1.
BUSINESS -- Supervision and Regulation." As of December 31, 1998, neither the
Company nor the Citizens Bank had entered into any agreement with any regulatory
authority requiring the Company or the Citizens Bank to maintain higher ratios
than regulations normally require. 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 Citizens Bank' ability to
pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to Item 6 is presented on the inside front cover
page of the accompanying 1998 Annual Report to Shareholders, which page is
hereby incorporated by reference.
10
<PAGE>
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 25 of the accompanying 1998 Annual Report to Shareholders, which pages
are hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required in response to this item is presented on pages 12
through 13 of the accompanying 1998 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 26 through 51 of the accompanying 1998 Annual
Report to Shareholders, are hereby incorporated by reference.
Independent Auditors' Report for the Years ended December 31, 1998, 1997
and 1996.
Consolidated Balance Sheets - December 31, 1998 and 1997.
Consolidated Statements of Income - Years ended December 31, 1998, 1997 and
1996.
Consolidated Statements of Stockholders' Equity and Comprehensive Income-
Years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997
and 1996.
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 (63) Director and Chairman of the Board
R.M. Ballenger (78) Director
Stayton M. Bonner, Jr. (46) Director
David J. Burks (75) Director
Billy Crawford (74) Director
Sheila Gresham (44) Director
William A. Hurst (61) Vice President, Treasurer and
Chief Financial Officer
James Michael Kangerga (46) Director
J. Mark Mann (43) Director
Milton S. McGee, Jr. (49) Director, President and
Chief Executive Officer
Charles H. Richardson (77) Director
Nelwyn Richardson (49) Secretary
Rebecca G. Tanner (43) Chief Accounting Officer
Tony Wooster (54) Director
Alfred Wylie (72) 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 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 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 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 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 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 HCB. Ms. Gresham has been President of Smith Chevrolet
Company from November 1998 to the present. She served as President of Smith
Chevrolet-Oldsmobile-Cadillac Company from August 1993 until November 1998.
Prior to that, Ms. Gresham 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 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 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 Republic Bank Brownwood from August 1983 to July 1986. Mr.
McGee also serves as a director of 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 HCB. Prior to his retirement over
seven 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
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.
13
<PAGE>
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 HCB.
Family Relationships
- --------------------
Charles Richardson, a director of the Company, HCB, and the Citizens Bank,
is the uncle of Stayton M. Bonner, Jr., who is also a director of the Company,
HCB, and the Citizens Bank. There are no other family relationships between the
members of the Board of Directors or executive officers of the Company or the
Citizens 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 or the Citizens Bank received a salary and bonus exceeding $100,000 in
the aggregate during 1998, 1997 or 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------------------------------------------------
Name and Principal All Other
Position Year Salary(1) Bonus Compensation(2)
-------- ---- --------- ----- ---------------
<S> <C> <C> <C> <C>
Milton S. McGee, Jr. 1998 173,400 91,900 25,162
President and Chief Executive 1997 165,600 80,600 23,238
Officer of the Company, the 1995 157,716 74,286 21,734
Citizens Bank, and HCB
</TABLE>
(1) Includes directors' fees.
(2) 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 Citizens Bank 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.
During 1998, the Company established a Performance and Retention Plan
whereby certain employees are provided incentive compensation opportunities at
the discretion of the Compensation Committee of the Board of Directors. Such
incentive compensation generally provides vesting over five years.
The value of potential future payouts, if any, under this PAR Plan are a
function of the number of PAR units awarded to the individual and the Company's
return on assets or net income after tax at the Citizens Bank during the
performance period. A more detailed discussion of the PAR Plan is set forth
herein. The following table sets forth awards granted under the PAR Plan to Mr.
McGee during 1998.
14
<PAGE>
<TABLE>
<CAPTION>
Long-Term Incentive Plans-Awards in Last Fiscal Year
Performance
or Other Estimated future payouts under
Number of Period Until non-stock price-based plans
Shares, Units or Maturation ------------------------------------------------
Name of Individual Other Rights or Payout Threshold Target Maximum
- ------------------ ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Milton S. McGee, Jr. 785 1/1/2003 - $54,950 $94,200
</TABLE>
Directors Compensation
- ----------------------
All directors of the Company, HCB and the Citizens Bank (except for the
Chairman of the Board) are paid a total of $1,200 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 $2,400 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.
Profit Sharing Plan
- -------------------
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 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 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 $345,000 to the profit sharing
plan in 1998, $303,000 in 1997, and $281,000 in 1996. The Citizens Bank's
contributions during 1998, 1997 and 1996 to the account of Milton S. McGee, Jr.
are as follows. Such amounts are included under the column captioned All Other
Compensation in the Summary Compensation Table.
<TABLE>
<CAPTION>
Name of Individual
or Number in Group Contributions of the Citizens Bank
- ------------------ ----------------------------------------------------------
1998 1997 1996
------------------ ------------------- -----------------
<S> <C> <C> <C>
Milton S. McGee, Jr. $21,784 $20,141 $18,920
</TABLE>
Change in Control Agreement
- ---------------------------
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") as amended on December 16, 1998. The Severance Agreement is designed
to provide certain benefits to McGee in the event there are changes 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
15
<PAGE>
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 (as defined in the Severance Agreement and described herein) 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 and defined
herein).
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 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 re-elect 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 (which includes benefits payable under any employee benefit plan,
program or practice) 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
16
<PAGE>
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 such 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 the Severance Agreement.
Non-Qualified Deferred Compensation Plan
- ----------------------------------------
On November 18, 1998, the Citizens Bank adopted the Citizens National Bank
Non-Qualified Deferred Compensation Plan ("Deferred Compensation Plan"),
effective January 1, 1999, to permit certain select management employees of the
Citizens Bank to defer the payment of a percentage of their compensation and to
provide for certain contributions by the Citizens Bank to augment such
employees' retirement income in addition to what is provided for under the tax
qualified plans of the Bank. The Deferred Compensation Plan is administered by
the Citizens Bank.
Persons eligible to participate in the Deferred Compensation Plan are
determined by the Chairman of the Compensation Committee or the President of the
Citizens Bank. Participants may elect to defer up to fifty percent (50%) of
compensation. In addition to participant deferral elections, the Citizens Bank
may, in the discretion of the Board of Directors, make a matching or non-
matching contribution each plan year. A separate account is maintained for each
participant in the plan to which participant deferrals and contributions made by
Citizens Bank are credited. These accounts are held in an irrevocable grantor
trust maintained by the Citizens Bank, however the trust remains subject to the
general creditors of the Citizens Bank.
Amounts deferred at the election of the participant are immediately fully
vested. Contributions made by the Citizens Bank become vested in a participant's
account over a five-year period based on the number of years of service the
participant completes with the Citizens Bank. All contributions become fully
vested upon retirement, disability, death or upon a change in control of the
Citizens Bank or the Company. Payment under the Deferred Compensation Plan is
made in either a single cash lump sum or in annual payments over a period of
years as selected by the participant.
This summary is qualified in its entirety by the text of the Citizens
National Bank Non-Qualified Deferred Compensation Plan.
17
<PAGE>
1998 Performance and Retention Plan
- -----------------------------------
On November 18, 1998, the Citizens Bank adopted the Citizens National Bank
1998 Performance and Retention Plan ("PAR Plan"), effective January 1, 1998, for
the purpose of providing incentive compensation opportunities to certain key
employees for their past and future services to the Citizens Bank and to offer
such key employees an inducement to remain as employees. In addition, the PAR
Plan is intended to offer an inducement to secure the services of other persons
capable of fulfilling key positions by providing incentive compensation
opportunities.
The PAR Plan grants Performance and Retention Units ("PARs") to key
employees of the Citizens Bank as selected by the committee that administers the
PAR Plan. The PARs entitle participants to a cash payment equal to the amount
by which the final PAR value exceeds the grant PAR value over the course of the
performance period. The grant PAR value is determined by the committee at the
beginning of the performance period and is set out in the PAR agreement executed
by the Citizens Bank and the participant. The final PAR value is determined
based upon the performance of financial and nonfinancial performance goals set
by the committee at the beginning of the performance period and is related to
the appreciation in the value of the greater of (i) return on assets or (ii) net
income after tax at the Citizens Bank (before PAR payment of the Citizens Bank).
Upon a participant's termination of employment, other than due to death,
disability, retirement, involuntary termination or termination for Good Reason,
any outstanding PAR shall terminate and no further vesting shall occur. If a
participant is terminated for Cause, payment of the PAR, including any vested
portion is immediately forfeited. Payment of PARs shall be made following the
close of the applicable performance period.
This summary is qualified in its entirety by the text of the Citizens
National Bank 1998 Performance and Retention Plan.
Employee Severance Protection Plan
- ----------------------------------
On November 18, 1998, the Citizens Bank adopted the Citizens National Bank
Employee Severance Protection Plan ("Severance Plan"), effective January 1,
1998, for the purpose of retaining the services of the bank's key officers in
the event of a threat of a change in control of the Citizens Bank and to ensure
their continued dedication and efforts in such event without undue concern for
their personal financial and employment security. Persons participating in the
bank's PAR Plan also participate in the Severance Plan.
If a change in control of the Bank has occurred, and within 90 days before
or two years after the change in control the participant's employment with the
Bank terminates for any reason (other than (i) for cause, (ii) by reason of
disability, (iii) termination by the participant other than for good reason, or
(iv) for death), the participant is entitled to certain severance benefits.
Severance benefits include (a) not less than 24 nor more than 52 weeks' salary,
depending upon years of services, age and level of base compensation, plus an
amount equal to the employee's bonus which could have been paid under the
Citizen Bank's bonus plan, assuming attainment of all performance targets, (b)
six months of continued life insurance, disability plan benefits, medical and
dental benefits which were provided to the participant at the time of
termination, (c) immediate vesting of all "Performance and Retention Units"
under the PAR Plan and full vesting in all other non-qualified benefit plans and
compensation plans.
In the event it is determined that any payment or distribution of any type
by the Citizens Bank to or for the benefit of a participant, whether paid or
payable or distributed or distributable pursuant to the terms of the Severance
Plan or otherwise would be subject to the excise tax imposed by Section 4999 of
the Code, or any interest or penalties with respect to such excise tax, then the
participant's payments shall be capped at 2.99 times the participant's average
annual compensation during a period as specified in Section 280G of the Code so
that the participant will not be liable for assessment of an excise tax on the
payment of any termination amounts.
This summary is qualified in its entirety by the text of the Citizens
National Bank Employee Severance Protection Plan.
18
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders
- ----------------------
At March 1, 1999, the Company had 404 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.
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 / 8.19%
8100 Hickory Creek Drive
Austin, TX 78735
Stayton M. Bonner, Jr. 154,026 / 7.64%(3)
P. O. Box 1833
Henderson, TX 75653
Michael Kangerga 132,978 / 6.60%
102 1/2 E. Main Street
Henderson, TX 75652
Ella Langdon Alford Trust 165,044 / 8.19%
P. O. Box 10
Brixey, MO 65618
Citizens National Bank 132,840 / 6.59%(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 2,016,074 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 sole 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 co-trustee 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.
19
<PAGE>
Management
- ----------
The following table sets forth the number of shares of the Company Stock
beneficially owned (i) by each director of the Company and (ii) by the directors
and executive officers of the Company as a group as of March 1, 1999.
<TABLE>
<CAPTION>
Number and Percent of Shares
Name Owned of Company Stock(1)
- ---- -------------------------
<S> <C>
E. Landon Alford 140,228 / 6.95%(2)
R. M. Ballenger 800 / 0.04%
Stayton M. Bonner, Jr. 154,026 / 7.64%(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 officers of the 393,829/ 19.53%(9)
Company as a group (15 Persons)
</TABLE>
(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 2,016,074 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 sole 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) 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.
(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.
20
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Citizens Bank has had, and is expected to have in the future, banking
transactions in the ordinary course of business with certain of the Company's
and the Citizens Bank's respective directors, executive officers and their
"associates." Management of the Company and the Citizens Bank believe that all
such transactions 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 40 of the 1998 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 1998, 1997 and 1996 as listed
in Item 8 of this report, together with the report of KPMG LLP dated
February 26, 1999, appearing on pages 26 through 51 of the accompanying
1998 Annual Report to Shareholders are incorporated herein by
reference.
2. Financial Statement Schedules
None
3. Exhibits
10.3 Amendment One to the Change in Control Agreement Between
Henderson Citizens Bancshares, Inc. and Milton S. McGee, Jr.
dated December 16, 1998.
10.4 Citizens National Bank Non-Qualified Deferred Compensation Plan
dated November 18, 1998.
10.5 Citizens National Bank 1998 Performance and Retention Plan dated
November 18, 1998.
10.6 Citizens National Bank Employee Severance Protection Plan dated
November 18, 1998.
13.1 Henderson Citizens Bancshares, Inc. 1998 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
1998.
(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:
21
<PAGE>
Exhibit
10.2 Change in Control Agreement dated June 12, 1995 by and between
Henderson Citizens Bancshares, Inc. and Milton S. McGee Jr.
10.3 Amendment One to the Change in Control Agreement Between Henderson
Citizens Bancshares, Inc. and Milton S. McGee, Jr. dated December
31, 1998.
10.4 Citizens National Bank Non-Qualified Deferred Compensation Plan
dated November 18, 1998.
10.5 Citizens National Bank 1998 Performance and Retention Plan dated
November 18, 1998.
10.6 Citizens National Bank Employee Severance Protection Plan dated
November 18, 1998.
22
<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 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ E. Landon Alford Director and Chairman of March 24, 1999
- -------------------------------- the Board
E. Landon Alford
/s/ Milton S. McGee, Jr. Director, President and March 24, 1999
- -------------------------------- Chief Executive Officer
Milton S. McGee, Jr.
/s/ R. M. Ballenger Director March 24, 1999
- --------------------------------
R. M. Ballenger
/s/ Stayton M. Bonner, Jr. Director March 24, 1999
- -------------------------------- Stayton M. Bonner, Jr.
/s/ D. J. Burks Director March 24, 1999
- --------------------------------
D. J. Burks
/s/ Billy Crawford Director March 24, 1999
- --------------------------------
Billy Crawford
23
<PAGE>
/s/ Sheila Gresham Director March 24, 1999
- -------------------------------------
Sheila Gresham
/s/ James Michael Kangerga Director March 24, 1999
- -------------------------------------
James Michael Kangerga
/s/ J. Mark Mann Director March 24, 1999
- -------------------------------------
J. Mark Mann
/s/ Charles H. Richardson Director March 24, 1999
- -------------------------------------
Charles H. Richardson
/s/ Tony Wooster Director March 24, 1999
- -------------------------------------
Tony Wooster
/s/ Alfred Wylie Director March 24, 1999
- -------------------------------------
Alfred Wylie
24
<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 29, 1999, and copies of such information shall be
sent to the Securities and Exchange Commission on or before such time:
(1) 1998 Annual Report to Shareholders
(2) Notice of Annual Meeting of Shareholders and Proxy Statement
(3) Proxy Card
25
<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).
10.3 Amendment One to the Change in Control Agreement Between Henderson Citizens
Bancshares, Inc. and Milton S. McGee, Jr. dated December 16, 1998.
10.4 Citizens National Bank Non-Qualified Deferred Compensation Plan dated
November 18, 1998.
10.5 Citizens National Bank 1998 Performance and Retention Plan dated November
18, 1998.
10.6 Citizens National Bank Employee Severance Protection Plan dated November
18, 1998.
13.1 Henderson Citizens Bancshares, Inc. 1998 Annual Report to Shareholders.
21.1 Subsidiaries of registrant.
27.1 Financial Data Schedule.
Exhibits - Page 1
<PAGE>
EXHIBIT 10.3
AMENDMENT ONE TO THE CHANGE IN CONTROL AGREEMENT BETWEEN
HENDERSON CITIZENS BANCSHARES, INC. AND MILTON S. MCGEE, JR.
Amendment made this 16th day of December, 1998, by Citizens Bancshares,
Inc., (the "Company"), a registered bank holding company which controls Citizens
National Bank, a national bank with its principal offices in Henderson, Texas,
as agreed to by Milton S. McGee, Jr., (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive entered into a Change in Control
Agreement (the "Agreement") effective as of June 12th, 1995; and
WHEREAS, the Company and the Executive desire to amend the Agreement so as
to provide that a reduction in the Executive's benefits as in effect immediately
prior to a Change in Control will constitute "Good Reason" as that term is
defined in the Agreement;
WHEREAS, the Company pursuant to Article Five of the Agreement retained the
authority to amend the Agreement if consented to by the Executive;
WHEREAS, the Executive has consented to such amendment.
NOW, THEREFORE, the Agreement is amended as follows effective as of the
date set forth above:
1. Section 4(ii) is deleted in its entirety and the following is
substituted in its place:
"(ii) A reduction of the Executive's base salary or a failure to
provide comparable overall compensation (which includes any benefits
provided for under each employee benefit plan, program and practice [other
than as a result of year to year variations in bonuses, overtime or
benefits consistent with past practice]), as in effect immediately prior to
a Change in Control without the prior written consent of the Executive,
which is not remedied within ten (10) calendar days after receipt by the
Company of written notice from the Executive of such reduction."
IN WITNESS WHEREOF, this Amendment has been executed the day and year first
above written.
HENDERSON CITIZENS BANCSHARES, INC.
By: /s/ Landon Alford
-------------------------------------
Landon Alford,
Chairman of the Board
/s/ Milton S. McGee, Jr.
-----------------------------------------
Milton S. McGee, Jr.
<PAGE>
EXHIBIT 10.4
CITIZENS NATIONAL BANK
NON-QUALIFIED DEFERRED COMPENSATION PLAN
<PAGE>
CITIZENS NATIONAL BANK
NON-QUALIFIED DEFERRED COMPENSATION PLAN
Table of Contents
-----------------
Page
--------
SECTION 1 - Purpose, Definitions and Construction
1.1 Purpose of the Plan 3
1.2 Definitions 3
1.3 Construction 5
SECTION 2 - Eligibility
2.1 Eligibility Requirements 6
SECTION 3 - Contributions to the Plan
3.1 Participant Contributions 6
3.2 Bank Discretionary Matching Contributions 6
3.3 Bank Non-Matching Contributions 6
3.4 Establishment of Account 6
SECTION 4 - Allocation and Investment
4.1 Allocation 7
4.2 Establishment of Trust 7
4.3 Allocation of Investment Earnings 7
SECTION 5 - Determination of Payment of Account
5.1 Vesting of Account 7
5.2 Determination of Account 8
5.3 Timing of Payment 8
5.4 Form of Payment 8
SECTION 6 - Miscellaneous
6.1 Administration of the Plan 9
6.2 Amendment and Termination of the Plan 9
6.3 Notices to Participants 9
6.4 Non-Alienation 9
6.5 Arbitration 9
6.6 Law Governing 9
6.7 Validity 9
6.8 Effect on Successors in Interest 10
<PAGE>
CITIZENS NATIONAL BANK
NON-QUALIFIED DEFERRED COMPENSATION PLAN
SECTION 1. PURPOSE. DEFINITIONS AND CONSTRUCTION
1.1 Purpose of the Plan Citizens National Bank (''Bank") hereby establishes
the Citizens National Bank Non-Qualified Deferred Compensation Plan ("Plan").
This Plan is established by the Bank to permit certain select management
employees, who are defined below, to defer the payment of a percentage of their
Compensation, and in addition thereto, to provide for certain Bank contributions
to augment such employees' retirement income in addition to what is provided for
under the tax qualified plans of the Bank. This Plan is not intended to, and
does not, qualify under Sections 401(a) and 501(a) of the Internal Revenue Code
of 1986, as amended, and is designed to be exempt from the requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
1.2 Definitions The following terms, when found in the Plan, shall have
the meanings set forth below:
(a) Account Balance: At any time, the total of all amounts credited
---------------
under the terms of the Plan to a Participant, the rights to which are determined
under the Plan.
(b) Beneficiary: The person(s) and/or the trust(s) created for the
-----------
benefit of a person or persons who are the natural object of the Participant's
bounty, or the Participant's estate, whichever is designated by the Participant
to receive the benefits payable hereunder upon his death.
(c) Bank: Citizens National Bank and any successor bank.
----
(d) Board: The Board of Directors of Citizens National Bank or
------
Henderson Citizens Bancshares, Inc.
(e) Change in Control: A "Change in Control" shall be deemed to occur
-----------------
if:
(i) any "person" (as that term is used in Section 13(d) and 14(d)(2)
of the Exchange Act) (other than the Bank, the Company, an
affiliate of the Bank, or an affiliate of the Company) becomes,
directly or indirectly, the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of securities representing
30% or more of the combined voting power for election of members
of the Board of the then outstanding voting securities of the
Bank or Company or any successor of the Bank or Company;
- --------------------------------------------------------------------------------
Citizens National Bank Page 3
Non-Qualified Deferred Compensation Plan
<PAGE>
(ii) during any period of two (2) consecutive years or less,
individuals who at the beginning of such period constituted the
Board cease, for any reason, to constitute at least a majority of
the Board, unless the election of nomination for election of each
new member of the Board was approved by a vote of at least two-
thirds of the members of the Board then still in office who were
members of the Board at the beginning of the period;
(iii) the equityholders of the Bank or Company approve any
merger or consolidation to which the Bank or Company is a party as
a result of which the persons who were equityholders of the Bank
or Company immediately prior to the effective date of the merger
or consolidation (and excluding, however, any shares held by any
party to such merger or consolidation and their affiliates) shall
have beneficial ownership of less than 50% of the combined voting
power for election of members of the Board (or equivalent) of the
surviving entity following the effective date of such merger or
consolidation; or
(iv) the equityholders of the Bank or Company approve any
merger or consolidation as a result of which the equity interests
in the Bank or Company shall be changed, converted or exchanged
(other than a merger with a wholly-owned subsidiary of the Bank or
Company) or any liquidation of the Bank or Company, or any sale or
other disposition of 50% or more of the assets or earnings power
of the Bank or Company.
(f) Code: The Internal Revenue Code of 1986, as it may be amended
----
from time to time, including any successor.
(g) Company: Henderson Citizens Bancshares, Inc. and any successor
-------
corporation.
(h) Compensation: Compensation, as designated on the Non-Qualified
------------
Deferred Compensation Election Form, shall be the total cash remuneration paid
by the Bank during each Plan Year, as reported on Form W-2 or its subsequent
equivalent, including bonuses, fees, commissions, amounts deferred under Code
Sections 401(k) and 125, and amounts deferred under any other non-qualified
program of salary reduction. Compensation hereunder shall not be subject to any
limitations applicable to tax qualified plans, such as pursuant to Code Sections
401(a)(17) or 415.
(i) Disability: A physical or mental condition of a Participant
----------
resulting from bodily injury, disease or mental disorder which renders him
incapable of continuing any gainful occupation. The determination of Disability
shall be made either as a result of the Participant qualifying for a pension
under the federal Social Security Act, or based upon such evidence as is
determined to be applicable by the Bank in its sole discretion.
- --------------------------------------------------------------------------------
Citizens National Bank Page 4
Non-Qualified Deferred Compensation Plan
<PAGE>
(j) Effective Date: January 1, 1999.
--------------
(k) Eligible Employee: A person employed by the Bank who has been
-----------------
designated by the Chairman of the Compensation Committee of the Board or the
President of the Bank by name, position, or in any other manner, as being in the
class of persons who are eligible to participate in the Plan. However, no
person who is an employee of the Bank shall be selected as an Eligible Employee
except a member of the select group of management or highly compensated
employees of the Bank, as such term is defined under Section 201 of the ERISA,
and regulations and rulings promulgated thereunder by the Department of Labor.
(l) Exchange Act: The Securities and Exchange Act of 1934, as amended.
------------
(m) Normal Retirement Age: The date on which a Participant attains age
---------------------
sixty-five (65).
(n) Normal Retirement Date: The first day of the month coincident with
----------------------
or next following a Participant's Normal Retirement Age.
(o) Participant: An Eligible Employee who has met the requirements
-----------
of Section 2.1 hereof, and whose participation has not been terminated.
(p) Plan: The Citizens National Bank Non-Qualified Deferred
----
Compensation Plan, as set forth herein, and as it may be amended from time to
time.
(q) Plan Year: The twelve month period beginning on January 1 and
---------
ending on December 31 each year.
(r) Service: The period of a Participant's employment considered in
--------
the calculation of the vested amount of his benefits. A Participant's Service
shall be determined in twelve (12) month periods, commencing with the twelve
(12) month period that begins on his date of hire with the Bank, and thereafter
based on Plan Years, including the Plan Year within which falls his date of
hire. During such twelve (12) month periods, a Year of Service will be granted
if the Participant completes at least one thousand (1,000) Hours of Service. An
Hour of Service is each hour for which the Participant is paid by virtue of his
employment with the Bank, including hours paid but not worked, and including
hours completed prior to the date he actually becomes a Participant hereunder.
1.3 Construction The masculine gender, where appearing in the Plan, shall
be deemed to include the feminine gender, and the singular may indicate the
plural, unless the context clearly indicates the contrary. The words "hereof",
"herein", "hereunder" and other similar compounds of the word '"here" shall,
unless otherwise specifically stated, mean and refer to the entire Plan, not to
any particular provision or Section. Section headings are included for
convenience of reference and are not intended to add to, or subtract from, the
terms of the Plan.
- --------------------------------------------------------------------------------
Citizens National Bank Page 5
Non-Qualified Deferred Compensation Plan
<PAGE>
SECTION 2. ELIGIBILITY
2.1 Eligibility Requirements An Eligible Employee shall become a
Participant hereunder as of the first January 1 or July 1 which is coincident
with or next follows his completion of one (1) year of Service.
SECTION 3. CONTRIBUTIONS TO THE PLAN
3.1 Participant Contributions Each Participant shall make a written
election by the execution of a Deferred Compensation Plan Agreement
("Agreement"), prior to the first day of the Plan Year (or, as to Participants
who first become Participants as of a July 1, prior to such date) to reduce his
Compensation otherwise to be paid in cash. Such election shall provide for a
salary reduction election of up to fifty percent (50%) of Compensation.
Any Agreement made under the terms of this Section 3.1 shall be irrevocable
for the Plan Year prior to which it is made, but may be changed as of the first
day of any subsequent Plan Year by written notice meeting the foregoing
requirements.
3.2 Bank Discretionary Matching Contributions The Bank may make a matching
contribution each Plan Year to be known as a Bank Discretionary Matching
Contribution. The determination as to whether a Bank Discretionary
Matching Contribution shall be made is in the sole discretion of the Board of
Directors of the Bank, determined on an annual basis.
3.3 Bank Non-Matching Contributions The Bank may make a Bank Non-Matching
Contribution each Plan Year. The determination as to whether a Bank Non-
Matching Contribution shall be made is in the sole discretion of the Board of
Directors of the Bank, determined on an annual basis.
3.4 Establishment of Account Balance Each Participant herein shall have
maintained in his name an Account Balance, to which shall be credited his salary
reduction contributions, as well as his allocable share of Bank contributions
made under the terms of this Section. A Participant's Account Balance shall
reflect his share of such contributions, including his allocable share of any
gains and losses pursuant to Section 4.3 hereof.
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SECTION 4. ALLOCATION AND INVESTMENT
4.1 Allocation Contributions made pursuant to Section 3.1 hereof shall be
allocated to the Account Balance of the Participant from whose Compensation such
amounts were reduced, as soon as practicable following the date of actual salary
reduction.
Any contribution made pursuant to Sections 3.2, and 3.3 hereof shall be
allocated to each Participant who is in the active employ of the Bank as of the
last day of the Plan Year for which such contribution was made, unless that
Participant's termination of employment is as a result of his death, Disability,
attainment of Normal Retirement Age, or such other cause as shall be deemed as
acceptable by the Board.
4.2 Establishment of Trust The Bank may establish a trust fund (Rabbi
Trust) with regard to the Account Balances hereunder, designed to be an
irrevocable grantor trust under Code Section 671.
4.3 Allocation of Investment Earnings Investment earnings shall be credited
as of the last day of each calendar year, based on guidelines as established by
the Compensation Committee of the Board. The earnings to be allocated will be
allocated to each Participant's Account Balance in the proportion that the
Participant's Account Balance at the beginning of the year plus one-half (1/2)
of any additions made to the Account Balance during the year, bears to the total
of all such Account Balances.
SECTION 5. DETERMINATION OF PAYMENT OF ACCOUNT
5.1 Vesting of Account Balance A Participant's Account Balance derived from
contributions made under Section 3.1 hereof shall be one hundred percent (100%)
vested and non-forfeitable at all times.
The amount of such a Participant's Account Balance other than that derived
from contributions made pursuant to Section 3.1 hereof such Account Balance
shall become one hundred percent (100%) vested and non-forfeitable in accordance
with the following:
(a) Upon the retirement of a Participant at or after his Normal
Retirement Date.
(b) Upon a determination of Disability.
(c) Upon the death of a Participant.
(d) Upon a Change in Control.
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Prior to the occurrence of any of the foregoing, such Participant shall
become vested in his Account Balance upon any other termination in accordance
with the following schedule:
Years of Service
With the Bank Vested Percentage
------------- -----------------
1 10%
2 20%
3 50%
4 75%
5 100%
5.2 Determination of Account Balance As of the date of a Participant's
termination of employment with the Bank (including termination due to any of the
events specified under Section 5.1 hereof), his vested Account Balance shall be
determined in accordance with the provisions of Section 5.1 above. Thereafter,
as of the last day of the Plan Year coincident with or next following his
termination of employment, the non-vested portion of his Account Balance shall
be forfeited. Such forfeited amount shall be reallocated among all Participants
eligible to receive Bank contributions as of such date under Section 4.1 hereof,
in the proportion that such Participant's Compensation for the Plan Year bears
to the Compensation for the Plan Year of all Participants eligible for such
contribution.
5.3 Timing of Payment A Participant, or in the case of a benefit due to the
death of a Participant, his Beneficiary, shall be entitled to payment of his
vested Account Balance immediately following the termination of his employment
status with the Bank.
Payment shall be made as soon as administratively feasible following such
event, based on the Participant's Account Balance as of the last day of the
calendar year next preceding the date of distribution. However, if the Bank
determines that such payment would not be in the best interest of remaining
participants due to fluctuations in the value of the trust, no distribution
shall be made until a subsequent value of the trust is determined, as of the
last day of the calendar year in which the event requiring distribution occurs.
5.4 Form of Payment A Participant or Beneficiary entitled to payment
shall receive, based upon his irrevocable written election prior to actual
commencement of payment, either a single lump sum payment in cash or equal
annual installment payments over a period of years elected by the Participant.
This election, however, shall be made upon the Participant's initial entry
into the Plan, shall be made in writing, and shall be irrevocable. If a
Participant does not make any such election, he shall be deemed to have
irrevocably elected to receive his balance, when it becomes due, in the form of
a single lump sum payment.
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SECTION 6. MISCELLANEOUS
6.1 Administration of the Plan The Plan shall be administered by the Bank.
The books and records of the Plan shall be maintained by the Bank at its
expense, and no member of the Board, or any employee of the Bank acting on its
behalf, shall be liable to any person for any action taken or omitted in
connection with the administration of the Plan, unless attributable to his own
fraud or willful misconduct.
6.2 Amendment or Termination of the Plan The Plan may be amended or
terminated at any time by the Board by the affirmative vote of a majority of the
members thereof. The Plan, however, shall not be amended, without prior written
consent of each affected Participant if such amendment or termination of the
Plan would adversely affect any material vested benefits or rights of such
person.
6.3 Notices to Participants From time-to-time, the Bank shall provide a
Participant with an accounting of the value of his Account Balance no less than
once a year. Further, a Participant will be provided written notice of any
amendment of the Plan that affects his rights herein, and of the termination of
the Plan.
6.4 Non-Alienation To the extent permitted by law, the right of any
Participant or Beneficiary in any Account Balance hereunder shall not be subject
in any manner to attachment or other legal process for the debts of such
Participant or Beneficiary, and any such Account Balance shall not be subject to
anticipation, alienation, sale, transfer, assignment or encumbrance.
6.5 Arbitration Any dispute or controversy arising under or in connection
with this Plan shall be settled exclusively by arbitration in Dallas, Texas, in
accordance with the employment rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitration's award in any court
having jurisdiction. Each party shall select an arbitrator and the two
arbitrators shall mutually select a third arbitrator for purposes of
arbitration. Each party shall bear his or its own cost of arbitration, but if
Employee is the prevailing party in such arbitration, he shall be entitled to
recover from this Bank as part of any award entered his reasonable expenses for
attorney's fees and disbursements.
6.6 Law Governing The Plan shall be construed in accordance with the laws of
the State of Texas, except as superseded by federal law, and in accordance with
applicable provisions of the Code and regulations or other authority issued
thereunder by the appropriate governmental authority.
6.7 Validity The invalidity or unenforceability of any provision or
provisions of this Plan shall not affect the validity or enforceability of any
other provision of this Plan, which shall remain in full force and effect.
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6.8 Effect on Successors in Interest This Plan shall inure to the benefit
of and be binding upon the heirs, administrators, executors and successors of
each of the parties hereto.
IN WITNESS WHEREOF, this Plan has been executed this 18th day of November,
1998.
CITIZENS NATIONAL BANK
By: /s/ E. Landon Alford
-------------------------
E. Landon Alford
Chairman of the Board
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EXHIBIT 10.5
CITIZENS NATIONAL BANK
1998 PERFORMANCE AND RETENTION PLAN
<PAGE>
CITIZENS NATIONAL BANK
1998 PERFORMANCE AND RETENTION PLAN
SECTION 1. PURPOSE
Citizens National Bank (''the Bank") hereby establishes the Citizens
National Bank 1998 Performance and Retention Plan ("the Plan"). The Bank, by
means of the Plan, seeks to provide incentive compensation opportunities to
certain key employees for their past and future services to the Bank and offer
such employees an inducement to remain as employees and, in addition, to offer
an inducement to secure the services of other persons capable of fulfilling key
positions by providing incentive compensation opportunities. Such incentive
compensation shall be based upon the award of Performance and Retention Units
("PARs"), the value of which is related to the appreciation in the value of the
greater of Return on Assets or Net Income After Tax before PAR payment of the
Bank.
SECTION 2. DEFINITIONS
As used herein, the following words and phrases shall have the following
respective meanings unless the context clearly indicates otherwise.
2.1 Bank Citizens National Bank and any successor bank.
2.2 Base Amount The average annual compensation which was includible in the
gross income of a participant for taxable years in the base period (usually five
years prior to year of Change in Control) as defined in Section 280G of the
Internal Revenue Code, as amended.
2.3 Board The Board of Directors of Citizens National Bank or Henderson
Citizens Bancshares, Inc.
2.4 Cause or Termination for Cause The Bank may terminate the Employee's
employment for "Cause." A Termination for Cause is a termination made after
determination by the CEO or the Board that the Employee (i) willfully and
continually failed to substantially perform his duties with the Bank (other than
a failure resulting from the Employee's incapacity due to physical or mental
illness) which failure continued for a period of at least thirty (30) days after
a written notice of demand for substantial performance has been delivered to the
Employee specifying the manner in which the Employee has failed to substantially
perform, or (ii) willfully engaged in conduct which is demonstrably and
materially injurious to the Bank, monetarily or otherwise; provided, however
that no termination of the Employee's employment shall be for Cause until (x)
there shall have been delivered to the Employee written notice setting forth
the circumstances giving rise to Termination for Cause, and (y) the Employee
shall have been provided an opportunity to be heard
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by the CEO or the Board (with the assistance of the Employee's counsel if the
Employee so desires). No act, nor failure to act, on the Employee's part shall
be considered "willful" unless he has acted, or failed to act, with an absence
of good faith and without a reasonable belief that his action or failure to act
was in the best interest of the Bank. Notwithstanding anything contained in this
Plan to the contrary, no failure to perform by the Employee, after Notice of
Termination is given by the Employer, shall constitute Cause.
2.5 Change in Control A "Change in Control" shall be deemed to occur if:
(a) any "person" (as that term is used in Section 13(d) and 14(d)(2)
of the Exchange Act) (other than the Bank, the Company, an affiliate of the
Bank, or an affiliate of the Company) becomes, directly or indirectly, the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
securities representing 30% or more of the combined voting power for
election of members of the Board of the then outstanding voting securities
of the Bank or Company or any successor of the Bank or Company;
(b) during any period of two (2) consecutive years or less,
individuals who at the beginning of such period constituted the Board cease,
for any reason, to constitute at least a majority of the Board, unless the
election of nomination for election of each new member of the Board was
approved by a vote of at least two-thirds of the members of the Board then
still in office who were members of the Board at the beginning of the
period;
(c) the equityholders of the Bank or Company approve any merger or
consolidation to which the Bank or Company is a party as a result of which
the persons who were equityholders of the Bank or Company immediately prior
to the effective date of the merger or consolidation (and excluding,
however, any shares held by any party to such merger or consolidation and
their affiliates) shall have beneficial ownership of less than 50% of the
combined voting power for election of members of the Board (or equivalent)
of the surviving entity following the effective date of such merger or
consolidation; or
(d) the equityholders of the Bank or Company approve any merger or
consolidation as a result of which the equity interests in the Bank or
Company shall be changed, converted or exchanged (other than a merger with
a wholly-owned subsidiary of the Bank or Company) or any liquidation of the
Bank or Company, or any sale or other disposition of 50% or more of the
assets or earnings power of the Bank or Company.
2.6 Chief Executive Officer or CEO The Chief Executive Officer of the Bank.
2.7 Committee The Compensation Committee, which shall be comprised of three or
more members who shall be appointed by the Board to administer the Plan, which
Board shall have the power to fill vacancies on the Committee arising by
resignation, death, removal or otherwise. In the absence of a Committee,
reference thereto shall be to the Board.
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2.8 Company Henderson Citizens Bancshares, Inc. and any successor
corporation.
2.9 Compensation The total cash remuneration paid by the Bank during each
Plan Year, as reported on Form W-2 or its subsequent equivalent, including
bonuses, fees, commissions, amounts deferred under Code Sections 401(k) and 125,
and amounts deferred under any other non-qualified program of salary reduction.
Compensation hereunder shall not be subject to any limitations applicable to tax
qualified plans, such as pursuant to Code Sections 401(a)(17) or 415.
2.10 Disability A physical or mental condition of a Participant resulting
from bodily injury, disease or mental disorder which renders him incapable of
continuing any gainful occupation. The determination of Disability shall be
made either as a result of the Participant qualifying for a pension under the
federal Social Security Act, or based upon such evidence as is determined to be
applicable by the Bank in its sole discretion.
2.11 Effective Date January 1, 1998.
2.12 Employee All employees of the Bank employed in a full-time employee
classification and identified on the Bank's payroll.
2.13 Exchange Act The Securities and Exchange Act of 1934, as amended.
2.14 Good Reason The occurrence, without the Employee's written consent, of
any of the following events or conditions caused by and within ninety (90) days
of the following:
(a) a change in the Employee's status, position or responsibilities
(including reporting responsibilities) which represents a substantial
reduction of the status, position or responsibilities as in effect
immediately prior thereto; the assignment to the Employee of any duties or
responsibilities which, in the Employee's reasonable judgment, are
inconsistent with such status, position or responsibilities; or any
removal of the Employee from or failure to reappoint or reelect him to any
of such positions, except in connection with the termination of his
employment for Cause, Disability, as a result of his death, or by the
Employee other than for Good Reason. Since this clause may result in the
Employee believing his duties and responsibilities represent a substantial
reduction as the result of a Change in Control and the Bank becoming a
subsidiary Bank or group under the successor Bank which may be adverse to
the belief of the successor Bank, any dispute or controversy arising in
connection with this clause shall be settled exclusively by arbitration as
stated in Section 6.11 of this Plan;
(b) a reduction in the Employee's annual Compensation;
(c) the Bank's requiring the Employee (without the consent of the
Employee) to be based at any place outside a fifty (50) mile radius of his
place of employment prior to a Change in Control, except for reasonably
required travel on the Bank's business which is
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not materially greater than such travel requirements prior to the Change
in Control or to make temporary assignments for a reasonable period of
time at other locations where the Bank has a special need for Employee's
services.
(d) the failure by the Bank to provide the Employee with compensation
and benefits comparable (in terms of benefit levels and/or reward
opportunities) to those provided for under each employee benefit plan,
program and practice as in effect immediately prior to the Change in
Control (or as in effect following the Change in Control, if greater);
(e) any material breach by the Bank of any provision of this Plan; or
(f) any purported termination of the Employee's employment for Cause
by the Bank which does not otherwise comply with the terms of this Plan.
2.15 Key Employee All Employees of the Bank employed in a key officer
position on the Bank's payroll, designated as participants in the Bank's
Performance and Retention Plan prior to a Change in Control.
2.16 Notice of Termination A notice which indicates the specific provisions
in this Plan relied upon as the basis for any termination of employment and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's employment under the provision
so indicated. No purported termination of employment shall be effective without
such Notice of Termination, when delivered personally or when mailed by United
States certified or registered mail, postage prepaid, addressed to the parties,
their successors in interest or assignees.
2.17 Participant A Key Employee who meets the eligibility requirements of
Section 3.
2.18 Performance Period A period of time determined by the Committee over
which performance is measured for the purpose of determining a Participant's
right to and the payment value of any Performance and Retention Units.
2.19 Performance and Retention Unit or PAR A contingent right to receive
cash at the end of a Performance Period, denominated in cash values.
2.20 Performance and Retention Unit or PAR Agreement The separate PAR
Agreement between the Bank and the Participant granting PARs to such
Participant.
2.21 Plan Citizens National Bank 1998 Performance and Retention Plan, as
hereinafter amended from time to time
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SECTION 3. ELIGIBILITY AND ADMINISTRATION
3.1 Participation The Committee shall from time to time designate those Key
Employees, if any, to be granted PARs under the Plan, the number of PARs which
shall be granted to each such Key Employee and any other terms or conditions
relating to the awards as it may deem appropriate, consistent with the
provisions of the Plan. A Key Employee who has been granted a PAR may, if
otherwise eligible, be granted additional PARs at any time.
3.2 Duration of Participation Subject to Section 2.12, a Participant shall
cease to be a Participant in the Plan if he ceases to be an Employee of the Bank
at any time prior to a Change in Control or, if his employment is terminated
following a Change in Control under circumstances where he is not entitled to a
"Severance Benefit" under the terms of the Citizens National Bank Employee
Severance Protection Plan, effective January 1, 1998. A Participant entitled to
payment of a Severance Benefit shall remain a Participant in the Plan until the
full amount of the Severance Benefit has been paid.
3.3 Committee Powers The Plan shall be administered by the Committee which
shall have full power and authority to: (i) designate Participants; (ii)
determine the PARs to be granted to Participants; (iii) determine the terms and
conditions of any PAR; (iv) determine whether, to what extent, and under what
circumstances PARs may be settled in cash or canceled, substituted, forfeited or
suspended, and the method or methods by which PARs may be settled, canceled,
substituted, forfeited or suspended; (v) interpret and administer the Plan and
any instrument or agreement relating to, or PAR made under, the Plan; (vi)
establish, amend, suspend or waive such rules and guidelines as the Committee
shall deem necessary or appropriate for administration of the Plan; (vii)
appoint such agents as it shall deem appropriate for the administration of the
Plan; provided, however, that the Committee shall not delegate any of the power
or authority set forth in (i) through (vi) above; and (viii) make any other
determination and take any other action that it deems necessary or desirable for
such administration. No member of the Committee shall vote or act upon any
matter relating solely to himself. All designations, determinations,
interpretations and other decisions with respect to the Plan or any PAR shall be
within the sole discretion of the Committee and shall be final, conclusive and
binding upon all persons, including the Bank or any parent or subsidiary, any
Participant, any holder or beneficiary of any PAR, any owner of an equity
interest in the Bank and any Employee.
3.4 No Liability No member of the Committee shall be liable for any action
or determination made in good faith by the Committee with respect to this Plan
or any PAR under this Plan, and to the fullest extent permitted by the Bank's
Articles of Incorporation and Bylaws, the Bank shall indemnify each member of
the Committee.
3.5 Meetings The Committee shall designate a chairman from among its
members, who shall preside at all of its meetings, and shall designate a
secretary, without regard to whether that person is a member of the Committee,
who shall keep the minutes of the proceedings and all records,
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documents, and data pertaining to its administration of the Plan. Meetings shall
be held at such times and places as shall be determined by the Committee. The
Committee may take any action otherwise proper under the Plan by the affirmative
vote, taken with or without a meeting, of a majority of its members.
SECTION 4. PERFORMANCE AND RETENTION UNIT
4.1 Performance and Retention Unit or PAR Awards
(a) Grant. The Committee is authorized to grant PARs to Participants.
The Committee may make grants of PARs in such a manner that more than one
Performance Period is in progress concurrently. For each Performance Period,
the Committee shall establish the number of PARs and the contingent value of any
PARs, which may vary depending on the degree to which performance objectives
established by the Committee are met.
(b) Performance Criteria. At the beginning of each Performance Period,
the Committee shall (i) establish for such Performance Period specific financial
or nonfinancial performance objectives as the Committee believes are relevant to
the Bank's overall business objectives; (ii) determine the value of a PAR grant
relative to performance objectives; and (iii) notify each Participant in writing
of the established performance objectives and minimum, target, and maximum PAR
value for such Performance Period.
(c) Modification. If the Committee determines in its sole discretion
that the established performance measures or objectives are no longer suitable
to Bank objectives because of a change in the Bank's business operations,
corporate structure, capital structure, or other conditions the Committee deems
to be appropriate, the Committee may modify the performance measures and
objectives as the Committee may consider appropriate.
(d) Payment. The basis for payment of PARs for a given Performance
Period shall be the achievement of those financial and nonfinancial performance
objectives determined by the Committee at the beginning of the Performance
Period. If minimum performance is not achieved for a Performance Period, no
payment shall be made and all contingent rights shall cease. If minimum
performance is achieved or exceeded, the value of a Performance Unit shall be
based on the degree to which actual performance exceeded the pre-established
minimum performance standards, as determined by the Committee. The amount of
payment shall be determined by multiplying the number of PARs granted during the
Performance Period times the final PAR unit value. Payments shall be made, in
the discretion of the Committee, solely in cash following the close of the
applicable Performance Period.
(e) Performance and Retention Plan Account. PARs granted to a
Participant shall be credited to a Performance and Retention Plan Account (the
"Account") established and maintained
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for such Participant. The Account of a Participant, which shall be the record of
PARs granted to him under the Plan, is solely for accounting purposes and shall
not require a segregation of any of the Bank assets. Each grant of PARs under
the Plan to a Participant and the value of such PARs as of the date of grant
shall be set forth in the Agreement which shall be executed between the Bank and
the Participant within thirty (30) days after the date of grant.
4.2 Supplemental Payment on Vesting of PARs The Committee, either at the
time of grant or at the time of vesting of PARs, may provide for a supplemental
payment by the Bank to the holder in an amount specified by the Committee which
shall not exceed the amount necessary to pay the federal income tax payable with
respect to both the vesting of such PARs and receipt of the supplemental
payment, assuming the Participant is taxed at the maximum effective federal
income tax rate applicable thereto. The supplemental payment shall be paid
within 30 days of each date that such PARs vest. The Committee shall have the
discretion to grant supplemental payments that are payable in cash, as
determined by the Committee at the time of payment.
SECTION 5. PROVISIONS RELATING TO PLAN PARTICIPATION
5.1 Plan Conditions
(a) Performance and Retention or PAR Agreement. Each Participant to whom a
PAR is granted under the Plan shall be required to enter into a PAR Agreement
with the Bank in a form provided by the Committee, which shall contain certain
specific terms, as determined by the Committee, with respect to the PAR and
shall include provisions that the Participant (i) shall not disclose any trade
or secret data or any other confidential information of the Bank acquired during
employment by the Bank or a subsidiary, or after the termination of employment
or retirement, (ii) shall abide by all the terms and conditions of the Plan and
such other terms and conditions as may be imposed by the Committee, and (iii)
shall not interfere with the employment of any other Bank employee. A PAR may
include a noncompetition agreement with respect to the Participant and/or such
other terms and conditions, including, without limitation, rights of repurchase
or first refusal, not inconsistent with the Plan, as shall be determined from
time to time by the Committee.
(b) No Right to Employment. Nothing in the Plan, any PAR Agreement or any
instrument executed pursuant to the Plan shall create any employment rights
(including without limitation, rights to continued employment) in any
Participant or affect the right of the Bank to terminate the employment of any
Participant at any time for any reason.
5.2 Transferability
(a) Non-Transferable Award. No PAR and no right under the Plan,
contingent or otherwise, shall be (i) assignable, saleable, or otherwise
transferable by a Participant except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order, or (ii)
subject to any encumbrance, pledge or charge of any nature. No transfer by will
or by the laws of
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descent and distribution shall be effective to bind the Bank unless the
Committee shall have been furnished with a copy of the deceased Participant's
will or such other evidence as the Committee may deem necessary to establish the
validity of the transfer. Any attempted transfer in violation of this Section
5.2 shall be void and ineffective for all purposes.
(b) Ability to Exercise Rights. Only the Participant or his guardian (if
the Participant suffers a Disability), or in the event of his death, his legal
representative or beneficiary, may receive cash payments or otherwise exercise
rights under the Plan. The executor or administrator of the Participant's
estate, or the person or persons to whom the Participant's rights under any PAR
will pass by will or the laws of the descent and distribution, shall be deemed
to be the Participant's beneficiary or beneficiaries of the rights of the
Participant hereunder and shall be entitled to exercise such rights as are
provided hereunder.
5.3 Rights as a Stockholder
A Participant of a PAR or a transferee of such Participant shall have no
rights as a stockholder for any awards granted under the terms of this Plan.
5.4 Termination of Employment, Death, Disability and Retirement
(a) Termination of Employment. If a Participant's employment by the Bank or
Company is terminated for any reason whatsoever other than death, Disability,
retirement, involuntary termination or termination for Good Reason, any PAR
granted pursuant to the Plan outstanding at the time and all rights thereunder
shall wholly and completely terminate, and unless otherwise established by the
Committee, no further vesting shall occur and the Participant shall be entitled
to payment of the portion of the PAR vested as of the termination date;
provided, however, that if a Participant is terminated for Cause, such
Participant's right to payment of the vested portion of his or her PAR shall be
forfeited as of the termination date of employment. In the event of termination
for death, Disability, retirement, or Change in Control, a PAR may be paid only
as determined by the Committee and provided in the PAR Agreement. However, the
following shall be used as a general guideline.
(b) Retirement. Unless otherwise approved by the Committee, upon the
retirement of an Employee:
(i) any nonvested portion of any outstanding PAR shall continue to
vest after retirement; and
(ii) any vested PAR shall expire on the earlier of (A) the expiration
date set forth in the PAR Agreement with respect to such PARs; or (B) the
expiration of six (6) months after the date of retirement.
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(c) Disability or Death. Unless otherwise approved by the Committe e,
upon termination of employment from the Bank and any parent or subsidiary as a
result of Disability or death:
(i) any nonvested portion of any outstanding PAR shall continue to
vest after Disability or death; and
(ii) any vested PAR shall expire upon the earlier of (A) the expiration
date set forth in the PAR Agreement with respect to such PARs or (B) the
first anniversary of such termination of such employment as a result of
Disability or death.
(d) Involuntary Termination. Unless otherwise approved by the Committee,
upon termination of employment from the Bank and any parent or subsidiary as a
result of involuntary termination (not Change in Control):
(i) any nonvested portion of any outstanding PAR shall vest on a
pro-rated basis based upon the number of months the terminated Employee has
been employed within the applicable Performance Period or Term; and
(ii) any vested PAR shall expire upon the earlier of (A) the expiration
date set forth in the PAR Agreement with respect to such PARs or (B) the
expiration of thirty-one (31) days after the Termination Date.
(e) Continuation. Subject to the express provisions of the Plan and the
terms of any applicable PAR Agreement, the Committee, in its discretion, may
provide for the continuation of any PAR for such period and upon such terms and
conditions as are determined by the Committee in the event that a Participant
ceases to be an employee .
5.5 Change in Control In the event of involuntary termination or termination
for Good Reason within 90 days before or two years after a Change in Control,
all PARs shall become vested, deemed earned in full and promptly paid to the
Participant without regard to payment schedules and notwithstanding that the
applicable performance cycle or retention cycle shall not have been completed.
5.6 Amendments to PARs The Committee may waive any conditions or rights
with respect to, or amend, alter, suspend, discontinue, or terminate, any
unexercised PAR theretofore granted, prospectively or retroactively, with the
consent of any relevant Participant.
5.7 Exchange of PARs The Committee may, in its discretion, permit
Participants under the Plan to surrender outstanding PARs in order to exercise
or realize the rights under other PARs, or in exchange for the grant of new PARs
or require holders of PARs to surrender outstanding PARs as a condition
precedent to the grant of new PARs.
================================================================================
Henderson Citizens Bancshares, Inc. Page 9
Performance and Retention Plan
<PAGE>
SECTION 6. MISCELLANEOUS
6.1 Effective Date and Grant Period This Plan shall become effective as of
January 1, 1998 and, unless sooner terminated by the Board, the Plan shall
terminate on December 31, 2007. After the termination of the Plan, no PARs may
be granted under the Plan, but previously granted awards shall remain
outstanding in accordance with their applicable terms and conditions.
6.2 Funding No provision of the Plan shall require the Bank, for the
purpose of satisfying any obligations under the Plan, to purchase assets or
place any assets in a trust or other entity to which contributions are made or
otherwise to segregate any assets in a manner that would provide any Participant
any rights that are greater than those of a general creditor of the Bank, nor
shall the Bank maintain separate bank accounts, books, records or other evidence
of the existence of a segregated or separately maintained or administered fund
if such action would provide any Participant with any rights that are greater
than those of a general creditor of the Bank. Participants shall have no rights
under the Plan other than as unsecured general creditors of the Bank except that
insofar as they may have come entitled to payment of additional compensation by
performance of services, they shall have the same rights as other employees
under applicable law. However, the Bank may establish a "Rabbi Trust" for
purposes of securing the payment pursuant to a Change in Control.
6.3 Withholding Taxes The Bank shall have the right to (i) make deductions
from any settlement of a PAR made under the Plan, including cash to be withheld
from any PAR, in an amount sufficient to satisfy withholding of any federal,
state or local taxes required by law, or (ii) take such other action as may be
necessary or appropriate to satisfy any such withholding obligations. The
Committee may determine the manner in which such tax withholding may be
satisfied.
6.4 Conflicts with Plan In the event of any inconsistency or conflict
between the terms of the Plan and a PAR Agreement, the terms of the Plan shall
govern.
6.5 No Guarantee of Tax Consequences Neither the Bank nor the Committee
makes any commitment or guarantee that any federal, state or local tax treatment
will apply or be available to any person participating or eligible to
participate hereunder.
6.6 Severability In the event that any provision of this Plan shall be held
illegal, invalid or unenforceable for any reason, such provision shall be fully
severable, but shall not affect the remaining provision of the Plan, and the
Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision had never been included herein.
6.7 Gender, Tense and Headings Whenever the context requires such, words of
the masculine gender used herein shall include the feminine and neuter, and
words used in the singular shall include the plural. Section headings as used
herein are inserted solely for convenience and reference and constitute no part
of the Plan.
================================================================================
Henderson Citizens Bancshares, Inc. Page 10
Performance and Retention Plan
<PAGE>
6.8 Amendment and Termination The Plan may be amended or terminated at any
time by the Board by the affirmative vote of a majority of the members thereof.
The Plan, however, shall not be amended, without prior written consent of each
affected Participant if such amendment or termination of the Plan would
adversely affect any material vested benefits or rights of such person.
6.9 Section 280G Payments In the event it shall be determined that any
payment or distribution of any type by the Bank to or for the benefit of the
Participant, whether paid or payable or distributed or distributable pursuant to
the terms of this Plan or otherwise (the "Total Payment"), would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
collectively referred to as the "Excise Tax"), then the Participant's Total
Payments shall be capped at 2.99 times the Participant's Base Amount so that the
Total Payment is the maximum amount permitted to be deducted as compensation
expense by the Bank and to be received by the Employee without liability for
this assessment of an excise tax on such payment.
All determinations required to be made this Section 6.9, including
whether an excise tax may be triggered and subsequently, capping the
Participant's Total Payment at 2.99 times his Base Amount to avoid the excise
tax, shall be made by the independent accounting firm retained by the Bank
immediately prior to the date of Change in Control (the "Accounting Firm"),
which shall provide detailed supporting calculations both to the Bank and the
Participant within 15 business days of the date of termination, if applicable,
or such earliest time as is requested by the Bank. If the Accounting Firm
determines that no Excise Tax is payable by the Participant, it shall furnish
the Participant with an opinion that he has substantial authority not to report
any Excise Tax on his federal income tax return. Any determination by the
Accounting Firm shall be binding upon the Bank and the Participant. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
all or a portion of the Total Payments which have been made by the Bank should
not have been made ("Overpayment") consistent with the calculations required to
be made hereunder. If the Bank's Accounting Firm determines an Overpayment has
been made to the Participant, the Employee shall promptly pay to the Bank the
amount of such Overpayment. In the event that the Bank exhausts its remedies
with the Internal Revenue Service and the Participant thereafter is required to
make payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Overpayment that has occurred and any such Excise Tax shall be promptly
paid by the Bank to or for the benefit of the Participant.
6.10 Governing Law The Plan shall be construed in accordance with the laws
of the State of Texas, except as superseded by federal law, and in accordance
with applicable provisions of the Code and regulations or other authority issued
thereunder by the appropriate governmental authority.
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Henderson Citizens Bancshares, Inc. Page 11
Performance and Retention Plan
<PAGE>
6.11 Arbitration Any dispute or controversy arising under or in connection
with this Plan shall be settled exclusively by arbitration in Dallas, Texas, in
accordance with the employment rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitration's award in any court
having jurisdiction. Each party shall select an arbitrator and the two
arbitrators shall mutually select a third arbitrator for purposes of
arbitration. Each party shall bear his or its own cost of arbitration, but if
Employee is the prevailing party in such arbitration, he shall be entitled to
recover from this Bank as part of any award entered his reasonable expenses for
attorney's fees and disbursements.
IN WITNESS WHEREOF, this Plan has been executed this 18th day of
November, 1998, to be effective as of January 1, 1998.
CITIZENS NATIONAL BANK
By: /s/ E. Landon Alford
--------------------
E. Landon Alford
Chairman of the Board
================================================================================
Henderson Citizens Bancshares, Inc. Page 12
Performance and Retention Plan
<PAGE>
EXHIBIT 10.6
CITIZENS NATIONAL BANK
EMPLOYEE SEVERANCE PROTECTION PLAN
<PAGE>
CITIZENS NATIONAL BANK
EMPLOYEE SEVERANCE PROTECTION PLAN
WHEREAS, the Board of Directors of Citizens National Bank recognizes that
the threat of an unsolicited takeover of the Bank may occur which can result in
significant distractions of its employees because of the uncertainties inherent
in such a situation; and
WHEREAS, the Board has determined that it is essential and in the best
interest of the Bank and its stockholders to retain the services of its
employees in the event of a threat of a change in control of the Bank and to
ensure their continued dedication and efforts in such event without undue
concern for their personal financial and employment security.
NOW, THEREFORE, in order to fulfill the above purposes, the following plan
has been developed and is hereby adopted effective January 1, 1998.
SECTION 1. ESTABLISHMENT OF PLAN
As of the Effective Date, the Bank hereby establishes a severance
compensation plan known as the Citizens National Bank Employee Severance
Protection Plan (the "Plan") as set forth in this document.
SECTION 2. DEFINITIONS
As used herein, the following words and phrases shall have the following
respective meanings unless the context clearly indicates otherwise.
2.1 Bank Citizens National Bank and any successor bank.
2.2 Base Amount The average annual compensation which was includible in the
gross income of a participant for taxable years in the base period (usually five
years prior to year of Change in Control) as defined in Section 280G of the
Internal Revenue Code.
2.3 Board The Board of Directors of Citizens National Bank or Henderson
Citizens Bancshares, Inc.
2.4 Bonus Amount An amount equal to the Employee's bonus which could have
been paid under the Bank's bonus plan (or any other bonus plan or program then
in effect) but excluding any single or one time "spot" award, for the fiscal
year in which a Change of Control occurs had he continued in employment until
the end of such fiscal year, assuming all performance targets and
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Citizens National Bank Page 1
Employee Severance Protection Plan
<PAGE>
goals (if applicable) had been fully met by the Bank and by the Employee, as
applicable, for such year.
2.5 Cause or Termination for Cause The Bank may terminate the Employee's
employment for "Cause." A Termination for Cause is a termination made after
determination by the CEO or the Board that the Employee (i) willfully and
continually failed to substantially perform his duties with the Bank (other than
a failure resulting from the Employee's incapacity due to physical or mental
illness) which failure continued for a period of at least thirty (30) days after
a written notice of demand for substantial performance has been delivered to the
Employee specifying the manner in which the Employee has failed to substantially
perform, or (ii) willfully engaged in conduct which is demonstrably and
materially injurious to the Bank, monetarily or otherwise; provided, however
that no termination of the Employee's employment shall be for Cause until (x)
there shall have been delivered to the Employee written notice setting forth
the circumstances giving rise to Termination for Cause, and (y) the Employee
shall have been provided an opportunity to be heard by the CEO or the Board
(with the assistance of the Employee's counsel if the Employee so desires). No
act, nor failure to act, on the Employee's part shall be considered "willful"
unless he has acted, or failed to act, with an absence of good faith and without
a reasonable belief that his action or failure to act was in the best interest
of the Bank. Notwithstanding anything contained in this Plan to the contrary,
no failure to perform by the Employee, after Notice of Termination is given by
the Employer, shall constitute Cause.
2.6 Change in Control A "Change in Control" shall be deemed to occur if:
(a) any "person" (as that term is used in Section 13(d) and 14(d)(2)
of the Exchange Act) (other than the Bank, the Company, an affiliate of the
Bank, or an affiliate of the Company) becomes, directly or indirectly, the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
securities representing 30% or more of the combined voting power for
election of members of the Board of the then outstanding voting securities
of the Bank or Company or any successor of the Bank or Company;
(b) during any period of two (2) consecutive years or less,
individuals who at the beginning of such period constituted the Board cease,
for any reason, to constitute at least a majority of the Board, unless the
election of nomination for election of each new member of the Board was
approved by a vote of at least two-thirds of the members of the Board then
still in office who were members of the Board at the beginning of the
period;
(c) the equityholders of the Bank or Company approve any merger or
consolidation to which the Bank or Company is a party as a result of which
the persons who were equityholders of the Bank or Company immediately prior
to the effective date of the merger or consolidation (and excluding,
however, any shares held by any party to such merger or consolidation and
their affiliates) shall have beneficial ownership of less than 50% of the
combined voting power for election of members of the Board (or equivalent)
of the surviving entity following the effective date of such merger or
consolidation; or
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Employee Severance Protection Plan
<PAGE>
(d) the equityholders of the Bank or Company approve any merger or
consolidation as a result of which the equity interests in the Bank or
Company shall be changed, converted or exchanged (other than a merger with a
wholly-owned subsidiary of the Bank or Company) or any liquidation of the
Bank or Company, or any sale or other disposition of 50% or more of the
assets or earnings power of the Bank or Company.
2.7 Chief Executive Officer or CEO The Chief Executive Officer of the Bank.
2.8 Company Henderson Citizens Bancshares, Inc. and any successor
corporation.
2.9 Compensation The total cash remuneration paid by the Bank during each
Plan Year, as reported on Form W-2 or its subsequent equivalent, including
bonuses, fees, commissions, amounts deferred under Code Sections 401(k) and 125,
and amounts deferred under any other non-qualified program of salary reduction.
Compensation hereunder shall not be subject to any limitations applicable to tax
qualified plans, such as pursuant to Code Sections 401(a)(17) or 415.
2.10 Disability A physical or mental condition of a Participant resulting
from bodily injury, disease or mental disorder which renders him incapable of
continuing any gainful occupation. The determination of Disability shall be
made either as a result of the Participant qualifying for a pension under the
federal Social Security Act, or based upon such evidence as is determined to be
applicable by the Bank in its sole discretion.
2.11 Effective Date January 1, 1998.
2.12 Employee All employees of the Bank or subsidiary employed in a full-
time employee classification and identified on the Bank's payroll, excluding
Milton S. McGee, Jr.
2.13 Exchange Act The Securities and Exchange Act of 1934, as amended.
2.14 Good Reason The occurrence, without the Employee's written consent, of
any of the following events or conditions caused by and within ninety (90) days
of the following:
(a) a change in the Employee's status, position or responsibilities
(including reporting responsibilities) which represents a substantial
reduction of the status, position or responsibilities as in effect
immediately prior thereto; the assignment to the Employee of any duties or
responsibilities which, in the Employee's reasonable judgment, are
inconsistent with such status, position or responsibilities; or any removal
of the Employee from or failure to reappoint or reelect him to any of such
positions, except in connection with the termination of his employment for
Cause, Disability, as a result of his death, or by the Employee other than
for Good Reason. Since this clause may result in the Employee believing
his duties and responsibilities represent a substantial reduction as the
result of a Change in Control and the Bank becoming a subsidiary Bank or
group under the successor
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Citizens National Bank Page 3
Employee Severance Protection Plan
<PAGE>
Bank which may be adverse to the belief of the successor Bank, any dispute
or controversy arising in connection with this clause shall be settled
exclusively by arbitration as stated in Section 9.5 of this Plan;
(b) a reduction in the Employee's annual Compensation;
(c) the Bank's requiring the Employee (without the consent of the
Employee) to be based at any place outside a fifty (50) mile radius of his
place of employment prior to a Change in Control, except for reasonably
required travel on the Bank's business which is not materially greater than
such travel requirements prior to the Change in Control or to make
temporary assignments for a reasonable period of time at other locations
where the Bank has a special need for Employee's services.
(d) the failure by the Bank to provide the Employee with compensation
and benefits comparable (in terms of benefit levels and/or reward
opportunities) to those provided for under each employee benefit plan,
program and practice as in effect immediately prior to the Change in
Control (or as in effect following the Change in Control, if greater);
(e) any material breach by the Bank of any provision of this Plan; or
(f) any purported termination of the Employee's employment for Cause
by the Bank which does not otherwise comply with the terms of this Plan.
2.15 Key Employee All Employees employed in a key officer position on the
Bank's payroll who are designated as participants in the Bank's Performance and
Retention Plan prior to a Change in Control.
2.16 Notice of Termination A notice which indicates the specific provisions
in this Plan relied upon as the basis for any termination of employment and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's employment under the provision
so indicated. No purported termination of employment shall be effective without
such Notice of Termination, when delivered personally or when mailed by United
States certified or registered mail, postage prepaid, addressed to the parties,
their successors in interest or assignees.
2.17 Participant A Key Employee who meets the eligibility requirements of
Section 3.
2.18 Protection Pay Severance allowance determined for each Participant
that provides (2) two weeks per complete year of service plus (2) two weeks per
whole year over age 40 plus (2) two weeks per whole $10,000 of Compensation
provided, however, that such calculation shall not be less than twenty-four (24)
weeks or more than fifty-two (52) weeks.
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Citizens National Bank Page 4
Employee Severance Protection Plan
<PAGE>
2.19 Severance Benefit The benefit payable in accordance with Section 4 of
the Plan.
SECTION 3. ELIGIBILITY
3.1 Participation Each Key Employee shall automatically be entitled to be a
Participant in the Plan as of the Effective Date, or the date he is designated a
participant in the Citizens National Bank 1998 Performance and Retention Plan,
whichever occurs later.
3.2 Duration of Participation Subject to Section 2.12, a Participant shall
cease to be a Participant in the Plan if he ceases to be an Employee of the Bank
at any time prior to a Change in Control or, if his employment is terminated
following a Change in Control under circumstances where he is not entitled to a
Severance Benefit under the terms of this Plan. A Participant entitled to
payment of a Severance Benefit shall remain a Participant in the Plan until the
full amount of the Severance Benefit has been paid.
SECTION 4. SEVERANCE BENEFITS
4.1 Right to Severance Benefit A Participant shall be entitled to receive
from the Bank a Severance Benefit in the amount provided in Section 4.2 if (i) a
Change in Control has occurred and (ii) within 90 days before or two years after
a Change in Control, the Participant's employment with the Bank terminates for
any reason, except that notwithstanding the provisions of this paragraph (a), no
benefits under this Plan will be payable should the Participant's termination of
employment be i) for Cause, ii) by reason of Disability, iii) initiated by the
Participant for other than Good Reason, or iv) by reason of the Participant's
death, or v) occur other than during the periods described immediately above.
4.2 Amount of Severance Benefit If a Participant's employment is terminated
in circumstances entitling him to a Severance Benefit as provided in Section
4.1, such Participant shall be entitled to the following benefits:
(a) the Bank shall pay to the Participant, as severance pay and in
lieu of any further salary for periods subsequent to the Termination Date
(as specified in Section 5.2), in a single payment (without any discount
for accelerated payment), an amount in cash equal to the Protection Pay and
Bonus Amount, subject to Section 6.1. This Severance Benefit shall not be
discounted by reason of the fact that the time of payment is accelerated in
advance of the ordinary course of payments under this Plan;
(b) for a period of six (6) months subsequent to the Participant's
termination of employment, the Bank shall at its expense continue on behalf
of the Participant and his dependents and beneficiaries, the basic life
insurance, disability plan benefits, medical and dental benefits, which
were being provided to the Participant at the time of termination of
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Employee Severance Protection Plan
<PAGE>
employment. The benefits provided in this Subsection 4.2(b) shall be no
less favorable to the Participant, in terms of amounts and deductibles and
costs to him, than the coverage provided the Participant under the plans
providing such benefits at the time Notice of Termination is given. The
Bank's obligation hereunder to provide the foregoing benefits shall
terminate if the Participant obtains health benefit coverage under a
subsequent employer's benefit plans;
(c) Employee shall have immediate vesting of all "Performance and
Retention Units" under the Citizens National Bank 1998 Performance and
Retention Plan or any other long-term incentives granted to Employee and
full vesting in all other non-qualified benefit plans and compensation
plans.
(d) the Bank shall transfer to the Key Employee, all right, title or
other ownership interest it may have in any automobile then being provided
by the Bank for use by the Participant;
(e) the amounts provided for in Section 4.2(a) shall be paid within
thirty (30) days after the Employee's termination of employment;
(f) the Bank shall transfer to the Key Employee, any right, title or
ownership in any club memberships provided by the Bank;
(g) the Participant shall not be required to mitigate the amount of
any payment provided for in this Plan by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of
any compensation or benefits provided to the Employee in any subsequent
employment.
SECTION 5. TERMINATION OF EMPLOYMENT
5.1 Written Notice Required Any purported termination of employment,
either by the Bank or by the Participant, shall be communicated by written
Notice of Termination to the other.
5.2 Termination Date In case of the Participant's death, the
Participant's Termination Date shall be his date of death. In all other cases,
the Participant's Termination Date shall be the date specified in the Notice of
Termination subject to the following:
(a) if the Participant's employment is terminated by the Bank for
Cause or due to Disability, the date specified in the Notice of Termination
shall be at least thirty (30) days from the date the Notice of Termination
is given to the Participant, provided that in the case of Disability the
Participant shall not have returned to the full-time performance of his
duties during such period of at least thirty (30) days; and
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Employee Severance Protection Plan
<PAGE>
(b) if the Participant terminates his employment for Good Reason, the
date specified in the Notice of Termination shall not be more than sixty
(60) days after the date the Notice of Termination is given to the Bank.
SECTION 6. REDUCTION IN PAYMENT
6.1 Section 280G Payments In the event it shall be determined that any
payment or distribution of any type by the Bank to or for the benefit of the
Participant, whether paid or payable or distributed or distributable pursuant to
the terms of this Plan or otherwise (the "Total Payment"), would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
collectively referred to as the "Excise Tax"), then the Participant's Total
Payments shall be capped at 2.99 times the Participant's Base Amount so that the
Total Payment is the maximum amount permitted to be deducted as compensation
expense by the Bank and to be received by the Employee without liability for
this assessment of an excise tax on such payment.
6.2 Determination by Accountant All determinations required to be made this
Section 6, including whether an excise tax may be triggered and subsequently,
capping the Participant's Total Payment at 2.99 times his Base Amount to avoid
the excise tax, shall be made by the independent accounting firm retained by the
Bank immediately prior to the date of Change in Control (the "Accounting Firm"),
which shall provide detailed supporting calculations both to the Bank and the
Participant within 15 business days of the date of termination, if applicable,
or such earliest time as is requested by the Bank. If the Accounting Firm
determines that no Excise Tax is payable by the Participant, it shall furnish
the Participant with an opinion that he has substantial authority not to report
any Excise Tax on his federal income tax return. Any determination by the
Accounting Firm shall be binding upon the Bank and the Participant. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
all or a portion of the Total Payments which have been made by the Bank should
not have been made ("Overpayment") consistent with the calculations required to
be made hereunder. If the Bank's Accounting Firm determines an Overpayment has
been made to the Participant, the Employee shall promptly pay to the Bank the
amount of such Overpayment. In the event that the Bank exhausts its remedies
with the Internal Revenue Service and the Participant thereafter is required to
make payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Overpayment that has occurred and any such Excise Tax shall be promptly
paid by the Bank to or for the benefit of the Participant.
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Employee Severance Protection Plan
<PAGE>
SECTION 7. SUCCESSORS TO BANK
This Plan shall bind 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 Bank, in the same manner and to the same extent
that the Bank would obligated under this Plan if no succession had taken place.
In the case of any transaction in which a successor would not by the foregoing
provision or by operation of law be bound by this Plan, the Bank shall require
such successor expressly and unconditionally to assume and agree to perform the
Bank's obligations under this Plan, in the same manner and to the same extent
that the Bank would be required to perform if no such succession had taken
place. Such successor may, with the Employee's written consent, replace this
Plan with a successor plan that provides benefits that can be received under
this Plan.
SECTION 8. DURATION, AMENDMENT AND PLAN TERMINATION
8.1 Duration This Plan shall continue in effect until terminated in
accordance with Section 8.2. If a Change in Control occurs, this Plan shall
continue in full force and effect, and shall not terminate or expire until after
all Participants who have become entitled to a Severance Benefit hereunder shall
have received such payments in full.
8.2 Amendment or Termination The Plan may be terminated or amended in any
respect by resolution adopted by two-thirds of the Board provided, however, that
no such amendment or termination of the Plan may be made if such amendment or
termination would adversely affect any right of an Employee who became a
Participant prior to the later of a) the date of adoption of any such amendment
or termination, or b) the effective date of any such amendment, or termination,
and provided further, that the Plan no longer shall be subject to amendment,
change, substitution, deletion, revocation or termination in any respect
whatsoever following a Change in Control. This Plan will terminate on December
31, 2012.
8.3 Form of Amendment The form of any amendment or termination of the Plan
shall be a written instrument signed by a duly authorized officer or officers of
the Bank, certifying that the amendment or termination has been approved by the
Board.
SECTION 9. MISCELLANEOUS
9.1 Indemnification If a Participant institutes any legal action in seeking
to obtain or enforce, or is required to defend in any legal action the validity
or enforceability of, any right or benefit provided by this Plan and prevails,
the Bank will pay for all actual legal fees and expenses incurred by such
Participant.
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Employee Severance Protection Plan
<PAGE>
9.2 Employment Status This Plan does not constitute a contract of
employment or impose on the Bank any obligation to retain the Participant as an
employee, to change the status of the Participant's employment as an Employee,
or to change any employment policies of the Bank.
9.3 Validity and Severability The invalidity or unenforceability of any
provision of the Plan shall not affect the validity or enforceability of any
other provision of the Plan, which shall remain in full force and effect, and
any prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
9.4 Governing Law The validity, interpretation, construction and
performance of the Plan shall in all respects be governed by the laws of the
State of Texas.
9.5 Arbitration Any dispute or controversy arising under or in connection
with this Plan shall be settled exclusively by arbitration in Dallas, Texas, in
accordance with the employment rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitration's award in any court
having jurisdiction. Each party shall select an arbitrator and the two
arbitrators shall mutually select a third arbitrator for purposes of
arbitration. Each party shall bear his or its own cost of arbitration, but if
Employee is the prevailing party in such arbitration, he shall be entitled to
recover from this Bank as part of any award entered his reasonable expenses for
attorney's fees and disbursements.
9.6 Conflicts with Plan In the event of any inconsistency or conflict
between the terms of the Plan and any Summary Plan Description, the terms of the
Plan shall govern.
CITIZENS NATIONAL BANK
By: /s/ E. Landon Alford
-----------------------------------
E. Landon Alford
Chairman of the Board
Date: November 18, 1998
-----------------
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Citizens National Bank Page 9
Employee Severance Protection Plan
<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,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands except per share data)
Total interest income $ 22,234 22,267 20,716 20,346 14,946
Total interest expense 11,377 11,546 11,203 11,536 7,127
------------------------------------------------------------
Net interest income 10,857 10,721 9,513 8,810 7,819
Provision (reduction of allowance)
for loan losses 623 330 264 180 (150)
------------------------------------------------------------
Net interest income after
provision (reduction of
allowance) for loan losses 10,234 10,391 9,249 8,630 7,969
Total other income 4,754 3,290 3,243 2,009 1,676
Total other expense (10,614) (9,265) (8,038) (7,556) (6,359)
------------------------------------------------------------
Income before income tax expense 4,374 4,416 4,454 3,083 3,286
Income tax expense 868 1,026 1,110 619 651
------------------------------------------------------------
Net Income 3,506 3,390 3,344 2,464 2,635
============================================================
Per share data:
Net income 1.74 1.61 1.55 1.14 1.22
Dividends .64 .64 .64 .64 .64
Dividend payment ratio 36.85% 39.53 41.21 56.14 52.50
Return on average assets 0.98% 0.98 1.00 0.76 0.99
Return on average equity 10.16% 10.56 10.60 8.25 9.42
Balance Sheet Information:
Loans, net $129,263 106,061 100,825 80,499 63,784
Allowance for loan losses 1,701 1,249 1,146 1,019 997
Total assets 386,919 358,493 356,830 326,879 313,038
Total deposits 345,720 322,107 320,673 293,611 285,522
Stockholders' equity 35,911 32,729 31,988 31,206 26,147
Stockholders' equity / total assets 9.28% 9.13 8.96 9.55 8.35
</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, 1998
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 1998 Annual Report.
INTRODUCTION
- ------------
Henderson Citizens Bancshares, Inc. (the "Company") was incorporated as a
Texas corporation on November 13, 1990 and was organized for the purpose of
becoming a second-tier bank holding company through the direct acquisition of
one hundred percent (100%) of the issued and outstanding shares of the common
stock of Henderson Citizens Delaware Bancshares, Inc. (the "Delaware BHC") and
through the indirect acquisition of one hundred percent (100%) of the issued and
outstanding shares of the $5.00 par value per share common stock of Citizens
National Bank (the "Citizens Bank"). The Delaware BHC was incorporated pursuant
to the laws of the State of Delaware on February 21, 1991. 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 the Citizens Bank 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 Citizens Bank.
Delaware BHC owns 100% of the issued and outstanding shares of the Citizens
Bank. The Delaware BHC was organized as a Delaware corporation in 1991 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 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 established 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.
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. 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
4
<PAGE>
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. 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 in Waskom, Texas (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 purchase price 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 sole banking
office of the Waskom Bank is now being operated as a full-service branch of the
Citizens Bank since completion of a merger on July 23, 1998.
On December 11, 1998, the Company acquired all of the outstanding shares of
Jefferson National Bank (the "Jefferson Bank") located at 109 E. Broadway,
Jefferson, Texas, for a combination of cash and notes payable. The transaction
was accounted for using the purchase method of accounting and resulted in an
increase in total assets of $31,913,000 and total deposits of $28,564,000. The
Citizens Bank merged operations of the Jefferson Bank with the existing Citizens
Bank Jefferson branch at the close of business on December 11, 1998.
The Company's management continues their strategy to increase market share
and enhance long-range profitability by evaluating potential acquisitions. This
evaluation process involves maintenance of strong equity capital and consistent
earnings, and meeting internal financial objectives of the Company.
5
<PAGE>
Results of Operations
- ---------------------
Net income for 1998 was $3,506,000 compared to $3,390,000 for 1997 and
$3,344,000 for 1996. The increase in earnings in 1998 was attributable to a
slight increase in net interest margin, net gain on sale of securities and
improved non-interest income. The Company experienced a net gain on sale of
securities in 1998 of $292,000 compared to a net gain in 1997 of $191,000 and in
1996 of $719,000. A provision for loan losses of $623,000 was made in 1998
compared to provisions of $330,000 in 1997 and $264,000 in 1996 respectively.
Net interest margins in 1998 improved over 1997 and 1996 levels. Other income,
excluding securities transactions, in 1998 increased approximately $1,363,000
over 1997. Other expenses were $10,614,000 in 1998 compared to $9,265,000 in
1997.
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 a decrease in interest income of
$33,000 and a decrease in interest expense of $169,000 in 1998. Differences in
yields and volumes can be found in Table II.
Net interest spreads and margins for 1998 increased from 1997 and in 1997
from 1996. Although the average rate earned on interest earning assets declined
slightly from 6.99% in 1997 to 6.91% in 1998, the average rate paid on interest
bearing deposits also declined slightly from 4.11% in 1997 to 4.01% in 1998. Net
interest spreads were approximately 2.9%, 2.9%, and 2.7% for the years 1998,
1997, and 1996, respectively, and net interest margins were 3.6%, 3.5%, and 3.2%
during the same three-year period.
Interest Income
- ---------------
Securities. Yields on all securities, other than state and municipal
----------
securities, decreased in 1998 from yields in 1997 for various reasons. The
decrease in yields in 1998 compared to 1997 was primarily due to lower rates on
reinvestments. The increase in yields on state and municipal securities in 1998
compared to 1997 was primarily 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 decreased during 1998 as
compared to 1997. U.S. governments yielded 5.86%, 5.97% and 5.65% in 1998, 1997
and 1996, respectively. State and municipal yields were 7.04%, 6.95% and 6.65%
in 1998, 1997 and 1996, respectively. Other securities, which includes mortgage
backed securities and collateralized mortgage obligations, yielded 5.87% in
1998, 6.23% in 1997, and 6.11% in 1996.
Loans. In 1998, the Company experienced a 15.09% increase in average loan
-----
balances over 1997. The average loan balance increased approximately
$15,275,000 to $116,520,000 in 1998 compared to $101,245,000 in 1997. In 1997,
the average loan balances increased approximately $12,561,000 over the 1996
balances. The average loan balance during 1998 increased due to continued
strong loan demand and the acquisition of the Jefferson Bank. Yields on loans
decreased slightly to 8.61% in 1998 compared to 8.73% in 1997. Yields on loans
in 1997 increased from 8.62% in 1996.
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 5.39% in 1998 from 5.14% in 1997. The 1997 rate of 5.14% was a
decrease from 5.25% in 1996. The yield on federal funds sold declined from
6.20% in 1997 to 5.36% in 1998. In contrast the 1997 rate of 6.20% increased
from 5.40% in 1996.
6
<PAGE>
<TABLE>
<CAPTION>
Table I - Average Balances and Interest Yields and Spreads (dollars in thousands)
Years Ended December 31
----------------------------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
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 10,119 545 5.39 7,565 389 5.14 6,228 327 5.25
Federal funds sold 6,543 351 5.36 3,257 202 6.20 2,165 117 5.40
Securities:
U.S. governments 84,931 4,976 5.86 60,996 3,640 5.97 58,780 3,323 5.65
State and municipals* 36,256 1,670 7.04 32,200 1,478 6.95 31,664 1,390 6.65
Other*** 84,727 4,987 5.87 123,977 7,718 6.23 129,609 7,917 6.11
Loans, net** 116,520 9,705 8.61 101,245 8,840 8.73 88,684 7,642 8.62
----------------------------------------------------------------------------------------
Total interest-earning
assets* 339,096 22,234 6.91 329,240 22,267 6.99 317,130 20,716 6.76
Other assets:
Cash and due from banks 7,561 7,486 9,582
Premises and equipment, net 5,434 4,652 3,300
Allowance for loan losses (1,439) (1,159 (1,097
Other assets 6,814 6,258 5,188
--------- -------------- --------------
Total average assets $357,466 $346,477 $334,103
========= ============== ==============
Interest-bearing
liabilities:
NOW, money market and
savings deposits 120,254 3,026 2.52 117,556 3,195 2.72 117,455 3,337 2.84
Time deposits 163,007 8,318 5.10 162,297 8,298 5.11 154,685 7,839 5.07
Other borrowed funds 536 33 4.48 860 53 6.16 443 27 6.09
----------------------------------------------------------------------------------------
Total interest-bearing
liabilities 283,797 11,377 4.01 280,713 11,546 4.11 272,583 11,203 4.11
Other liabilities and
stockholders equity:
Demand deposits 36,883 31,955 27,864
Other liabilities 2,006 2,538 2,117
Stockholders' equity 34,780 32,115 31,539
--------- -------------- --------------
Total average liabilities
and stockholders equity $357,466 $346,477 $334,103
========= ============== ==============
Net interest income $10,857 $10,721 $ 9,513
========== ========== ==========
Net interest spread* 2.90% 2.88% 2.65
======= ======= =======
Net interest margin* 3.56% 3.49% 3.23
======= ======= =======
* Interest yields have been presented on a tax equivalent basis using a 34% rate.
** Non-accrual loans have been included in average balances, thereby reducing yields.
*** Primarily consists of mortgage backed securities and collateralized mortgage obligations.
</TABLE>
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>
<CAPTION>
Table II - Analysis of Changes in Net Interest Income (dollars in thousands)
1998 over 1997 1997 over 1996
-------------------------------------------------------------------------------------------------
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 $ 131 25 156 $ 70 (8) 62
Federal funds sold 204 (55) 149 59 26 85
Securities:
U.S. governments 1,429 (93) 1,336 125 192 317
State and municipals 282 (90) 192 24 64 88
Other* (2,447) (284) (2,731) (337) 138 (199)
Loans, net 1,334 (469) 865 1,085 113 1,198
------- ---- ------ ------ ---- -----
Total interest income 933 (966) (33) 1,026 525 1,551
------- ---- ------ ------ ---- -----
Interest-bearing liabilities:
NOW, money market and
savings deposits 73 (242) (169) 3 (145) (142)
Time deposits 36 (16) 20 385 74 459
Other borrowed funds (20) - (20) 25 1 26
------- ---- ------ ------ ---- -----
Total interest expense 89 (258) (169) 413 (70) 343
------- ---- ------ ------ ---- -----
Net interest income $ 844 (708) 136 $ 613 595 1,208
======= ==== ====== ====== === =====
</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 $120,254,000 in 1998,
compared to $117,556,000 in 1997 and $117,455,000 in 1996. Time deposits, which
consist of certificate of deposits and individual retirement accounts, averaged
$163,007,000 in 1998, $162,297,000 in 1997, and $154,685,000 in 1996. Average
interest bearing deposits increased $3,408,000 from 1997 to 1998 and $7,713,000
from 1996 to 1997. Total interest expense decreased slightly between 1998 and
1997 primarily due to rates. Total interest expense increased slightly in 1997
from 1996 due primarily to volume. The average interest rate on interest-bearing
deposits was 4.01% in 1998, 4.11% in 1997, and 4.11% in 1996.
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 $4,462,000 in 1998 compared to $3,099,0000 in 1997 and
$2,524,000 in 1996. The increase of approximately $1,363,000 during 1998 was
primarily the result of an increase in insufficient funds fee income due to a
new overdraft program initiated in 1998 and, also, the result of increased
fiduciary income. 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.
Non-interest Expense
- --------------------
Total non-interest expense in 1998 was $10,614,000 compared to $9,265,000
in 1997 and $8,038,000 in 1996. These increases are explained in further detail
by category below.
Personnel Expense. Personnel costs for 1998 were $6,296,000 compared to
-----------------
$5,601,000 in 1997, and $4,770,000 in 1996, The increase of $695,000 over 1997
was due primarily to general increases in salaries and benefits.
Occupancy Expense and Equipment Expense. Total occupancy and equipment
----------------------------------------
expenses were $1,264,000 in 1998, $1,038,000 in 1997, and $927,000 in 1996. The
increase in 1998 was due to expenses related to the continuing enhancement of
the facilities. The increase in 1997 was due to remodeling, the addition of a
trust office in Corsicana, Texas, maintenance and service contracts, and the
full year effect of the Waskom Bank.
Regulatory Assessments and Other Expenses. Regulatory assessments were
-----------------------------------------
$132,000 in 1998 compared to $127,000 in 1997 and $191,000 in 1996. In 1996 the
Jefferson branch was charged a one-time assessment for former savings and loan
deposits of approximately $73,000. Other expenses were $2,922,000 in 1998
compared to $2,499,000 in 1997 and $2,150,000 in 1996. The increase in 1998
from 1997 is principally due to an increase in professional fees and, also, due
to increases in postage, advertising, and customer relations costs which were
impacted by the promotion of the new overdraft program and other direct
marketing initiatives. The increase in 1997 from 1996 is due principally to
legal fees, stationery and supplies, telephone, hotels and travel, educational
meetings, special events, Pulse service fees, and the affects of a full year of
other expenses related to the Waskom Bank.
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 1998, management made a provision of $623,000 as a result of average
loan growth of approximately 15% and anticipated increased risk due to the
overdraft program. 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%. See "Management's Discussion and Analysis of the Financial
Condition and Results of Operations of the Company -- Allowance for Loan Losses"
for more detailed discussion relative to the provision for loan losses.
Income Taxes
- ------------
The Company's effective tax rate was 19.8% in 1998, 23.2% in 1997, and
24.9% in 1996. This effective rate is less than the statutory rate of 34%
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 emphasizes management's philosophy of
maximizing returns through investments in securities. As detailed in the
following Table III, securities have been the Company's largest asset component
for the last five years totaling 53.1%, 60.8%, 63.9%, 69.3%, and 71.6%, of total
assets for the years 1998 through 1994, respectively. The decrease in securities
in 1998 is the result of increased emphasis on loan growth due to decreasing
securities rates. Total assets have grown from a December 31, 1994, level of
$313,038,000 to $386,919,000 at December 31, 1998. The increase in total assets
that resulted from the most recent Jefferson transaction in 1998 was
approximately $31,913,000. The increase in total assets that resulted from the
Waskom transaction in 1996 was approximately $25,700,000.
<TABLE>
<CAPTION>
Table III - Condensed Balance Sheet Information (dollars in thousands)
December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits
with financial institutions $ 17,174 $ 8,212 3,892 2,642 3,661
Federal funds sold 10,230 5,040 1,150 - 2,000
Securities 205,423 217,973 228,155 226,450 224,244
Loans, net 129,263 106,061 100,825 80,499 63,784
Cash and due from banks 9,493 8,886 12,413 8,916 8,688
Other 15,336 12,321 10,395 8,372 10,661
------------- ----------- -------------- --------- ---------
Total assets $386,919 $358,493 356,830 326,879 313,038
============= =========== ============== ========= =========
Liabilities:
Demand deposits-non-interest bearing $ 42,960 $ 32,860 31,785 28,435 25,164
Interest-bearing demand and
savings deposits 132,353 126,016 120,468 114,295 116,259
Time deposits 170,407 163,231 168,420 150,881 144,099
------------- ----------- -------------- --------- ---------
Total deposits 345,720 322,107 320,673 293,611 285,522
Other liabilities 5,288 3,657 4,169 2,062 1,369
------------- ----------- -------------- --------- ---------
Total liabilities 351,008 325,764 324,842 295,673 286,891
Stockholders' equity 35,911 32,729 31,988 31,206 26,147
------------- ----------- -------------- --------- ---------
Total liabilities and
stockholders' equity $386,919 $358,493 356,830 326,879 313,038
============= =========== ============== ========= =========
</TABLE>
Liquidity
- ---------
The Company invests in short-term 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 primarily
from service charges and the net interest earned from the investment of customer
deposits. Net cash provided by operating activities was $5,277,000 in 1998,
$3,341,000 in 1997, and $4,819,000 in 1996.
Investing Activities
- --------------------
The Company invests available funds primarily in securities and loans to
customers. Funds not otherwise used are invested in federal funds sold and
interest-bearing demand accounts, primarily with the Federal Home Loan Bank.
Additionally, in 1998, the Company received net cash of $5,188,000 as a result
of the acquisition of the Jefferson 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. Additionally, the Company paid cash dividends in each of
the years 1998, 1997 and 1996. From time to time, the Company makes purchases
of treasury stock. In 1997, an issuer tender offer resulted in treasury stock
purchases in an amount of approximately $1,424,000.
Asset/Liability Management
- --------------------------
Asset/liability management involves the acquisition and deployment of funds
at an appropriate rate and maturity structure so as to optimize net interest
income while satisfying the cash flow requirements of depositors and borrowers.
Generally, management maintains an excess of interest-sensitive liabilities over
interest-sensitive assets. Table IV provides an analysis of the Company's
interest rate sensitivity for its assets and liabilities. Note that the amounts
disclosed in Table IV are shown based upon the period the underlying asset or
liability is subject to repricing regardless of maturity.
<TABLE>
<CAPTION>
Table IV - Rate Sensitivity Analysis (dollars in thousands)
Interest Sensitivity/Gap Analysis
December 31, 1998
Over
1 - Month 3 - Month 6 Month 1 - Year 1 - Year Total
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans $ 14,357 4,696 5,082 8,677 98,524 131,336
Securities 39,529 2,626 9,963 19,927 132,395 204,440
Other earning assets 24,764 292 - 1,098 1,250 27,404
------------- ------------- ------------- ------------- ------------------------
78,650 7,614 15,045 29,702 232,169 363,181
Funding Source-
Interest bearing deposits 149,941 29,586 29,641 26,249 67,343 302,760
------------- ------------- ------------- ------------- ------------------------
Repricing/Maturity Gap:
Period $(71,291) $(21,972) $ (14,596) $ 3,453 $164,826
============= ============= ============= ============= ============
Cumulative (71,291) (93,263) (107,859) (104,406) 60,420
============= ============= ============= ============= ============
Period/Total Earning Assets (19.60%) (6.04%) (4.01%) 0.95% 45.38%
</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 monthly. 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, 1998. 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, 1998.
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, 1998:
<TABLE>
<CAPTION>
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 18,584 28,487 18,664 9,433 17,533 57,353 150,054 152,471 6.00%
Floating Rate - 347 - - - 53,572 53,919 53,852 5.62%
Equity Securities - - - - - 467 467 467 5.72%
-------------------------------------------------------------------
Total Securities 18,584 28,834 18,664 9,433 17,533 111,392 204,440 206,790
Loans
Fixed Rate 21,596 13,484 19,939 18,820 26,584 16,525 116,948 112,003 8.13%
Floating Rate 6,672 332 1,232 646 1,501 4,005 14,388 14,388 9.23%
-------------------------------------------------------------------
Total 28,268 13,816 21,171 19,466 28,085 20,530 131,336 126,391
LIABILITIES
Savings, NOW,
and Money Market
Deposits - - - - - 132,353 132,353 132,353 2.43%
Certificates of Deposit 117,967 46,528 2,754 1,394 1,626 138 170,407 171,442 4.97%
Short-term
Borrowings 2,282 - - - - - 2,282 2,282 4.94%
<CAPTION>
Scheduled maturity of market risk sensitive instruments at December 31, 1997:
Average
Over Fair Effective
Year 1 Year 2 Year 3 Year 4 Year 5 5 Years Total Value Yield
ASSETS
Securities
Fixed Rate 35,006 61,757 23,084 9,934 5,938 12,833 148,552 148,917 5.93%
Floating Rate 7,980 2,689 7,497 7,880 5,093 37,914 69,053 69,053 6.29%
Equity Securities - - - - - 368 368 368 5.69%
-------------------------------------------------------------------
Total Securities 42,986 64,446 30,581 17,814 11,031 51,115 217,973 218,338
Loans
Fixed Rate 37,059 18,460 16,459 6,597 7,053 7,499 93,127 89,033 9.69%
Floating Rate 7,015 667 1,309 1,052 692 4,144 14,879 14,879 9.08%
-------------------------------------------------------------------
Total 44,074 19,127 17,768 7,649 7,745 11,643 108,006 103,912
LIABILITIES
Savings, NOW,
and Money Market
Deposits - - - - - 126,016 126,016 126,016 2.72%
Certificates of Deposit 143,378 13,880 4,052 735 1,186 - 163,231 163,872 4.58%
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 $131,336,000 at December
31, 1998 compared to $108,006,000 at December 31, 1997 and $103,185,000 at
December 31, 1996.
As can be seen in Table VI, a strong increase of approximately 23.8% in
commercial and industrial loans, a strong increase of approximately 28.1% in
real estate loans occurred while installment loans increased a moderate 8.7% in
1998. In 1998, the Jefferson Bank acquisition resulted in an increase in total
loans of approximately $7,337,000. The additional increase in total loans
experienced by the Company in 1998 was due to increased loan demand. In 1997,
there was a strong increase of approximately 17.2% in commercial and industrial
loans, a moderate increase of approximately 8.5% in real estate loans while
installment loans decreased a moderate 9.7%. The increase in 1996 from 1995 was
the result of strong loan demand and an approximately $6,100,000 increase due to
the acquisition of the Waskom Bank. Increases in loans not related to the
acquisition of the Waskom Bank 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, 1998, real estate mortgage loans comprised 48.9% of the
loan portfolio, compared to 46.4% and 44.8% at December 31, 1997 and December
31, 1996, respectively.
<TABLE>
<CAPTION>
Table VI Loan Information (dollars in thousands) - Outstanding Balances at:
December 31,
-----------------------------------------------------------------------------------------
Types of Loans 1998 1997 1996 1995 1994
- ----------------------------
---------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 34,632 27,973 23,863 22,444 18,410
Real estate - mortgage 64,204 50,122 46,211 34,009 28,683
Installment 32,500 29,911 33,111 26,234 18,123
---------------- ---------------- --------------- --------------- ---------------
Total $131,336 108,006 103,185 82,687 65,216
================ ================ =============== =============== ===============
</TABLE>
Approximately 11% 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,
1998:
<TABLE>
<CAPTION>
Table VII - Loan Interest and Maturity Information (dollars in thousands)
At December 1, 1998
-------------------------------------------------------------
Commercial Real
and Industrial Estate Installment Totals
---------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fixed rate loans:
Mature within one year $ 6,245 10,450 4,901 21,596
Mature in one to five years 12,549 39,532 26,463 78,544
Mature after five years 7,369 9,536 118 17,023
----------------- ------------- ------------- ------------
Total fixed rate loans 26,163 59,518 31,482 117,163
Floating rate loans:
Mature within one year 5,444 507 513 6,464
Mature in one to five years 1,625 1,883 202 3,710
Mature after five years 1,400 2,296 303 3,999
----------------- ------------- ------------- ------------
Total floating rate loans 8,469 4,686 1,018 14,173
Total loans:
Mature within one year 11,689 10,957 5,414 28,060
Mature in one to five years 14,174 41,415 26,665 82,254
Mature after five years 8,769 11,832 421 21,022
----------------- ------------- ------------- ------------
Total loans $34,632 64,204 32,500 131,336
================= ============= ============= ============
</TABLE>
14
<PAGE>
Allowance for Loan Losses
- -------------------------
The balance in allowance for loan losses at December 31, 1998 was $1,701,000
compared to the December 31, 1997 balance of $1,249,000 and the December 31,
1996 balance of $1,146,000. The allowance for loan losses at December 31, 1998,
1997 and 1996, was 1.30%, 1.16%, and 1.11%, of outstanding loans, respectively.
The acquisition of the Jefferson Bank accounted for approximately $165,000 of
the increase in the allowance for loan losses in 1998. 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 1998, 1997, and 1996
respectively the Company made provisions to increase the allowance for loan
losses by $623,000, $330,000, and $264,000. The larger provisions during 1998
and 1997 were made due to continued growth in loan and lease balances. The
increased provision and increased percentage of the allowance as a percentage of
total loans is due primarily to the Company's new overdraft program that
increased risk. However, management believes the risk is significantly offset
by the increase in fees generated. In 1998 the Company experienced net charge
offs of $336,000 compared to net charge offs in 1997 of $227,000.
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, 1998 is adequate to cover
losses inherent in its loan portfolio. A migration analysis and an internal
classification system for loans also help 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 that 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
$567,000 will be charged off in the year ending December 31, 1999. The breakdown
of this estimate is as follows: $52,000 in commercial and industrial, $15,000 in
real estate - mortgage, and $500,000 in installment.
15
<PAGE>
<TABLE>
<CAPTION>
Table VIII Analysis of Allowance of Loan Losses (dollars in thousands)
Years Ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ -------------- ------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,249 1,146 1,019 997 1,014
Charge-offs:
Commercial and industrial 78 57 20 90 27
Real estate mortgage 26 1 - - 2
Installment loans 455 289 223 157 33
------------ -------------- ------------- ---------------------------
Total charge-offs 559 347 243 247 62
------------ -------------- ------------- ---------------------------
Recoveries:
Commercial and industrial 69 49 28 40 157
Real estate mortgage - - - - -
Installment loans 154 71 54 49 38
------------ -------------- ------------- ---------------------------
Total recoveries 223 120 82 89 195
------------ -------------- ------------- ---------------------------
Net charge-offs (recoveries) 336 227 161 158 (133)
Additions charged (credited) to
Operations 623 330 264 180 (150)
Addition due to acquisition 165 - 24 - -
------------ -------------- ------------- ---------------------------
Balance at end of period $ 1,701 $ 1,249 $ 1,146 1,019 997
======== ======== ======= ====== ======
Average loans outstanding
during the period* $116,520 101,245 88,684 71,347 55,516
Gross charge-offs as a percent
of average loans* 0.48% 0.34 0.29 0.35 0.11
Recoveries as a percent of
gross charge-offs 39.89% 34.58 33.75 36.03 314.52
Ratio of net charge-offs (recoveries)
during the period to average loans
outstanding during the period* 0.29% 0.22 0.19 0.22 (0.24)
* Net of unearned income
</TABLE>
<TABLE>
<CAPTION>
Table IX Allocation of Allowance for Loan Losses (dollars in thousands)
As of
December 31,
------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------------
Reserve Reserve Reserve Reserve Reserve
Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio*
------------ -------- --------- -------- ----------- --------- ---------- -------- --------- -------
Commercial
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
and industrial $ 677 39.8% $ 619 49.5% $ 359 23.1% $ 468 27.2% $ 239 29.7%
Real estate -
Mortgage 511 30.0 191 15.3 81 44.8 112 41.1 123 43.7
Installment 498 29.3 413 33.1 420 32.1 366 31.7 86 26.6
Unallocated 15 0.9 26 2.1 286 N/A 73 N/A 549 N/A
----------- -------- ---------- -------- --------------- -------- ---------- -------- ---------- --------
$1,701 100.0% $1,249 100.0% $1,146 100.0% $1,019 100.0% $ 997 100.0%
=========== ======== ========== ======== =============== ======== ========== ======== ========== ========
*Represents the ratio of each loan category to gross loans (including unearned interest)
</TABLE>
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 $81,000 in 1998, $172,000 in 1997, and $147,000 in
1996. The decrease from 1997 to 1998 was the result of one loan being moved out
of nonaccrual status. The increase from 1996 to 1997 was the result of one loan
being moved to nonaccrual status. 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, 1998, the Company had one restructured loan.
Loans past due over ninety days and still accruing interest were $21,000 at
December 31, 1998, a slight increase from the December 31, 1997 amount of
$20,000.
The following table presents an analysis of nonaccrual, past due, other
real estate and restructured loans at December 31, 1998.
<TABLE>
<CAPTION>
Table X - Analysis of Nonaccrual, Past Due, Other Real Estate, and Restructured Loans (dollars in thousands)
At December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 81 172 147 99 195
Restructured loans 69 - - - -
Other impaired loans - - - - -
Other real estate 125 186 151 - -
---------------- --------------- --------------- --------------- ---------------
Total nonperforming assets 275 358 298 99 195
================ =============== =============== =============== ===============
Allowance for loan loss to
nonperforming assets 618.55% 384.88 384.90 1029.29 511.28
Nonperforming assets as a per-
centage of stockholders' equity 0.8% 1.1 .9 .3 .7
Loans past due 90+ days and
still $ 21 $ 20 $ 33 41 33
accruing
================ =============== =============== =============== ===============
Other potential problem loans - - - - -
================ =============== =============== =============== ===============
Income that would have been
recorded in accordance with
original terms $ 6 5 7 5 20
Less income actually
recorded - - 3 - -
---------------- --------------- --------------- --------------- ---------------
Loss of income $ 6 5 4 5 20
================ =============== =============== =============== ===============
</TABLE>
17
<PAGE>
Securities
- ----------
The Investment Committee, under the guidance of the Company's Investment
Policy, assesses the short and long-term investment needs of the Company after
consideration of loan demand, interest rate factors, and prevailing market
conditions. Recommendations for securities purchases and other transactions are
then made considering safety, liquidity, and maximization of return to the
Company. Management determines the proper classification of securities (e.g.,
hold-to-maturity, available-for-sale) 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 approximately 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 that 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 71% 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, 1998, the Company's level of structured notes was
insignificant.
Securities are the Company's single largest interest-earning asset
representing approximately 53%, 61%, 64% of total assets at December 31, 1998,
1997, and 1996 respectively. The investment portfolio totaled $205.4 million at
December 31, 1998, down from $218.0 and $228.2 million at December 31, 1997 and
December 31, 1996, respectively.
18
<PAGE>
The various types of securities held by the Company are listed below in
Table XI:
<TABLE>
<CAPTION>
Table XI - Investment Securities Information (dollars in thousands)
Held to Maturity Portfolio At December 31,
---------------------------------------------------------------
(Carried at Amortized Cost) 1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. Treasuries 7,013 $ 7,038 7,062
U.S. Government Agencies 3,064 10,144 10,215
State and Municipal 47,037 32,213 34,069
Corporate securities - - 2,508
Other Securities 352 - -
----------------- ----------------- -----------------
57,466 49,395 53,854
Mortgage-backed securities
and collateralized mortgage
obligations 17,071 19,838 28,561
----------------- ----------------- -----------------
Total Held to Maturity 74,537 $ 69,233 82,415
================= ================= =================
Available for Sale Portfolio At December 31,
---------------------------------------------------------------
(Carried at Market Value) 1998 1997 1996
----------------- ----------------- -----------------
U.S. Treasuries 48,061 $ 60,282 54,115
U.S. Government Agencies 14,287 20,029 17,716
State and Municipal 2,435 - -
Corporate securities - - 1,004
Other securities 467 368 348
----------------- ----------------- -----------------
65,250 80,679 73,183
Mortgage-backed securities and
collateralized mortgage obligation 65,636 68,061 72,557
----------------- ----------------- -----------------
Total Available for Sale 130,886 $148,740 145,740
================= ================= =================
</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>
<CAPTION>
Table XII - Investment Securities Maturities and Yield Information (dollars in thousands)
Held to Maturity Portfolio (Carried at amortized cost):
As of December 31, 1998
-----------------------
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 $10,077 5.69% - - - - - - - - 10,077 10,115
State and
Municipal* 5,984 6.57 8,688 6.68 11,087 6.93 21,278 6.71 - - 47,037 48,267
Corporate
securities - - - - - - - - - - - -
Other - - - - - - 352 4.21 - - 352 352
------- ---- ----- ---- ------ ---- ------ ---- ------ ----- ------ ------
Sub Total 16,061 6.68 8,688 6.16 11,087 7.65 21,630 7.47 - - 57,466 58,734
Mortgage-backed
Securities - - - - - - - - 17,071 6.06 17,071 17,170
------- ---- ----- ---- ------ ---- ------ ---- ------ ----- ------ ------
Total $16,061 6.68 8,688 6.16 11,087 7.65 21,630 7.47 17,071 6.06 74,537 75,904
======= ==== ===== ==== ====== ==== ====== ==== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Available for Sale Portfolio (Carried at Market Value):
As of December 31, 1998
-----------------------
Matures in Matures in Matures in Matures in Amortizing
1 Year or Less 1-5 Years 5-10 Years After 10 Years Securities Total
-------------- ---------------- ---------------- ---------------- -------------- Amortized Market
Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Cost Value
------- ----- ------- ----- ------- ----- ------- ------ ------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Treasury and
government agencies $ 1,512 4.62% $57,870 5.60% $ 1,984 6.29% - - - - 61,366 62,347
State and Municipal* - - - - 115 5.94 2,320 6.72% - - 2,435 2,435
Corporate securities - - - - - - - - - - - -
Other securities - - - 0.00 467 5.70 - - - - 467 467
------- ---- ------- ---- ------- ---- ------ ---- ------ ----- ------ -------
Sub Total 1,512 4.62 57,870 5.60 2,566 0.00% 2,320 6.72 - - 64,268 65,249
Mortgage-backed
securities - - - - - - - - 65,635 5.71 65,635 65,637
------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- -------
Total $ 1,512 4.62% $57,870 5.60% $ 2,566 0.00% $ 2,320 6.72% 65,635 5.71 129,903 130,886
======= ==== ======= ==== ======= ==== ====== ==== ====== ==== ======= =======
* Yields are stated on a tax-equivalent basis at a 34% effective tax rate.
</TABLE>
20
<PAGE>
Deposits
- --------
Total deposits at December 31, 1998 were $345.7 million, an increase of
approximately $23.6 million from the December 31, 1997 deposit total of $322.1
million. Total deposits increased during 1998 by approximately $28.5 million as
a result of the Jefferson Bank acquisition, which increase was partially offset
by the overall decrease in deposits. Deposits totaled approximately $320.7
million at December 31, 1996.
Total average deposits in 1998 were $320,144,000, an increase of $8,336,000
over 1997. Total average deposits in 1996 were $311,808,000, an increase of
$11,804,000 over the December 31, 1996 total of $300,004,000. The majority of
the increase from 1996 to 1997 was a result of the Waskom Bank acquisition,
which occurred in September 1997, and the majority of the increase from 1997 to
1998 was a result of the Jefferson acquisition, which occurred in December 1998.
The average balances of the various deposit types for the last three years
along with the interest paid and average deposit interest rates follow:
<TABLE>
<CAPTION>
Table XIII - Analysis of Depositor Average Balances (dollars in thousands)
Year Ended December 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- ------------------------------- -------------------------------
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 $ 36,883 - -% $ 31,955 - -% $ 27,864 - -%
Interest-bearing demand 75,420 1,814 2.42 73,665 1,910 2.59 72,194 2,015 2.79
Savings 10,270 252 2.45 9,419 250 2.65 8,442 226 2.68
Money market accounts 34,564 960 2.78 34,472 1,035 3.03 36,819 1,096 2.98
Time 163,007 8,318 5.10 162,297 8,298 5.11 154,685 7,839 5.07
-------- ------ ---- -------- ------ ---- -------- ------ -----
Total $320,144 11,344 4.01 $311,808 11,493 4.11% $300,004 11,176 4.11%
======== ====== ==== ======== ====== ===== ======== ====== ====
</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, 1998, 50.9% of
total average deposits were time deposits as compared to 52.1%, and 51.6% at
December 31, 1997 and 1996, respectively.
Included in the table below are time deposits at December 31, 1998, with
balances of $100,000 or more. These deposits represent 25.8% of total time
deposits, and the majority of such deposits will mature within three months,
reflecting the volatile nature of these deposits. The cost of these funds is
generally higher than for other time deposits. The following table provides an
analysis of the maturity of these deposits:
<TABLE>
<CAPTION>
Table XIV - Certificates of Deposit $100,000 or more (dollars in thousands) at December 31, 1998
Maturity from Percent of
December 31, 1998 Total
----------------- ----------
<S> <C> <C>
Three months or less $24,994 56.80%
Within months four through six 9,548 21.70%
Within months seven through twelve 9,241 21.00%
Over one year 220 0.50%
------- ------
Total $44,003 100.00%
======= ======
</TABLE>
21
<PAGE>
Short-Term Borrowings
- ---------------------
As of December 31, 1998, the Company's short term borrowings consisted of
notes payable issued as a result of the Waskom Bank and Jefferson Bank
acquisitions. The Waskom notes payable plus accrued interest totaled $468,000 at
December 31, 1998 and were accruing interest at the rate of 4.94%. The rate of
interest on the Waskom notes payable changed from 5.61% to 4.94% on September
10,1998. As of January 4, 1999, the balance of the Waskom notes payable had been
reduced to zero. The Jefferson notes payable plus accrued interest totaled
$1,838,000 at December 31, 1998 and were accruing interest at the rate of 4.43%
and will remain at this rate until their maturity on January 15, 1999. As of
March 5, 1999, the balance of the Jefferson notes payable had been reduced to
zero.
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. In anticipation of additional cash which may
potentially be required in the Company's vaults related to Y2K concerns, the
Company has established credit lines at several large correspondents.
Capital Resources and Capital Adequacy
- --------------------------------------
The Company's shareholders' equity of $35,911,000 at December 31, 1998
remains at a level considered to be adequate by management. Shareholder equity
increased from 1997 to 1998 due to profits in excess of dividends paid to
shareholders reflected in the increase in retained earnings from 1997, and as a
result of a net change in the net unrealized gain (loss) on available for sale
securities of $984,000. The increase in the net unrealized gain on available
for sale securities was caused by a decline in long term interest rates, which
has had a positive impact on the market price of many of the Company's
investment securities. Shareholders' equity was $32,729,000 at December 31, 1997
and $31,988,000 at December 31, 1996.
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, 1998,
Citizens Bank had Tier 1 and total capital ratios of 19.24% and 20.29%
respectively. 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.
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, 1998, Citizens Bank's
leverage ratio was 8.8% compared to 9.1% and 9.0% as of December 31, 1997 and
December 31, 1996 respectively.
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, 1998, 1997, and
1996, Citizens 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.
On December 11, 1998, the Citizens Bank completed its acquisition of all of
the issued and outstanding stock of Jefferson National Bank. The Citizens Bank
acquired certain assets and assumed certain liabilities for a purchase price of
$6,150,200 that was funded with a combination of notes and cash.
During 1998, the Company purchased 1,120 shares of its common stock from
four shareholders at an average cost of $14.50 per share. These privately
negotiated transactions all occurred after expiration of the tender offer (see
above). 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.
Employees
- ---------
At December 31, 1997, the Company employed approximately 168 full-time and
21 part-time employees. Management highly values and respects its excellent
relationship with its employees.
Year 2000
- ---------
The Year 2000 ("Y2K") issue relates to the fact that many computer systems,
hardware and software, use a two digit field to represent the year. The concern
is that on January 1, 2000, a computer system may incorrectly interpret the year
2000 as 1900 causing various mathematical calculations to be wrong.
Since mid 1996, the Company has been actively preparing for the entry to
the year 2000 in an effort to minimize the impact of the Y2K issue to the
Company and its customers. The Company established a Y2K committee headed by a
senior member of the staff. The Y2K committee reviewed a list of the Company's
equipment that might be affected by any glitch caused by the date rollover to
the year 2000 and developed a plan to test all mission critical systems and
remediate if necessary.
All information technology systems, such as the main computer system, check
sorter, LAN & WAN networks, ATMs, PCs and core system software, will be tested
by March 31, 1999. By mid March 1999, the testing of these systems was
substantially complete and all systems have either tested compliant or the
appropriate upgrade and enhancement has been installed to remediate the
identified problem. Additional testing will be performed by June 30,1999 to
provide an added comfort level that all systems are ready to operate in the new
millenium.
All the non-information technology systems, including security systems,
vaults, elevators and HVAC systems, have been listed and will be tested by June
30, 1999. Like the information technology systems, all of the systems reviewed
and tested to this point have been found to be Y2K compliant or an upgrade or
enhancement has been added to remediate the identified problem.
The Company has assessed the Y2K risks related to outside companies and
businesses with whom it relies to provide service to the Company's customers.
Two of the primary concerns are electrical and telephone service.
Representatives of the Company have been in contact with the various companies
that provide these services in each of its locations and believe, based on
representations given by third parties, that they will be able to provide
continuous service to the Company in the new millennium. As the Company has
become more reliant on its information technology system, a diesel generator to
provide backup electrical power to the main bank location has been purchased and
is scheduled to be operational by June 1999.
23
<PAGE>
The third principal Y2K concern is the Company's correspondent relationship
with the Federal Reserve Bank for the transmission of electronic funds and wire
transfers. Testing with the Federal Reserve has been completed and all tests
have been completed as Y2K compliant. The Company also maintains accounts with
several major correspondent banks that could be used as alternate source for
wire transfers and clearing checks.
The cost of replacing non-compliant Y2K hardware and software in 1998 was
approximately $57,000. This does not include the purchase of a check sorter and
a phone system for the main bank at a cost of approximately $220,000 since these
items were targeted for replacement before it was determined that they were not
Y2K compliant. The $57,000 does include the salary of a person who was hired in
mid year of 1998 to assist with the testing for Y2K, but does not include salary
expense for the personnel that were already on staff. In 1999, the Company
anticipates spending approximately $25,000 on systems and testing related to
Y2K.
The impact of the Y2K issues on the Company will depend not only on the
corrective steps the Company takes, but will also depend on the way governmental
agencies and other businesses react. Notwithstanding the Company's best efforts,
there can be no assurance that all customers and third party vendors with whom
the Company conducts business will adequately address their Y2K issues. With
this in mind, the bank is developing contingency plans for implementation in the
event a significant third party vendor does not adequately address the Y2K
issues. These plans primarily involve using backup sites, alternate vendors or
internal remediation.
The Company has questioned various loan and deposit customers regarding
their Y2K readiness and related issues to anticipate how the liquidity of the
bank may be affected. The primary concerns of the Company are the concern
depositors may have and how much additional cash will be required to be in the
vaults to fund liquidity needs of depositors. The Company has established credit
lines at several large correspondents in an abundance of caution. The Company
has reviewed its larger loan commitments to assess the Company's potential
exposure to any of its borrower's lack of Y2K readiness. This credit risk will
be used in calculating the provision for loan loss.
The Company has attempted to address all known Y2K issues in a timely and
correct manner. Despite the Company's best efforts to accurately plan for the
Year 2000, the results could vary from these estimates if the bank has
unforeseen difficulties in a mission critical system and its ultimate
remediation.
Competition
- -----------
The Company services a large portion of the East Texas area with offices in
Henderson, Overton, and Mount Enterprise, in Rusk County, Jefferson, in Marion
County, Malakoff and Chandler, in Henderson County, Waskom, in Harrison County,
and Corsicana in 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 1999 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, reducing its overhead by utilization of economies of
scale, coordinating its branch operations, maintaining deposits in a
historically low interest rate environment, staying abreast of the latest
technological changes, preserving its strong dividend payout, and increasing 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
24
<PAGE>
magnitude as the price of goods and services, since such prices are directly
affected by inflation. In the current interest rate environment, liquidity and
the maturity structure of the Company's assets and liabilities are important to
the maintenance of acceptable performance levels.
It is the philosophy of the Company to remain independent in ownership, to
foster its image as the community leader in banking, increase market share
through selected acquisitions and aggressive marketing, maintain a sound
earning-asset portfolio, and assess liquidity needs while maintaining our
profitability and the return to our shareholders.
Recent Accounting Pronouncements
- --------------------------------
The following selected accounting pronouncements were issued during 1998, but
have not yet become effective, and are listed together with the expected impact
on the Company.
FASB 133, Accounting for Derivative Instruments and Hedging Activities
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivatives embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Statement will be effective for the company in the fiscal
year ending in 2000. Due to the Company's limited use of derivative
instruments, the effect of implementation of this new pronouncement is not
expected to have a significant effect on the financial position or results of
operations of the Company.
SOP 98-5, Reporting on the Costs of Start-Up Activities This Statement of
Position requires that the costs of start-up activities, including
organizational costs, be expensed as incurred. SOP 98-5, effective for fiscal
years beginning after December 15, 1998, requires initial application to be
recorded as of the beginning of the fiscal year in which the SOP is first
adopted and is reported as the cumulative effect of a change in accounting
principle. Although certain capitalized costs of the Company will be effected,
the effect of implementation of this new pronouncement is not expected to have a
significant effect on the financial condition or results of operations of the
Company.
Forward-Looking Information
- ---------------------------
Statements and financial discussion and analysis by management contained
throughout this Annual Report that are not historical facts are forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve a number of
risks and uncertainties. Various factors could cause actual results to differ
materially from the forward-looking statements, including, without limitation,
changes in interest rates and economic conditions, increased competition for
deposits and loans adversely affecting rates and terms, changes in availability
of funds increasing costs or reducing liquidity, changes in applicable statutes
and governmental regulations, the Company's ability to successfully complete its
Y2K compliance project in time, and the loss of any member of senior management
or operating personnel and the potential inability to hire qualified personnel
at reasonable compensation levels.
25
<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, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Shreveport, Louisiana
February 26, 1999
26
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
----------------- -----------------
<S> <C> <C>
Cash and due from banks $ 9,493 8,886
Interest-bearing deposits with financial institutions 17,174 8,212
Federal funds sold 10,230 5,040
Securities:
Held to maturity, approximate market value of
$75,904 in 1998 and $69,598 in 1997 74,537 69,233
Available for sale 130,886 148,740
----------------- -----------------
205,423 217,973
Loans, net 129,263 106,061
Premises and equipment, net 6,202 5,209
Accrued interest receivable 3,706 3,311
Other assets 5,428 3,801
----------------- -----------------
$ 386,919 358,493
================= =================
Liabilities and Stockholders' Equity
Deposits:
Demand - noninterest-bearing 42,960 32,860
NOW accounts 85,029 79,810
Money market and savings 47,324 46,206
Certificates of deposit and other time deposits 170,407 163,231
----------------- -----------------
Total deposits 345,720 322,107
Accrued interest payable 1,325 1,105
Notes payable 2,282 844
Other liabilities 1,681 1,708
----------------- -----------------
351,008 325,764
Stockholders' equity:
Preferred stock, $5 par value; 2,000,000 shares
authorized, none issued or outstanding - -
Common stock, $5 par value; 10,000,000 shares
authorized, 2,160,000 issued 10,800 10,800
Capital surplus 5,400 5,400
Undivided profits 21,089 18,875
Accumulated other comprehensive income 649 (335)
----------------- -----------------
37,938 34,740
Less treasury stock at cost, 143,626 shares in
1998 and 142,506 shares in 1997 (2,027) (2,011)
----------------- -----------------
Total stockholders' equity 35,911 32,729
Commitments and contingencies ----------------- -----------------
$ 386,919 358,493
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans $ 9,705 8,840 7,642
Investment securities
Taxable - available-for-sale 8,178 8,829 8,058
Taxable - held-to-maturity 1,785 2,529 3,182
Tax-exempt 1,670 1,478 1,390
Federal funds sold 351 202 117
Interest-bearing deposits with financial institutions 545 389 327
----------- ----------- -----------
Total interest income 22,234 22,267 20,716
----------- ----------- -----------
Interest expense:
Deposits:
NOW accounts 1,814 1,910 2,015
Money market and savings 1,212 1,285 1,322
Certificates of deposit and other time deposits 8,318 8,298 7,839
Other borrowed funds 33 53 27
----------- ----------- -----------
Total interest expense 11,377 11,546 11,203
----------- ----------- -----------
Net interest income 10,857 10,721 9,513
Provision for loan losses 623 330 264
----------- ----------- -----------
Net interest income after provision for loan losses 10,234 10,391 9,249
----------- ----------- -----------
Other income:
Service charges, commissions, and fees 2,253 1,440 1,148
Income from fiduciary activities 894 753 632
Net realized gains on securities transactions 292 191 719
Other 1,315 906 744
----------- ----------- -----------
Total other income 4,754 3,290 3,243
----------- ----------- -----------
Other expenses:
Salaries and employee benefits 6,296 5,601 4,770
Occupancy and equipment 1,264 1,038 927
Regulatory assessments 132 127 191
Other 2,922 2,499 2,150
----------- ----------- -----------
Total other expenses 10,614 9,265 8,038
----------- ----------- -----------
Income before income tax expense 4,374 4,416 4,454
Income tax expense 868 1,026 1,110
----------- ----------- -----------
Net income $ 3,506 3,390 3,344
=========== =========== ===========
Net income per common share $ 1.74 1.61 1.55
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
other Total
Preferred Common Capital Undivided comprehensive Treasury stockholders'
stock stock surplus profits income (loss) stock equity
--------- ------ ------- --------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ - 10,800 5,400 14,859 147 - 31,206
Comprehensive income:
Net income - - - 3,344 - - 3,344
Net change in unrealized gains (losses) on
securities available for sale, net of tax - - - - (850) - (850)
-------------
Total comprehensive income 2,494
Purchase of - - - - - (334) (334)
29,700 shares of treasury stock
Cash dividends ($0.64 per share) - - - (1,378) - - (1,378)
--------- ------ ------- --------- ------------- -------- -------------
Balances at December 31, 1996 - 10,800 5,400 16,825 (703) (334) 31,988
Comprehensive income:
Net income - - - 3,390 - - 3,390
Net change in unrealized gains (losses) on
securities available for sale, net of tax - - - - 368 - 368
-------------
Total comprehensive income 3,758
Purchase of 112,806 shares of treasury stock - - - - - (1,677) (1,677)
Cash dividends ($0.64 per share) - - - (1,340) - - (1,340)
--------- ------ ------- --------- ------------- -------- -------------
Balances at December 31, 1997 - 10,800 5,400 18,875 (335) (2,011) 32,729
Comprehensive income:
Net income - - - 3,506 - - 3,506
Net change in unrealized gains (losses) on
securities available for sale, net of tax - - - - 984 - 984
-------------
Total comprehensive income 4,490
Purchase of 1,120 shares of treasury stock - - - - - (16) (16)
1,120 shares of treasury stock
Cash dividends ($0.64 per share) - - - (1,292) - - (1,292)
--------- ------ ------- --------- ------------- -------- -------------
Balances at December 31, 1998 $ - 10,800 5,400 21,809 649 (2,027) 35,911
========= ====== ======= ========= ============= ======== =============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,506 3,390 3,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (152) (125) 131
Net amortization (accretion) of premium
discount on securities 501 352 589
Net realized gains on (292) (191) (719)
securities transactions
Provision for loan losses 623 330 264
Depreciation and amortization 774 437 375
Decrease (increase) in accrued interest receivable (112) 138 624
Decrease (increase) in other assets 380 (618) (74)
Increase (decrease) in accrued interest payable 53 (39) (14)
Increase (decrease) in other liabilities 27 (333) 299
Other (31) - -
---------- -------- ---------
Net cash provided by operating activities 5,277 3,341 4,819
---------- -------- ---------
Investing activities:
Proceeds from sales of available-for-sale securities 31,207 31,909 55,669
Proceeds from maturities, paydowns, and calls of
available-for-sale securities 53,770 18,452 25,473
Proceeds from maturities, paydowns, and calls of
securities held to maturity 21,721 19,722 15,995
Purchases of available-for-sale securities (56,841) (52,634) (74,142)
Purchases of securities held to maturity (21,390) (6,871) (11,291)
Net increase in loans (16,705) (5,869) (15,051)
Proceeds from sales, premises and equipment
and other real estate 214 157 -
Net cash received from acquisition
Purchases of bank premises and equipment (1,046) (1,941) (756)
Net cash received from acquisitions 5,188 - 1,544
Other 23 - -
---------- -------- ---------
Net cash provided by (used in) investing activities 16,141 2,925 (2,559)
---------- -------- ---------
Financing activities:
Net increase (decrease) in deposits (4,951) 1,434 5,349
Payments on notes payable (400) - -
Cash dividends paid (1,292) (1,340) (1,378)
Purchase of treasury stock (16) (1,677) (334)
---------- -------- ---------
Net cash provided by (used in) by financing activities (6,659) (1,583) 3,637
---------- -------- ---------
Increase in cash and cash equivalents 14,759 4,683 5,897
Cash and cash equivalents at beginning of year 22,138 17,455 11,558
---------- -------- ---------
Cash and cash equivalents at end of year $ 36,897 22,138 17,455
========== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
(1) Summary of Significant Accounting Policies
(a) Business
Henderson Citizens Bancshares, Inc. (the "Company") through its indirect
subsidiary, Citizens National Bank, Henderson, Texas (the "Bank"),
provides a full range of banking services to individual and corporate
customers in east Texas. The Company and the Bank are subject to
regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory authorities.
(b) Basis of Presentation
The consolidated financial statements include the financial statements of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(d) 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.
(e) Securities
The Company classifies its debt and 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.
31
<PAGE>
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary results
in a reduction in carrying amount to fair value. The impairment is
charged to earnings, and a new cost basis for the security is
established.
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
is 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.
(f) 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 include 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.
(g) 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
32
<PAGE>
procedures, and other relevant factors. This evaluation is inherently
subjective as it requires material estimates including the amounts and
timing of future cash flows expected to be received on impaired loans.
The provision for loan losses is charged to expense, and loans charged
off, net of recoveries, are charged directly to the allowance.
While the Company uses available information to recognize losses on
loans, future changes to the allowance may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies may require the
Company to record changes to the allowance based on their judgments about
information available to them at the time of their examination.
(h) 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.
(i) 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.
(j) Basic Net Income Per Common Share
Basic 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 2,017,166 in 1998, 2,109,747 in
1997 and 2,153,333 in 1996. There are no potential commons shares;
therefore diluted net income per common shares is not presented.
(k) 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.
Goodwill is included in other assets on the consolidated balance sheets.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be
33
<PAGE>
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
(l) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes standards for reporting and presentation of comprehensive
income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains
(losses) on securities and is presented in the consolidated statements of
stockholders' equity and comprehensive income. This Statement requires
only additional disclosures in the consolidated financial statements; it
does not affect the Company's financial position or results of
operations. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
(m) Recently Issued But Not Effective Pronouncements
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued which establishes accounting and reporting
standards for derivative instruments, including certain derivatives
embedded in other contracts, and for hedging activities. It requires
that an entity recognizes all derivatives as either assets or liabilities
in the balance sheet and measures those instruments at fair value. The
Statement will be effective for the Company in the fiscal year ending
2000. Due to the level of use of derivatives of the Company, the effect
of implementation of this new pronouncement is not expected to have a
significant effect on the financial position or results of operations of
the Company.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. SOP
98-5 requires that the costs of start-up activities, including
organizational costs, be expensed as incurred. SOP 98-5, effective for
fiscal years beginning after December 15, 1998, requires initial
application to be recorded as of the beginning of the fiscal year in
which the SOP is first adopted and is reported as the cumulative effect
of a change in accounting principle. Although certain capitalized costs
will be affected, the effect of implementation of this new pronouncement
is not expected to have a significant effect on the financial condition
or results of operations of the Company.
(n) Segment Information
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information was issued which establishes standards for the
way public business enterprises are to report information about operating
segments. SFAS No. 131 utilizes the management approach as a basis for
identifying reportable segments. The management approach is based
34
<PAGE>
on the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. The Company's
management views its banking operations as one segment and makes
decisions about resource allocation and performance assessment based on
the same financial information presented throughout these consolidated
financial statements. The Company does have a separate trust department
but such operations are not significant. Therefore, the disclosure
requirements of SFAS No. 131 are not presented in these financial
statements.
(o) Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
(2) Acquisitions
On December 11, 1998, the Bank acquired all of the outstanding shares of
Jefferson National Bank. Pursuant to the purchase agreement, the Bank paid
$6,150,200, $1,838,000 of which was paid as a note payable due on demand
having an interest rate of 4.43%. This transaction resulted in
approximately $2,622,000 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 $31,913,000 and total deposits of $28,564,000. Operations
of Jefferson National Bank prior to the acquisition are not included in
these consolidated financial statements.
On September 17, 1996, the Company acquired substantially all of the
outstanding shares of Waskom Bancshares, Inc. and its majority owned
subsidiary, First State Bank, Waskom, Texas. Pursuant to the purchase
agreement, the Company paid $3,463,000, $1,511,000 of which was paid as a
note payable due upon demand having an interest rate of 6.10%. This
transaction resulted in approximately $1,337,000 in goodwill, which is
being amortized over fifteen years on a straight-line basis. The
transaction was accounted for using the purchase method of accounting. This
acquisition resulted in an increase in total assets of $24,075,000 and
total deposits of $21,714,000. Operations of Waskom Bancshares, Inc. and
First State Bank prior to the acquisition are not included in these
consolidated financial statements.
Proforma information on these two acquisitions are not presented due to its
insignificance.
(3) Cash and Due From Banks
The Bank is a member of the Federal Reserve System and is required to
maintain reserve balances in accordance with Federal Reserve Bank
requirements. Such reserve requirements totaled $1,063,000 and $794,000 at
December 31, 1998 and 1997, respectively.
35
<PAGE>
(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 Bank's 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 1999, the Bank will be required to obtain approval of the
regulatory agencies before it can declare any dividends which exceed 1999
net income by approximately $1,671,000.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
was signed into law on December 19, 1991. The prompt corrective actions of
the FDICIA place restrictions on any insured depository institution that
does not meet certain requirements, including minimum capital ratios. The
restrictions are based on an institution's FDICIA defined capital category
and become increasingly more severe as an institution's capital category
declines. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and regulatory environment for
insured depository institutions, including reductions in insurance coverage
for certain kinds of deposits, increased supervision by the federal
regulatory agencies, increased reporting requirements for insured
institutions, and new regulations concerning internal controls, accounting,
and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories in
declining order are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To be considered "well capitalized," an institution is
required to have at least a 5% leverage ratio, a 6% Tier I risk-based
capital ratio, and a 10% total risk-based capital ratio. However, the
regulatory agencies may impose higher minimum standards on individual
institutions or may downgrade an institution from one category because of
safety and soundness concerns.
At December 31, 1998, the Bank's leverage ratio was 8.8%, Tier I risk-based
ratio was 19.2%, and total risk-based ratio was 20.3%.
36
<PAGE>
(5) Securities
The amortized cost (carrying value) and approximate fair value of
securities held-to-maturity at December 31, 1998 and 1997, are summarized
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
U.S. Treasury $ 7,013 13 - 7,026
U.S. government agencies 3,064 25 - 3,089
State and municipal 47,037 1,248 (18) 48,267
Mortgage-backed securities
and collateralized
mortgage obligations 17,071 102 (3) 17,170
Other 352 - - 352
----------- ------------ ------------ ---------
$ 74,537 1,388 (21) 75,904
=========== ============ ============ =========
<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>
37
<PAGE>
The amortized cost and approximate fair value (carrying value) of securities
available-for-sale at December 31, 1998 and 1997, are summarized as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury $ 47,129 931 - 48,060
U.S. government agencies 14,237 50 - 14,287
State and municipal 2,435 - - 2,435
Mortgage-backed securities
and collateralized
mortgage obligations 65,635 260 (258) 65,637
Other securities 467 - - 467
-------------- -------------- -------------- -------------
$ 129,903 1,241 (258) 130,886
============== ============== ============== =============
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------- -------------- -------------- --------------
<S> <C> <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
============== ============== ============== =============
</TABLE>
38
<PAGE>
The amortized cost and estimated fair value of securities at December 31,
1998, 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
-------------- -------------- --------------
<S> <C> <C> <C>
Due in one year or less $ 16,061 16,134 73
Due after one year through five years 8,688 8,928 240
Due after five years through ten years 11,087 11,600 513
Due after ten years 21,630 22,072 442
Mortgage-backed securities and
collateralized mortgage obligations 17,071 17,170 99
-------------- -------------- --------------
$ 74,537 75,904 1,367
============== ============== ==============
Securities Held-To-Maturity
----------------------------------------------
Net
Amortized Estimated unrealized
cost fair value gains
-------------- -------------- --------------
<S> <C> <C> <C>
Due in one year or less $ 1,512 1,513 1
Due after one year through five years 57,870 58,838 968
Due after five years through ten years 2,566 2,584 18
Due after ten years 2,320 2,320 -
Mortgage-backed securities,
collateralized mortgage obligations
and other amortizing securities 65,635 65,631 2
-------------- -------------- --------------
$ 129,903 130,886 983
============== ============== ==============
</TABLE>
Proceeds from the sales of available-for-sale securities were $31,207,000 and
$31,909,000 in 1998 and 1997, respectively. Gross gains of $292,000 and
$259,000 were recognized on those sales in 1998 and 1997, respectively.
There were no gross losses recognized on sales in 1998, and $68,000 in gross
losses were recognized on sales in 1997.
Investment securities having a carrying value of $97,930,000 and $60,382,000
at December 31, 1998 and 1997, respectively, were pledged to secure public
funds on deposit or for other purposes as required or permitted by law.
39
<PAGE>
(6) Loans and Allowance for Loan Losses
The composition of the loan portfolio at December 31, 1998 and 1997, is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Real estate mortgage $ 64,204 27,973
Commercial and industrial 34,632 50,122
Installment and other 32,500 29,911
-------------- --------------
Total 131,336 108,006
-------------- --------------
Less:
Allowance for loan losses (1,701) (1,249)
Unearned discount (372) (696)
-------------- --------------
Loans, net $ 129,263 106,061
============== ==============
</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 $504,000 and $737,000 at
December 31, 1998 and 1997, respectively. The change during 1998 reflects
$1,043,000 in new loans and $1,276,000 of repayments.
At December 31, 1998 and 1997, the Banks had discontinued the accrual of
interest on loans aggregating $81,000 and $172,000 respectively. Net
interest income for 1998 and 1997 would have been higher by $5,700 and
$5,600, respectively, had interest been accrued at contractual rates on
nonperforming loans.
At December 31, 1998 and 1997, the recorded investment in impaired loans was
$151,000 and $172,000, respectively. The average recorded investment in
impaired loans for 1998 and 1997 approximated $163,000 and $107,000,
respectively. No interest income was recognized on these impaired loans for
1998 and 1997.
Changes in the allowance for loan losses are summarized as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, January 1 $ 1,249 1,146 1,019
Provision for loan losses 623 330 264
Addition due to acquisition 165 - 24
Loans charged off (559) (347) (243)
Recoveries on loans 223 120 82
-------------- -------------- --------------
Balance, December 31
$ 1,701 1,249 1,146
============== ============== ==============
</TABLE>
40
<PAGE>
During 1998 and 1997, the Bank reduced loans through the repossession of
other real estate and assets by $260,000 and $152,000, respectively. There
were no such reductions in 1996.
(7) Premises and Equipment
Premises and equipment at December 31, 1998 and 1997, are summarized as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
December 31,
Estimated ----------------------------------
useful lives 1998 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Land - $ 665 442
Bank buildings 40 years 5,974 5,032
Furniture, fixtures, and equipment 5-10 years 4,492 3,754
Construction in progress 178 14
-------------- --------------
11,309 9,242
Less accumulated depreciation (5,107) (4,033)
-------------- --------------
Premises and equipment, net $ 6,202 5,209
============== ==============
</TABLE>
Amounts charged to operating expenses for depreciation were $577,000,
$437,000, and $375,000 in 1998, 1997, and 1996, respectively.
(8) Deposits
Included in certificates of deposit and other time deposits at December 31,
1998 and 1997, were $44,003,000 and $53,230,000, respectively, of
certificates of deposit in denominations of $100,000 or more. Interest
expense on time deposits of $100,000 or more amounted to $2,497,000,
$2,650,000, and $2,281,000, for the years ended December 31, 1998, 1997,
and 1996, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as
follows (dollars in thousands):
Years ending December 31:
1999 $ 117,967
2000 46,528
2001 2,754
2002 1,394
2003 1,626
Thereafter 138
-----------
$ 170,407
===========
41
<PAGE>
Deposits with directors, executive officers and their related business
interests, in the opinion of management, are made substantially on the same
terms as those prevailing at the time for comparable deposits with other
persons, totaled $3,562,000 and $6,271,000 at December 31, 1998 and 1997,
respectively.
During 1998, 1997, and 1996, the Banks made interest payments of
$11,157,000, $11,496,000, and $11,149,000, 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, 1998, 1997, and 1996, is as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current $ 1,020 1,151 979
Deferred (152) (125) 131
------------- ------------- -------------
$ 868 1,026 1,110
============= ============= =============
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% in 1998, 1997, and 1996, to pretax income
when compared to actual income tax expense as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,487 1,501 1,519
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest (679) (542) (471)
Other 60 67 62
------------- ------------- -------------
Actual income tax
$ 868 1,026 1,110
============= ============= =============
Effective tax rate 19.8% 23.2 24.9
============= ============= =============
</TABLE>
42
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997, are presented below (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 128 64
Organizational/acquisition costs 28 89
Accrued liabilities 100 83
Net unrealized loss on securities
available-for-sale - 173
Other assets 65 -
------------- -------------
Total gross deferred tax assets 321 409
Less valuation allowance - -
------------- -------------
Net deferred tax assets 321 409
------------- -------------
Deferred tax liabilities:
Investment securities $ (58) 170
Premises and equipment depreciation (109) -
Other assets - 64
Net unrealized gain on securities
available-for-sale (334) -
------------- -------------
Total deferred tax liabilities (501) 234
------------- -------------
Net deferred tax asset (liability) $ (180) 175
============= =============
</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 receivable of $159,000 and federal income
taxes payable of $235,000 at December 31, 1998 and 1997, respectively. A net
deferred federal income tax liability of $180,000 at December 31, 1998 is
included in other liabilities and a net deferred federal income tax asset of
$175,000 is included in other assets at December 31, 1997.
Income taxes paid during 1998, 1997, and 1996, totaled $1,280,000,
$1,155,000, and $995,000, respectively.
43
<PAGE>
(10) Benefit Plans
The Company has a 401(k) savings plan which covers substantially all
full-time employees with at least 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
$345,000, $303,000, and $281,000 related to the plan for the years ended
December 31, 1998, 1997, and 1996, respectively.
During 1998, the Company established a non-qualified deferred compensation
plan and performance and retention plan for certain select management
employees of the Company. Contributions by the Company are at the
discretion of the Board of Directors and generally provides vesting over
five years. The Company expensed $120,000 related to these plans during
the year ended December 31, 1998.
(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
1998, 1997, and 1996, the Company charged HCB a management fee of $32,500,
$27,500, and $15,000, respectively for various services provided to HCB.
The amount charged was considered to be the fair value of those services
rendered. During 1998, 1997 and 1996, Citizens National Bank Henderson,
Texas' trust department charged HCB an additional $10,202, $9,282 and
$6,530, respectively, for management services related to HCB's mineral
interests.
(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.
44
<PAGE>
(13) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1998 and 1997. The
fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 9,493 9,493 8,886 8,886
Interest-bearing deposits with
financial institutions 17,174 17,174 8,212 8,212
Federal funds sold 10,230 10,230 5,040 5,040
Securities 205,423 206,790 217,973 218,338
Loans, net 129,263 124,318 106,061 103,912
Accrued interest receivable 3,706 3,706 3,311 3,311
Financial liabilities:
Deposits:
Demand - noninterest-bearing 42,960 42,960 32,860 32,860
NOW accounts 85,029 85,029 79,810 79,810
Money market and savings 47,324 47,324 46,206 46,206
Certificates of deposit and
other time deposits 170,407 171,442 163,231 163,872
Accrued interest payable 1,325 1,325 1,105 1,105
Notes payable 2,282 2,282 844 844
</TABLE>
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:
45
<PAGE>
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, 1998 and 1997. 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.
Notes Payable
For these short term instruments, the carrying amount is a reasonable
estimate of fair value.
46
<PAGE>
(14) Financial Instruments With Off-Balance Sheet Risk
The Bank is 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 Bank's 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 Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments.
Contractual or
notional amount
at December 31, 1998
--------------------
Financial instruments whose contractual
amounts represent credit risk:
Commitments to extend credit $ 22,082,000
Standby letters of credit 245,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount and
nature of collateral obtained, if deemed necessary by the Bank 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 Bank 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 Bank holds collateral supporting those commitments for which
collateral is deemed necessary.
(15) Concentration of Credit Risk
The Bank grants real estate, commercial, and industrial loans to customers
primarily in Henderson, Texas, and surrounding areas of east Texas.
Although the Bank has a diversified loan portfolio, a substantial portion
(approximately 47% at December 31, 1998) of its loans are secured by real
estate
47
<PAGE>
and its ability to fully collect its loans is dependent upon the real
estate market in this region. The Bank typically requires collateral
sufficient in value to cover the principal amount of the loan. Such
collateral is evidenced by mortgages on property held and readily
accessible to the Bank.
The Bank has $15,385,000 and $7,119,000 on deposit with the Federal Home
Loan Bank of Dallas at December 31, 1998 and 1997, respectively.
(16) Other Comprehensive Income
Other comprehensive income for the years ended December 31, 1998, 1997 and
1996 consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Unrealized net holding gains (losses) arising
during period $ 1,177 494 (375)
Less: Reclassification adjustment for net
gains included in net income 193 126 475
---------- ---------- ----------
Net change in unrealized gains (losses) on
securities $ 984 368 (850)
========== ========== ==========
</TABLE>
48
<PAGE>
(17) 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, 1998 and 1997, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Balance Sheets
(Parent Only)
December 31, 1998 and 1997
(dollars in thousands)
Assets 1998 1997
-------------- --------------
<S> <C> <C>
Cash in subsidiary bank $ 821 367
Investment in subsidiaries 35,881 33,551
Other assets - 27
-------------- --------------
Total assets $ 36,702 33,945
-------------- --------------
Liabilities and Stockholders' Equity
Liabilities:
Dividends declared $ 323 323
Accounts payable 24 49
Other liabilities 444 844
-------------- --------------
791 1,216
Stockholders' equity:
Preferred stock - -
Common stock 10,800 10,800
Capital surplus 5,400 5,400
Undivided profits 21,089 18,875
Accumulated other comprehensive income 649 (335)
Less treasury stock (2,027) (2,011)
-------------- --------------
Total stockholders' equity 35,911 32,729
-------------- --------------
Total liabilities and stockholders' equity $ 36,702 33,945
============== ==============
</TABLE>
49
<PAGE>
Statements of Income
(Parent Only)
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Dividends, including dividends paid by
subsidiary banks $ 2,185 3,070 4,368
Interest expense - 10 -
Operating expenses 25 50 27
----------- ---------- ----------
Income before income tax benefit and
equity in undistributed earnings of
subsidiaries 2,160 3,010 4,341
Income tax expense - 12 12
----------- ---------- ----------
Income before equity in undistributed
earnings of subsidiaries 2,160 2,998 4,329
Equity in undistributed earnings of subsidiaries 1,346 392 (985)
----------- ---------- ----------
Net income $ 3,506 3,390 3,344
=========== ========== ==========
</TABLE>
50
<PAGE>
Statements of Cash Flows
(Parent Only)
Years ended December 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,506 3,390 3,344
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiaries (1,346) (392) 985
Decrease (increase) in other assets 27 (14) 12
Increase (decrease) in accounts payable
and dividends declared (25) 5 21
Decrease in other liabilities (400) (667) -
---------- --------- ----------
Net cash provided by operating
activities 1,762 2,322 4,362
Investing activities - purchase of subsidiary - - (1,934)
Financing activities:
Cash dividends paid (1,292) (1,340) (1,378)
Purchase of treasury stock (16) (1,677) (334)
---------- --------- --------
Net cash used by financing
activities (1,308) (3,017) (1,712)
Increase (decrease) in cash 454 (695) 716
Cash at beginning of year 367 1,062 346
---------- ---------- ----------
Cash at end of year $ 821 367 1,062
========== ========== ==========
</TABLE>
51
<PAGE>
INDEPENDENT AUDITORS LEGAL COUNSEL REGISTRAR/TRANSFER AGENT
KPMG 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
13, 1999.
FORM 10-K
The Company will, upon written request, provide after April 1, 1999, without
charge, a copy of the annual report on Form 10-K for 1998 filed with the
Securities and Exchange Commission to any shareholder to whom this 1998 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 HENDERSON CITIZENS DELAWARE
BANCSHARES, INC. 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
52
<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 1, 1999, (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
1999 LOW HIGH REPRESENTED REPRESENTED
- ---- -------------- --------------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
First Quarter
(Through March
1, 1999) 14.50 14.50 4 663
1998
- ----
First Quarter 14.50 14.50 - -
Second Quarter 14.50 14.50 3 28
Third Quarter 14.50 14.50 3 600
Fourth Quarter 14.50 14.50 7 3,500
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
</TABLE>
As of March 1, 1999, there were 404 shareholders of record.
53
<PAGE>
EXHIBIT 21.1
------------
Henderson Citizens Bancshares, Inc.
Henderson Citizens Delaware Bancshares, Inc. (100%)
Citizens National Bank, Henderson, Texas (100%)
CNB Community Development Corporation (100%)
Waskom Bancshares, Inc. (100%)
Exhibit 21.1 - Page 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,493
<INT-BEARING-DEPOSITS> 17,174
<FED-FUNDS-SOLD> 10,230
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130,886
<INVESTMENTS-CARRYING> 74,537
<INVESTMENTS-MARKET> 75,904
<LOANS> 130,964
<ALLOWANCE> 1,701
<TOTAL-ASSETS> 386,919
<DEPOSITS> 345,720
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,288
<LONG-TERM> 0
0
0
<COMMON> 10,800
<OTHER-SE> 27,138
<TOTAL-LIABILITIES-AND-EQUITY> 386,919
<INTEREST-LOAN> 9,705
<INTEREST-INVEST> 11,633
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,338
<INTEREST-DEPOSIT> 11,344
<INTEREST-EXPENSE> 11,377
<INTEREST-INCOME-NET> 10,857
<LOAN-LOSSES> 623
<SECURITIES-GAINS> 1,315
<EXPENSE-OTHER> 10,614
<INCOME-PRETAX> 4,374
<INCOME-PRE-EXTRAORDINARY> 4,374
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,506
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
<YIELD-ACTUAL> 0
<LOANS-NON> 81
<LOANS-PAST> 21
<LOANS-TROUBLED> 69
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,249
<CHARGE-OFFS> 559
<RECOVERIES> 223
<ALLOWANCE-CLOSE> 1,701
<ALLOWANCE-DOMESTIC> 1,701
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
