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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, 1999
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
of incorporation or organization) Identification No.)
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 14, 2000, was $20,412,788. 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,
2000: 2,001,834.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 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 1999 Annual Report to Shareholders is not deemed filed as
part of this report. (Index to Exhibits is located on page Exhibits-1.)
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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 engages 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, 1999, the Company had, on a consolidated basis, total assets of
approximately $393,446,000, total deposits of approximately $355,423,000, total
loans (net of unearned discount and allowance for loan losses) of approximately
$144,197,000, and total stockholders' equity of approximately $35,771,000.
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 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 1999, the Company purchased 5,274 shares of its common stock from
ten shareholders at an average cost of $17.50 per share. These privately
negotiated transactions all occurred after expiration of the tender offer. 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 June 1, 1999, the Comptroller of Currency approved the establishment of
two additional branch locations for the Citizens Bank; one located at 400 West
Collin Street, Corsicana, Texas, and the second located at 1708 East End
Boulevard North, Marshall, Texas.
On December 20, 1999, the Citizens Bank opened their full service branch
location in Marshall, Texas.
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,
Waskom, and Marshall, 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, 1999, the
Citizens Bank had approximately $393,434,000 in assets, $355,776,000 in
deposits, $144,197,000 in loans (net of unearned discount and allowance for loan
losses), and $35,749,000 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 offers most types of loans, including
commercial, agribusiness, credit card, consumer, mortgage, home equity, and real
estate loans. The Citizens Bank also provides 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.
On August 8, 1999, the Citizens Bank received approval to own an insurance
subsidiary, HCB Insurance Agency, Inc., to perform general insurance agency
activities in Mt. Enterprise, Texas.
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 1999. At the Chandler branch, Saturday
drive up banking has been offered since April 1996. Saturday drive up banking
has been offered by the Waskom branch since September 1998 and by the Jefferson
branch since February 1998. Saturday drive up banking and Saturday full service
banking has been offered at the Marshall branch since it was established in
December 1999.
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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, and Waskom and Marshall which includes Harrison
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. No significant problems related to the year 2000 ("Y2K") issue
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have been discovered with the Company's business systems or with any integral
systems linking the Company to third party vendors. The Company's total cost of
Y2K preparations was approximately $137,000. The cost of replacing non-
compliant Y2K hardware and software combined with the expenses for related
testing was approximately $107,000 of the total. Approximately $30,000 was also
spent on a generator and its installation. The total amount does not include
the purchase of a check sorter and a phone system for the main bank facility at
a cost of approximately $220,000, as these items were targeted for replacement
before it was determined that they were not Y2K compliant. This amount does
include the salary of an employee who was hired in 1998 to assist with the
testing for Y2K but does not include salary expense for the personnel that were
already on staff.
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, 1999, the Citizens Bank employed approximately
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162 full-time and 34 part-time employees.
The Banking Industry in East Texas. The banking industry is affected by
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general economic conditions such as interest rates, inflation, recession,
unemployment and other factors beyond the Company's control. During the mid to
late 1980's, declining oil prices had an indirect effect on the Company's
business, and the deteriorating real estate market cause a significant portion
of the increase in the Company's nonperforming assets during that period.
During the early 1990's, the East Texas economy entered into a recovery and
growth period that continues as we enter the year 2000. During the last ten
years the East Texas economy has diversified, decreasing the overall impact of
declining oil prices, however, the East Texas economy is still affected by the
oil industry. One area of concern continues to be the personal bankruptcy rate
occurring nationwide and in East Texas. Management expects this trend to have
some effect on the Company's net charge-offs. Management of the Company,
however, cannot predict whether current economic conditions will improve, remain
the same or decline.
Supervision and Regulation. Banking is a complex, highly regulated
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industry. The primary goals of the bank regulatory scheme are to maintain a safe
and sound banking system and to facilitate the conduct of sound monetary policy.
In furtherance of these goals, Congress has created several largely autonomous
regulatory agencies and enacted numerous laws that govern banks, bank holding
companies and the banking industry. 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.
The descriptions are qualified in their entirety by reference to the specific
statutes and regulations discussed.
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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, as
amended.
The Bank Holding Company Act provides that a bank holding company must
obtain the prior approval of the Federal Reserve Board for the acquisition of
more than 5% of the voting stock or substantially all the assets of any bank or
bank holding company. The Bank Holding Company Act also provides that, with
certain exceptions, a bank holding company may not (i) engage in any activities
other than those of banking or managing or controlling banks and other
authorized subsidiaries or (ii) own or control more than 5% of the voting shares
of any company that is not a bank. The Federal Reserve Board has deemed certain
limited activities to be closely related to banking and therefore permissible in
which a bank holding company may engage. In addition, applicable law restricts
the extension of credit to any bank holding company by any subsidiary insured
depository institution.
Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
(the "Modernization Act"), enacted on November 11, 1999, with an effective date
of March 11, 2000, expands the types of activities in which a bank holding
company may engage. Subject to various limitations, the Modernization Act
generally permits a bank holding company to elect to become a "financial holding
company." A financial holding company may affiliate with securities firms and
insurance companies and engage in other activities that are "financial in
nature." Among the activities that are deemed "financial in nature" are, in
addition to traditional lending activities, securities underwriting, dealing in
or making a market in securities, sponsoring mutual funds and investment
companies, insurance underwriting and agency activities, certain merchant
banking activities, and activities that the Federal Reserve Board considers to
be closely related to banking. A bank holding company may become a financial
holding company under the Modernization Act if each of its subsidiary banks is
"well capitalized" under the FDICIA prompt corrective action provisions (See
"Bank Regulation" below), is well managed and has at least a satisfactory rating
under the Community Reinvestment Act. In addition, the bank holding company
must file a declaration with the Federal Reserve Board that the bank holding
company wishes to become a financial holding company. A bank holding company
that falls out of compliance with such requirements may be required to cease
engaging in certain activities. Any bank holding company that does not elect to
become a financial holding company remains subject to the current restrictions
of the Bank Holding Company Act. In a similar manner, a bank may establish one
or more subsidiaries, which subsidiaries may then engage in activities that are
financial in nature. Applicable law and regulation provide, however, that the
amount of such investments are generally limited to 45% of the total assets of
the bank, and such investments are not aggregated with the bank for determining
compliance with capital adequacy guidelines. Further, the transactions between
the bank and such a subsidiary are subject to certain limitations. (See
generally, the discussion of Transactions with Affiliates described under "Bank
Regulation" below.)
Under the Modernization Act, the Federal Reserve Board serves as the
primary "umbrella" regulator of financial holding companies, with supervisory
authority over each parent company and limited authority over its subsidiaries.
Expanded financial activities of financial holding companies will generally be
regulated according to the type of such financial activity: banking activities
by banking regulators, securities activities by securities regulators, and
insurance activities by insurance regulators. The Modernization Act also
imposes additional restrictions and heightened disclosure requirements regarding
private information collected by financial institutions. All implementing
regulations under the Modernization Act have not yet been promulgated in final
form, and the Company cannot predict the full sweep of the new legislation and
has not yet determined whether it will elect to become a financial holding
company.
4
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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.
This authority includes the power to impose interest ceilings and reserve
requirements on such debt obligations. A bank holding company and its
subsidiaries are also prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
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, subject to
certain aging and deposit concentration limits that may be imposed under
applicable state laws. 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 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
19.58% and a Tier 1 Capital Ratio of 18.40% at December 31, 1999. The Federal
Reserve Board risk-based capital standards contemplate that evaluation of
capital adequacy will take account of a wide range of other factors, including
overall interest rate exposure; liquidity, funding and market risks; the quality
and level of earnings; investment, loan portfolio, and other concentrations of
credit; certain risks arising from nontraditional activities; the quality of
loans and investments; the effectiveness of loan and investment policies; and
management's overall ability to monitor and control financial and operating
risks including the risks presented by concentrations of credit and
nontraditional activities.
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 are comprised of
total assets less intangible assets. As of December 31, 1999, the Company's
Leverage Capital Ratio was 8.96%. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory level, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals
for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the
ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to
quarterly average total assets. As of December 31, 1999, the Federal Reserve
Board had not advised the Company of any specific minimum Tangible Tier 1
Leverage Ratio applicable to it.
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As a bank holding company that does not, as an entity, currently engage in
separate business activities of a material nature, the Company's ability to pay
cash dividends depends upon the cash dividends it receives from the Citizens
Bank through the Delaware BHC. The Company's only significant sources of income
are (i) dividends paid by the Citizens Bank and (ii) the tax savings, if any,
that result from the filing of consolidated income tax returns for the Company,
the Delaware BHC and the Citizens Bank. The Company must pay all of its
operating expenses from funds received by it from the Citizens Bank. Therefore,
shareholders may receive dividends from the Company only to the extent that
funds are available after payment of the Company's operating expenses. The
Federal Reserve Board has stated that, as a matter of prudent banking, a bank
holding company generally should not maintain a rate of cash dividends unless
its net income available to common stockholders has been sufficient to fully
fund the dividends, and the prospective rate of earnings retention appears
consistent with the bank holding company's capital needs, asset quality and
overall financial condition.
The ability of the Company to pay dividends is further 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 following
is a summary of certain restrictions that are applicable to the operations of
the Citizens Bank:
Transactions with Affiliates. With respect to the federal legislation
applicable to the Citizens Bank, the Federal Reserve Act, as amended by the
Competitive Equality Banking Act of 1987, prohibits the Citizens Bank from
engaging in specified transactions (including, for example, loans) with certain
affiliates unless the terms and conditions of such transactions are
substantially the same or at least as favorable to the Citizens Bank as those
prevailing at the time for comparable transactions with or involving other
nonaffiliated entities. In the absence of such comparable transactions, any
transaction between the Citizens Bank and its affiliates must be on terms and
under circumstances, including credit standards that in good faith would be
offered or would apply to nonaffiliated companies. In addition, certain
transactions, referred to as "covered transactions," between the Citizens Bank
and its affiliates may not exceed 10% of the Citizens Bank's capital and surplus
per affiliate and an aggregate of 20% of its capital and surplus for covered
transactions with all affiliates. Certain transactions with affiliates, such as
loans, also must be secured by collateral of specific types and amounts.
Finally, the Citizens Bank is prohibited from purchasing low quality assets from
an affiliate. Every company under common control with the Citizens Bank,
including the Company and the Delaware BHC, are deemed to be affiliates of the
Citizens Bank.
Loans to Insiders. Federal law also constrains the types and amounts of
loans that the Citizens Bank may make to its executive officers, directors and
principal shareholders. Among other requirements, such loans must be approved
by the Citizens Bank's board of directors in advance and must be on terms and
conditions as favorable to the Citizens Bank as those available to unrelated
persons.
Regulation of Lending Activities. Loans made by the Citizens Bank are also
subject to numerous federal and state laws and regulations, including the Truth-
In-Lending Act, Federal Consumer Credit Protection Act, the Texas Consumer
Credit Code, the Texas Consumer Protection Code, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act and adjustable rate mortgage
disclosure requirements. Remedies to the borrower and penalties to the Citizens
Bank are provided for failure of the Citizens Bank to comply with such laws and
regulations.
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Branch Banking. Pursuant to the Texas Finance Code, all banks located in
Texas are authorized to branch statewide, subject to prior regulatory approval.
Accordingly, a bank located anywhere in Texas has the ability, subject to
regulatory approval, to establish branch facilities near any of the Citizens
Bank's facilities and within its market areas. If other banks were to establish
branch facilities near the Citizens Bank or any of its facilities, it is
uncertain whether such branch facilities would have a materially adverse effect
on the business of the Citizens Bank.
In addition, in 1994 Congress adopted the Riegle-Neal Interstate Banking
and Branching Efficiency Act. That statute provides for nationwide interstate
banking and branching, subject to certain aging and deposit concentration limits
that may be imposed under applicable state laws. Current Texas law permits
interstate branching only through acquisition of a financial institution that is
at least 5 years old, and after the acquisition, the resulting institution and
its affiliates cannot hold more than 20% of the total deposits in the state.
Accordingly, a bank with its main office outside the state of Texas generally
cannot branch on a de novo basis into Texas. The new law permits applicable
regulatory authorities to approve de novo branching in Texas by institutions
located in states that would permit Texas institutions to branch on a de novo
basis into those states. Currently, the laws of 13 states provide such
reciprocity, but it is possible that, over the next few years, additional states
will provide for reciprocity in de novo branching.
The FDIC has adopted regulations under the Riegle-Neal Act to prohibit an
out-of-state bank from using the new interstate branching authority primarily
for the purpose of deposit production. These regulations include guidelines to
insure that interstate branches operated by an out-of-state bank in a host state
are reasonably helping to meet the credit needs of the communities served by the
out-of-state bank.
Dividends. All dividends paid by the Citizens Bank are paid to the
Company, the sole indirect shareholder of the Citizens Bank, through the
Delaware BHC. The general dividend policy of the Citizens Bank is to pay
dividends at levels consistent with maintaining liquidity and preserving
applicable capital ratios and servicing obligations of the Company. The
dividend policy of the Citizens Bank is subject to the discretion of the board
of directors of the Citizens Bank and will depend upon such factors as future
earnings, financial conditions, cash needs, capital adequacy, compliance with
applicable statutory and regulatory requirements and general business
conditions.
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 by any 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 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, 1999, the Citizens Bank had capital ratios as
follows:
<TABLE>
<CAPTION>
Tier 1 Total Leverage
Capital Ratio Capital Ratio Capital Ratio
------------------- ----------------------- ---------------------
<S> <C> <C> <C>
18.39% 19.57% 8.98%
</TABLE>
See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS -- Dividends."
7
<PAGE>
The exact amount of future dividends on the stock of the Citizens Bank will
be a function of the profitability of the Citizens Bank in general and
applicable tax rates in effect from year to year. The Bank's ability to pay
dividends in the future will directly depend on its future profitability, which
cannot be accurately estimated or assured.
FDICIA. The FDIC Improvement Act of 1991 ("FDICIA") made a number of
reforms addressing the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions, and improvement of
accounting standards. This statute also limited deposit insurance coverage,
implemented changes in consumer protection laws and provided for least-cost
resolution and prompt regulatory action with regard to troubled institutions.
FDICIA also places certain restrictions on activities of banks depending on
their level of capital. FDICIA divides banks into five different categories,
depending on their level of capital. Under regulations adopted by the FDIC, a
bank is deemed to be "well capitalized" if it has a Total Capital Ratio of 10%
or more, a Tier 1Capital Ratio of 6% or more and a Leverage Capital Ratio of 5%
or more, and if the bank is not subject to an order or capital directive to meet
and maintain a certain capital level. Under such regulations, a bank is deemed
to be "adequately capitalized" if it has a Total Capital Ratio of 8% or more, a
Tier 1Capital Ratio of 4% or more and a Leverage Capital Ratio of 4% or more
(unless it receives the highest composite rating at its most recent examination
and is not experiencing or anticipating significant growth, in which instance it
must maintain a Leverage Capital Ratio of 3% or more). Under such regulations,
a bank is deemed to be "undercapitalized" if it has a Total Capital Ratio of
less than 8%, a Tier 1Capital Ratio of less than 4% or a Leverage Capital Ratio
of less than 4%. Under such regulations, a bank is deemed to be "significantly
undercapitalized" if it has a Total Capital Ratio of less than 6%, a Tier
1Capital Ratio of less than 3% and a Leverage Capital Ratio of less than 3%.
Under such regulations, a bank is deemed to be "critically undercapitalized" if
it has a Leverage Capital Ratio of less than or equal to 2%. A bank may be
reclassified to be in a capitalization category that is next below that
indicated by its actual capital position (but not to "critically
undercapitalized") if it receives a less-than-satisfactory examination rating by
its examiners with respect to its asset quality, management, earnings or
liquidity that has not been corrected, or it is determined that the bank is in
an unsafe or unsound condition or engaged in an unsafe or unsound practice.
If a national bank is classified as undercapitalized, the bank is required
to submit a capital restoration plan to the Comptroller. Pursuant to FDICIA, an
undercapitalized bank is prohibited from increasing its assets, engaging in a
new line of business, acquiring any interest in any company or insured
depository institution, or opening or acquiring a new branch office, except
under certain circumstances, including the acceptance by the FDIC of a capital
restoration plan for the bank.
Furthermore, if a national bank is classified as undercapitalized, the
Comptroller may take certain actions to correct the capital position of the
bank. If a bank is classified as "significantly undercapitalized" or
"critically undercapitalized," the Comptroller is required to take one or more
prompt corrective actions. These actions include, among other things,
requiring: sales of new securities to bolster capital, improvements in
management, limits on interest rates paid, prohibitions on transactions with
affiliates, termination of certain risky activities and restrictions on
compensation paid to executive officers. If a bank is classified as "critically
undercapitalized," FDICIA requires the bank to be placed into conservatorship or
receivership within 90 days, unless the FDIC determines that other action would
better achieve the purposes of FDICIA regarding prompt corrective action with
respect to undercapitalized banks.
Under FDICIA, banks may be restricted in their ability to accept brokered
deposits, depending on their capital classification. "Well capitalized" banks
are permitted to accept brokered deposits, but all banks that are not well
capitalized are not permitted to accept such deposits. The Comptroller may, on
a case-by-case basis, permit banks that are adequately capitalized to accept
brokered deposits if the Comptroller determines that acceptance of such deposits
would not constitute an unsafe or unsound banking practice with respect to the
bank.
Deposit Insurance. Under the FDIC's risk-based insurance assessment
system, each insured bank is placed in one of nine "assessment risk
classifications" based on its capital classification and the FDIC's
consideration of supervisory evaluations provided by the institution's primary
federal regulator. Each insured bank's insurance assessment rate is then
determined by the risk category in which it has been classified by the FDIC.
There is
8
<PAGE>
currently a 27 basis point spread between the highest and lowest assessment
rates, so that banks classified as strongest by the FDIC are subject in 2000 to
0% assessment, and banks classified as weakest by the FDIC are subject to an
assessment rate of 0.27%. In addition to its insurance assessment, each insured
bank is subject in 2000 to a debt service assessment of $0.016 per one hundred
dollars of deposits to help recapitalize the Savings Association Insurance Fund
of the FDIC. Under these assessment criteria, the Citizens Bank is required to
pay annual deposit premiums to the FDIC in the amount of $0.016 per hundred
dollars of deposits. The Bank's deposit insurance assessments may increase or
decrease depending upon the risk assessment classification to which the Citizens
Bank is assigned by the FDIC. Any increase in insurance assessments could have
an adverse effect on the Citizens Bank's earnings.
FIRREA. The Financial Institution Reform, Recovery and Enforcement Act of
------
1989 ("FIRREA") was signed into law on August 9, 1989. This legislation
includes various provisions that affect or may affect the Company, the Delaware
BHC and the Citizens Bank. Among other matters, FIRREA generally permits bank
holding companies to acquire healthy thrifts as well as failed or failing
thrifts. FIRREA removed certain cross-marketing prohibitions previously
applicable to thrift and bank subsidiaries of a common holding company.
Furthermore, a multi-bank holding company may 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. Such 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.
Governmental Monetary Policies. The commercial banking business is
------------------------------
affected not only by general economic conditions but also by the monetary
policies of the Federal Reserve Board. Changes in the discount rate on member
bank borrowings, control of borrowings, open market operations, the imposition
of and changes in reserve requirements against member banks, deposits and assets
of foreign branches, the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates and the placing of
limits on interest rates which member banks may pay on time and savings deposits
are some of the instruments of monetary policy available to the Federal Reserve
Board. Those monetary policies influence to a significant extent the overall
growth of bank loans, investments and deposits and the interest rates charged on
loans or paid on time and savings deposits. The nature of future monetary
policies and the effect of such policies on the future business and earnings of
the Citizens Bank, therefore, cannot be predicted accurately.
Management of the Company and the Citizens Bank cannot predict what other
legislation or economic and monetary policies of the various regulatory
authorities might be enacted or adopted or what other regulations might be
adopted or the effects thereof. Future legislation and polices and the effects
thereof might have a significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Such legislation and policies have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future.
9
<PAGE>
The foregoing is an attempt to summarize some of the relevant laws, rules
and regulations governing banks and bank holding companies but does not purport
to be a complete summary of all applicable laws, rules and regulations governing
banks and bank holding companies.
ITEM 2. PROPERTIES
The Citizens Bank owns its main banking office and eight 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, located (i) 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 eight 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 Overton branch also maintains an
ATM at Kilgore College in Kilgore, Texas. 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. An ATM is located behind the Jefferson
branch office at 109 East Broadway. 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 Marshall branch is located at 1708 East End Boulevard
North, Marshall, Texas. Currently, the Marshall branch is located in a leased
modular building with two attached drive-in lanes and an ATM until construction
is completed on a permanent branch facility at the same location. The Marshall
branch also has one ATM located in a convenience store at 401 Pinecrest. 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 1999.
10
<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, 2000, (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
2000 LOW HIGH REPRESENTED REPRESENTED
- ---- ------- ------- -------------- ------------
<S> <C> <C> <C> <C>
First Quarter
(Through March
1, 2000) 17.50 17.50 2 9,266
1999
- ----
First Quarter 14.50 17.50 5 1,063
Second Quarter 17.50 17.50 - -
Third Quarter 17.50 17.50 7 3,674
Fourth Quarter 17.50 17.50 1 900
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
</TABLE>
As of March 1, 2000, there were 410 shareholders of record.
11
<PAGE>
DIVIDENDS
The Company declared quarterly dividends on the Company Stock during 1999
that approximated $343,000 (or $0.17 per share) for the first quarter of 1999,
$343,000 (or $0.17 per share) for the second quarter of 1999, $343,000 (or $0.17
per share) for the third quarter of 1999, and $342,000 (or $0.17 per share) for
the fourth quarter of 1999. The Company paid four quarterly dividends on the
Company stock during 1999. On January 4, 1999, the Company paid a dividend on
the Company stock that approximated $323,000. On March 31, 1999, the Company
paid a dividend on the Company stock that approximated $343,000 (or $0.17 per
share). On June 30, 1999 the Company paid a dividend on the Company stock that
approximated $343,000 (or $0.17 per share). On September 30, 1999 the Company
paid a dividend on the Company stock that approximated $343,000 (or $0.17 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, 1999 were 18.40%, 19.58% and 8.96%,
respectively, and thus were above the regulatory minimums. See "ITEM 1.
BUSINESS -- Supervision and Regulation." As of December 31, 1999, 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 1999 Annual Report to Shareholders, which page is
hereby incorporated by reference.
12
<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 5
through 32 of the accompanying 1999 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 13
through 14 of the accompanying 1999 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 32 through 59 of the accompanying 1999 Annual
Report to Shareholders, are hereby incorporated by reference.
Independent Auditors' Report for the Years ended December 31, 1999, 1998
and 1997.
Consolidated Balance Sheets - December 31, 1999 and 1998.
Consolidated Statements of Income - Years ended December 31, 1999, 1998 and
1997.
Consolidated Statements of Stockholders' Equity and Comprehensive Income-
Years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998
and 1997.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<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
---------- -------------------------------
David Alford (31) Director
E. Landon Alford (64) Director and Chairman of the Board
R.M. Ballenger (79) Director
Kenneth Black (53) Vice President
Stayton M. Bonner, Jr. (47) Director
David J. Burks (76) Director
Billy Crawford (75) Director
Sheila Gresham (45) Director
James Michael Kangerga (47) Director
J. Mark Mann (44) Director
Milton S. McGee, Jr. (50) Director, President and Chief Executive
Officer
Charles H. Richardson (78) Director
Nelwyn Richardson (50) Secretary
Jeff Scribner (43) Vice President
Rebecca G. Tanner (44) Vice President, Treasurer, CFO and CAO
Tony Wooster (55) Director
William E. Wylie (56) Director
Business Experience
- -------------------
David Alford has served as a director of the Company since November 1999.
Mr. Alford has served as a director of the Citizens Bank since November 1999 and
has served on several committees of the Citizens Bank since 1999. Mr. Alford
also serves as a director of H.C.B. Inc., a Texas corporation ("HCB") and an
affiliate of the Company. Mr. Alford has been employed with Alford Investments
since 1991.
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 HCB. 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.
Kenneth Black has served as Vice President of the Company since 1999. Mr.
Black has served as Senior Vice President of the Citizens Bank since January
1999. Prior to that, Mr. Black had served as Vice President of the Citizens
Bank since September 1994.
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.
14
<PAGE>
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.
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.
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
eight 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.
Jeff Scribner has served as Vice President of the Company since 1999. Mr.
Scribner has served as Senior Vice President of the Citizens Bank since 1999 and
as Vice President since 1995. Prior to that, Mr. Scribner served as Vice
President for NationsBank in Dallas for approximately three years. Mr. Scribner
has served on the Trust Committee since 1995.
15
<PAGE>
Rebecca G. Tanner has served as Chief Accounting Officer of the Company
since 1990. Since December 1999, she has also served as Vice President,
Treasurer and Chief Financial Officer of the Company. Ms. Tanner has served as
Vice President and Controller of the Citizens Bank since September 1991. 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.
William E. Wylie has served as a director of the Company since November
1999 and as a director of the Citizens Bank since 1999. Mr. Wylie is an estate
and probate attorney in Tyler, Texas. Mr. Wylie has been a member of various
Board of Directors' committees at the Citizens Bank since 1999. 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. David Alford, a director of the Company,
HCB, and the Citizens Bank, is the son of Landon Alford, 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 1999, 1998 or 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
------------------------------------------------------------------------------------
Name and Principal All Other
Position Year Salary(1) Bonus Compensation(2)
------------ -------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Milton S. McGee, Jr. 1999 $185,820 $93,570 $27,558
President and Chief Executive 1998 173,400 91,900 25,162
Officer of the Company, the 1997 165,600 80,600 23,238
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.
16
<PAGE>
During 1998, the Company established a Performance and Retention Plan (the
"PAR 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 the 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 1999 and 1998.
<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. 540 1/1/2004 - $43,200 $64,800
Milton S. McGee, Jr. 785 1/1/2003 - 54,950 94,200
</TABLE>
Director 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 $368,000 in 1999, $345,000 to the
profit sharing plan in 1998, and $303,000 in 1997. The Citizens Bank's
contributions during 1999, 1998 and 1997 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
- -------------------------------- ----------------------------------------------------------
1999 1998 1997
------------------ ------------------- -----------------
<S> <C> <C> <C>
Milton S. McGee, Jr. $22,789 $21,784 $20,141
</TABLE>
17
<PAGE>
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 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,
18
<PAGE>
he has been rendered unable to carry out, or has been hindered in the
performance of, any of the authorities, powers, functions, responsibilities or
duties attached to his position with the Company or the Citizens Bank
immediately prior to the Change in Control, which situation is not remedied
within thirty (30) calendar days after receipt by the Company of written notice
from McGee of such determination; (iv) the Citizens Bank relocates its principal
executive offices or requires McGee to have as his principal location of work
any location which is in excess of thirty (30) miles from the current location
of the Citizens Bank or to travel away from his office in the course of
discharging his responsibilities or duties hereunder more than thirty (30)
consecutive calendar days or an aggregate of more than ninety (90) calendar days
in any consecutive three hundred sixty-five (365) calendar-day period without,
in either case, his prior consent; or (v) failure by the Company to require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to McGee, expressly to
assume and agree to perform the Severance Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place.
Under the terms of the Severance Agreement, Termination for Cause means
that McGee is involuntarily terminated from employment based upon his commission
of any of the following: (i) an intentional act of fraud, embezzlement or theft
in connection with his duties or in the course of his employment with the
Company or the Citizens Bank; (ii) intentional wrongful damage to property of
the Company or the Citizens Bank; (iii) intentional wrongful disclosure of trade
secrets or confidential information of the Company or the Citizens Bank; (iv)
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease and desist order; or (v) intentional breach
of fiduciary duty owed to the Company or the Citizens Bank involving personal
profit, provided, that no act, or failure to act, on the part of McGee is to be
deemed "intentional" unless done, or omitted to be done, by McGee not in good
faith and without reasonable belief that his action or omission was in the best
interest of the Company or the Citizens Bank.
Should McGee die prior to full payment of all benefits due under the
Severance Agreement, payment of any remaining benefits is to be made to his
beneficiaries designated in writing, or, if no designation is made, to his
estate. The Company has no obligation to reserve funds to fulfill its
obligations under the Severance Agreement, and the Company has not elected to
reserve any funds for such purpose. The Severance Agreement terminates on the
earlier of (i) McGee's sixty-fifth (65th) birthday, (ii) the fifth anniversary
of the first event that constitutes a Change in Control, or (iii) the fifth
anniversary of the date of execution of the Severance Agreement, provided,
however, that the Severance Agreement will not terminate pursuant to subsection
(iii) unless either party to the Severance Agreement notifies the other party
prior to 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 (the "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.
19
<PAGE>
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, and 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.
1998 Performance and Retention Plan
- -----------------------------------
On November 18, 1998, the Citizens Bank adopted the Citizens National Bank
1998 Performance and Retention Plan (the "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 non-financial 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.
20
<PAGE>
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.
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders
- ----------------------
At March 1, 2000, the Company had 410 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.
<TABLE>
<CAPTION>
Name and Address of Number and Percent of Shares
Beneficial Owner Owned of Company Stock(1)
---------------- -------------------------
<S> <C>
E. Landon Alford 140,228 / 7.00%(2)
P. O. Box 67
Henderson, TX 75653
John R. Alford, Jr. 165,040 / 8.24%
8100 Hickory Creek Drive
Austin, TX 78735
Stayton M. Bonner, Jr. 154,026 / 7.69%(3)
P. O. Box 1833
Henderson, TX 75653
Michael Kangerga 132,978 / 6.64%
102 1/2 E. Main Street
Henderson, TX 75652
Ella Langdon Alford Trust 161,016 / 8.04%
P. O. Box 10
Brixey, MO 65618
Citizens National Bank 132,840 / 6.64%(4)
and Stayton M. Bonner, Trustees
P. O. Box 1009
Henderson, TX 75653
</TABLE>
(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 2,001,834 shares outstanding.
(2) Includes 2,000 shares owned by Mr. Alford's wife, Phyllis P. Alford.
(3) Includes 18,102 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 2.21% 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 4.42%, of the Company Stock. The shares held in all three trusts are
voted solely by Mr. Bonner.
22
<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, 2000.
Number and Percent of Shares
Name Owned of Company Stock(1)
- ---- -------------------------
E. Landon Alford 140,228 / 7.00%(2)
David Alford 8,932 / 0.45%
R. M. Ballenger 800 / 0.04%
Stayton M. Bonner, Jr. 154,026 / 7.69%
David J. Burks 9,775 / 0.49%
Billy Crawford 1,000 / 0.05%
Sheila Gresham 6,120 / 0.31%
James M. Kangerga 9,188 / 0.46%
J. Mark Mann 5,710 / 0.29%(4)
Milton S. McGee, Jr. 8,536 / 0.43%(5)
Charles H. Richardson 24,160 / 1.21%(6)
Tony Wooster 1,800 / 0.09%(7)
William E. Wylie 5,200 / 0.26%
Directors and executive officers of the 376,355/ 18.80%(8)
Company as a group (17 Persons)
(1) Unless otherwise indicated, all shares listed are held of record by the
individual indicated with the sole power to vote and dispose of such
shares. Percentages are based on 2,001,834 shares outstanding.
(2) Includes 2,000 shares owned by Mr. Alford's wife, Phyllis P. Alford.
(3) Includes 18,102 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.
Includes 1,838 shares controlled by Mr. McGee as beneficiary of the estate
of his mother, Agatha 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) Any discrepancy between the actual total of the percentages and the stated
total percentage is due to rounding.
23
<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 48 of the 1999 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 1999, 1998 and 1997 as
listed in Item 8 of this report, together with the report of KPMG LLP
dated March 3, 2000 appearing on pages 33 through 60 of the
accompanying 1999 Annual Report to Shareholders are incorporated
herein by reference.
2. Financial Statement Schedules
None
3. Exhibits
13.1 Henderson Citizens Bancshares, Inc. 1999 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
1999.
(c) See the Exhibit Index attached hereto.
Management Contracts and Compensation Plans -- The following exhibits
listed in the Exhibit Index are identified below in response to Item 14(a)-
3 on Form 10-K:
Exhibit
10.2 Change in Control Agreement dated June 12, 1995 by and between
Henderson Citizens Bancshares, Inc. and Milton S. McGee Jr.
(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 31, 1998 (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.4 Citizens National Bank Non-Qualified Deferred Compensation Plan
dated November 18, 1998 (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.5 Citizens National Bank 1998 Performance and Retention Plan dated
November 18, 1998 (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.6 Citizens National Bank Employee Severance Protection Plan dated
November 18, 1998 (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
24
<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/ Rebecca Tanner
------------------
Rebecca Tanner
Vice President, Treasurer and Chief
Financial Officer (Principal Financial
Officer) and Chief Accounting
Officer (Principal Accounting Officer)
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/S/ E. Landon Alford Director and Chairman of March 28, 2000
- --------------------------------------- the Board
E. Landon Alford
/S/ David Alford Director March 28, 2000
- ---------------------------------------
David Alford
/S/ R. M. Ballenger Director March 28, 2000
- ---------------------------------------
R. M. Ballenger
/S/ Stayton M. Bonner, Jr. Director March 28, 2000
- ---------------------------------------
Stayton M. Bonner, Jr.
/S/ D. J. Burks Director March 28, 2000
- ---------------------------------------
D. J. Burks
/S/ Billy Crawford Director March 28, 2000
- ---------------------------------------
Billy Crawford
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ Sheila Gresham Director March 28, 2000
- ---------------------------------------
Sheila Gresham
/S/ James Michael Kangerga Director March 28, 2000
- ---------------------------------------
James Michael Kangerga
/S/ J. Mark Mann Director March 28, 2000
- ---------------------------------------
J. Mark Mann
/S/ Charles H. Richardson Director March 28, 2000
- ---------------------------------------
Charles H. Richardson
/S/ Tony Wooster Director March 28, 2000
- ---------------------------------------
Tony Wooster
/S/ William E. Wylie Director March 28, 2000
- ---------------------------------------
William E. Wylie
</TABLE>
26
<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 30, 2000, and copies of such information shall be
sent to the Securities and Exchange Commission on or before such time:
(1) 1999 Annual Report to Shareholders
(2) Notice of Annual Meeting of Shareholders and Proxy Statement
(3) Proxy Card
27
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
EXHIBITS
to the
FORM 10-K ANNUAL REPORT
under
THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended:
December 31, 1999
___________________
HENDERSON CITIZENS
BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2371232
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 West Main Street
P.O. Box 1009,
Henderson, Texas 75653
(Address of principal (Zip Code)
executive offices)
(903) 657-8521
(Registrant's telephone number, including area code)
<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
(incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1998).
10.4 Citizens National Bank Non-Qualified Deferred Compensation Plan dated
November 18, 1998 (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
10.5 Citizens National Bank 1998 Performance and Retention Plan dated
November 18, 1998 (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
10.6 Citizens National Bank Employee Severance Protection Plan dated
November 18, 1998 (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
13.1 Henderson Citizens Bancshares, Inc. 1999 Annual Report to Shareholders.
21.1 Subsidiaries of registrant.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 13.1
------------
<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, 1999
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 1999 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 were 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 entity's individual board 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.
The 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
in order 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, the 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 Citizens 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.
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 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.
<PAGE>
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. The acquisition of
the Waskom Bank resulted in an increase in total assets of the Citizens Bank of
approximately $25,256,000 and total deposits of $22,908,000 as of September 17,
1996.
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.
On June 1, 1999, the Comptroller of Currency approved the establishment of
two additional branch locations for the Citizens Bank; one located at 400 West
Collin Street, Corsicana, Texas, and the second located at 1708 East End
Boulevard North, Marshall, Texas.
On December 20, 1999, the Citizens Bank opened its full service branch
location in Marshall, Texas.
The Company's management continues its strategy to increase market share
and enhance long-range profitability by evaluating potential acquisitions. This
evaluation process involves maintenance of strong equity capital and consistent
earnings, and meeting internal financial objectives of the Company.
2
<PAGE>
Results of Operations
- ---------------------
During the year ended December 31, 1999, the Company's net income increased
to $3,909,000 from $3,506,000 and $3,390,000 for the same periods in 1998 and
1997 respectively. The increase in net income for 1999 was primarily
attributable to higher net interest income, a lower provision for loan losses,
increased other income and reduced tax provision offset by an increase in other
expenses. In 1998, the increase in net income resulted from slightly higher net
interest income, increased other income and reduced tax provision that was
offset by a higher provision for loan losses and increased other expenses.
Net interest income was higher, $11,590,000 in 1999 compared to $10,857,000
in 1998 and $10,721,000 in 1997. The provision for loan losses was lower,
$354,000 in 1999 compared to $623,000 in 1998 and $330,000 in 1997. Other
income increased to $5,414,000 in 1999 compared to $4,754,000 in 1998 and
$3,290,000 in 1997. Other expenses increased to $12,011,000 in 1999 compared to
$10,614,000 in 1998 and $9,265,000 in 1997. The tax provision was reduced to
$730,000 in 1999 compared to $868,000 in 1998 and $1,026,000 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 are weighted to produce yields
and rates for each category of assets and liabilities. The difference between
the weighted yields of assets and rates on liabilities is the net interest
spread. Net interest margin is net interest income as a percentage of total
interest-earning assets.
Net interest income was affected by an increase in interest income of
$932,000 in 1999 over 1998 due to higher average balance for interest earning
assets offset by slightly lower yields. There was a slight increase in interest
expense of $199,000 in 1999 over 1998 due to an increase in average balances
offset by a decline of 21 basis points on the average yield. In 1998 compared to
1997, there was no significant change in interest income as slightly higher
earning assets were offset by slightly lower yields. Interest expense was
reduced slightly as related liabilities were impacted by 1998 rates that were 10
basis points lower than 1997. Differences in yields and volumes can be found in
Table II.
Net interest spreads were approximately 3.1%, 2.9%, and 2.9% for the years
1999, 1998, and 1997, respectively, and net interest margins were 3.7%, 3.6%,
and 3.5% during the same three-year period.
Interest Income
- ---------------
Loans. In 1999, interest income on loans increased $1,432,000 over 1998
------
as an increase in average balances was partially offset by a decrease of 23
basis points on average rates paid. A similar situation occurred in 1998
compared to 1997, with an increase of $865,000, as higher average balances were
partially offset by a decrease of 12 basis points on average rates paid. The
average loan balance during 1999 increased due to continued strong loan demand
and the acquisition of the Jefferson Bank in December 1998.
Securities. Income from investment securities decreased $233,000 from
----------
1999 compared to 1998, as slightly higher average balances were more than offset
by a decrease in yields, primarily in U.S. government securities. Income from
investment securities decreased $1,203,000 in 1998 from 1997 due to lower
average balances and, to a lesser degree, lower yields. The decrease in yields
in 1999 compared to 1998 was primarily due to lower rates on reinvestments.
Yields on all securities, other than state and municipal securities, decreased
in 1998 from yields in 1997 for various reasons. See Tables I and II.
Other Interest Earning Assets. Other interest-earning assets consist of
-----------------------------
interest-bearing deposits with other financial institutions and federal funds
sold. Interest income on other interest earning assets decreased $267,000 due
mainly to lower average balances. Such amounts increased in 1998 from 1997 by
$305,000 due to higher average balances.
3
<PAGE>
<TABLE>
<CAPTION>
Table I - Average Balances and Interest Yields and Spreads (dollars in thousands)
Years Ended December 31
---------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ -----------------------------
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>
$137,997 11,137 8.38% $116,520 9,705 8.61% $101,245 8,840 8.73%
Loans, net**
Securities:
U.S. governments 72,800 3,999 5.49 84,931 4,976 5.86 60,996 3,640 5.97
State and municipals* 48,461 2,232 6.98 36,256 1,670 7.04 32,200 1,478 6.95
Other*** 87,828 5,169 5.89 84,727 4,987 5.87 123,977 7,718 6.23
Interest-bearing deposits with 8,207 420 5.12 10,119 545 5.39 7,565 389 5.14
financial institutions
Federal funds sold 4,045 209 5.17 6,543 351 5.36 3,257 202 6.20
--------- -------- ------- --------- ------- ------- -------- ------ ------
Total interest-earning assets* 359,338 23,166 6.88 339,096 22,234 6.91 329,240 22,267 6.99
Other assets:
Cash and due from banks 11,135 7,561 7,486
Premises and equipment, net 6,458 5,434 4,652
Allowance for loan losses (1,948) (1,439) (1,159)
Other assets 9,988 6,814 6,258
--------- ------------ --------------
Total average assets $384,971 $357,466 $346,477
========= ============ ==============
Interest-bearing liabilities:
NOW, money market and savings
deposits $128,315 2,862 2.23% $120,254 3,026 2.52% $117,556 3,195 2.84%
Time deposits 176,188 8,706 4.94 163,007 8,318 5.10 162,297 8,298 5.11
Other borrowed funds 81 8 9.88 536 33 4.48 860 53 6.16
--------- -------- ------- --------- ------- ------- -------- ------ ------
Total interest-bearing liabilities 304,584 11,576 3.80 283,797 11,377 4.01 280,713 11,546 4.11
Other liabilities and stockholders
equity:
Demand deposits 42,622 36,883 31,955
Other liabilities 2,295 2,006 2,538
Stockholders' equity 35,470 34,780 32,115
--------- ------------ --------------
Total average liabilities and
stockholders equity $384,971 $357,466 $346,477
========= ============ ==============
Net interest income $11,590 $10,857 $10,721
========== ========== ==========
Net interest spread* 3.08% 2.90% 2.88%
========= ========== ========
Net interest margin* 3.66% 3.56% 3.49%
========= ========== ========
</TABLE>
* 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.
4
<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)
1999 over 1998 1998 over 1997
-------------------------------------------------------------------------------------
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:
Loans, net 1,800 (368) 1,432 1,334 (469) 865
Securities:
U.S. governments (666) (311) (977) 1,429 (93) 1,336
State and municipals 852 (290) 562 282 (90) 192
Other* 183 (1) 182 (2,447) (284) (2,731)
Interest-bearing deposits
with financial (103) (22) (125) 131 25 156
institutions
Federal funds sold (134) (8) (142) 204 (55) 149
-------------- ------------ ------------ ----------- ------------ ----------
Total interest income 1,932 (1,000) 932 933 (966) (33)
-------------- ------------ ------------ ----------- ------------ ----------
Interest-bearing liabilities:
NOW, money market and
savings deposits 203 (367) (164) 73 (242) (169)
Time deposits 672 (284) 388 36 (16) 20
Other borrowed funds (20) (5) (25) (20) - (20)
-------------- ------------ ------------ ----------- ------------ ----------
Total interest expense 855 (656) 199 89 (258) (169)
-------------- ------------ ------------ ----------- ------------ ----------
Net interest income $1,077 (344) 733 $ 844 (708) 136
============== ============ ============ =========== ============ ==========
</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. Interest expense on deposit accounts increased $224,000 in 1999 from
1998 primarily due to an increase in average balances offset somewhat by
decreased rates. (See Tables I and II.) Average balances increased in 1999
from 1998 due primarily to the Jefferson Bank acquisition in December 1998.
Interest expense on deposit accounts decreased $149,000 in 1998 compared to 1997
due primarily to a 32 basis point difference in rates on NOW, money market and
savings deposits.
5
<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 $5,227,000 in 1999 compared to $4,462,000 in 1998 and
$3,099,0000 in 1997. The increase of approximately $765,000 during 1999 was
largely the result of increases in insufficient fee income and fiduciary income.
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.
Non-interest Expense
- --------------------
Total non-interest expense in 1999 was $12,011,000 compared to $10,614,000
in 1998 and $9,265,000 in 1997. These increases are explained in further detail
by category below.
Personnel Expense. Personnel costs for 1999 were $6,961,000 compared to
-----------------
$6,296,000 in 1998, and $5,601,000 in 1997. The increase of $669,000 in 1999
over 1998 was due primarily to general increases in salaries and benefits and
the addition of employees resulting from the Jefferson Bank acquisition. The
increase in 1998 over 1997 was due primarily to general increases in salaries
and benefits.
Occupancy Expense and Equipment Expense. Total occupancy and equipment
----------------------------------------
expenses were $1,541,000 in 1999, $1,264,000 in 1998, and $1,038,000 in 1997.
The increases in both 1999 and 1998 were due primarily to expenses related to
the continuing growth and enhancement of the facilities.
Other Expenses. Other expenses were $3,509,000 in 1999 compared to
--------------
$3,054,000 in 1998 and $2,626,000 in 1997. The increase in 1999 from 1998 is
due to increases in acquisition expense and goodwill amortization due to the
Jefferson Bank acquisition in December 1998. Professional fees also increased
in 1999 compared to 1998, and, as in 1998, increases in supplies, postage, and
communications resulted from direct marketing initiatives. In 1999, other
expense was decreased as a result of amended franchise tax returns resulting in
refunds of approximately $233,000. 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.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $354,000, $623,000 and $330,000 in 1999,
1998 and 1997, respectively. 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 15.74% in 1999, 19.8% in 1998, and
23.2% in 1997. These effective rates are 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.
6
<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 48.9%, 53.1%, 60.8%, 63.9%, and 69.3%, of total
assets for the years 1999 through 1995, respectively. The decrease in securities
since 1996 is the result of increased emphasis on loan growth and decreasing
securities rates. Total assets have grown from a December 31, 1995, level of
$326,879,000 to $393,446,000 at December 31, 1999. 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)
At December 31,
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 24,040 9,493 8,886 12,413 8,916
Interest-bearing deposits
with financial institutions 5,357 17,174 8,212 3,892 2,642
Federal funds sold 9,285 10,230 5,040 1,150 -
Securities 192,254 205,423 217,973 228,155 226,450
Loans, net 144,197 129,263 106,067 100,825 80,499
Other 18,312 15,336 12,315 10,395 8,372
---------- --------------- ------------------- ----------------- -----------------
Total assets $393,446 386,919 358,493 356,830 326,879
========== =============== =================== ================= =================
Liabilities:
Demand deposits-non-interest bearing $ 44,807 42,960 32,860 31,785 28,435
Interest-bearing demand and
savings deposits 127,247 132,353 126,016 120,468 114,295
Time deposits 183,369 170,407 163,231 168,420 150,881
---------- --------------- ------------------- ----------------- -----------------
Total deposits 355,423 345,720 322,107 320,673 293,611
Other liabilities 2,252 5,288 3,657 4,169 2,062
---------- --------------- ------------------- ----------------- -----------------
Total liabilities 357,675 351,008 325,764 324,842 295,673
Stockholders' equity 35,771 35,911 32,729 31,988 31,206
---------- --------------- ------------------- ----------------- -----------------
Total liabilities and
stockholders' equity $393,446 386,919 358,493 356,830 326,879
========== =============== =================== ================= =================
</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.
7
<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 $3,548,000 in 1999,
$5,277,000 in 1998, and $3,341,000 in 1997.
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. .
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 1999, 1998, and 1997. In 1999, the Company paid off notes payable
balances from the Jefferson acquisition of $2,282,000. 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, 1999
<S> <C> <C> <C> <C> <C> <C>
Over
1 - Month 3 - Month 6 - Month 1 - Year 1 - Year Total
Earning assets:
Loans $ 17,284 6,050 4,952 9,067 109,176 146,529
Securities 25,055 3,235 7,242 14,621 145,039 195,191
Other earning assets 13,745 199 100 598 - 14,642
------------------------------ ------------ ------------ --------------- --------------
56,084 9,484 12,294 24,286 254,215 356,362
Funding Source-
Interest bearing deposits 154,464 46,484 48,224 42,188 19,256 310,616
------------------------------ ------------ ------------ --------------- --------------
Repricing/Maturity Gap:
Period $(98,380) (37,000) (35,930) (17,902) 234,959
============================== ============ ============ ===============
Cumulative $(98,380) (135,380) (171,310) (189,212) 45,747
============================== ============ ============ ===============
Period/Total Earning Assets (27.61)% (10.38)% (10.08)% (5.02)% 65.93%
</TABLE>
8
<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 amortized cost 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, 1999. The expected maturity categories take into
consideration historical prepayment speeds as well as actual amortization of
principal and do 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, 1999.
9
<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>
<CAPTION>
Table V - Market Risk Sensitive Instruments (dollars in thousands)
Scheduled maturity of market risk sensitive instruments at December 31, 1999:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Over Fair Effective
Year 1 Year 2 Year 3 Year 4 Year 5 5 Years Total Value Yield
ASSETS
Securities
Fixed Rate $ 6,839 12,964 25,498 26,995 11,910 67,147 151,353 146,574 6.11%
Floating Rate - - - - - 43,345 43,345 42,858 5.78%
Equity Securities - - - - - 493 493 493 6.85%
---------------------------------------------------------------------
Total Securities $ 6,839 12,964 25,498 26,995 11,910 110,985 195,191 189,925
Loans
Fixed Rate 20,916 14,729 23,841 24,715 24,532 22,364 131,097 131,587 8.05%
Floating Rate 8,766 690 402 1,470 2,099 2,005 15,432 15,569 9.04%
---------------------------------------------------------------------
Total $ 29,682 15,419 24,243 26,185 26,631 24,369 146,529 147,156
LIABILITIES
Savings, NOW, and
Money Market $127,247 - - - - - 127,247 127,247 2.23%
Deposits
Certificates of Deposit 164,447 12,518 3,880 1,764 760 - 183,369 183,582 4.94%
Scheduled maturity of market risk sensitive instruments at December 31, 1998:
Average
Over Fair Effective
Year 1 Year 2 Year 3 Year 4 Year 5 5 Years Total Value Yield
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 $132,353 - - - - - 132,353 132,353 2.43%
Deposits
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%
</TABLE>
10
<PAGE>
Loans
- -----
The Company's loan portfolio consists primarily of real estate, commercial
and industrial, and consumer loans. Total loans were $146,529,000 at December
31, 1999 compared to $131,336,000 at December 31, 1998 and $108,006,000 at
December 31, 1997.
As can be seen in Table VI, a moderate increase of approximately 8.68% in
commercial and industrial loans, a strong increase of approximately 21.4% in
real estate loans occurred while installment loans decreased by a moderate 4.8%
in 1999. The overall increase in 1999 is the result of strong market demand for
home loans and commercial properties. 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.
At December 31, 1999, real estate mortgage loans comprised 53.2% of the
loan portfolio, compared to 48.9% and 48.4% at December 31, 1998 and December
31, 1997, respectively.
<TABLE>
<CAPTION>
Table VI - Loan Information (dollars in thousands) - Outstanding Balances at:
December 31,
----------------------------------------------------------------------------------------------------
Types of Loans 1999 1998 1997 1996 1995
- -------------------------- ------------------- ---------------- ---------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 37,639 34,632 27,973 23,863 22,444
Real estate - mortgage 77,935 64,204 50,122 46,211 34,009
Installment 30,955 32,500 29,911 33,111 26,234
------------------- ---------------- ---------------- -------------------- --------------
Total $ 146,529 131,336 108,006 103,185 82,687
=================== ================ ================ ==================== ==============
</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,
1999:
<TABLE>
<CAPTION>
Table VII - Loan Interest and Maturity Information (dollars in thousands)
At December 31, 1999
--------------------------------------------------------------
Commercial Real
and Industrial Estate Installment Totals
----------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Fixed rate loans:
Mature within one year $ 5,669 8,939 6,308 20,916
Mature in one to five years 13,735 50,706 23,376 87,817
Mature after five years 9,004 13,079 281 22,364
----------------- ------------- -------------- -----------
Total fixed rate loans 28,408 72,724 29,965 131,097
Floating rate loans:
Mature within one year 6,189 1,790 787 8,766
Mature in one to five years 2,284 2,235 142 4,661
Mature after five years 758 1,186 61 2,005
----------------- ------------- -------------- -----------
Total floating rate loans 9,231 5,211 990 15,432
Total loans:
Mature within one year 11,858 10,729 7,095 29,682
Mature in one to five years 16,019 52,941 23,518 92,478
Mature after five years 9,762 14,265 342 24,369
----------------- ------------- -------------- -----------
Total loans $37,639 77,935 30,955 146,529
================= ============= ============== ===========
</TABLE>
11
<PAGE>
Allowance for Loan Losses
- -------------------------
The balance in allowance for loan losses at December 31, 1999 was $2,200,000
compared to the December 31, 1998 balance of $1,701,000 and the December 31,
1997 balance of $1,249,000. The 1999 net increase was the result of a provision
of $354,000 and recoveries of $1,035,000 offset by charge-offs of $890,000. The
increase in 1998 was the result of a provision of $623,000, acquisition addition
of $165,000 and recoveries of $223,000 offset by charge-offs of $559,000. In
1999, the Company recorded a smaller provision due to net recoveries of $145,000
compared to net charge-offs of $336,000 in 1998. The allowance for loan losses
at December 31, 1999, 1998, and 1997, was 1.50%, 1.30%, and 1.16%, of
outstanding loans, respectively. As in 1997, increases in 1996 and 1995 were
due to continued increases in loan and lease balances. The increased percentage
of the allowance as a percentage of total loans is due primarily to the
Company's new overdraft program that increased risk and, in general, the current
status of economic conditions.
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, 1999 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
$842,000 will be charged off in the year ending December 31, 2000. The breakdown
of this estimate is as follows: $177,000 in commercial and industrial, $26,000
in real estate - mortgage, $278,000 in installment, and $361,000 in overdrafts.
12
<PAGE>
<TABLE>
<CAPTION>
Table VIII - Analysis of Allowance of Loan Losses (dollars in thousands)
Years Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,701 1,249 1,146 1,019 997
Charge-offs:
Commercial and industrial 335 78 57 20 90
Real estate mortgage 27 26 1 - -
Installment loans 528 455 289 223 157
------------ --------- --------- -------- --------
Total charge-offs 890 559 347 243 247
------------ --------- --------- -------- --------
Recoveries:
Commercial and industrial 796 69 49 28 40
Real estate mortgage 11 - - - -
Installment loans 228 154 71 54 49
------------ --------- --------- -------- --------
Total recoveries 1,035 223 120 82 89
------------ --------- --------- -------- --------
Net charge-offs (recoveries) (145) 336 227 161 158
Additions charged (credited) to operations 354 623 330 264 180
Addition due to acquisition - 165 - 24 -
------------ --------- --------- --------- --------
Balance at end of period $ 2,200 1,701 1,249 1,146 1,019
------------ --------- --------- -------- --------
Average loans outstanding
during the period* $137,997 116,520 101,245 88,684 71,347
Gross charge-offs as a percent
of average loans* 0.64% 0.48 0.34 0.29 0.35
Recoveries as a percent of
gross charge-offs 116.29% 39.89 34.58 33.75 36.03
Ratio of net charge-offs (recoveries)
during the period to average loans
outstanding during the period* (0.11)% 0.29 0.22 0.19 0.22
* Net of unearned income
</TABLE>
<TABLE>
<CAPTION>
Table IX - Allocation of Allowance for Loan Losses (dollars in thousands)
As of December 31,
--------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------
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 $ 691 25.7% $ 677 26.4% $ 619 25.9% $ 359 23.1% $ 468 27.2%
Real estate -
Mortgage 741 53.2 511 48.9 191 46.4 81 44.8 112 41.1
Installment 722 21.1 498 24.7 413 27.7 420 32.1 366 31.7
Unallocated 46 N/A 15 N/A 26 N/A 286 N/A 73 N/A
--------------------------------------------------------------------------------------------------------------
$2,200 100.0% $1,701 100.0% $1,249 100.0% $1,146 100.0% $1,019 100.0%
==============================================================================================================
*Represents the ratio of each loan category to gross loans (including unearned interest)
</TABLE>
13
<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.
The Company did not have any nonaccrual loans as of December 31, 1999.
Nonaccrual loans totaled $81,000 in 1998, and $172,000 in 1997. The decrease
from 1997 to 1998 was the result of one loan being moved out of 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, 1999, the Company
had no restructured loans.
Loans past due over ninety days and still accruing interest were $183,000
at December 31, 1999, an increase from the December 31, 1998 amount of $20,000.
The following table presents an analysis of nonaccrual, past due, other
real estate and restructured loans at December 31, 1999.
<TABLE>
<CAPTION>
Table X - Analysis of Nonaccrual, Past Due, Other Real Estate, and Restructured Loans (dollars in thousands)
At December 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ - 81 172 147 99
Restructured loans - 69 - - -
Other impaired loans - - - - -
Other real estate 150 125 186 151 -
---------------- --------------- --------------- ----------- -----------
Total nonperforming assets $ 150 275 358 298 99
================ =============== =============== =========== ===========
Allowance for loan loss to
nonperforming assets 1,466.67% 618.55 348.88 384.90 1,029.29
Nonperforming assets as a percentage
of stockholders' equity 0.4% 0.8 1.1 .9 .3
Loans past due 90+ days and
still accruing $ 183 21 20 33 41
================ =============== =============== =========== ===========
Other potential problem loans $ - - - - -
================ =============== =============== =========== ===========
Income that would have been
recorded in accordance with
original terms $ - 6 5 7 5
Less income actually
recorded - - - - -
---------------- --------------- --------------- ----------- -----------
Loss of income $ - 6 5 4 5
================ =============== =============== =========== ===========
</TABLE>
14
<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 76% of the total as of December 31, 1999,
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, and 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. At
December 31, 1999, floating rate securities made up 66% of the CMO portfolio.
Support and liquidity classes with longer average lives and floating rate
coupons comprise 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, 1999, the Company had no structured notes.
Securities are the Company's single largest interest-earning asset
representing approximately 49%, 53%, and 61% of total assets at December 31,
1999, 1998, and 1997 respectively. The investment portfolio totaled $192.2
million at December 31, 1999, down from $205.4 and $218.0 million at December
31, 1998 and December 31, 1997, respectively.
15
<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)
Available for Sale Portfolio At December 31,
-----------------------------------------------------------------------------
(Carried at Market Value) 1999 1998 1997
---------------------- ----------------------- ------------------
<S> <C> <C> <C>
U.S. Treasuries $ 17,916 48,060 60,282
U.S. Government Agencies 48,932 14,287 20,029
State and Municipal - 2,435 -
Other securities 493 467 368
---------------------- ----------------------- ------------------
$67,341 65,249 80,679
Mortgage-backed securities and
collateralized mortgage obligations 64,334 65,637 68,061
---------------------- ----------------------- ------------------
Total Available for Sale $131,675 130,886 148,740
====================== ======================= ==================
Held to Maturity Portfolio At December 31,
------------------------------------------------------------------------------
(Carried at Amortized Cost) 1999 1998 1997
---------------------- ----------------------- ------------------
U.S. Treasuries $ - 7,013 7,038
U.S. Government Agencies - 3,064 10,144
State and Municipal 46,895 47,037 32,213
Corporate securities 2,068 - -
Other Securities 228 352 -
---------------------- ----------------------- ------------------
$49,191 57,466 49,395
Mortgage-backed securities and
collateralized mortgage obligations 11,388 17,071 19,838
---------------------- ----------------------- ------------------
Total Held to Maturity $ 60,579 74,537 69,233
====================== ======================= ==================
</TABLE>
16
<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)
Available for Sale Portfolio (Carried at Market Value):
As of December 31, 1999
----------------------------
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>
US Treasury and $ - -% $64,915 5.48% $ 1,933 6.29% $ - -% $ - -% $ 68,481 66,848
government agencies
State and Municipal* - - - - - - - - - - - -
Corporate securities - - - - - - - - - - - -
Other - - - - 493 5.09 - - - - 493 493
-------- ----- ------- ------- -------- ------- ------- ----- -------- ------- -------- ---------
Sub Total - - 64,915 6.91 2,426 6.04 - - - - 68,974 67,341
Mortgage-backed
securities - - - - - - - - 64,334 5.94 65,638 64,334
-------- ----- ------- ------- -------- ------- ------- ----- -------- ------- -------- ---------
Total $ - -% $64,915 6.91% $ 2,426 6.04% $ - -% $64,334 5.94% $134,612 131,675
======== ===== ======= ======= ======== ======= ======= ===== ======== ======= ======== =========
</TABLE>
Held to Maturity Portfolio (Carried at amortized cost)
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------
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 $ - -% $ - -% $ - -% $ - -% $ - -% $ - -
State and Municipal* 4,117 6.41 6,259 7.32 12,204 7.14 24,315 6.97 - - 46,895 44,830
Corporate securities - - 2,068 5.64 - - - - - - 2,068 2,000
Other securities - - - - - - 228 5.23 - - 228 223
------- ---- ------- ----- ------- ------ ------- ----- -------- ------- -------- ---------
Sub Total 4,117 6.41 8,327 6.91 12,204 7.14 24,543 6.95 - - 49,191 47,053
Mortgage-backed
securities - - - - - - - - 11,388 5.99 11,388 11,197
------- ---- ------- ----- ------- ------ ------- ----- -------- ------- -------- ---------
Total $4,117 6.41% $ 8,327 6.91% $12,204 7.14% $24,543 6.95% $11,388 5.99% $ 60,579 58,250
======= ==== ======= ===== ======= ====== ======= ===== ======== ======= ======== =========
* Yields are stated on a tax-equivalent basis at a 34% effective tax rate.
</TABLE>
17
<PAGE>
Deposits
- --------
Total deposits at December 31, 1999 were $355.4 million, an increase of
approximately $9.7 million from the December 31, 1998 deposit total of $345.7
million. Total deposits increased during 1999 as a result of continued growth.
Deposits totaled approximately $322.1 million at December 31, 1997.
Total average deposits in 1999 were $347,125,000, an increase of $26,981,000
over 1998. Total average deposits in 1998 were $320,144,000, an increase of
$8,336,000 over the December 31, 1997 total of $311,808,000. The majority of the
increases from 1998 to 1999 and from 1997 to 1998 were 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>
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
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 $ 42,622 - -% $ 36,883 - -% $ 31,955 - -%
Interest-bearing
demand 81,786 1,720 2.10 75,420 1,814 2.42 73,665 1,910 2.59
Savings 12,259 276 2.25 10,270 252 2.45 9,419 250 2.65
Money market
accounts 34,270 866 2.53 34,564 960 2.78 34,472 1,035 3.03
Time 176,188 8,706 4.94 163,007 8,318 5.10 162,297 8,298 5.11
-----------------------------------------------------------------------------------------------------------
Total $347,125 11,568 3.33% $320,144 11,344 4.01% $311,808 11,493 4.11%
===========================================================================================================
</TABLE>
18
<PAGE>
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, 1999, 50.8% of
total average deposits were time deposits as compared to 50.9%, and 52.1% at
December 31, 1998 and 1997, respectively.
Included in the table below are time deposits at December 31, 1999, with
balances of $100,000 or more. These deposits represent 25.2% 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,
1999
Maturity from Percent of
December 31, 1999 Total
---------------------------- --------------------
<S> <C> <C>
Three months or less $ 25,114 56.57%
Within months four through six 17,383 39.16%
Within months seven through twelve 1,625 3.66%
Over one year 271 0.61%
---------------------------- --------------------
Total $ 44,393 100.00%
============================ ====================
</TABLE>
Short-Term Borrowings
- ---------------------
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. Due to potential concerns related to Y2K,
the Company increased its cash balances and established credit lines at several
large correspondents during the latter part of 1999. The Company, however, did
not have to utilize these credit lines.
Capital Resources and Capital Adequacy
- --------------------------------------
The Company's shareholders' equity of $35,771,000 at December 31, 1999
remains at a level considered to be adequate by management. Shareholder equity
decreased slightly from 1998 to 1999 due to a net change in the net unrealized
loss on available for sale securities of $2,587,000. Shareholder equity
increased from profits in excess of dividends paid to shareholders. The increase
in the net unrealized loss on available for sale securities was caused by
general rate increases in the market. Shareholders' equity was $35,911,000 at
December 31, 1998 and $32,729,000 at December 31, 1997.
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
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. As a result, banks are 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, 1999,
Citizens Bank had Tier 1 and total capital ratios of 18.39% and 19.57%
respectively. At December 31, 1998, Citizens Bank had Tier 1 and total capital
ratios of 19.2% and 20.3% respectively. At December 31, 1997, Citizens Bank had
a Tier 1 and total capital ratio of 23.7% and 24.7% 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 are comprised of total assets less the intangible assets
that are deducted from Tier 1 capital. As of December 31, 1999, Citizens Bank's
leverage ratio was 9.0% compared to 8.8% and 9.1% as of December 31, 1998 and
December 31, 1997 respectively.
19
<PAGE>
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, 1999, 1998, and
1997, Citizens Bank met all regulatory requirements to be deemed "well
capitalized."
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.
During 1999, the Company purchased 5,274 shares of its common stock from
ten shareholders at an average cost of $17.33 per share. 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, 1999, the Company employed approximately 162 full-time and
34 part-time employees. Management highly values and respects its excellent
relationship with its employees.
Year 2000
- ---------
No significant problems related to the year 2000 issue have been discovered
with the Company's business systems or with any integral systems linking the
Company to third party vendors. The Company's total cost of Y2K preparations
was approximately $137,000. The cost of replacing non-compliant Y2K hardware
and software combined with the expenses for related testing was approximately
$107,000 of the total. Approximately $30,000 was also spent on a generator and
its installation. The total does not include the purchase of a check sorter
and a phone system for the main bank facility at a cost of approximately
$220,000, as these items were targeted for replacement before it was determined
that they were not Y2K compliant. This amount does include the salary of an
employee who was hired in 1998 to assist with the testing for Y2K but does not
include salary expense for the personnel that were already on staff.
20
<PAGE>
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 and Marshall 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 non-banking
financial institutions and non-financial 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 2000 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 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 accounting pronouncement has been issued, but has not yet become
effective, and is 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 2001. 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.
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, and the loss of any member of senior management or
operating personnel and the potential inability to hire qualified personnel at
reasonable compensation levels.
21
<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%)
HCB Insurance Agency, Inc. (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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,041
<INT-BEARING-DEPOSITS> 5,357
<FED-FUNDS-SOLD> 9,285
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,675
<INVESTMENTS-CARRYING> 60,579
<INVESTMENTS-MARKET> 58,250
<LOANS> 146,529
<ALLOWANCE> 2,200
<TOTAL-ASSETS> 393,446
<DEPOSITS> 355,423
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,252
<LONG-TERM> 0
0
0
<COMMON> 10,800
<OTHER-SE> 24,971
<TOTAL-LIABILITIES-AND-EQUITY> 393,446
<INTEREST-LOAN> 11,137
<INTEREST-INVEST> 12,029
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,166
<INTEREST-DEPOSIT> 11,568
<INTEREST-EXPENSE> 11,576
<INTEREST-INCOME-NET> 11,590
<LOAN-LOSSES> 354
<SECURITIES-GAINS> 187
<EXPENSE-OTHER> 12,011
<INCOME-PRETAX> 4,639
<INCOME-PRE-EXTRAORDINARY> 4,639
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,909
<EPS-BASIC> 1.94
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,701
<CHARGE-OFFS> 890
<RECOVERIES> 1,035
<ALLOWANCE-CLOSE> 2,200
<ALLOWANCE-DOMESTIC> 2,200
<ALLOWANCE-FOREIGN> 0
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