UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2002 Commission file number: 33-42286
HENDERSON CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 6712 75-2371232
- ------------------------------------ ------------------------------------ ----------------------
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification No.)
201 West Main Street, P.O. Box 1009
Henderson, Texas 75653-1009
(903) 657-8521
(Address, including ZIP code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes ______No
-----
At March 31, 2002, 1,994,218 shares of Common Stock, $5.00 par value, were
outstanding.
1
HENDERSON CITIZENS BANCSHARES, INC.
QUARTER ENDED MARCH 31, 2002
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets ....................................................... 3
Consolidated Statements of Income ................................................. 4
Consolidated Statements of Changes in Stockholders' Equity ........................ 5
Condensed Consolidated Statements of Cash Flows ................................... 6
Notes to Consolidated Financial Statements ........................................ 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 11
ITEM 3 - Quantitative and Qualitative Disclosure About Market Risk ................ 17
PART II - OTHER INFORMATION ....................................................... 18
SIGNATURES ........................................................................ 19
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
HENDERSON CITIZENS BANCSHARES, INC.
Consolidated Balance Sheets
(dollars in thousands, except share amounts)
(unaudited)
March 31, December 31,
Assets 2002 2001
------ --------------- ---------------
Cash and due from banks $ 11,522 14,390
Interest-bearing deposits with financial institutions 8,455 11,946
Federal funds sold 15,540 16,860
-------------- ---------------
Total cash and cash equivalents 35,517 43,196
Securities available for sale, at fair value 166,576 185,410
Securities held to maturity, estimated fair value of $95,446
in 2002 and $57,171 in 2001 95,555 57,170
-------------- ---------------
262,131 242,580
Loans, net 214,441 212,665
Premises and equipment, net 11,163 11,302
Accrued interest receivable 3,432 4,157
Intangible assets 10,024 9,449
Other assets 3,991 2,836
-------------- ---------------
$ 540,699 526,185
============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand - non interest-bearing 69,647 70,527
Interest-bearing transaction accounts 90,626 87,781
Money market and savings 95,410 94,844
Certificates of deposit and other time deposits 232,914 220,578
-------------- ---------------
Total deposits 488,597 473,730
Accrued interest payable 1,269 1,394
Other borrowings 2,702 4,098
Other liabilities 3,535 3,029
-------------- ---------------
496,103 482,251
Stockholders' equity:
Preferred stock, $5 par value; 2,000,000 shares authorized,
none issued or outstanding - -
Common stock, $5 par value; 10,000,000 shares authorized,
2,160,000 issued 10,800 10,800
Surplus 5,400 5,400
Retained earnings 30,788 29,243
Accumulated other comprehensive income 25 903
Treasury stock, 165,782 shares in 2002
and 165,582 shares in 2001 at cost (2,417) (2,412)
-------------- ---------------
Total stockholders' equity 44,596 43,934
-------------- ---------------
$ 540,699 526,185
============== ===============
See accompanying notes to consolidated financial statements.
3
HENDERSON CITIZENS BANCSHARES, INC.
Consolidated Statements of Income
(dollars in thousands, except share amounts)
(unaudited)
Three months
ended March 31,
2002 2001
--------------- ---------------
Interest income:
Loans, including fees $ 3,962 3,576
Securities:
Taxable - available for sale 1,937 2,360
Taxable - held to maturity 530 131
Tax-exempt - held to maturity 484 492
Federal funds sold 104 275
Interest-bearing deposits with financial institutions 94 185
--------------- ---------------
Total interest income 7,111 7,019
--------------- ---------------
Interest expense:
Deposits:
Transaction accounts 274 397
Money market and savings 359 505
Certificates of deposit and other time deposits 2,345 3,052
Other borrowed funds 17 10
--------------- ---------------
Total interest expense 2,995 3,964
--------------- ---------------
Net interest income 4,116 3,055
Provision for loan losses 260 110
--------------- ---------------
Net interest income after provision for loan losses 3,856 2,945
--------------- ---------------
Noninterest income:
Service charges, commissions, and fees 1,390 1,019
Income from fiduciary activities 369 329
Net realized gains on securities transactions 862 3
Other 262 215
--------------- ---------------
Total noninterest income 2,883 1,566
--------------- ---------------
Noninterest expenses:
Salaries and employee benefits 2,660 2,044
Occupancy and equipment 566 481
Other 1,001 863
--------------- ---------------
Total other expenses 4,227 3,388
--------------- ---------------
Income before income tax expense 2,512 1,123
Income tax expense 628 160
--------------- ---------------
Net income $ 1,884 963
=============== ===============
Basic earnings per common share $ 0.94 0.48
=============== ===============
Weighted average number of shares outstanding 1,994,293 1,995,216
=============== ===============
See accompanying notes to consolidated financial statements.
4
HENDERSON CITIZENS BANCSHARES, INC.
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Three months ended March 31, 2002 and 2001
(dollars in thousands, except share and per share amounts)
Accumulated
Other
Preferred Common Retained Comprehensive Treasury
Stock Stock Surplus Earnings Income (Loss) Stock Total
---------- ---------- ---------- ----------- ---------------- ----------- ------------
Balances at January 1, 2001 $ - 10,800 5,400 25,894 (575) (2,397) 39,122
Comprehensive income:
Net Income - - - 963 - - 963
Other comprehensive income:
Change in net unrealized
gain (loss) on securities
available for sale,
net of tax of $525 - - - - 1,018 - 1,018
------------
Total comprehensive income 1,981
Cash dividends declared
($.17 per share) - - - (339) - - (339)
---------- ---------- ---------- ----------- ---------------- ----------- ------------
Balances at March 31, 2001 $ - 10,800 5,400 26,518 443 (2,397) 40,764
========== ========== ========== =========== ================ =========== ============
Balances at January 1, 2002 $ - 10,800 5,400 29,243 903 (2,412) 43,934
Comprehensive income:
Net Income - - - 1,884 - - 1,884
Other comprehensive income:
Change in net unrealized
gain (loss) on securities
available for sale arising
during the period,
net of tax of $(452) - - - - (878) - (878)
------------
Total comprehensive income 1,006
Purchase of 200 shares of
treasury stock - - - - - (5) (5)
Cash dividends declared
($.17 per share) - - - (339) - - (339)
---------- ---------- ---------- ----------- ---------------- ----------- ------------
Balances at March 31, 2002 $ - 10,800 5,400 30,788 25 (2,417) 44,596
========== ========== ========== =========== ================ =========== ============
See accompanying notes to consolidated financial statements.
5
HENDERSON CITIZENS BANCSHARES, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31, 2002 and 2001
(dollars in thousands)
2002 2001
------------- -------------
Net cash provided by operating activities $ 1,808 1,112
Investing activities:
Securities available for sale:
Sales 49,953 5,009
Purchases (45,096) (35,571)
Maturities and repayments 13,360 23,772
Securities held to maturity:
Purchases (41,284) -
Maturities and repayments 2,852 777
Net change in loans (2,036) (835)
Proceeds from sale of premises and equipment
and other real estate 97 27
Purchases of bank premises, equipment and software (121) (543)
------------- -------------
Net cash from investing activities (22,275) (7,364)
------------- -------------
Financing activities:
Net increase in deposits 14,867 36,746
Other borrowed funds (1,396) 804
Cash dividends paid (678) (682)
Purchase of treasury stock (5) -
------------- -------------
Net cash from financing activities 12,788 36,868
------------- -------------
Change in cash and cash equivalents (7,679) 30,616
Cash and cash equivalents at beginning of period 43,196 25,993
------------- -------------
Cash and cash equivalents at end of period $ 35,517 56,609
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Income taxes paid, net of refunds $ - 50
============= =============
Interest paid $ 3,120 3,930
============= =============
See accompanying notes to consolidated financial statements.
6
HENDERSON CITIZENS BANCSHARES, INC.
Notes to Consolidated Financial Statements
March 31, 2002
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements are unaudited, but
include all adjustments, consisting of normal recurring accruals, which
management considers necessary for a fair presentation of the financial
position, results of operations, and cash flows.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed
or omitted pursuant to Securities and Exchange Commission rules and
regulations. The consolidated financial statements and footnotes
included herein should be read in conjunction with the Company's annual
consolidated financial statements as of December 31, 2001 and 2000, and
for each of the years in the three year period ended December 31, 2001
included in the Company's 2001 Form 10-K.
The accompanying consolidated financial statements of the Company include
the accounts of its wholly owned subsidiary, Citizens National Bank.
The financial statements of Citizens National Bank are consolidated
with its wholly owned subsidiaries, HCB Insurance Agency, Inc. and
Community Development Corporation ("CDC").
Certain amounts in the prior financial statements have been reclassified
to conform to the current presentation.
(2) Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board issued two
statements--SFAS 141, Business Combinations, and SFAS 142, Goodwill and
Other Intangible Assets, which impacts the Company's accounting for its
reported goodwill and other intangible assets.
SFAS 141, Business Combinations--This statement eliminates the pooling
method for accounting for business combinations. It requires that
intangible assets that meet certain criteria be reported separately
from goodwill and that negative goodwill arising from a business
combination be recorded as an extraordinary gain.
SFAS 142, Goodwill and Other Intangible Assets--This statement eliminates
the amortization of goodwill and other intangibles that are determined
to have an indefinite life. It requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are
determined to have an indefinite life.
The standards have been applied by the Company, beginning January 1, 2002.
The Company has not yet completed its initial impairment test, which
must be completed by June 30, 2002. However, management believes no
significant impairment exists. In accordance with the new standards,
goodwill of $65,000 is no longer being amortized. Following is a
reconciliation of reported net income and basic earnings per common
share to the adjusted amounts assuming the new standards were applied
effective January 1, 2001 (in thousands, except per share amounts):
Three Months Ended March 31,
2002 2001
---- ----
Reported net income $ 1,884 $ 963
Add back goodwill amortization - 65
--------- ----------
Adjusted net income $ 1,884 $ 1,028
========= ==========
Reported earnings per share $ 0.94 $ 0.48
Goodwill amortization - .03
--------- ----------
Adjusted earnings per share $ 0.94 $ 0.51
========= ==========
7
HENDERSON CITIZENS BANCSHARES, INC.
Notes to Consolidated Financial Statements
(3) Acquisition
-----------
On July 2, 2001, the Company acquired all of the outstanding shares of
Rusk County Bancshares, Inc. Henderson, Texas, ("RCBI") and its wholly
owned indirect banking subsidiary, Peoples State Bank for a purchase
price of $12,550,000 in cash. The results of operations of Peoples
State Bank have been included in the Company's consolidated income
statement since that date. This transaction was accounted for using the
purchase method of accounting. Of the $4,737,000 of goodwill and other
intangible assets acquired, approximately $2,659,000 has been assigned
to core deposit intangibles and is being amortized using the
straight-line method over seven years. The residual of approximately
$2,078,000 has been recorded as unidentified goodwill and is not being
amortized, but is subject to annual impairment tests. The following is
condensed pro-forma information for the acquisition of RCBI. Had this
transaction occurred previously on January 1, 2001, net interest income
for the three months ended March 31, 2001 would have been $3,706,000,
while net income for the same period would have been $1,106,000. Basic
earnings per share for the three months ended March 31, 2001 would have
been $0.55.
(4) Securities
----------
The amortized cost and estimated fair values of securities available for
sale at March 31, 2002 and December 31, 2001, are summarized as follows
(in thousands of dollars):
March 31, 2002
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- --------------- -------------- -----------------
U.S. Government agencies $ 20,812 164 (216) 20,760
Mortgage-backed securities and
collateralized mortgage obligations 145,726 619 (529) 145,816
------------- --------------- -------------- -----------------
$ 166,538 783 (745) 166,576
============= =============== ============== =================
December 31, 2001
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- --------------- -----------------
U.S. Treasury $ 8,002 301 - 8,303
U.S. Government agencies 57,483 779 (139) 58,123
Mortgage-backed securities and
collateralized mortgage obligations 118,555 742 (313) 118,984
------------- ------------- --------------- -----------------
$ 184,040 1,822 (452) 185,410
============= ============= =============== =================
8
HENDERSON CITIZENS BANCSHARES, INC.
Notes to Consolidated Financial Statements
The amortized cost and estimated fair values of securities held-to-
maturity at March 31, 2002 and December 31, 2001 are summarized as
follows (in thousands of dollars):
March 31, 2002
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------------ ---------------- ------------------
U.S. Government agencies $ 24,403 1 (238) 24,166
State and municipal 41,684 644 (351) 41,977
Mortgage-backed securities and
collateralized mortgage obligations 27,289 40 (255) 27,074
Corporate 2,020 53 - 2,073
Other securities 159 - (3) 156
------------- ------------------ ---------------- ------------------
$ 95,555 738 (847) 95,446
============= ================== ================ ==================
December 31, 2001
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ----------------- -------------------- ------------------
U.S. Government agencies $ 4,975 - - 4,975
State and municipal 42,137 501 (611) 42,027
Mortgage-backed securities and
collateralized mortgage obligations 7,852 48 - 7,900
Corporate 2,025 67 - 2,092
Other securities 181 - (4) 177
------------- -------------- -------------------- ------------------
$ 57,170 616 (615) 57,171
============= ============== ==================== ==================
9
HENDERSON CITIZENS BANCSHARES, INC.
Notes to Consolidated Financial Statements
March 31, 2002
(5) Loans and Allowance for Loan Losses
-----------------------------------
The composition of the Company's loan portfolio is as follows (in
thousands of dollars)
March 31, December 31,
2002 2001
---------------- --------------
Real estate mortgage $ 115,417 114,175
Commercial and industrial 65,200 62,619
Installment and other 37,154 39,093
---------------- --------------
Total 217,771 215,887
Less:
Allowance for loan losses (3,319) (3,205)
Unearned discount (11) (17)
---------------- --------------
Loans, net $ 214,441 212,665
================ ==============
Changes in the allowance for loan losses for the three months ended March
31, 2002 and 2001 summarized as follows (in thousands of dollars):
Three months ended March 31,
-----------------------------------
2002 2001
----------------- --------------
Balance, beginning of period $ 3,205 2,355
Provision charged to operating expense 260 110
Charge offs:
Commercial, financial, and agriculture (34) (58)
Real estate-mortgage - (31)
Installment loans to individuals (178) (113)
Recoveries:
Commercial, financial, and agriculture 9 4
Real estate-mortgage - -
Installment loans to individuals 57 57
----------------- --------------
Balance, March 31 $ 3,319 2,324
================= ==============
10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC.
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
The following discussion and analysis of the consolidated financial condition
and results of operations of the Company should be read in conjunction with the
consolidated financial statements and the notes thereto, and other financial and
statistical information appearing elsewhere in this report.
Recent Developments
- -------------------
On December 14, 2001, the Bank entered into a Branch Purchase and Assumption
Agreement with Cedar Creek Bank, Seven Points, Texas, to purchase two facilities
in Corsicana, Texas. On February 20, 2002, Bank received approval from the
Office of the Comptroller of Currency for the purchase and assumption of the two
branches. These two facilities were converted to full-service branches of the
Bank at the close of business on April 26, 2002.
Results of Operations
- ---------------------
Net income for the first three months of 2002 increased to $1,884,000 compared
to $963,000 for the same period in 2001. Net interest income for the three
months ended March 31, 2002 was $4,116,000 compared to $3,055,000 for the same
period in 2001. The Company made a provision of $260,000 to the allowance for
loan losses during the first three months of 2002. A provision of $110,000 was
made for loan losses during the same period in 2001. The Company experienced a
net gain on securities transactions of $862,000 in the first three months of
2002 compared to a net gain on securities transactions of $3,000 in the first
three months of 2001. Noninterest income, excluding net gains on securities
transactions, for the first three months of 2002 was $2,021,000 compared to
$1,563,000 for the same period in 2001. Total noninterest expenses for the first
three months of 2002 were $4,227,000 compared to $3,388,000 for the same period
in 2001. Income tax expense for the first three months of 2002 and 2001 was
$628,000 and $160,000, respectively.
Net Interest Income. For the three months ended March 31, 2002,
-------------------
net interest income was $4,116,000 compared to $3,055,000 for the first three
months of 2001. Interest income was up $92,000 during the three months ended
March 31, 2002, primarily due to growth as a result of the acquisition of
Peoples State Bank in July of 2001. Even though volumes increased on
interest-bearing liabilities, interest expense decreased by $969,000 during the
three months ended March 31, 2002. This decrease was due to a combination of
sharp declines in interest rates paid and, also, as a result of the change in
the composition of interest-bearing liabilities due to time deposits
representing five percent less of total interest-bearing liabilities at March
31, 2002, than at March 31, 2001.
Provision for Loan Losses. The provision for loan losses was
-------------------------
$260,000 for the first three months of 2002 compared to $110,000 for the first
three months of 2001. See "Management's Discussion and Analysis of the Financial
Condition and Results of Operations of the Company--Allowance for Loan Losses"
for a more detailed discussion relative to the provision for loan losses.
Noninterest Income. Noninterest income, excluding securities
------------------
gains/losses, was $2,021,000 for the first three months of 2002 as compared to
$1,563,000 in the first three months of 2001. This increase is largely
attributable to increases in service charges primarily due to the growth in fees
collected for insufficient funds, which is largely attributable to the Peoples
State bank acquisition. Increases in trust fee income and increases in
mortgage-servicing income realized from the sale of FHLMC loans also contributed
to the rise in noninterest income. The Company experienced a net gain on
securities transactions of $862,000 for the first three months of 2002 compared
to a net gain on securities transactions of $3,000 for the first three months of
2001. Given the level of interest rates on securities maturing in an 18 month
period, the Company elected to capture the gain in anticipation of rising
interest rates.
Noninterest Expenses. Noninterest expenses for the three-month
--------------------
period ended March 31, 2002, were $4,227,000 compared to $3,388,000 during the
same period in 2001. The increase in other expenses is due to the increase in
salary and related benefits expense resulting from normal year-end salary
increases in the current year combined with the acquisition of Peoples State
Bank in July of 2001and the acquisition of two former Jefferson Heritage
branches in October of 2001. Occupancy expenses continue to increase with the
addition of new facilities and the remodeling of existing properties.
11
Income Taxes. Income tax expense for the first three months of
------------
2002 was $628,000, compared to $160,000 in the same period in 2001. The
effective tax rates for the first three months of 2002 and 2001 were 25.0% and
14.2%. The 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.
Financial Condition
- -------------------
The Company's total assets at March 31, 2002 of $540,699,000 increased from the
total assets at December 31, 2001 of $526,185,000. The Company's loan portfolio
grew to $214,441,000 at March 31, 2002, up slightly from $212,665,000 at
December 31, 2001. Total deposits were $488,597,000 at March 31, 2002, compared
to the December 31, 2001 total of $473,730,000.
Deposits and Other Borrowings
- -----------------------------
Total deposits at March 31, 2002 increased from the December 31, 2001 balances
by $14,867,000. This increase was due mostly to an increase in public funds that
is partially offset by a decrease in the volume of certificates of deposit.
During July 2000, the Company changed from the Treasury Tax and Loan Daily
Remittance Option to the Treasury Tax and Loan Note Option, which allows the
Company to keep on deposit customer tax payments for short periods of time until
withdrawn by the Treasury. At March 31, 2002, amounts payable under this note
totaled $2,702,000.
Liquidity
- ---------
Liquidity is the ability of the Company to fund customers' needs for borrowing
and deposit withdrawals. The purpose of liquidity management is to assure
sufficient cash flow to meet all of the financial commitments and to capitalize
on opportunities for business expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the Company to its customers. The Company's
principal sources of funds are deposits, loan and securities repayments,
maturities of securities, sales of securities available for sale and other funds
provided by operations. The Company also has various federal funds sources from
correspondent banks. While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions and competition. The Company maintains investments in liquid assets
based upon management's assessment of (1) need for funds, (2) expected deposit
flows, (3) yields available on short-term liquid assets and (4) objectives of
the asset/liability management program.
Cash and cash equivalents decreased $7,679,000 from $43,196,000 at December 31,
2001 to $35,517,000 at March 31, 2002. Cash and cash equivalents represented
6.6% of total assets at March 31, 2002 compared to 8.2% of total assets at
December 31, 2001. This decrease was due mainly to excess cash and fed funds
being invested in mortgage-backed securities and government agency securities
for increased yields. The Company has the ability to borrow federal funds from
various correspondent banks should the Company need to supplement its future
liquidity needs in order to meet deposit flows, loan demand or to fund
investment opportunities. Management believes the Company's liquidity position
is strong based on its level of cash and cash equivalents, core deposits, the
stability of its other funding sources and the support provided by its capital
base.
As summarized in the Consolidated Statements of Cash Flows, the most significant
transactions that affected the Company's level of cash and cash equivalents,
cash flows and liquidity during the first three months of 2002 were the net
increase in deposits of $14,867,000, securities purchases of $86,380,000,
securities sales of $49,953,000 and securities maturities and repayments of
16,212,000.
Capital Resources
- -----------------
At March 31, 2002, stockholders' equity totaled $44,596,000, or 8.2% of total
assets, compared to $43,934,000, or 8.3% of total assets, at December 31, 2001.
The Company and its Bank subsidiary, Citizens National Bank, are subject to
regulatory capital requirements administered by federal banking agencies. Bank
regulators monitor capital adequacy very closely and consider it an important
factor in ensuring the safety of depositors' accounts. As a result, bank
regulators have established standard risk based capital ratios that measure the
amount of an institution's capital in relation to the degree of risk contained
in the balance sheet, as well as off-balance sheet exposure. Federal law
requires each federal banking regulatory agency to take prompt corrective action
to resolve problems of insured depository institutions including, but not
limited to, those that fall below one or more prescribed capital ratios.
According to the regulations, institutions whose Tier 1 and total capital ratios
meet or exceed 6.0% and 10.0% of risk-weighted assets, respectively, are
considered "well capitalized." Tier 1 capital is shareholders' equity excluding
the unrealized gain or loss on securities classified as available for sale and
intangible assets. Tier 2 capital, or total capital, includes Tier 1 capital
plus the allowance for loan losses not to exceed
12
1.25% of risk weighted assets. Risk weighted assets are the Company's total
assets after such assets are assessed for risk and assigned a weighting factor
based on their inherent risk. In addition to the risk-weighted ratios, all
institutions are required to maintain Tier 1 leverage ratios of at least 5.0% to
be considered "well capitalized" and 4.0% to be considered "adequately
capitalized." The leverage ratio is defined as Tier 1 capital divided by
adjusted average assets for the most recent quarter.
The tables below set forth the Consolidated and Citizens National Bank only
capital ratios as of March 31, 2002 and December 31, 2001.
Consolidated Bank Only
------------ ---------
March 31, 2002
- --------------
Tier 1 capital to risk-weighted assets ratio 14.4% 14.3%
Total capital to risk-weighted assets ratio 15.7 15.6
Leverage ratio 6.7 6.6
December 31, 2001
- -----------------
Tier 1 capital to risk-weighted assets ratio 13.9% 13.7%
Total capital to risk-weighted assets ratio 15.1 15.0
Leverage ratio 6.7 6.7
As of March 31, 2002 and December 31, 2001, Citizens National Bank met the level
of capital required to be categorized as well capitalized under prompt
corrective action regulations. Management is not aware of any conditions
subsequent to March 31, 2002 and December 31, 2001 that would change the
Company's or the Citizens National Bank's capital categories.
Loans
- -----
The Company's loan portfolio consists primarily of real estate, commercial and
industrial, and consumer loans. Gross loans were $217,771,000 at March 31, 2002
compared to $215,887,000 at December 31, 2001.
As can be seen in the table in Note 5 above, an increase of approximately 4.1%
in commercial and industrial loans, an increase of approximately 1.1% in real
estate loans, and a decrease of 5.0% in installment loans occurred during the
first three months of 2002.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses at March 31, 2002 and December 31, 2001 was 1.52%
and 1.48% of outstanding loans, respectively. By its nature, the process through
which management determines the appropriate level of the allowance requires
considerable judgment. The determination of the necessary allowance, and
correspondingly the provision for loan losses, involves assumptions about
projections of national and local economic conditions, the composition of the
loan portfolio, and prior loss experience, in addition to other considerations.
As a result, no assurance can be given that future losses will not vary from the
current estimates. However, the allowance at March 31, 2002 represents
management's best estimate of probable losses that have been incurred within the
existing portfolio of loans. A migration analysis and an internal classification
system for loans also help identify potential problems, if any, which are not
identified otherwise. From these analyses, management determines which loans are
potential candidates for nonaccrual status, including impaired loan status, or
charge-off. Management continually reviews loans and classifies them consistent
with the guidelines established by the Office of the Comptroller of Currency to
help ensure that an adequate allowance is maintained.
The provision for loan losses is determined by management as the amount to be
added to the allowance for loan losses after net charge-offs have been deducted
to bring the allowance to a level, which is considered adequate to absorb losses
inherent in the loan portfolio. The amount of the provision is based on
management's review of the loan portfolio, and the consideration of such factors
as historical loss experience, general prevailing economic conditions, changes
in the size and composition of the loan portfolio and specific borrower
considerations, including the ability of the borrower to repay the loan and the
estimated value of the underlying collateral.
The provision for loan losses for the three months ended March 31, 2002 totaled
$260,000 compared to $110,000 for the three months ended March 31, 2001.
Management anticipates it will continue its provisions to the allowance for loan
losses at current levels for the near future, providing the volume of
nonperforming loans remains insignificant, to compensate for loan growth,
particularly higher risk commercial and installment loans.
13
Non Accrual, Past Due and Restructured Loans
- --------------------------------------------
The Company's policy is to discontinue the accrual of interest income on loans
whenever it is determined that reasonable doubt exists with respect to timely
collectibility of interest and principal. Loans are placed on nonaccrual status
if either material deterioration occurs in the financial position of the
borrower, payment in full of interest or principal is not anticipated, payment
in full of interest or principal is past due 90 days or more unless well
secured, payment in full of interest or principal on a loan is past due 180 days
or more, regardless of collateral, or the loan in whole or in part is classified
as doubtful. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed on
nonaccrual status, interest is no longer accrued or included in interest income
and previously accrued income is reversed.
The following is a summary of the Company's problem loans as of March 31, 2002
and December 31, 2001.
March 31, December 31,
2002 2001
------------ ----------
(dollars in thousands)
Nonaccrual loans $ 74 74
Restructured loans - -
Other impaired loans 492 475
Loans past due 90+ days and still accruing 232 18
------------ ----------
Total non-performing loans $ 798 567
============ ==========
Other potential problem loans $ - -
============ ==========
Other non-performing assets, other real estate owned $ - 90
============ ==========
14
Concentration of Credit Risk
- ----------------------------
The Company grants real estate, commercial, and industrial loans to customers
primarily in Henderson, Texas, and surrounding areas of east Texas. Although the
Company has a diversified loan portfolio, a substantial portion (approximately
53.0% at March 31, 2002) of its loans are secured by real estate and its ability
to fully collect its loans is dependent upon the real estate market in this
region. The Company typically requires collateral sufficient in value to cover
the principal amount of the loan. Such collateral is evidenced by mortgages on
property held and readily accessible to the Company. See additional information
related to the composition of the Company's loan portfolio included in Note 5 to
the consolidated financial statements.
Securities
- ----------
The Investment Committee, under the guidance of the Company's Investment Policy,
assesses the short and long-term needs of the Company after consideration of
loan demand, interest rate factors, and prevailing market conditions.
Recommendations for purchases and other transactions are then made considering
safety, liquidity, and maximization of return to the Company. Management
determines the proper classification of securities at the time of purchase.
Securities that management does not intend to hold to maturity or that might be
sold under certain circumstances are classified as available for sale. If
management has the intent and the Company has the ability at the time of
purchase to hold the securities until maturity, the securities will be
classified as held to maturity.
The management strategy for securities is to maintain a very high quality
portfolio with generally short duration. The quality of the portfolio is
maintained with 83% of the total as of March 31, 2002 comprised of U.S.
Treasury, federal agency securities, and agency issued mortgage securities. 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 that 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. 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 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. As of March 31, 2002, floating rate
securities made up 38% 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.
Securities are the Company's single largest interest-earning asset representing
approximately 48% of total assets at March 31, 2002. The investment portfolio
totaled $262,131,000 at March 31, 2002, up from $242,580,000 at December 31,
2001. This increase resulted due to an increase in deposits combined with excess
cash and fed funds being invested in mortgage-backed securities and government
agency securities for increased yields.
15
Corporate Objectives
- --------------------
It is the philosophy of the Company to continue to remain independent in
ownership, to foster its image as the community leader in banking, to increase
its market share through selected acquisitions and aggressive marketing, to
maintain a sound earning-asset portfolio, and to assess liquidity needs while
maximizing its profitability and return to its shareholders.
Forward-Looking Information
- ---------------------------
Statements and financial discussion and analysis by management contained
throughout this Form 10-Q 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.
16
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures are interest rate risk and, to a
lesser extent, liquidity risk. The Company does not maintain a trading account
for any class of financial instrument and the Company is not affected by foreign
currency exchange rate risk or commodity price risk.
Interest rate risk is the risk that the Company's financial condition will be
adversely affected due to movements in interest rates. The Company, like other
financial institutions, is subject to interest rate risk to the extent that its
interest-earning assets reprice differently than its interest-bearing
liabilities. The income of financial institutions is primarily derived from the
excess of interest earned on interest-earning assets over the interest paid on
interest-bearing liabilities. A high ratio of interest sensitive liabilities
tends to benefit net interest income during periods of falling interest rates as
the average rate paid on interest-bearing liabilities declines faster than the
average rate earned on interest-earning assets. The opposite holds true during
periods of rising interest rates. One of the Company's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. 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.
Accordingly, the Company places great importance on monitoring and controlling
interest rate risk.
There are several methods employed by the Company to monitor and control
interest rate risk. One such method is using 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 repricing can occur due to changes in rates on variable rate
products as well as maturities of interest-earning assets and interest-bearing
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.
One strategy used by the Company to reduce the volatility of its net interest
income is to originate variable rate loans tied to market indices. Such loans
reprice on an annual, quarterly, monthly or daily basis as the underlying market
index change. Currently, approximately 15% of the Company's loan portfolio
reprices on at least an annual basis.
The Company has also structured the securities portfolio so that most of the
mortgage-backed securities reprice on at least an annual basis. The Company also
maintains most of its securities in the available for sale portfolio to take
advantage of changes in interest rates and to maintain liquidity for loan
funding and deposit withdrawals. The mortgage-backed and related securities also
provide the Company with a constant cash flow stream from principal repayments.
The Company invests short-term excess funds in overnight federal funds that
mature and reprice on a daily basis.
The Company's 2001 annual report details a table that provides information about
the Company's financial instruments that are sensitive to changes in interest
rates as of December 31, 2001. The table is based on information and assumptions
set forth in the discussion. The Company believes the assumptions utilized are
reasonable. Management believes that no events have occurred since December 31,
2001 which would significantly change the ratio of rate sensitive assets to rate
sensitive liabilities for the given time horizons in the table.
17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On April 9, 2002, the Company held its annual meeting of shareholders. At
the meeting, the following directors were elected for a term of one year.
David Alford Jim Kangerga
Landon Alford Milton S. McGee, Jr.
R. M. Ballenger J. Mark Mann
S. M. Bonner, Jr. Charles Richardson
D. J. Burks Tony Wooster
Billy Crawford William E. Wylie
Sheila Smith Gresham
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None.
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HENDERSON CITIZENS BANCSHARES, INC.
Date: May 7, 2002 By: /s/ Milton S. McGee, Jr.
----------- ------------------------------
Milton S. McGee, Jr., CPA
President
Date: May 7, 2002 By: /s/ Rebecca G. Tanner
----------- ------------------------------
Rebecca G. Tanner, CPA
Vice President, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
19