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WASHINGTON, D.C. 20549
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AMENDMENT NUMBER 1 TO FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
EXCHANGE ACT OF 1934
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CITIZENS HOLDING COMPANY
Mississippi 64-0666512
521 Main Street
Philadelphia, Mississippi 39350
Registrant's Telephone Number, including area code: (601) 656-4692
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class to be so registered Name of each exchange on which
each class is to be registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.20 PAR VALUE PER SHARE
(Title of Class)
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ITEM 1. BUSINESS
GENERAL
Citizens Holding Company (the "Corporation") is a one-bank holding company
that holds 113,203 or 96.59% of the outstanding shares of The Citizens Bank of
Philadelphia, Mississippi (the "Bank"). The Corporation was incorporated under
Mississippi law on February 16, 1982, at the direction of the Board of Directors
of the Bank in order to facilitate the Bank's adoption of a one-bank holding
company structure. The Corporation offered one share of common stock and four
$5 debentures for each share of Bank stock. At this initial offering, 99,825
shares or 85.17% of the outstanding shares were exchanged for Corporation
shares. Subsequent to the initial offering, the Corporation has purchased
13,378 shares to increase the number of shares owned to the current level.
Prior to its acquisition of the Bank's stock, the Corporation conducted no
business or operations. The Corporation's principal office is located at 521
Main Street, Philadelphia, Mississippi 39350 and its telephone number is (601)
656-4692.
As a bank holding company, the Corporation engages in commercial banking
through its sole banking subsidiary and may engage in certain non-banking
activities closely related to banking and own certain other business
corporations that are not banks, subject to applicable laws and regulations.
All references hereinafter to the activities or operations of the Corporation
reflect the Corporation's acting or operating through the Bank.
The Bank was opened on February 8, 1908 as The First National Bank of
Philadelphia with $50,000 in capital and a $5,000 surplus. In 1917 the Bank
surrendered its national charter and obtained a state charter at which time the
name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi.
The Bank's principal executive offices are also located at 521 Main Street,
Philadelphia, Mississippi 39350, and its telephone number is (601) 656-4692.
At December 31, 1998, the Bank was the largest bank headquartered in Neshoba
County with total assets of $333,027,000 and total deposits of $282,520,000.
OPERATIONS
The Corporation, through the Bank, engages in a wide range of commercial
and personal banking activities, including accepting demand deposits (including
Now and Money Market Accounts), accepting savings and time deposit accounts,
making secured and unsecured loans to corporations, individuals and others,
issuing letters of credit, originating mortgage loans, and providing personal
and corporate trust services.
The Corporation's lending services include commercial, real estate,
installment (direct and indirect), and credit card loans. Revenues from the
Corporation's lending activities constitute the largest component of the
Corporation's operating revenues.
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The loan portfolio constituted 69.17% of the earning assets of the
Corporation at December 31, 1998 and has in the opinion of management
historically produced the highest interest rate spread above the cost of funds.
The Corporation's loan personnel have the authority to extend credit under
guidelines established and approved by the Board of Directors. Any aggregate
credit which exceeds the authority of the loan officer is forwarded to the loan
committee for approval. The loan committee is composed of various Bank
directors, including the Chairman. All aggregate credits that exceed the loan
committee's lending authority are presented to the full Board of Directors for
ultimate approval or denial. The loan committee not only acts as an approval
body to ensure consistent application of the Corporation's loan policy but also
provides valuable insight through communication and pooling of knowledge,
judgment and experience of its members.
The Corporation's primary lending area generally includes East Central
Mississippi, specifically Neshoba, Newton, Leake, Scott, Attala and Kemper
counties and contiguous counties. The Corporation extends out-of-area credit
only to borrowers who are considered to be low risk, and only on a very limited
basis.
This six county area is mainly rural with Philadelphia at 7,000 in
population being the largest city. Agriculture and some light industry are a
big part of the economy of this area. The largest employer in the Corporation's
service area is the Mississippi Band of Choctaw Indians with their schools,
manufacturing plants and their main source of income, The Silverstar Casino and
Resort (the "Casino"). The Casino, and its related services employs
approximately 2,500 people from the Corporation's service area. Understandably
unemployment in the six county area is consistently among the lowest in the
state.
The Corporation has in the past and intends to continue to make most types
of real estate loans including but not limited to single and multi-family
housing, farm loans, residential and commercial construction loans and loans for
commercial real estate. At the end of 1998 the Corporation had 28.73% of the
loan portfolio in single family and multifamily housing, 15.75% in non-farm,
non-residential loans, 13.21% in farm related real estate loans and 3.11% in
real estate construction loans.
The Corporation's loan portfolio includes commercial, industrial and
agricultural production loans totaling 15.34% of the portfolio at year-end 1998.
Consumer loans make up approximately 22.74% of the total loan portfolio.
Consumer loans include loans for household expenditures, car loans, credit card
loans, student loans and other loans to individuals. While this category has
experienced a greater percentage of charge-offs than the other classifications,
the Corporation is committed to continue to lend this type of loan to fill the
needs of the Corporation's customer base.
All loans in the Corporation's portfolio are subject to risk from the state
of the economy in the Corporation's area and also that of the nation. Since the
Corporation's local economy has been strong and unemployment is at historic
lows, general risk levels would also be considered
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to be low. The Corporation has used and continues to use conservative Loan-to-
Value ratios and thorough credit evaluation to lessen the risk on all types of
loans. The use of conservative appraisals has also reduced exposure on real
estate loans. Thorough credit checks and evaluation of past internal credit
history has helped to reduce the amount of risk related to consumer loans.
Government guarantees of loans are used when appropriate. Commercial loans are
evaluated by collateral value and ability to service debt. Businesses seeking
loans must have a good product line and sales, responsible management,
manageable debt load and a product that is not adversely affected by downturns
in the economy.
The Corporation provides a wide range of personal and corporate trusts and
trust-related services, including serving as executor of estates, as trustee
under testamentary and inter vivos trusts and various pension and other employee
benefit plans, as guardian of the estates of minors and incompetents, and as
escrow agent under various agreements.
The Corporation offers discount brokerage services through First Tennessee
Bank.
The Corporation is continually introducing new products and services as
permitted by the regulatory authorities and desired by the public. In late 1997,
the Corporation completed construction on a new branch building in Kosciusko,
Mississippi. This full service facility was opened in early 1998 and allows the
Corporation to compete with other banks in this area. In 1996 the Corporation
opened the new Westside building in Philadelphia, Mississippi. This building
replaced a smaller drive-up facility. The Corporation began a VISA Checkcard
program in early 1997 to provide its customers with access to their checking
account 24 hours a day from all locations that accept VISA cards. This, in
conjunction with the Corporation's 24 Hour Phone Teller, allows the
Corporation's customers to have easy and convenient access to their funds and
account balances 24 hours a day, 7 days a week. Customers may also access their
accounts via the Internet (http:\\www.thecitizensbankphila.com). This website
provides the Corporation's customers the ability to review their accounts in
detail, make transfers between their accounts, and pay bills from anywhere in
the world. The Bank also has three automated teller machines available to its
customers 24 hours a day, 7 days a week.
EMPLOYEES
The Corporation has no compensated employees. At December 31, 1998, the
Bank employed 131 full-time employees and 31 part-time employees. The Bank is
not a party to any collective bargaining agreements, and employee relations are
considered to be good.
SUPERVISION AND REGULATION
The Bank is chartered under the banking laws of the State of Mississippi
and is subject to the supervision of, and is regularly examined by, the
Department of Banking and Consumer Finance and the FDIC. The Corporation is a
registered bank holding company within the meaning of the Bank Holding Company
Act ("BHC Act"), and is subject to the supervision of the Federal
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Reserve Board ("FRB"). Certain legislation and regulations affecting the
businesses of the Corporation and the Bank are discussed below.
GENERAL. As a bank holding company, the Corporation is subject to the BHC
Act. The Corporation reports to, registers with, and is examined by the FRB.
The FRB also has the authority to examine the Corporation's subsidiaries which
includes the Bank.
The FRB requires the Corporation to maintain certain levels of capital. The
FRB also has the authority to take enforcement action against any bank holding
company that commits any unsafe or unsound practice, violates certain laws,
regulations, or conditions imposed in writing by the FRB.
Under the BHC Act, a company generally must obtain the prior approval of
the FRB before it exercises a controlling influence over, or acquires directly
or indirectly, more than 5% of the voting shares or substantially all of the
assets of any bank or bank holding company. The Corporation is generally
prohibited under the BHC Act from acquiring ownership or control of more than 5%
of the voting shares of any company that is not a bank or bank holding company
and from engaging directly or indirectly in activities other than banking,
managing banks, or providing services to affiliates of the holding company. A
bank holding company, with the approval of the FRB, may engage or acquire the
voting shares of companies engaged in activities that the FRB has determined to
be so closely related to banking or managing or controlling banks, as to be a
proper incident thereto. A bank holding company must demonstrate that the
benefits to the public of the proposed activity will outweigh possible adverse
effects associated with those activities.
Transactions between the Corporation, the Bank and any future subsidiaries
of the Corporation are subject to a number of other restrictions. FRB policies
forbid the payment by bank subsidiaries of management fees which are
unreasonable in amount or exceed the fair market value of the services rendered
(or, if no market exists, actual costs plus a reasonable profit). Additionally,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit, sale or
lease of property, or furnishing of services. Subject to certain limitations,
depository institution subsidiaries of bank holding companies may extend credit
to, invest in the securities of, purchase assets from, or issue a guarantee,
acceptance, or letter of credit on behalf of, an affiliate, provided that the
aggregate of such transactions with affiliates may not exceed 10% of the capital
stock and surplus of the institution, and the aggregate of such transactions
with all affiliates may not exceed 20% of the capital stock and surplus of such
institution. The Corporation may only borrow from depository institution
subsidiaries if the loan is secured by marketable obligations with a value of a
designated amount in excess of the loan. Further, the Corporation may not sell
a low-quality asset to a depository institution subsidiary.
CAPITAL STANDARDS. The FRB, FDIC and other federal banking agencies have
risk-based capital adequacy guidelines intended to provide a measure of capital
adequacy that reflects the
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degree of risk associated with a bank's operations. Under these guidelines,
nominal dollar amounts of assets and credit equivalent amounts of off-balance
sheet items are multiplied by one of several risk adjustment percentages, which
range from 0% for assets with low credit risk, such as certain U.S. government
securities, to 100% for assets with relatively higher credit risk, such as
business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off-balance sheet
items. The regulators measure risk-adjusted assets and off-balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of
common stock, retained earnings, noncumulative perpetual preferred stock and
minority interests in certain subsidiaries, less most other intangible assets.
Tier 2 capital may consist of a limited amount of the allowance for loan losses
and other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital are subject to other requirements and limitations of
the federal banking agencies. Since December 31, 1992, the federal banking
agencies have required a minimum ratio of qualifying total capital to risk-
adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1
capital to risk-adjusted assets and off-balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The following table represents the capital ratios for the Corporation and
the Bank as of December 31, 1998:
The Corporation The Bank
Risk-based Capital Ratio: Ratio Ratio Requirement
- ------------------------ --------- ------ ------------
Total Capital 18.13% 17.53% 8.00%
Tier 1 Capital 16.88% 16.28% 4.00%
Tier 1 Capital Leverage Ratio: 10.61% 10.20% 4.00%
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As required by Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the federal financial institution agencies solicited comments
in September, 1993 on a proposed rule and method of incorporating an interest
rate risk component into the current risk-based capital guidelines, with the
goal of ensuring that institutions with high levels of interest rate risk have
sufficient capital to cover their exposures. Interest rate risk is the risk
that changes in market interest rates might adversely affect a bank's financial
condition or future profitability. Under the proposal, interest rate risk
exposures would be quantified by weighting assets, liabilities and off-balance
sheet items by risk factors which approximate sensitivity to interest rate
fluctuations. As proposed, institutions identified as having an interest rate
risk exposure greater than a defined threshold would be required to allocate
additional capital to support this higher risk. Higher individual capital
allocations could be required by the bank regulators based upon supervisory
concerns. The agencies adopted a final rule effective September 1, 1995 which
is substantially similar to the proposed rule, except that the final rule does
not establish (1) a measurement framework for assessing the level of a bank's
interest rate exposure; or (2) a minimum level of exposure above which a bank
will be required to hold additional capital for interest rate risk if it has a
significant exposure or a weak interest rate risk management process. The
agencies also solicited comments on and are continuing their analysis of a
proposed policy statement which would establish a framework to measure and
monitor interest rate exposure.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS. FDICIA requires
each federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions, including but not limited to those
that fall below one or more of the prescribed minimum capital ratios. The law
requires each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. The Corporation and Bank are classified as well-capitalized
under these guidelines.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a prima facie showing by the agency that such relief is
appropriate. Additionally, a holding company's inability to serve as a source
of strength to its subsidiary banking organizations could serve as an additional
basis for a regulatory action against the holding company.
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SAFETY AND SOUNDNESS STANDARDS. FDICIA also implemented certain specific
restrictions on transactions and required the regulators to adopt overall safety
and soundness standards for depository institutions related to internal control,
loan underwriting and documentation, and asset growth. Among other things,
FDICIA limits the interest rates paid on deposits by undercapitalized
institutions, the use of brokered deposits and the aggregate extension of credit
by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal financial institution agencies published a final rule effective
on August 9, 1995, implementing safety and soundness standards. FDICIA added a
new Section 39 to the Federal Deposit Insurance Act which required the agencies
to establish safety and soundness standards for insured financial institutions
covering (1) internal controls, information systems and internal audit systems;
(2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5)
asset growth; (6) compensation, fees and benefits; (7) asset quality, earnings
and stock valuation; and (8) excessive compensation for executive officers,
directors or principal shareholders which could lead to material financial loss.
If an agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. If the agency requires submission of a compliance plan and the
institution fails to timely submit an acceptable plan or to implement an
accepted plan, the agency must require the institution to correct the
deficiency. Under the final rule, an institution must file a compliance plan
within 30 days of a request to do so from the institution's primary federal
regulatory agency. The agency may elect to initiate enforcement action in
certain cases rather than rely on an existing plan, particularly where failure
to meet one or more of the standards could threaten the safe and sound operation
of the institution.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. The power of the board
of directors of an insured depository institution to declare a cash dividend or
other distribution with respect to capital is subject to statutory and
regulatory restrictions which limit the amount available for such distribution
depending upon the earnings, financial condition and cash needs of the
institution, as well as general business conditions. FDICIA prohibits insured
depository institutions from paying management fees to any controlling persons
or, with certain limited exceptions, making capital distributions, including
dividends, if, after such transaction, the institution would be
undercapitalized.
An FRB policy statement provides that a bank holding company should not
declare or pay a cash dividend to its shareholders if the dividend would place
undue pressure on the capital of its subsidiary banks or if the dividend could
be funded only through additional borrowings or other arrangements that might
adversely affect the financial position of the bank holding company.
Specifically, a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully
fund each consistent with its capital
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needs, asset quality, and overall financial condition. Further, the Corporation
is expected to act as a source of financial strength for each of its subsidiary
banks and to commit resources to support its subsidiary bank in circumstances
when it might not do so absent such policy.
The Corporation's ability to pay dividends depends in large part on the
ability of the Bank to pay dividends to the Corporation. The payment of
dividends by a Mississippi state bank is restricted by additional provisions of
state law. As a general rule, the Bank may declare a dividend in an amount
deemed expedient by the Board of Directors of the Bank. Any such dividend,
however, may not (i) impair the capital stock of the Bank; (ii) be in an amount
greater than the remainder of undivided profits then on hand after deducting
losses, bad debts, depreciation, and all other expenses, or (iii) constitute a
withdrawal of any portion of the capital stock of the Bank. In addition, the
Bank must obtain the prior approval of the Mississippi Department of Banking and
Consumer Finance for the payment of any dividend. Additionally, under FDICIA,
the Bank may not make any capital distribution, including the payment of
dividends, if after making such distribution the Bank would be in any of the
"undercapitalized" categories under the FDIC's Prompt Corrective Action
regulations.
Finally, under the Financial Institution's Supervisory Act, the FDIC also
has the authority to prohibit the Bank from engaging in business practices which
the FDIC considers to be unsafe or unsound. It is possible, depending upon the
financial condition of the Bank and other factors, that the FDIC could assert
that the payment of dividends or other payments in some circumstances might be
such an unsafe or unsound practice and thereby prohibit such payment.
FDIC INSURANCE ASSESSMENTS. The FDIC has established several mechanisms to
increase funds to protect deposits insured by the Bank Insurance Fund ("BIF")
and the Savings Association Insurance Fund ("SAIF"), both of which are
administered by the FDIC. The Bank's deposits are insured through BIF except
for those deposits the Bank acquired from the Resolution Trust Corporation in
April, 1994. This acquisition consisted of one branch of the former Security
Federal Savings and Loan in Kosciusko, Mississippi, and these deposits remain
insured through SAIF.
As required by FDICIA, the FDIC has adopted a risk-based assessment system
for deposit insurance premiums. Under this system, depository institutions are
charged anywhere from zero to $.27 for every $100 in insured domestic deposits,
based on such institutions' capital levels and supervisory subgroup assignment.
The FDIC's rules set forth which supervisory subgroup assignments are made by
the FDIC, the assessment classification review procedure, provide for the
assignment of new institutions to the "well-capitalized" assessment group, set
forth when an institution is to make timely adjustments as appropriate, and set
forth the basis, and report data, on which capital group assignments are made
for insured branches of foreign banks, and expressly address the treatment of
certain lifeline accounts for which special assessment treatment is given.
The BIF reached its required 1.25 reserve ratio in 1995, and in response
the FDIC reduced deposit insurance assessment rates on BIF-insured deposits to
historic low levels. Legislation
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enacted in September, 1996 included provisions for the recapitalization of the
SAIF. The legislation imposed a one-time assessment in the amount of 65.7 basis
points on all SAIF-insured deposits held as of March 31, 1996. The Bank paid an
assessment in the amount of $28,640 on the small portion of its deposits that
are SAIF-insured. As a result of the payment of the special assessment and the
adoption of regulations implementing the legislation, rates for deposits insured
through SAIF have been brought into parity with BIF rates. The BIF and SAIF
deposit insurance assessment rates currently in effect range from zero to $.27
per $100 of insured deposits, with the healthiest financial institutions,
including the Bank, not being required to pay any deposit insurance premiums.
INTERSTATE BANKING AND BRANCHING. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act")
was signed into law. The Interstate Act effectively permits nationwide banking.
As of September 30, 1995, the Interstate Act provides that adequately
capitalized and adequately managed bank holding companies may acquire banks in
any state, even in those jurisdictions that had previously barred acquisitions
by out-of-state institutions, subject to deposit concentration limits. The
deposit concentration limits provide that regulatory approval by the FRB may not
be granted for a proposed interstate acquisition if after the acquisition, the
acquiror on a consolidated basis would control more than 10% of the total
deposits nationwide or would control more than 30% of deposits in the state
where the acquiring institution is located. The deposit concentration state
limit does not apply for initial acquisitions in a state and, in every case, may
be waived by the state regulatory authority. Interstate acquisitions are
subject to compliance with the Community Reinvestment Act ("CRA"). States are
permitted to impose age requirements not to exceed five years on target banks
for interstate acquisitions.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Interstate branching by consolidation of banks
was permitted beginning June 1, 1997, except in states that have passed
legislation prior to that date "opting-out" of interstate branching. If a state
opted-out prior to June 1, 1997, then banks located in that state may not
participate in interstate branching. A state may opt in to interstate branching
by bank consolidation or by de novo branching by passing appropriate
legislation. The laws of the host state regarding community reinvestment, fair
lending, consumer protection (including usury limits) and establishment of
branches shall apply to the interstate branches.
De novo branching by an out-of-state bank is not permitted unless the host
state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
Effective May 1, 1997, Mississippi "opted in" to the interstate branching
provision of the Interstate Act.
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The Interstate Act permits bank subsidiaries of a bank holding company to
act as agents for affiliated depository institutions in receiving deposits,
renewing time deposits, closing loans, servicing loans and receiving payments on
loans and other obligations. A bank acting as agent for an affiliate is not
considered a branch of the affiliate. Any agency relationship between
affiliates must be on terms that are consistent with safe and sound banking
practices. The authority for an agency relationship for receiving deposits
includes the taking of deposits for an existing account but is not meant to
include the opening or origination of new deposit accounts. Subject to certain
conditions, insured saving associations that were affiliated with banks as of
June 1, 1994 may act as agents for such banks. An affiliate bank or saving
association may not conduct any activity as an agent which such institution is
prohibited from conducting as principal.
To ensure that interstate branching does not result in taking deposits
without regard to a community's credit needs, the regulatory agencies are
directed to implement regulations prohibiting interstate branches from being
used as "deposit production offices." The regulations to implement this
provision were due by June 1, 1997. The regulations include a provision to the
effect that if loans made by an interstate branch are less than fifty percent of
the average of all depository institutions in the state, then the regulator must
review the loan portfolio of the branch. If the regulator determines that the
branch is not meeting the credit needs of the community, it has the authority to
close the branch and to prohibit the bank from opening new branches in the
state.
COMMUNITY REINVESTMENT ACT. In October, 1994, the federal financial
institution regulatory agencies proposed a comprehensive revision of their
regulations implementing the Community Reinvestment Act ("CRA"), enacted in 1977
to promote lending by financial institutions to individuals and businesses
located in low and moderate income areas. In May, 1995, the proposed CRA
regulations were published in final form effective as of July 1, 1995. The
revised regulations included transitional phase-in provisions which generally
required mandatory compliance not later than July 1, 1997, although earlier
voluntary compliance was permissible. Under the former CRA regulations,
compliance was evaluated by an assessment of the institution's methods for
determining, and efforts to meet, the credit needs of such borrowers. This
system was highly criticized by depository institutions and their trade groups
as subjective, inconsistent and burdensome, and by consumer representatives for
its alleged failure to aggressively penalize poor CRA performance by financial
institutions. The revised CRA regulations emphasize an assessment of actual
performance rather than of the procedures followed by a bank, to evaluate
compliance with the CRA. Overall CRA compliance continues to be rated across a
four-point scale from "outstanding" to "substantial noncompliance," and continue
to be a factor in review of applications to merger, establishment of new
branches or formation of bank holding companies. In addition, any bank rated in
"substantial noncompliance" with the revised CRA regulations may be subject to
enforcement proceedings. Different evaluation methods are used depending on the
asset size of the bank.
The "lending, investments and service test method" is applicable to all
banks with more than $250 million in assets which are not wholesale or limited
purpose banks and do not elect to be evaluated by the "strategic plan assessment
method" which is discussed below. Central to this
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method is the requirement that such banks collect and report to their primary
federal bank regulators detailed information regarding home mortgage, small
business and farm and community development loans which is then used to evaluate
CRA compliance. At the bank's option, data regarding consumer loans and any
other loan distribution it may choose to provide also may be collected and
reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending practices to
meet low and moderate income credit needs and, at the bank's election, lending
by affiliates or through consortia or third parties in which the bank has an
investment interest; (ii) investment performance by measure of the bank's
"qualified investments," that is, the extent to which the bank's investments,
deposits, membership shares in a credit union, or grants primarily to benefit
low or moderate income individuals and small businesses and farms, address
affordable housing or other needs not met by the private market, or assist any
minority or women-owned depository institution by donating, selling on favorable
terms or providing on a rent-free basis any branch of the bank located in a
predominantly minority neighborhood; and (iii) service performance by evaluating
the demographic distribution of the bank's branches and ATMs, its record of
opening and closing them, the availability of alternative retail delivery
systems (such as telephone banking, banking by mail or at work, and mobile
facilities) in low and moderate income geographies and to low- and moderate-
income individuals, and (given the characteristics of the bank's service area(s)
and its capacity and constraints) the extent to which the bank provides
"community development services" (services which primarily benefit low and
moderate income individuals or small farms and businesses or address affordable
housing needs not met by the private market) and their innovativeness and
responsiveness.
Any bank may request to be evaluated by the "strategic plan assessment
method" by submitting a strategic plan for review and approval. Such a plan
must involve public participation in its preparation, and contain measurable
goals for meeting low and moderate income credit needs through lending,
investments and provision of services. Such plans generally will be evaluated
by measuring strategic plan goals against standards similar to those which will
be applied in evaluating a bank according to the "lending, investments and
service test method."
The federal financial institution regulatory agencies issued a final rule
effective as of January 1, 1996, to make certain technical corrections to the
revised CRA regulations. Among other matters, the rule clarifies the transition
from the former CRA regulations to the revised CRA regulations by confirming
that when an institution either voluntarily or mandatorily becomes subject to
the performance tests and standards of the revised regulations, the institution
must comply with all of the requirements of the revised regulations and is no
longer subject to the provisions of the former CRA regulations.
The FDIC examined the Bank on March 12, 1997 and again most recently on
June 1, 1999, for its performance under the CRA. The CRA requires that in
connection with its
11
<PAGE>
examination of a financial institution, each federal financial supervisory
agency shall (1) assess the institution's record of helping to meet the credit
needs of its entire community, including low- and moderate-income neighborhoods,
consistent with safe and sound operations of the institution, and (2) take that
record of performance into account when deciding whether to approve an
application of the institution for a deposit facility. The Bank was rated
Satisfactory during both of these examinations.
The Bank's Satisfactory rating is based on several criteria used by the
regulatory agency. Lending levels are acceptable and the distribution of credit
demonstrates the Bank's success at extending credit without neglecting low-or
moderate-income residents. Credit is extended to geographic areas of all income
groups. Additionally, the Bank has attempted to serve the small business and
small farm sectors of the economy. Ascertainment and marketing programs are
effective at soliciting the needs of the entire community and promoting the
Bank's products and services. No discriminatory practices or illegal
discouragement of applications were found. In management's opinion, the Bank
has invested in a sizeable amount of local community development issuances.
IMPACT OF MONETARY POLICIES
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
other borrowings, and the interest rate earned by banks on loans, securities and
other interest-earning assets comprises the major source of banks' earnings.
Thus, the earnings and growth of banks are subject to the influence of economic
conditions generally, both domestic and foreign, and also to the monetary and
fiscal policies of the United States and its agencies, particularly the FRB.
The FRB implements national monetary policy, such as seeking to curb inflation
and combat recession, by its open-market dealings in United States government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements and through adjustments to the
discount rate applicable to borrowings by banks which are members of the FRB.
The actions of the FRB in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on the Corporation
cannot be predicted. In addition, adverse economic conditions could make a
higher provision for loan losses a prudent course and could cause higher loan
loss charge-offs, thus adversely affecting the Corporation's net earnings.
COMPETITION
The banking business is a highly competitive business. The Corporation's
market area consists principally of Neshoba, Newton, Leake, Scott, Attala and
Kemper Counties in Mississippi, although the Corporation also competes with
other financial institutions in those counties and in surrounding counties in
Mississippi in obtaining deposits and providing many types of financial
services. The Corporation competes with larger regional banks for the business
of companies located in the Corporation's market area. A healthy economy, such
as the
12
<PAGE>
Corporation's market area is experiencing, invites certain challenges,
especially that of competition.
All financial institutions today are faced with the challenge of competing
for customers' deposits, and the Bank is no exception. The Bank competes with
savings and loan associations, credit unions, production credit associations and
federal land banks and with finance companies, personal loan companies, money
market funds and other non-depository financial intermediaries. Many of these
financial institutions have resources many times greater than those of the
Corporation. In addition, new financial intermediaries such as money-market
mutual funds and large retailers are not subject to the same regulations and
laws that govern the operation of traditional depository institutions.
Recent changes in federal and state law have resulted in and are expected
to continue to result in increased competition. The reductions in legal
barriers to the acquisition of banks by out-of-state bank holding companies
resulting from implementation of the Interstate Act and other recent and
proposed changes are expected to continue to further stimulate competition in
the markets in which the Corporation operates, although it is not possible to
predict the extent or timing of such increased competition.
Currently, there are approximately fourteen different financial
institutions in the Corporation's market area competing for the same customer
base. Despite these challenges, the Corporation has not only been able to
maintain its market share, but has actually increased its share in recent years.
FORWARD-LOOKING STATEMENTS
This Form 10 and future filings made by the Corporation with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Corporation and the Bank, and oral statements made by
executive officers of the Corporation and Bank, may include forward-looking
statements relating to such matters as (a) assumptions concerning future
economic and business conditions and their effect on the economy in general and
on the markets in which the Corporation and the Bank do business, and (b)
expectations for increased revenues and earnings for the Corporation and Bank
through growth resulting from acquisitions, attraction of new deposit and loan
customers and the introduction of new products and services. Such forward-
looking statements are based on assumptions rather than historical or current
facts and, therefore, are inherently uncertain and subject to risk.
To comply with the terms of a "safe harbor" provided by the Private
Securities Litigation Reform Act of 1995 that protects the making of such
forward-looking statements from liability under certain circumstances, but which
does not apply to initial public offerings, the Corporation notes that a variety
of factors could cause the actual results or experience to differ materially
from the anticipated results or other expectations described or implied by such
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development
13
<PAGE>
and results of the Corporation's and Bank's business include the following: (a)
the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Corporation operates; (b)
changes in the legislative and regulatory environment that negatively impact the
Corporation and Bank through increased operating expenses; (c) increased
competition from other financial and non-financial institutions; (d) the impact
of technological advances; and (e) other risks detailed from time to time in the
Corporation's filings with the Securities and Exchange Commission. The
Corporation does not undertake any obligation to update or revise any forward-
looking statements subsequent to the date on which they are made.
ITEM 2. FINANCIAL INFORMATION
The following discussion and analysis is presented to facilitate the
understanding of the Corporation's financial condition. This discussion and
analysis is broken down into two components. Financial information and results
of operations for each of the three years in the period ended December 31, 1996,
1997 and 1998 is found under 2A hereof. The information should be used in
conjunction with the accompanying consolidated financial statements and
footnotes contained elsewhere in this document. Additionally, unaudited interim
financials for the second-quarter ended June 30, 1999 have been included and are
discussed under 2B hereof. Dollar amounts in tables are presented in thousands.
2A. FINANCIAL INFORMATION - YEAR ENDED DECEMBER 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS OF DECEMBER 31, 1998, 1997 AND 1996
INTRODUCTION AND OVERVIEW
The Corporation, through the Bank as its sole subsidiary, conducts business
in thirteen commercial bank offices located in Neshoba, Newton, Leake, Scott,
Attala, and Kemper counties, Mississippi, and a loan production office located
in Lauderdale county, also in Mississippi. The Bank is engaged in a variety of
financial services, including accepting deposits, making commercial and consumer
loans, making mortgage loans, and providing personal trust services.
The Mississippi counties which the Corporation primarily serves have
benefitted from increasingly strong economies over the past few years. In July,
1995, the Mississippi Band of Choctaw Indians (the "Tribe") opened the
Silverstar Casino and Resort (the "Casino") on the Reservation in west Neshoba
County. This complex has grown in the past three years to include not only a
casino but a 512 room hotel, 2,500 seat convention center and 36 holes of
championship golf. Because the Casino is not regulated by the State of
Mississippi, exact figures are not released to the public about the amount of
play in the Casino, but industry analysts have estimated it to be equal to all
four of the casinos in Vicksburg, Mississippi. In addition to the Casino, the
Tribe has numerous industries and is the largest employer in Neshoba County.
14
<PAGE>
The region served by the Corporation is largely agricultural with a
moderate amount of light industrial plants. In the past several years, the
chicken industry has expanded greatly in the western part of the service area.
The Corporation has been involved in this growth through its lending to
individual farmers for construction of chicken houses and the related support
facilities. Timber is also an important part of the economy in this six county
area. In addition to the local land and timber owners, Philadelphia is home to
two moderate size lumber mills and numerous timber equipment dealers and is
within a short distance to several others.
Although the Corporation has made bank acquisitions in the last five years,
there are currently no pending bank mergers or bank acquisitions. However,
management does plan to aggressively pursue any such opportunities, either
branch locations or entire banks, as they may become available. Management
anticipates additional acquisitions or mergers with like-minded community banks
may occur in the future. The Statements in this paragraph relating to potential
mergers or acquisitions are forward-looking statements which may or may not be
accurate due to the impossibility of predicting future events.
Y2K AWARENESS AND PREPARATION
The Corporation has been diligent in preparing for the possible
consequences of the date change on January 1, 2000. The Board has reviewed
these anticipated consequences and assigned a Y2K Coordinator the task of
reviewing the Corporation's systems to make a determination of what adjustments
would be required. The Board approved a budget for the solutions of these
potential problems in the amount of $376,713. At the time of this application
$365,773 or 97.1% of this budget had been expended. Although some other benefits
were obtained from the upgrades to the computer system, the main force behind
the upgrade at this time was the need to address the Y2K issue.
Although the Corporation's computer hardware and software were certified
Y2K compliant by the respective vendors, the Corporation engaged the services of
an outside consultant to conduct an on-site test of the computer systems.
Testing of the system was accomplished by forward dating the system into the
year 2000 and running sample transactions on these dates. During this test, no
abnormalities in processing were discovered due to this date change. The
Corporation will continue to monitor shared application software reviews to keep
abreast of the software's compliance with the Y2K event.
The Corporation's personal computers have been evaluated and replaced or
updated as needed. All other identified date sensitive equipment has been
replaced or converted as required to maintain Y2K compliance. The Corporation
believes that it achieved its goal to have identified and corrected all
potential Y2K problems by June 30, 1999, but will continue to search for
potential problem areas and address them immediately, if any is found.
The Corporation currently requires that Y2K readiness be considered in the
credit decision process on all new loan customers. Loan customers that have
potential exposure would pose a
15
<PAGE>
credit risk if they have not addressed the possibility of business interruptions
due to Y2K. The Corporation's loan personnel have taken steps to identify
current loan customers with potential Y2K exposure and have surveyed them to
check on their progress in resolving any problems. This process did not identify
any problem areas that might be of concern for the Corporation.
Regardless of the Corporation's diligence, several problems could arise as
a result of Y2K failures. Loss of electrical power, loss of communications and
panic among the general public would require special operating procedures. The
Corporation has formulated plans to continue business in the event that any of
these situations occur. Specifically, procedures are in place to handle
customer requests manually in case use of the computer is lost. Plans for
clearing checks and other cash items also have been made. Also, additional cash
will be added to the vault to handle the anticipated cash withdrawals in the
fourth quarter of 1999.
FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS AND RELATED STATISTICS
(Dollar references in thousands except per share data)
The following selected data has been taken from the Corporation's
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere.
Overview of Operations
The major components of the Corporation's operating results for the past
five years are summarized in Table 1 - Five Year Financial Summary.
TABLE 1 - FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------
June 30
1999 1998 1997 1996 1995 1994
(Unaudited) (Audited) (Audited) (Audited) (Audited) (Audited)
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income- tax equivalent (1) 12,243 23,698 21,588 20,369 18,041 14,068
Interest Expense 5,287 10,860 9,659 8,684 7,727 4,935
Net interest income-tax equivalent 6,956 12,838 11,929 11,685 10,314 9,133
Tax equivalent adjustment (1) -115 -147 -82 -114 -96 -80
Net interest income 6,841 12,691 11,847 11,571 10,218 9,053
Provision for loan losses 383 846 740 791 604 592
Net interest income after provision
for loan losses 6,458 11,845 11,107 10,780 9,614 8,461
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Noninterest income 1,766 3,320 2,990 2,686 2,433 2,460
Noninterest expenses 3,857 7,966 7,046 6,665 6,379 5,899
Income before income taxes 4,367 7,199 7,051 6,801 5,668 5,022
Income tax expense 1,487 2,487 2,561 2,407 2,046 1,804
NET INCOME 2,880 4,712 4,490 4,394 3,622 3,218
PER SHARE DATA (2)
Net Income $ 0.87 $ 1.42 $ 1.36 $ 1.33 $ 1.15 $ 1.02
Cash dividends 0.15 0.24 0.17 0.15 0.14 0.15
Shareholders' equity, end of year 11.02 10.72 9.44 8.09 7.25 6.13
SELECTED ACTUAL YEAR-END BALANCES
Total assets 345,245 334,232 286,634 270,679 264,453 215,939
Earning Assets 317,975 305,551 266,762 251,518 241,495 202,586
Investment securities available for sale 96,395 91,539 67,292 72,472 76,022 5,899
Investment securities held for maturity 0 0 0 0 0 71,991
Loans-Net 221,107 11,3499 191,605 177,005 154,380 123,715
Allowance for loan losses -3,000 -2,900 -2,700 -2,500 -2,300 -2,100
Total deposits 290,473 282,242 248,984 229,443 238,677 186,784
Noninterest-bearing demand deposits 34,871 37,983 35,526 34,353 35,492 31,213
Interest-bearing demand deposits 82,829 68,394 56,904 54,960 75,857 4,105
Savings deposits 19,867 19,106 17,188 16,994 15,617 14,426
Time deposits 152,906 156,761 139,365 123,136 111,711 97,039
Long term borrowings 10,000 10,000 0 33 65 198
Shareholders' equity 36,448 35,455 31,220 26,758 22,858 19,331
Equity to assets ratio 10.56% 10.61% 10.89% 9.89% 8.64% 8.95%
SELECTED AVERAGE BALANCES
Total Assets 341,071 314,896 279,961 271,241 242,024 204,720
Earning Assets 311,115 293,120 259,036 250,670 224,492 187,257
Securities 93,554 79,401 70,023 76,138 75,847 68,199
Loans 211,923 202,228 186,843 168,542 141,192 113,628
Allowance for loan losses 2,922 2,701 2,523 2,342 2,103 1,927
Total deposits 287,889 268,514 242,459 38,358 216,479 182,707
Noninterest-bearing demand deposits 37,649 34,909 34,718 37,894 34,213 29,607
Interest-bearing demand deposits 76,565 68,330 57,406 68,036 59,134 45,126
Savings deposits 19,229 18,201 17,594 16,681 15,154 14,556
Time deposits 154,456 147,074 132,741 115,747 107,978 93,418
Long-term borrowings 10,000 7,630 3 35 127 292
Shareholders' equity 36,030 33,513 28,920 24,610 21,195 18,391
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits 73,60% 75.31% 76.95% 76.16% 64.68% 65.34%
Return on average assets 1.69% 1.50% 1.60% 1.62% 1.50% 1.61%
Return on average equity 15.99% 14.08% 15.24% 17.77% 17.15% 17.41%
Dividend payout ratio 17.22% 16.85% 12.52% 11.29% 12.15% 14.33%
Leverage capital ratio 10.56% 10.61% 10.92% 9.88% 8.74% 9.20%
Efficiency ratio (3) 43.09% 48.01% 45.56% 45.29% 49.02% 50.24%
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA
Number of employees (FTE) 143 140 138 137 133 122
Average common stock
outstanding 3,308,750 3,308,750 3,308,750 3,308,750 3,151,240 3,151,240
Cash dividends declared 496 794 562 496 441 473
</TABLE>
(1) Net interest income has been presented on both a tax equivalent and non-tax
equivalent basis. Tax equivalent basis was calculated using a 34% tax rate
for all periods presented. The tax equivalent adjustment reverses the tax
equivalent basis in order to present net interest income reflected in the
consolidated financial statements.
(2) Per share data has been retroactively adjusted to give effect for stock
dividends and splits, including the five to one (5:1) stock split that was
effective January 1, 1999.
(3) The efficiency ratio is calculated by dividing noninterest income expense by
the sum of the interest income, on a fully tax equivalent basis, and
noninterest income.
The Corporation earned $4,712,000 or $1.42 per share, for 1998,
compared to $4,490,000, or $1.36 per share, for 1997. Although the 4.9%
increase in earnings in 1998 over 1997 earnings was more than the 2.2%
increase of 1997 over 1996, the yearly increase was still less than that of
the previous four years. In 1998 the decline in the net interest margin
stabilized due to a decline in the rates paid on time deposits. Loan rates
also declined during this period but to a lesser degree and loan demand
remained strong. The increase in income in 1998 was due to an increase in
the Bank's assets during the year.
Earnings in 1997 were impacted by a decline in the net interest
margin. The small increase in net income was due to an increase in asset
size and an increase in fee income. Net charge-offs decreased both as a
percentage of loans outstanding and as an actual dollar amount of loans
charged off in 1997.
NET INTEREST INCOME
Net interest income is the most significant component of the
Corporation's earnings. Net interest income is the difference between
interest and fees realized on earning assets, primarily loans and
securities, and interest paid on deposits and other borrowed funds. The
net interest margin is this difference expressed as a percentage of average
earning assets. Net interest income is determined by several factors,
including the volume of earning assets and liabilities, the mix of earning
assets and liabilities and interest rates. Although there are a certain
number of these factors which can be controlled by management policies and
actions, certain other factors, such as the general level of credit demand,
Federal Reserve Board monetary policy, and changes in tax law are beyond
the control of management. Tables 1 through 4 are an integral part in
analyzing the components of net interest income and the changes which have
occurred between the time periods presented. Table 1 - Five Year Financial
Summary shows the corporation's net interest income from 1994 through 1998.
Table 2 - Average Balance Sheets and Interest Rates represent the major
components of interest earning assets and interest-bearing liabilities.
18
<PAGE>
TABLE 2 - AVERAGE BALANCE SHEETS AND INTEREST RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997
-------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Securities
Taxable 70,801 4,213 5.95% 63,333 4,117 6.50%
Tax-exempt (1) 8,600 565 6.57% 5,345 350 6.55%
-------- ------ ----- -------- ------ -----
Total Securities 79,401 4,778 6.02% 68,678 4,467 6.50%
Loans (2)
Commercial 181,931 16,122 8.86% 167,628 15,033 8.97%
Installment 20,297 2,185 10.77% 19,552 2,073 10.60%
-------- ------
Total loans 202,228 18,307 9.05% 187,180 17,106 9.14%
Federal Home Loan
Bank Account 1,576 91 5.77% 78 4 5.13%
Federal Funds Sold 9,804 523 5.33% 2,112 125 5.92%
-------- ------ ----- -------- ------ -----
TOTAL EARNING
ASSETS 293,009 23,699 8.09% 258,048 21,702 8.41%
NONINTEREST EARNING ASSETS
Allowance for loan
losses (2,701) (2,523)
Premises and
equipment 4,374 3,915
Cash and due from
banks 11,818 11,821
Accrued interest and
other assets 8,396 8,700
-------- --------
TOTAL ASSETS $314,896 $279,961
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Deposits
Interest-bearing demand
deposits 68,330 1,958 2.87% 57,281 1,590 2.78%
Savings Deposits 18,201 678 3.73% 17,313 675 3.90%
Time Deposits 147,074 7,761 5.28% 132,742 7,192 5.42%
-------- ------ ----- -------- ------ -----
Total interest-bearing
deposits 233,605 10,397 4.45% 207,336 9,457 4.56%
Borrowed funds
Short-term borrowings 635 33 5.20% 4,148 202 4.87%
Long-term debt 7,630 430 5.64% 0 0 0.00%
-------- ------ ----- -------- ------
Total borrowed funds 8,265 463 5.60% 4,148 202 4.87%
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES 241,870 10,860 4.49% 211,484 9,659 4.57%
======== ====== ===== ======== ====== =====
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing
demand deposits 34,909 34,995
Accrued interest and
other liabilities 4,604 4,562
Shareholders' equity 33,513 28,920
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY $314,896 $279,961
======== ========
NET INTEREST INCOME AND
INTEREST RATE SPREAD 12,839 3.60% 12,043 3.84%
====== ===== ====== =====
NET INTEREST MARGIN 4.38% 4.67%
===== =====
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996
-------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
-------------------------------
<S> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Securities
Taxable 68,692 4,325 6.30%
Tax-exempt (1) 6,539 463 7.08%
-------- ------ -----
Total Securities 75,231 4,788 6.36%
Loans (2)
Commercial 149,697 13,365 8.93%
Installment 18,394 1,979 10.76%
-------- ------ -----
Total loans 168,091 15,344 9.13%
Federal Home Loan Bank Account 40 3 7.50%
Federal Funds Sold 5,768 313 5.43%
-------- ------ -----
TOTAL EARNING ASSETS 249,130 20,448 8.21%
NONINTEREST EARNING ASSETS
Allowance for loan losses (2,343)
Premises and equipment 3,837
Cash and due from banks 13,020
Accrued interest and other assets 7,597
TOTAL ASSETS $271,241
========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Deposits
Interest-bearing demand deposits 67,906 1,794 2.64%
Savings Deposits 16,397 639 3.90%
Time Deposits 115,746 6,027 5.21%
-------- ------ -----
Total interest-bearing deposits 200,049 8,460 4.23%
Borrowed funds
Short-term borrowings 4,114 220 5.35%
Long-term debt 35 4 11.43%
-------- ------ -----
Total borrowed funds 4,149 224 5.40%
-------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES 204,198 8,684 4.25%
NONINTEREST-BEARING
LIABILITIES
Noninterest-bearing demand
deposits 38,175
Accrued interest and other
liabilities 4,258
Shareholders' equity 24,610
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $271,241
========
NET INTEREST INCOME AND
INTEREST RATE SPREAD 11,764 3.96%
====== =====
NET INTEREST MARGIN 4.72%
======
</TABLE>
20
<PAGE>
(1) Interest income on tax-exempt securities and loans has been adjusted to a
tax equivalent basis using a marginal federal income tax rate of 34% for
all years. Tax equivalent security adjustments were $146 for 1998, $81 for
1997, and $110 for 1996. Tax equivalent loan adjustments were $1 for 1998,
$1 for 1997, and $4 for 1996.
(2) Nonaccrual loans are included in average loan balances.
Table 3 - Net Interest Earning Assets illustrates net interest earning assets
and liabilities for 1998, 1997 and 1996.
TABLE 3 - NET INTEREST EARNING ASSETS
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Average interest earning
assets $293,009 $258,048 $249,130
Average interest bearing
liabilities 241,870 211,484 204,198
-------- -------- --------
$ 51,139 $ 46,564 $ 44,932
======== ======== ========
</TABLE>
Table 4 - Volume and Rate Analysis depicts the dollar effect of volume and rate
changes from 1996 through 1998. Variances which were not specifically
attributable to volume or rate were allocated proportionately between rate and
volume using the absolute values of each for a basis for the allocation.
Nonaccruing loans were included in the average loan balances used in
determining the yields.
Interest income on tax-exempt securities and loans has been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 34%.
21
<PAGE>
TABLE 4 - VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
1998 change from 1997 due to 1997 change from 1996 due to
Volume Rate Total Volume Rate Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Loans 1,367 (166) 1,201 1,745 17 1,762
Securities
Taxable 448 (352) 96 (346) 138 (208)
Tax-exempt 213 2 215 (78) (35) (113)
Federal Home Loan Bank
Account 77 10 87 2 (1) 1
Federal Funds Sold 410 (12) 398 (216) 28 (188)
-------- -------- -------- ----- ---- -----
TOTAL INTEREST INCOME 2,515 (518) 1,997 1,107 147 1,254
INTEREST EXPENSE
- ----------------
Interest-bearing demand
deposits 317 51 368 (295) 91 (204)
Savings deposits 33 (30) 3 36 0 36
Time deposits 756 (187) 569 922 243 1,165
Short-term borrowings (183) 14 (169) 2 (20) (18)
Long-term borrowings 430 0 430 (4) 0 (4)
-------- -------- -------- ----- ---- -----
TOTAL INTEREST EXPENSE 1,353 (152) 1,201 661 314 975
-------- -------- -------- ----- ---- -----
NET INTEREST INCOME 1,162 (366) 796 446 (167) 279
======== ======== ======== ===== ==== =====
</TABLE>
22
<PAGE>
Net interest income for 1998 on a tax equivalent basis was 6.61% higher
than that for 1997, while the net interest margin for 1998 was 4.38% compared to
4.67% for 1997. Tax equivalent net interest income for 1997 was 2.37% higher
than that for 1996 while the net interest margin decreased to 4.67% from 4.72%
in 1996.
The increase in net interest income during 1998 was predominantly a result
of increases in earning asset volume. The loan growth experienced in 1998 was
due to a continuing strong loan demand in the Corporation's service area. This
increase in interest income was partially offset by volume increases in
interest-bearing liabilities. The earning asset yield decreased to 8.09% in
1998, compared to 8.41% in the previous year, predominantly through the loan
portfolio, where the increase in loan volume as a percent of earning assets
provided a higher yield relative to the yield on other earning assets. The
average yield on loans decreased to 9.05% in 1998 compared to the 1997 yield of
9.14%. Although there was an increase in the investment securities average
balance, the average yield decreased to 6.02% in 1998 from 6.50% in 1997. Total
interest-bearing liabilities increased in 1998 primarily due to continued strong
growth in the Corporation's area. The interest-bearing deposit growth of 12.67%
was offset by a slightly lower interest rate paid, 4.45% in 1998 compared to
4.56% in 1997.
Net interest income in 1997 increased 2.37% over 1996 due mainly to an
increase in the volume of interest-bearing assets. The earning asset yield
increased to 8.41% in 1997 compared to 8.21% in 1996 as a result of increases in
the volume and rate of loans during this period and a slight decrease in the
traditionally lower yielding federal funds sold and securities portfolio. Like
earning assets, interest-bearing liabilities showed good growth in average
balances, and the interest rates paid on deposits increased from 4.23% in 1996
to 4.56% in 1997, increasing the rate on total interest-bearing liabilities to
4.57% in 1997 compared to the 1996 rate of 4.25%.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed by management to be sufficient to absorb loses inherent in
the credit portfolio. Factors considered in establishing an appropriate
allowance include: a careful assessment of the financial condition of the
borrower; a realistic determination for the value and adequacy of underlying
collateral; the condition of the local economy and the condition of the specific
industry of the borrower; a comprehensive analysis of the levels and trends of
loan categories; and review of delinquent and classified loans.
The Corporation maintains a comprehensive loan review program to evaluate
loan administration, credit quality, and loan documentation. This program also
includes a regular
23
<PAGE>
review of problem loan ("watch") reports, delinquencies, and charge-offs. The
adequacy of the allowance for loan losses is evaluated on a quarterly basis.
This evaluation focuses on specific loan reviews, changes in the type and volume
of the loan portfolio given the current and forecasted economic conditions, and
historical loss experience. Any one of the following conditions may necessitate
a review of a specific loan: a question of whether the customer's cash flow or
net worth may not be sufficient to repay the loan; the loan has been criticized
in a regulatory examination; the accrual of interest has been suspended; serious
delinquency; or other reasons where either the ultimate collectibility of the
loan is in question or the loan has other special or unusual characteristics
which require special monitoring.
Activity in the allowance for loan losses is reflected in Table 5 -
Analysis of Allowance for Loan Losses. The recorded values of loans and leases
actually removed from the consolidated balance sheets are referred to as charge-
offs and, after netting out recoveries on previously charged-off assets, become
net charge-offs. The Corporation's policy is to charge-off loans, when, in
management's opinion, the loan is deemed uncollectible, although concerted
efforts are made to maximize recovery.
TABLE 5 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 2,700 $ 2,500 $ 2,300 $ 2,100 $ 1,925
LOANS CHARGED-OFF
- --------------------------
Commercial and agricultural 364 326 287 163 245
Real estate 10 13 41 72 159
Installment 434 383 377 350 203
Credit card 71 66 51 17 0
------- ------- ------- ------- -------
TOTAL CHARGE-OFFS 879 788 756 602 607
CHARGE-OFFS RECOVERED
- --------------------------
Commercial and agricultural 55 89 41 76 72
Real estate 3 0 0 22 0
Installment 147 145 115 100 117
Credit card 28 14 9 0 0
------- ------- ------- ------- -------
TOTAL RECOVERIES 233 248 165 198 189
------- ------- ------- ------- -------
Net loans charged-off 646 540 591 404 418
Current year provision 846 740 791 604 593
------- ------- ------- ------- -------
BALANCE AT END OF YEAR 2,900 2,700 2,500 2,300 2,100
======= ======= ======= ======= =======
Loans at year end 208,449 191,605 177,005 154,380 123,715
Ratio of allowance to loans
at year end 1.39% 1.41% 1.41% 1.49% 1.70%
Average loans 202,228 186,843 168,542 141,192 113,628
Ratio of net loans charged-off
to average loans 0.32% 0.29% 0.35% 0.29% 0.37%
</TABLE>
24
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and Agricultural $ 500 $ 450 $ 400 $ 350 $ 300
Real Estate 300 300 250 200 200
Consumer 800 750 700 650 650
Unallocated 1,300 1,200 1,150 1,100 950
------------------------------------------------------
$2,900 $2,700 $2,500 $2,300 $2,100
====== ====== ====== ====== ======
</TABLE>
COMPOSITION OF LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural 15.34% 13.15% 13.75% 15.72% 17.69%
Real estate 60.80% 62.81% 63.08% 60.60% 58.49%
Installment 22.74% 23.25% 22.41% 22.99% 23.19%
Other 1.12% 0.79% 0.76% 0.69% 0.63%
------------------------------------------------------
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
</TABLE>
Nonperforming assets and relative percentages to loan balances are
presented in Table 6 - Nonperforming Assets. The level of nonperforming loans
and leases is an important element in assessing asset quality and the relevant
risk in the credit portfolio. Nonperforming loans include nonaccrual loans,
restructured loans, and loans delinquent 90 days or more. Loans are classified
as nonaccrual when management believes that collection of interest is doubtful,
typically when payments are past due over 90 days, unless well secured and in
the process of collection. Another element associated with asset quality is
other real estate owned (OREO), which represents properties acquired by the
Corporation through loan defaults by customers.
25
<PAGE>
TABLE 6 - NONPERFORMING ASSETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
PRINCIPAL BALANCE ------ ------ ------ ------- --------
- ------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 649 $ 344 $ 171 $ 91 $ 117
90 days or more past due 1641 1862 1731 1303 511
------- ------- ------- ------- -----
TOTAL NONPERFORMING LOANS 2290 2206 1902 1394 628
======= ======= ======= ======= =====
Nonperforming as a percent of loans 1.10% 1.15% 1.07% 0.90% 0.51%
Other real estate owned 57 10 132 217 321
OREO as a percent of loans 0.03% 0.01% 0.07% 0.14% 0.26%
Allowance as a percent of
nonperforming loans 126.64% 122.39% 131.44% 164.99% 334.39%
</TABLE>
The consolidated provision for loan losses was $846,000 for 1998, $740,000
for 1997, and $791,000 for 1996. Net charge-offs ranged from .37% in 1994 to
.32% in 1998 with the highest percentage year being 1996 at .35%. The
percentage of the allowance compared to nonperforming loans increased to 126.64%
in 1998 from 122.39% in 1997 after having decreased from 334.39% in 1994. The
amount of the future years' provision for loan losses will be subject to
adjustment based on the evaluations of the loan portfolio for loss reserve
adequacy.
During the time period from 1994 to 1998, nonperforming loans increased
from $628,000 in 1994 to $2,290,000 in 1998. Nonperforming loans as a percent
of loans increased from .90% in 1995 to 1.10% in 1998 with the highest
percentage year being 1997 at 1.15%. The allowance as a percent of loans was
1.39% in 1998 compared to 1.70% in 1994. During this period, nonaccrual loan
balances increased slightly due to the Corporation's aggressive policy in
transferring loans to nonaccrual status.
Statements of Financial Accounting Standard No. 114 and 118, "Accounting by
Creditors for Impairment of a Loan," became effective January 1, 1995. These
statements changed the way loan loss allowance estimates were to be made for
problem loans. In general, when it is determined that all principal and
interest due under the contractual terms of a loan are not fully collectible,
management must value the loan using discounted future expected cash flows.
Management has not recognized any loans as being impaired in conformity with
FASB 114 and 118 for the years 1998, 1997, and 1996. Application of this
statement should not have a material effect on the Corporation's financial
statements.
26
<PAGE>
The decrease in other real estate owned was primarily the result of a
strong real estate market in the Corporation's area and the sale of a large
commercial property. All other real estate owned is carried by the Corporation
at the lower of cost or fair value, less disposal costs.
Management believes loans classified for regulatory purposes as loss,
doubtful or substandard that are not included in nonperforming or impaired loans
do not represent or result from trends or uncertainties which will have a
material impact on future operating results, liquidity, or capital resources.
The most recent safety and soundness exam conducted concurrently as of October
12, 1998 by the FDIC and the Mississippi Department of Banking and Consumer
Finance, classified $5,821,000 as Substandard loans, and $177,000 as Loss loans.
All loans that were classified Loss were charged off by December 31, 1998 except
for three loans totaling $21,000 that were paid up current by that date and
remain current.
In addition to loans classified for regulatory purposes, management also
designates certain loans for internal monitoring purposes in a watch category.
Loans may be placed on management's watch list as a result of delinquent status,
concern about the borrower's financial condition or the value of the collateral
securing the loan, substandard classification during regulatory examinations, or
simply as a result of management's desire to monitor more closely a borrower's
financial condition and performance. Watch category loans may include loans
with loss potential that are still performing and accruing interest and may be
current under the terms of the loan agreement; however, management may have a
significant degree of concern about the borrowers' ability to continue to
perform according to the terms of the loan. Loss exposure on these loans is
typically evaluated based primarily upon the estimated liquidation value of the
collateral securing the loan. Also, watch category loans may include credits
which, although adequately secured and performing, reflect a past delinquency
problem or unfavorable financial trends exhibited by the borrower.
All watch list loans are subject to additional scrutiny and monitoring.
The Corporation's policies require loan officers to identify borrowers that
should be monitored in this fashion and believe this process ultimately results
in the identification of problem loans in a more timely fashion.
At December 31, 1998, the Corporation had a total of $5,723,434 of loans on
its watch list, which included $5,453,171 in loans classified by regulatory
authorities. Non-accrual loans in the amount of $649,353 are included in the
regulatory classification total. Other loans in the amount of $270,263 were
placed on the watch list by management due to marginal capacity, insufficient
collateral, delinquency or poor performance.
Of the $5,723,434 of loans on the Corporation's watch list, $3,384,617 or
59% were secured by real estate and $2,788,477 or 49% of the $3,384,617 amount
were for one-to-four family housing units. Farm real estate and commercial real
estate comprised the remainder of the real estate watch list loan total.
Commercial, agricultural production and industrial loans totaled
27
<PAGE>
$1,454,511 or 26% of the total watch list amount, while the remainder of the
watch list loans, $884,306 or 15%, were loans made to individuals for personal
expenditures.
NON-INTEREST INCOME AND EXPENSE
A listing of noninterest income and expense from 1996 through 1998 and
percentage changes between years is included in Table 7 - Noninterest Income and
Expense.
TABLE 7 - NONINTEREST INCOME & EXPENSE
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 FROM '97 1997 FROM '96 1996
-------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
NONINTEREST INCOME
Income from fidciary activities $ 1 -66.67% $ 3 200.00% $ 1
Service charges on deposit accounts 2,178 12.62% 1,934 8.17% 1,788
Other operating income 1,141 8.36% 1,053 17.39% 897
------ ------ ------ ------ ------
TOTAL NONINTEREST INCOME $3,320 11.04% $2,990 11.32% $2,686
====== ====== ====== ====== ======
NONINTEREST EXPENSE
Salaries and employee benefits $4,664 15.82% $4,027 3.92% $3,875
Occupancy expense 1,226 27.05% 965 14.61% 842
Other operating expense 2,076 1.07% 2,054 5.44% 1,948
------ ------ ------ ------ ------
TOTAL NONINTEREST EXPENSE 7,966 13.06% 7,046 5.72% 6,665
====== ====== ====== ====== ======
</TABLE>
Noninterest income increased 11.04% to $3,320,000 in 1998 compared to
$2,990,000 in 1997. The primary source of the increase in noninterest income
was income from service charges on deposit accounts. This increase was due to
the increase in the number and dollar amount of checking accounts opened during
this period. Noninterest income increased 11.32% in 1997 compared to 1996.
Service charges on deposit accounts increased 8.17%, again due to an increase in
the number of new customers being serviced and an increase in fee related
activities.
Total non-interest expense increased 13.06% to $7,966,000 in 1998 compared
to $7,046,000 in 1997. As a percentage of average total assets, total
noninterest expense was 2.53% in 1998 compared to 2.52% in 1997. Salaries and
employee benefits increased 15.82% due to annual salary adjustments, new hire,
increased benefit costs and payment of an extra payroll in 1998 due to the
Corporation's bi-weekly payroll periods. Total noninterest expense increased
5.72% to $7,046,000 in 1997 compared to $6,665,000 in 1996. As a percentage of
average total assets, total noninterest expense was 2.52% in 1997 compared to
2.46% in 1996. Salaries and employee benefits increased 3.92% during 1997 due
mainly to annual salary adjustments.
28
<PAGE>
Occupancy expense increased 27.05% to $1,226,000 in 1998 compared to
$965,000 in 1997. The increase was due primarily to an increase in depreciation
related to the new Kosciusko branch. Occupancy and equipment expense increased
14.61% during 1997, primarily as a result of the first full year of operation of
the new Philadelphia, Mississippi Westside branch, purchases of new equipment
and increases in the maintenance costs of the equipment.
Other operating income increased 8.36% in 1998 from 1997. Other operating
expense increased 1.07% to $2,076,000 in 1998. This increase was due to larger
than normal increases in postage, office supplies and legal and accounting
expenses. Other operating expenses was $2,054,000 in 1997, compared to
$1,948,000 in 1996, an increase of 5.44%. Several expenses experienced
decreases during this period including, FDIC assessment and travel.
INCOME TAXES
The Corporation records a provision for income taxes currently payable,
along with a provision for those taxes in the future. Such deferred taxes arise
from differences in timing of certain items for financial statement reporting
rather than income tax reporting. The major difference between the effective
tax rate applied to the Corporation's financial statement income and the federal
statutory rate of 34% is interest on tax-exempt securities and loans.
The Corporation's effective tax rate was 33.77%, 35.05% and 34.02% in 1998,
1997 and 1996, respectively. Further tax information regarding the Corporation
is disclosed in Note 7 to the consolidated financial statements.
FINANCIAL CONDITION
SECURITIES
On January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and accordingly classified certain of its securities as
available-for-sale. In December 1995, the Corporation transferred the remainder
of its held-to-maturity securities to available-for-sale during the moratorium
period granted by FASB. At December 1998, the Corporation classified all of its
securities as available-for-sale.
Securities held-to-maturity are those which the Corporation has both the
positive intent and ability to hold to maturity, and are reported at amortized
cost. Securities available-for-sale are those which the Corporation may decide
to sell if needed for liquidity, asset/liability management, or other reasons.
Securities available-for-sale are reported at fair value, with unrealized gains
and losses included as a separate component of equity, net of tax. The
Corporation does not maintain any securities for trading purposes.
29
<PAGE>
Table 8 - Securities and Security Maturity Schedule summarizes the carrying
value of securities from 1996 through 1998 and the maturity distribution at
December 31, 1998, by classification. Interest on tax-exempt securities has
been adjusted to a tax equivalent basis using a marginal federal tax rate of 34%
and a state tax rate of 5% for all years.
<TABLE>
<CAPTION>
TABLE 8 - SECURITIES
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
- -----------------------------
U. S. Treasuries $37,879 $31,345 $ 5,181
U. S. Agencies 15,757 15,261 26,449
Mortgage Backed 23,556 14,336 33,598
States, municipals and other 14,347 6,350 7,244
------- ------- -------
TOTAL SECURITIES AVAILABLE-
FOR-SALE $91,539 $67,292 $72,472
SECURITIES HELD-TO-MATURITY
- -----------------------------
U. S. Treasuries 0 0 0
U. S. Agencies 0 0 0
Mortgage Backed 0 0 0
States, municipals and other 0 0 0
------- ------- -------
TOTAL SECURITIES HELD-TO-MATURITY $ 0 $ 0 $ 0
------- ------- -------
TOTAL SECURITIES 91,539 67,292 72,472
======= ======= =======
</TABLE>
30
<PAGE>
SECURITIES MATURITY SCHEDULE
<TABLE>
<CAPTION>
1 Year and less 1 to 5 Years 5 to 10 Years Over 10 years
------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
- ------------------
U. S. Treasury 8,513 5.43% 29,366 6.38% 0 0.00% 0 0.00%
U. S. Agencies 301 5.75% 8,685 6.53% 5,335 6.15% 1,436 5.56%
Mortgage-backed 99 5.80% 1,057 6.06% 2,704 6.03% 19,696 6.32%
States, municipal and
other (1) 1,956 6.30% 4,196 7.72% 884 6.87% 7,311 7.84%
------- ---- ------- ---- ------ ---- ------- ----
TOTAL AVAILABLE-
FOR-SALE $24,524 5.60% $49,486 6.53% $9,106 6.18% $ 8,423 6.67%
======= ==== ======= ==== ====== ==== ======= ====
TOTAL HELD-TO-
MATURITY 0 0.00% 0 0.00% 0 0.00% 0 0.00%
</TABLE>
(1) Average rates were calculated on tax equivalent basis using a marginal
federal income tax rate of 34% and a state tax rate of 5%.
The majority of the securities portfolio is composed of U.S. Treasury
securities, Federal agency securities, state municipal securities (tax exempt),
and mortgage-backed securities.
The securities portfolio carries varying degrees of risk. Investments in
U.S. Treasury and Federal agency securities have little or no credit risk.
Mortgage-backed securities are substantially issues of Federal agencies.
Obligations of states and political subdivisions are the areas of highest
potential credit exposure in the portfolio. This risk is minimized through the
purchase of high quality investments. When purchased, obligations of states and
political subdivisions and corporate bonds must have a credit rating by Moody's
or Standard & Poors of A or better. Substantially all of these investments were
rated A or better at December 31, 1998. The risk of non-rated municipal bonds
is minimized by limiting the amounts invested in local issues. Management
believes the non-rated securities are of high quality. No securities of an
individual issuer, excluding U.S. government and its agencies, exceeded 10% of
the Corporation's shareholders' equity as of December 31, 1998. The Corporation
does not use off-balance sheet derivative financial instruments as defined in
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments."
As total earning assets have increased over the past years, the security
portfolio balances have also increased. Total securities were $91,539,000,
$67,292,000 and $72,472,000 as of December 31, 1998, 1997 and 1996,
respectively.
The Corporation had an increase in the amount of securities available for
sale in 1998 of $24,247,000 or 36.03%. This increase is due in part to the
purchase of $5,000,000 in GNMA securities and $5,000,000 of municipals that were
purchased with $10,000,000 borrowed from the Federal Home Loan Bank. This
arrangement allowed the Corporation to take advantage of
31
<PAGE>
its heavy capital position to increase its income. The remainder of the increase
was due to the investment of funds not currently needed for loans.
In the first half of 1997, the Corporation sold $23,228,375 in agency and
mortgage-backed securities in an effort to supply suitable collateral for its
largest governmental depositor. The Corporation was able to take advantage of
the market at that time and to make the swap with a minimum of loss on the sale
of the securities. This loss was recovered by an increase in the yield of the
purchased securities. The Corporation invested the proceeds from this sale in
U.S. Treasury obligations.
There was very little change in the mix of investment securities from 1995
to 1996. The security balances decreased from $76,022,000 in 1995 to
$72,472,000 in 1996. This reduction was the result of a strong loan demand and
the need for additional loan funds.
U.S. Agencies increased approximately $451,000 between 1996 and 1995, while
mortgage-backed U.S. Treasury securities decreased approximately $3,824,000
during this same period. The change in portfolio mix was due to the interest
rate environment and the need to sell the small remainder portions of mortgage-
backed securities. During this period of declining interest rates and
increasing bond prices, the Corporation reduced the prepayment risk associated
with holding mortgage-backed securities by rotating out of such securities and
investing in U.S. Agency category securities with comparable yields and more
predictable prepayment characteristics.
As of December 31, 1998, the Corporation did not have any structured notes
in its portfolio. As of December 31, 1997, and 1996, the security portfolio
held structured notes totaling $0.00 and $3,459,000, respectively. The
investment policy has specific guidelines describing the types and
characteristics of acceptable structured notes for the Corporation's portfolio.
All structured notes are U.S. Government Agency issues.
Management's security strategy includes utilizing proceeds from the
maturity or sale of short-term securities, adjustable rate instruments, and
easily marketable securities to fund a portion of the continuing growth of the
loan portfolio. Tax-free and intermediate taxable bonds are used to further
enhance earnings. As of December 31, 1998, 100% of the total investment
security portfolio was classified in the available-for-sale category, which
allows flexibility in the asset/liability management function. As noted
earlier, sell strategies are executed, on occasion, when the interest rate
environment provides the opportunity to boost the overall portfolio performance.
Although the change in equity due to market value fluctuations in the
available-for-sale portfolio is not used in the Tier 1 capital calculation, the
change which occurred in the unrealized gain/loss on securities between 1997 and
1996 was a result of the swing in the interest rate environment during that
period, in conjunction with the change in the portfolio mix. Although there was
a significant change in the unrealized gain/loss on securities between 1997 and
1996, management considers these changes to be temporary in nature.
32
<PAGE>
LOANS
The loan portfolio constitutes the major earning asset of the Corporation
and in the opinion of management offers the best alternative for maximizing
interest spread above the cost of funds. The Corporation's loan personnel have
the authority to extend credit under guidelines established and approved by the
Board of Directors. Any aggregate credit which exceeds the authority of the
loan officer is forwarded to the loan committee for approval. The loan
committee is composed of various directors, including the Chairman. All
aggregate credits which exceed the loan committee's lending authority are
presented to the full Board of Directors for ultimate approval or denial. The
loan committee not only acts as an approval body to ensure consistent
application of the Corporation's loan policy but also provides valuable insight
through communication and pooling of knowledge, judgment, and experience of its
members.
The Corporation has stated in its Loan Policy the following objectives for
its loan portfolio: (a) to make loans on sound and thorough credit analysis,
(b) proper documentation of all loans, (c) to eliminate loans from the portfolio
that are under-priced, high risk or difficult and costly to administer, (d) to
seek good relationships with the customer, (e) to avoid undue concentrations of
loans, and (f) to keep non-accrual loans to a minimum by aggressive collection
policies.
The Corporation, through its policy, seeks to maintain a diversification of
its loan portfolio by limiting the various types of loans relative to the size
of the total portfolio. Agricultural loans and real estate loans are limited to
35% of total loans; land acquisition and development to 40%; commercial
construction to 25%; residential construction to 50%; and residential mortgage
to 60%.
The Corporation will extend credit both on a secured and unsecured basis to
borrowers whose credit, character and capacity to repay are firmly established.
In addition, there must be a clear purpose for the loan and a reliable and
sufficient source of repayment. Financial statements are required for all
unsecured loans of $10,000 and above. If collateral is to be used to secure the
loan, the quality and liquidity of the asset must be confirmed before the loan
is approved. All loan officers are granted lending limits under which they can
advance funds without the prior approval of the Chief Executive Officer. These
limits are assigned by the Chief Executive Officer and are subject to change
when necessary. The Chief Executive Officer can lend up to $250,000 on a
secured basis and $100,000 on an unsecured basis without the approval of the
Executive Loan Committee, which consists of the Chief Executive Officer and at
least two outside directors.
The Corporation has established certain Loan to Value (LTV) limitations for
the various types of loans offered to is customers. Each loan type has a
percentage LTV that represents the liquidity of the collateral. Real estate
LTV's range from 65% for raw land purchase to 85% for 1-4 residential
properties. LTV's on consumer loans such as automobiles, boats, aircraft and
33
<PAGE>
mobile homes are limited to 80% for new collateral and 75% for used collateral.
Timber deed loans are restricted to 80% of timber cruise.
The Corporation expects each loan to be paid in full at the time of
maturity. However, circumstances may arise that would cause a loan to not be
paid in full at maturity but rather, renewed for an additional period of time.
The loan officers will not agree prior to the initial loan to renew a note at
maturity, if requested, they will assess the loan for credit quality at the
requested renewal date and make a decision on the renewal at that time. If the
renewal loan complies with the credit criteria of the Corporation, the officer
may renew the loan. There is no written policy addressing the rollover of loans
and each renewal stands on its own merits. It is the practice of the
Corporation that a principal reduction must be made on or prior to the second
renewal date. Generally, all unsecured loans should have a 10% reduction before
the first renewal. The maturities of all loans are a decision that is mainly
determined by the needs of the customer, provided the maturity is within the
guidelines of the Corporation's credit policy. Furthermore, the desire of the
customer for a shorter maturity loan enables the Corporation to achieve its
asset liability management goals by having a greater amount of assets re-price
to match the repricing schedule of our short-time deposit portfolio.
In general, the loan growth experienced in 1998 was due to a continuation
of the overall growth in the area that is served by the Corporation. The
continued success of the Casino on the Choctaw Indian Reservation caused an
increase in the number of businesses to serve the visitors drawn by the Casino.
The increase of jobs in the area also helped to tighten the housing market in
the area and caused a large number of new houses to be built. This is evidenced
by the fact that real estate mortgage loans grew by $4,518,000 or 8.35% in 1998,
$3,203,000 or 6.29% in 1997 and grew by $3,435,000 or 7.23% in 1996.
Commercial and agricultural loans also showed large growth during this
period. These loans grew $8,266,000 or 9.11% in 1998, $9,601,000 or 11.84% in
1997 and $14,308,000 or 21.43% in 1996. This increase was not caused solely by
the influence of the Casino in the area, but was due in part to an increase in
the number of chicken house loans made in this period.
Commercial and agricultural loans are the largest segment of the loan
portfolio and, by nature, bear a higher degree of risk. Management is aware of
the increasing trend in this category and believes the lending practices,
policies, and procedures surrounding this loan category are adequate to manage
this risk.
Table 9 - Loans Outstanding reflects outstanding balances by loan type for
the past five years. Additional loan information is presented in Note 4 to the
consolidated financial statements.
34
<PAGE>
TABLE 9 - LOANS OUTSTANDING
<TABLE>
<CAPTION>
AT DECEMBER 31,
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $ 98,956 $ 90,690 $ 81,089 $ 66,781 $ 51,476
Real estate - construction 6,645 4,533 5,826 6,174 3,006
Real estate - mortgage 58,637 54,119 50,916 47,481 39,825
Consumer 49,734 47,466 44,015 38,482 31,102
-------- -------- -------- -------- --------
TOTAL LOANS 213,972 196,808 181,846 158,918 125,409
======== ======== ======== ======== ========
</TABLE>
Table 10 - Loan Liquidity and Sensitivity to Changes in Interest Rates reflects
the maturity schedule or repricing frequency of all loans. Also indicated are
fixed and variable rate loans maturing after one year for all loans.
TABLE 10 - LOAN LIQUIDITY
<TABLE>
<CAPTION>
LOAN MATURITIES AT DECEMBER 31, 1998
1 YEAR 1 - 5 OVER 5
AND LESS YEARS YEARS Total
------------------------------------------
<S> <C> <C> <C> <C>
All loans $ 87,912 $ 89,736 $ 36,324 $213,972
SENSITIVITY TO CHANGES IN INTEREST RATES
- ----------------------------------------
1 - 5 OVER 5
YEARS YEARS
------------------
Fixed rates $86,412 $21,417
Variable rates 3,324 14,907
------- -------
$89,736 $36,324
======= =======
</TABLE>
DEPOSITS
The Corporation offers a wide variety of deposit services to individual and
commercial customers, such as noninterest-bearing and interest-bearing checking
accounts, savings accounts, money market deposit accounts, and certificates of
deposit. The deposit base provides the major funding source for earning assets.
Total average deposits have shown steady growth over the past few years,
increasing 10.75% and 1.72% in 1998 and 1997, respectively. The decrease shown
in interest-bearing demand accounts and the increase in certificates of deposit
since 1996 are the result of a change in deposit choices by customers and not as
a result of any particular incentive. Time deposits continue to be the largest
single source of the Corporation's deposit base.
35
<PAGE>
A three year schedule of deposits by type and maturities of time deposits
greater than $100,000 is presented in Table 11 - Deposit Information.
TABLE 11 - DEPOSIT INFORMATION
<TABLE>
<CAPTION>
-------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing $ 34,909 $ 34,717 $ 37,895
Interest-bearing demand 68,330 2.87% 57,406 2.78% 68,036 2.64%
Savings 18,201 3.73% 17,594 3.90% 16,681 3.90%
Certificates of deposit 147,074 5.28% 132,742 5.42% 115,746 5.19%
-------------------------------------------------------------------
$268,514 3.88% $242,459 3.91% $238,358 3.55%
======== ===== ========= ===== ======== =====
</TABLE>
MATURITY RANGES OF TIME DEPOSITS
WITH BALANCES OF $100K OR MORE AT DECEMBER 31, 1998
<TABLE>
<S> <C>
3 months or less $29,503
3 through 6 months 11,642
6 through 12 months 16,970
over 12 months 1,486
-------
$59,601
=======
</TABLE>
The Corporation in its normal course of business will acquire large certificates
of deposit, generally from public entities, for a variety of maturities. These
funds are acquired on a bid basis and are considered to be part of the deposit
base of the Corporation.
BORROWINGS
Aside from the core deposit base and large denomination certificates of
deposit mentioned above, the remaining funding sources include short-term and
long-term borrowings. Short-term borrowings consist of federal funds purchased
from other financial institutions on an overnight basis, short-term borrowings
from the Federal Home Loan Bank of Dallas (FHLB), and U.S. Treasury demand notes
for treasury, tax and loan (TT&L).
36
<PAGE>
TABLE 12 - SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1998 1997 1996
----- ------ -------
<S> <C> <C> <C>
Year-end balance of federal funds purchased $ 0 $8,800 $ 0
Year-end balance of FHLB borrowings 0 0 0
Year-end balance of treasury tax and loan note 700 700 438
----- ------ -------
$ 700 $ 700 $ 9,238
===== ====== =======
Maximum month-end balance of federal
funds purchased 300 $4,300 $10,100
Maximum month-end balance of Federal
Home Loan Bank borrowings $ 0 $8,600 $10,400
Maximum month-end balance of Treasury
Tax and Loan Note $ 700 $ 700 $ 700
Average balance of short term borrowings $ 635 $4,148 $ 4,114
Weighted average rate of borrowings 5.20% 4.87% 5.34%
</TABLE>
As of December 31, 1998 and 1997, the Corporation's short-term borrowings
consisted only of the treasury tax open-end note in the amount of $700,000. As
of December 31, 1996, the Corporation had, in addition to the TT&L note in the
amount of $438,000, federal funds purchased in the amount of $8,800,000. The
Corporation foresees short-term borrowings to be a continued source of liquidity
and will continue to use these borrowings as a method to fund short-term needs.
The Corporation has the capacity to borrow up to $59 million from the FHLB and
other financial institutions in the form of federal funds purchased and will use
these borrowings if circumstances warrant such action.
The Corporation, at the end of 1998, had long-term debt in the amount of
$10,000,000 to the Federal Home Loan Bank for advances and $2,416,000 payable to
the State of Mississippi for advances under the Agribusiness Enterprise Loan
program. This program provides monies to banks to be extended to qualifying
farmers at no interest. Farmers that qualify for the program receive 20% of
their loan at zero interest. When the loan is repaid, the State receives its
pro-rata share of 20% of the principal payment. The last of the Corporation's
debentures matured on January 31, 1997 in the amount of $32,695. The remaining
maturity schedule of the long-term debt at December 31, 1998 is listed below.
<TABLE>
<CAPTION>
<S> <C>
Less than one year $ 1,000
One year to three years 18,000
Over three years 12,397,000
</TABLE>
37
<PAGE>
LIQUIDITY AND RATE SENSITIVITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available to meet financial commitments on a timely
basis. These commitments include honoring withdrawals by depositors, funding
credit obligations to borrowers, servicing long-term obligations, making
shareholder dividend payments, paying operating expenses, funding capital
expenditures, and maintaining reserve requirements.
Interest rate risk is the exposure to Corporation earnings and capital from
changes in future interest rates. All financial institutions assume interest
rate risk as an integral part of normal operations. Managing and measuring the
interest rate risk is the process that ranges from reducing the exposure of the
Corporation's interest margin regarding swings in interest rates to assuring
that there are sufficient capital and liquidity to support future balance sheet
growth.
The asset/liability committee is responsible for managing liquidity issues
and interest rate risk, among other matters. Various interest rate movements
are factored into a simulation model to assist the asset/liability committee in
assessing interest rate risk. The committee analyzes the results of the
simulation model to formulate strategies to effectively manage the interest rate
risk that may exist.
The liquidity of the Corporation is dependent on the receipt of dividends
from the Bank. Certain restrictions exist regarding the transfer of funds from
the Bank as explained in Item 1. Management expects that in the aggregate, the
Bank will continue to have the ability to provide adequate funds to the
Corporation.
The Bank's source of funding is predominantly core deposits consisting of
both commercial and individual deposits, maturities of securities, repayments of
loan principal and interest, and federal funds purchased, and long-term
borrowing from the FHLB. The deposit base is diversified between individual and
commercial accounts which helps avoid dependence on large concentrations of
funds. The Corporation does not solicit certificates of deposit from brokers.
The primary sources of liquidity on the asset side of the balance sheet are
federal funds sold and securities classified as available-for-sale. All of the
investment securities portfolio are classified in the available-for-sale
category, and are available to be sold, should liquidity needs arise. Table 13
- - Funding Uses and Sources details the main components of cash flows for 1998
and 1997.
38
<PAGE>
TABLE 13 - FUNDING USES AND SOURCES
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FUNDING USES
- ---------------
Loans $202,228 $15,048 8.04% $187,180 $45,988 32.57%
Taxable
securities 70,801 $ 7,468 11.79% 63,333 (6,109) -8.80%
Tax-exempt
securities 8,600 $ 3,255 60.90% 5,345 (368) -6.44%
Federal Home
Loan Bank stock 1,142 $ (203) -15.09% 1,345 653 94.36%
Federal funds
sold 9,804 $ 7,692 364.20% 2,112 (5,203) -71.13%
-------- ------- ------ -------- ------- ------
$292,575 $33,260 12.83% $259,315 $34,961 15.58%
======== ======= ====== ======== ======= ======
FUNDING SOURCES
- ---------------
Noninterest-
bearing deposits $ 34,909 ($86) -0.25% $ 34,995 $ 782 2.29%
Interest-bearing
demand and
savings deposits 86,531 $11,937 16.00% 74,594 306 0.41%
Time Deposits 147,074 $14,332 10.80% 132,742 24,764 22.93%
Short-term
borrowings 635 ($ 3,513) -84.69% 4,148 2,904 233.44%
Long-term debt 7,630 $ 7,627 254233.33% 3 (124) -97.64%
$276,779 $30,297 12.29% $246,482 $28,632 13.14%
======== ======= ====== ======== ======= ======
</TABLE>
Rate sensitivity gap is defined as the difference between the repricing of
interest earning assets and the repricing of interest bearing liabilities within
certain defined time frames. The Corporation's interest rate sensitivity
position is influenced by the distribution of interest earning assets and
interest-bearing liabilities among the maturity categories. Table 14 -
Liquidity and Interest Rate Sensitivity reflects interest earning assets and
interest-bearing liabilities by maturity distribution. Product lines repricing
in time periods predetermined by contractual agreements are included in the
respective maturity categories.
39
<PAGE>
TABLE 14 - LIQUIDITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
1 - 90 91 - 365 1 - 5
Days Days Years Over 5 years Total
--------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Loans $ 59,431 $ 52,635 $ 88,504 $ 7,879 $208,449
Investment securities 11,452 13,347 50,711 15,110 90,620
Federal Home Loan Bank stock 0 0 0 919 919
Federal Funds Sold 4,500 4,500
--------- -------- -------- -------- --------
75,383 65,982 139,215 $ 23,908 304,488
========= ======== ======== ======== ========
INTEREST BEARING LIABILITIES
- ----------------------------
Interest bearing demand deposits 68,394 0 0 0 68,394
Savings deposits 19,106 0 0 0 19,106
Time deposits 67,206 84,108 5,447 0 156,761
Short term borrowings 700 0 0 0 700
Long term borrowings 0 0 0 10,000 10,000
--------- -------- -------- -------- --------
TOTAL INTEREST BEARING
LIABILITIES 155,406 84,108 5,447 $10,000 $254,961
========= ======== ======== ======== ========
Rate sensitive gap (80,023) (18,126) 133,768 13,908 49,527
Rate sensitive cumulative gap (80,023) (98,149) 35,619 49,527
Cumulative gap as a percentage
of total earning assets -26.28% -32.23% 11.70% 16.27%
</TABLE>
The purpose of the above table is to measure interest rate risk utilizing
the repricing intervals of interest sensitive assets and liabilities. Rate
sensitive gaps constantly change as funds are acquired and invested and as rates
change. Rising interest rates are likely to increase net interest income in a
positive gap position while falling interest rates are beneficial in a negative
gap position.
The above rate sensitivity analysis places interest-bearing demand and
savings deposits in the shortest maturity category because these liabilities do
not have defined maturities. If these deposits were placed in a maturity
distribution representative of the Corporation's deposit base
40
<PAGE>
history, the shortfall of the negative rate sensitive gap position would be
reduced in the 1-to-90 day time frame.
The Corporation's large negative cumulative gap position in the one year
time period as of December 31, 1998 was mainly due to: (1) the interest-bearing
and savings deposits being classified in the 1-90 day category; (2)
approximately 97% of certificates of deposit maturing during the next twelve
months; and (3) a significant portion of the Corporation's loans maturing after
one year. A decline in the interest rate environment would enhance earnings,
while an increase in interest rates would have the opposite effect on corporate
earnings. The effect would be mitigated by the fact that interest-bearing
demand and savings deposits may not be immediately affected by changes in
general interest rates.
CAPITAL ADEQUACY
The Corporation and Bank are subject to various regulatory capital
guidelines as required by federal and state banking agencies, as discussed in
greater detail under Item 1 hereof. These guidelines define the various
components of core capital and assign risk weights to various categories of
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal regulatory agencies to define capital tiers. These
are: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio of
at least 6.00%, and a total capital ratio of at least 10.00%, and a leverage
ratio of at least 5.00% and not be under a capital directive order. Failure to
meet capital requirements can initiate regulatory action that could have a
direct material effect on the Corporation's financial statements. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions, asset growth, and expansion is limited,
in addition to the institution being required to submit a capital restoration
plan.
Management believes the Corporation and the Bank meet all the capital
requirements as of December 31, 1998, as noted below in Table 15 - Capital
Ratios, and is well-capitalized under the guidelines established by the banking
regulators. To be well-capitalized, the Corporation and Bank must maintain the
prompt corrective action capital guidelines described above.
Exclusive of the effect of the unrealized gains/losses on securities
component, which is driven by the interest rate environment, the Corporation's
shareholders' equity increased $3,928,000, or 14.72% in 1997. The Corporation
increased the amount of dividends paid to $794,100 in 1998 compared to $562,000
in 1997, an increase of $232,100 or 41.30%. The higher dividend payout, in
addition to the stock dividend declared in 1996, represent management's effort
to increase the value and return of each shareholder's investment in the
Corporation.
41
<PAGE>
At December 31, 1998, management was not aware of any current
recommendations by banking regulatory authorities which, if they were to be
implemented, would have, or are reasonably likely to have, a material effect on
the Corporation's consolidated liquidity, capital resources or operations.
TABLE 15 - CAPITAL RATIOS
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Tier 1 capital
Shareholders' equity $ 35,456 $ 31,221 $ 26,753
Less: Intangibles (717) (784) (851)
Add/less: Unrealized loss/(gain) on securities (930) (613) ( 78)
Add: Minority interest in equity accounts of
unconsolidated subsidiaries 1,200 1,106 (944)
-------- --------
TOTAL TIER 1 CAPITAL 35,009 30,930 26,773
======== ========
Total capital
Tier 1 capital 35,009 30,930 26,773
Allowable allowance for loan losses 2,597 2,356 2,205
-------- --------
TOTAL CAPITAL 37,606 33,286 28,978
======== ======== ========
RISK WEIGHTED ASSETS 207,437 188,098 176,077
======== ======== ========
AVERAGE ASSETS (FOURTH QUARTER) 330,079 283,195 271,087
======== ======== ========
RISK BASED RATIOS
TIER 1 16.88% 16.44% 15.21%
======== ======== ========
TOTAL CAPITAL 18.13% 17.70% 16.46%
======== ======== ========
LEVERAGE RATIOS 10.61% 10.92% 9.88%
======== ======== ========
</TABLE>
PENDING CHARGES
Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting
for Transfers and Servicing Financial Assets and Extinguishments of
Liabilities," has been issued and will apply to some institutions that sell
certain assets. SFAS 125 establishes standards for determining the
circumstances under which transfers of financial assets should be considered
sales or as secured borrowing and when a liability should be considered
extinguished, and addresses the accounting requirements for servicing financial
assets, including mortgage servicing rights. The Corporation did not have any
transactions that would be subject to SFAS 125 at
42
<PAGE>
December 31, 1998 or 1997 and does not have any at the current time. However,
the Statement will be followed in the future should the Corporation have any
activity that would fall under this accounting standard.
INFLATION
For a financial institution, effects of price changes and inflation vary
considerably from an industrial organization. Changes in the prices of goods
and services are the primary determinant of the industrial company's profit,
whereas changes in interest rates have a major impact on a financial
institution's profitability. Inflation affects the growth of total assets, but
it is difficult to assess its impact because neither the timing nor the
magnitude of the changes in the consumer price index directly coincide with
changes in interest rates.
During periods of high inflation there are normally corresponding increases
in the money supply. During such times financial institutions often experience
above average growth in loans and deposits. Also, general increases in the
price of goods and services will result in increased operation expenses. Over
the past few years the rate of inflation has been relatively low, and its impact
on the growth in the balance sheets and increased levels of income and expense
has been nominal.
2B. QUARTER ENDED JUNE 30, 1999
All information concerning the period ending December 31, 1998 presented under
2B has been retroactively adjusted to reflect the 5:1 stock split which was
effective January 1, 1999 in order to assist the reader in making an informed
analysis of these materials.
43
<PAGE>
FINANCIAL INFORMATION
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $ 11,453,090 $ 15,234,594
Interest bearing balances at Federal Home Loan Bank 724,592 1,063,244
Federal funds sold 800,000 4,500,000
------------ ------------
Cash and cash equivalents 12,977,682 20,797,838
Federal Home Loan Bank stock 1,024,800 918,500
Investment securities available for sale, at fair value 95,369,868 90,620,004
Loans, net of allowance for loan losses of
$3,000,000 in 1999 and $2,900,000 in 1998 221,107,266 208,449,416
Premises and equipment, net 4,350,263 4,433,652
Other real estate owned, net 296,034 57,094
Accrued interest receivable 3,782,563 3,697,109
Cash value of life insurance 2,641,709 2,516,361
Goodwill (net) 683,358 716,862
Other Assets 3,011,677 2,024,973
------------ ------------
TOTAL $345,245,220 $334,231,809
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 34,871,346 $ 37,983,554
Interest-bearing NOW and money market accounts 82,829,306 68,391,505
Savings deposits 19,866,694 19,106,323
Certificates of deposit 152,905,538 156,760,846
------------ ------------
Total deposits 290,472,884 282,242,228
Accrued interest payable 1,221,641 1,274,059
Federal Home Loan Bank advances 10,000,000 10,000,000
Federal funds Purchased 1,200,000 0
ABE loan liability 2,764,801 2,416,327
Treasury tax and loan note option 700,000 700,000
Directors deferred compensation payable 764,205 718,868
Income taxes payable 0 0
Other liabilities 438,535 225,390
------------ ------------
Total liabilities 307,562,066 297,576,872
------------ ------------
Minority interest in consolidated subsidiaries 1,234,758 1,199,628
STOCKHOLDERS' EQUITY
Common stock; $.20 par value, 3,750,000 shares authorized,
and 3,308,750 shares outstanding at June 30, 1999, and
$1.00 par value, 750,000 shares authorized and 670,750
shares outstanding at December 31, 1998 670,750 670,750
Less: Treasury stock, at cost 45,000 shares at
June 30, 1999 and 9,000 at December 31, 1998 (239,400) (239,400)
Additional paid-in capital 3,353,127 3,353,127
Retained earnings 33,124,246 30,740,947
Accumulated Other Comprehensive Income, net of
income taxes of $(242,169) in 1999 and $495,909 in 1998 (460,327) 929,885
------------ ------------
Total stockholders' equity 36,448,396 35,455,309
------------ ------------
TOTAL $345,245,220 $334,231,809
============ ============
</TABLE>
See notes to consolidated financial statements
44
<PAGE>
CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $4,771,770 $4,551,888 $ 9,509,086 $ 9,027,939
Federal funds sold 72,813 166,293 135,282 296,254
Investment securities 1,390,053 1,196,214 2,692,275 2,259,543
Other interest 9,579 53,598 21,360 56,376
---------- ---------- ------------ ------------
Total interest income 6,244,215 5,967,993 12,358,003 11,640,112
INTEREST EXPENSE:
Deposits 2,496,394 2,586,674 4,987,462 5,086,189
Other borrowed funds 151,508 128,898 299,379 161,872
---------- ---------- ------------ ------------
Total interest expense 2,647,902 2,715,572 5,286,841 5,248,061
---------- ---------- ------------ ------------
NET INTEREST INCOME 3,596,313 3,252,421 7,071,162 6,392,051
PROVISION FOR LOAN LOSSES 236,983 117,719 382,617 168,981
---------- ---------- ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,359,330 3,134,702 6,688,545 6,223,070
---------- ---------- ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 588,196 498,276 1,150,825 1,009,817
Other service charges and fees 93,479 79,386 184,645 170,552
Other income 114,434 43,537 201,090 153,251
---------- ---------- ------------ ------------
Total other income 796,109 621,199 1,536,560 1,333,620
OTHER EXPENSES:
Salaries and employee benefits 1,135,775 1,045,128 2,188,097 2,174,416
Occupancy expense 325,117 308,743 633,186 617,600
Other operating expense 456,939 333,763 935,494 882,563
Earnings applicable to minority interest 51,987 43,802 101,266 85,685
---------- ---------- ------------ ------------
Total other expenses 1,969,818 1,731,436 3,858,043 3,760,264
---------- ---------- ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,185,621 2,024,465 4,367,062 3,796,426
---------- ---------- ------------ ------------
PROVISION FOR INCOME TAXES 701,159 687,355 1,487,450 1,324,008
---------- ---------- ------------ ------------
NET INCOME $1,484,462 $1,337,110 $ 2,879,612 $ 2,472,418
========== ========== ============ ============
NET INCOME PER SHARE $0.45 $0.40 $0.87 $0.75
===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements
45
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net Income $1,484,462 $1,337,110 $ 2,879,612 $ 2,472,418
Other comprehensive income, net of tax (997,012) 22,531 (1,393,632) (59,147)
Unrealized gains (losses)
Less reclassification adjustment 3,419 0 3,419 0
Total other comprehensive income (993,593) 22,531 (1,390,213) (59,147)
Comprehensive income $ 490,869 $1,359,641 $ 1,489,399 $ 2,413,271
========== ========== ============ ============
</TABLE>
CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 3,091,368 $ 2,315,009
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities avail for sale 13,570,711 4,512,212
Proceeds from sale of investment securities 1,499,393 0
Purchases of investment securities (22,043,367) (19,164,882)
Purchases of bank premises, furniture, fixtures and
equipment (180,611) (298,794)
Decrease in interest bearing deposits with other banks 338,652 (3,164,731)
Net (increase) decrease in federal funds 4,900,000 (6,200,000)
Net increase in loans (13,040,467) (5,713,516)
Net Cash Used by Investing Activities (14,955,689) (30,029,711)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 8,230,656 21,973,301
Net increase (decrease) in ABE loans 348,474 (74,087)
Increase in FHLB advances 0 10,000,000
Payment of dividends (496,313) (397,050)
Net Cash Provided by Financing Activities 8,082,817 31,502,164
Net Increase (Decrease) in Cash and Due from Banks (3,056,912) 3,787,462
Cash and Due From Banks, beginning of year 15,234,594 10,025,883
Cash and Due from Banks, end of period 11,453,090 13,813,345
</TABLE>
46
<PAGE>
Notes to Unaudited Consolidated
Financial Statements
For the six months ended June 30, 1999
1. The interim consolidated financial statements are unaudited and reflect all
adjustments and reclassifications which, in the opinion of management, are
necessary for a fair presentation of the results of operations and
financial condition of the interim period. All adjustments and
reclassifications are or a normal and recurring nature. Results for the
period ending June 30, 1999, are not necessarily indicative for results
which may be expected for any other interim period or for the year as a
whole.
2. Summary of Significant Account Policies. See note 1 of the Notes to
Consolidated Financial Statements in the Citizens Holding Company 1998
Audit Report that was included as an exhibit to the Form-10 Registration
Application filed June 21, 1999.
Statements concerning future performance, developments or events,
concerning expectations for growth and market forecasts, and any other
guidance on future periods, constitute forward-looking statements which are
subject to a number of risks and uncertainties which might cause actual
results to differ materially from stated expectations. These factors
include, but are not limited to, the approval of regulatory
47
<PAGE>
agencies and shareholders, the effect of interest rates changes, the
expansion of the Corporation, competition in the financial services market
for both deposits and loans, and general economic conditions.
Investment Securities--The Corporation classifies all of its securities
as available-for-sale and carries them at fair value with unrealized gains
or losses reported as a separate component of capital, net of any
applicable income taxes. Realized gains or losses on the sale of securities
available-for-sale, if any, are determined on an identification basis. The
Corporation does not have any securities classified as Held for Trading.
3. In the ordinary course of business, the Corporation enters into commitments
to extend credit to its customers. These commitments are not reflected in
the accompanying financial statements. As of June 30, 1999, the Corporation
had entered into commitments with certain customers amounting to
$18,970,000 compared to $19,350,000 at December 31, 1998. There were
$319,025 of letters of credit outstanding at June 30, 1999, compared to
$290,000 at December 31, 1998.
4. Net income per share--Basic, has been computed based on the weighted
average number of shares outstanding during each period. Net income per
share--Diluted, has been computed based on the weighted average number of
shares outstanding during each period plus the dilutive effect of
outstanding granted options. Basic weighted average shares for 1998 have
been adjusted to reflect the five-for-one stock split on the common stock
effective January 1, 1999. Earnings per share were computed as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Basic weighted average shares outstanding 3,308,750 3,308,750
Dilutive effect of granted options 19,300 0
---------- ----------
Diluted weighted average shares outstanding 3,328,050 3,308,750
Net Income $2,879,612 $2,472,418
Net income per share--Basic $ .87 $ .75
Net income per share--Diluted $ .87 $ .75
</TABLE>
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Citizens Holding
Company, (the "Corporation").
LIQUIDITY
The Corporation has an asset and liability management program that assists
management in maintaining it interest margins during times of both rising and
falling interest rates and in maintaining sufficient liquidity. Liquidity if
the Corporation at June 30, 1999 was 35.90% and at December 31, 1998 was 38.21%.
Liquidity is the ratio of short-term investments to potentially volatile
liabilities. Management believes it maintains adequate liquidity for the
Corporation's current needs.
When the Corporation has more funds than it needs for its reserve requirements
or short-term liquidity needs, the Corporation increases its security
investments or sells federal funds. It is management's policy to maintain an
adequate portion of its portfolio of assets and liabilities on a short-term
basis to insure rate flexibility and to meet loan funding and liquidity needs.
The Corporation has federal funds lines with correspondent banks in the amount
of $28,500,000. In addition, the Corporation has the ability to draw on its
line of credit with the Federal Home Loan Bank in excess of $20,000,000 at June
30, 1999.
CAPITAL RESOURCES
The Corporation's equity capital was $36,448,396 at June 30, 1999. The main
source of capital for the Corporation has been the retention of net income.
On January 1, 1999, the Corporation issued a five-for-one (5:1) split to the
shareholders of the Corporation. This split increased the number of shares
outstanding to 3,308,750 from 661,750. The number of shares authorized
increased from 750,000 to 3,750,000 after the split. Additionally, the
shareholders approved an increase in authorized shares to 15,000,000 at the
annual meeting held April 13, 1999. Cash dividends in the amount of $496,312 or
$.15 per share were paid June 30, 1999, compared to $397,050 or $.12 per share
in the same period in 1998.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Total and Tier
1 capital (primarily common stock and retained earnings, less goodwill) to risk
weighted assets, and of Tier 1 capital to average assets. Management believes
that as of June 30, 1999, the Corporation meets all capital adequacy
requirements to which it is subject.
49
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital prompt Corrective
Actual Adequacy Purposes Actions Provisions
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999
Total Capital $40,173,395 18.51% $17,364,940 *8.00% $21,706,175 *10.00%
(to Risk-Weighted Assets)
Tier 1 Capital $37,460,123 17.26% $ 8,682,470 *4.00% $13,023,705 *6.00%
(to Risk-Weighted Assets)
Tier 1 Capital $37,460,123 10.98% $13,644,646 *4.00% $17,055,807 *5.00%
( to Average Assets)
* = greater than
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Corporation and the related changes
between those periods:
<TABLE>
<CAPTION>
For the six Months Ended Difference
1999 1998 Amount %
---------- ----------- -------- ------
<S> <C> <C> <C> <C>
Interest Income $12,358,003 $11,640,112 $717,891 6.17%
Interest Expense 5,286,841 5,248,061 38,780 0.74%
----------- ----------- -------- ------
Net Interest Income 7,071,162 6,392,051 679,111 10.62%
Provision for Loan Losses 382,617 168,981 213,636 126.43%
----------- ----------- -------- ------
Net Interest Income after
Provision for Loan Losses 6,688,545 6,223,070 465,475 7.48%
Other Income 1,536,560 1,333,620 202,940 15.22%
Other Expense 3,858,043 3,760,264 97,779 2.60%
----------- ----------- -------- ------
Income before Provision For
Income Taxes 4,367,062 3,796,426 570,636 15.03%
Provision for Income Taxes 1,487,450 1,324,008 163,442 12.34%
----------- ----------- -------- ------
Net Income $ 2,879,612 $ 2,472,418 407,194 16.47%
=========== =========== ======== ======
Net Income Per share B Basic $ 0.87 $ 0.75 $ 0.12 16.00%
=========== =========== ======== ======
Net Income Per Share-Diluted $ 0.87 $ 0.75 $ 0.12 16.00%
=========== =========== ======== =====
</TABLE>
50
<PAGE>
Net Income Per Share -- Basic is calculated using weighted average number of
shares outstanding for the period. Net Income Per Share -- Diluted is calculated
using the weighted average number of shares outstanding for the period, plus the
net effect of granted stock options.
Annualized return on average equity was 1.69% for the six months ended June 30,
1999, and 1.62% for the six months ended June 30, 1998.
The book value per share increased to $11.02 at June 30, 1999 compared to $10.72
at December 31, 1998. This increase is due to the increased earnings during
this period. Average assets for the six months ended June 30, 1999, were
$341,071,470 compared to $305,185,185 for the same period in 1998; average
equity increased to $36,029,538 for the six months ended June 30, 1999, from
$32,250,489 for the same period in 1998.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Corporation's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid for deposits and borrowed funds. The net interest margin is net
interest income expressed as a percentage of average earning assets.
The annualized net interest margin was 4.51% for the six months ended June 30,
1999, compared to an annualized net interest margin of 4.51% for the six months
ended June 30, 1998. Earnings assets averaged $311,115,046 for the six months
ended June 30, 1999. This represented an increase of $27,158,223 or 9.55%, over
average earning assets of $284,001,500 for the six months ended June 30, 1998.
This increase was from normal growth of the Corporation and not from any special
program or promotion.
The net interest income figures above include income from the Corporation's
securities. The following table shows the interest and fees and corresponding
yields for loans only.
<TABLE>
<CAPTION>
For the Six Months Ended
---------------------------------------
June 30, 1999 June 30, 1998
-------------------- ------------------
<S> <C> <C>
Interest and Fees $ 9,375,510 $ 8,947,518
Average Loans $213,933,314 $196,723,005
Annualized Yield 8.83% 9.16%
</TABLE>
CREDIT LOSS EXPERIENCE
As a natural corollary to the Corporation's lending activities, some loan losses
are to be expected. The risk of loss varies with the type of loan being made
and the creditworthiness of the borrower over the term of the loan. The degree
of perceived risk is taken into account in establishing the structure of, and
interest rates and security for, specific loans and for various types of loans.
The Corporation attempts to minimize its credit risk exposure by use of thorough
loan application and approval procedures.
The Corporation maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans which the Corporation's
management determines require further
51
<PAGE>
monitoring and supervision are segregated and reviewed on a periodic basis.
Significant problem loans are reviewed on a monthly basis by the Corporation's
Board of Directors.
The Corporation charges off that portion of any loan which management considers
to represent a loss. A loan is generally considered by management to represent
a loss in whole or in part when an exposure beyond the collateral value is
apparent, servicing of the unsecured portion has been discontinued or collection
is not anticipated based on the borrower's financial condition and general
economic conditions in the borrowers industry. The principal amount of any loan
which is declared a loss is charged against the Corporation's allowance for loan
losses.
The Corporation's allowance for loan losses is designed to provide for loan
losses which can be reasonably anticipated. The allowance for loan losses is
established through charges to operating expenses in the form of provisions for
loan losses. Actual loan losses or recoveries are charges or credited to the
allowance for loan losses. The amount of the allowance is determined by
management of the Corporation. Among the factors considered in determining the
allowance for loan losses are the current financial condition of the
Corporation's borrowers and the value of security, if any, for their loans.
Estimates of future economic conditions and their impact on various industries
and individual borrowers are also taken into consideration, as are the
Corporation's historical loan loss experience and reports of banking regulatory
authorities. Because these estimates, factors and evaluations are primarily
judgmental, no assurance can be given as to whether or not the Corporation will
sustain loan losses or that subsequent evaluation of the loan portfolio may not
require substantial changes in such allowance.
The following table summarizes the Corporation's allowance for loan loss for the
dates indicated:
<TABLE>
<CAPTION>
Amount of Percent of
June 30, Dec. 31, Increase Increase
1999 1998 (Decrease) (Decrease)
BALANCES: ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Gross loans $226,713,649 $213,972,111 $7,135,155 3.33%
Allowance for loan losses 3,000,0004 2,900,000 100,000 3.45%
Nonaccrual loans 380,551 649,000 (268,449) (41.36%)
Ratios:
Allowance for loan losses to
gross loans 1.32% 1.36%
Net loans charged off to allowance
For loan losses 9.42% 22.28%
</TABLE>
The provision for loan losses was $382,617 for the six months ended June 30,
1999. This is an increase of $213,636 or 126.43 %, over the $168,981 for the
six months ended June 30, 1998. This increase of 126.43% is due in part to the
change in the timing of management's additions to the allowance for loan loss.
Prior to 1999, this provision was made at year-end where now the provision is
adjusted quarterly. In addition to the quarterly addition to the allowance, the
Corporation adds an amount to the allowance in the amount of the net charge offs
each month and loan losses for the six months of 1999 was higher than 1998.
Gross loans outstanding increased 11.98% from June 30 1998 to June 30, 1999.
For the six months ended June 30, 1999, losses charged to the allowance for loan
losses totaled $412,558. This was offset by recoveries of $129,941, with the
net effect being $282,617 in loans charged to the allowance.
52
<PAGE>
Management of the Corporation reviews with the Board of Directors the adequacy
of the allowance for possible loan losses on a quarterly basis. The loan loss
provision is adjusted when specific items reflect a need for such an adjustment.
Management believes that there were no material loan losses during the last
fiscal year that has not been charged off. Management also believes that the
Corporation has adequately reserved for all credits in its portfolio that may
result in a loss to the Corporation.
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, wire
transfer fees, safe deposit box rentals and other revenue not derived from
interest on earning assets. Other operating income for the six months ended
June 30, 1999, increased $202,940 or 15.22% over the six months ended June 30,
1998. In periods of declining net interest margins, the Corporation has sought
to increase the income derived from these sources and will continue to seek
opportunities to do so.
OTHER OPERATING EXPENSE
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Corporation has put
pressure on Management to control overhead expenses. This desire to control
overhead has resulted in only a small increase in other operating expenses in
the six months ended June 30, 1999 compared to the six months ended June 30,
1998 of $97,779 or 2.60%. The Corporation's efficiency ratio at June 30, 1999
was 43.09%.
BALANCE SHEET ANALYSIS
<TABLE>
<CAPTION>
Amount of Percent of
June 30, Dec. 31, Increase Increase
1999 1998 (Decrease) (Decrease)
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 12,977,682 $ 20,797,838 ($7,820,156) (37.60%)
Investment Securities 95,369,868 90,620,004 4,749,864 5.24%
Loans 221,107,266 208,449,416 12,657,850 6.07%
Total Assets 345,245,220 334,231,809 11,013,411 3.30%
Total Deposits 290,472,884 282,242,228 8,230,656 2.92%
============ ============ =========== ======
Total Stockholders Equity 36,448,396 35,455,309 993,087 2.80%
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are made up of cash and federal funds sold. The
decrease of 37.60% is partly because of a continuing effort by the Corporation
to reduce the float on cash letters sent to clearing banks. During this period
federal funds sold were reduced to fund the strong loan demand and the increase
in investment securities.
53
<PAGE>
INVESTMENT SECURITIES
The investment securities are made up of U. S. Treasury Notes, U. S. Agency
debentures, mortgage-backed securities, obligations of states, counties and
municipal governments and Federal Home Loan Bank Stock. The increase of 5.24%
was caused by the need for additional pledging for governmental deposit accounts
and the desire to move surplus funds from the traditionally lower yielding
federal funds sold into higher yielding investments.
LOANS
Loan demand continued to be strong in the service area of the Corporation as
evidenced by the 6.07% increase in loans. Residential housing loans continue to
be in demand along with commercial and industrial loans. No special loan
programs were initiated during this period to add to this growth.
DEPOSITS
The following shows the balance and percentage change in the various deposits:
<TABLE>
<CAPTION>
Amount of Percent of
June 30, Dec. 31, Increase Increase
1999 1998 (Decrease) (Decrease)
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Noninterest-bearing Deposits $ 34,871,346 $ 37,983,554 ($3,112,208) (8.19%)
Interest-Bearing Deposits 82,829,306 68,391,505 14,437,801 21.11%
Savings 19,866,694 19,106,323 760,371 3.98%
Certificates of Deposit 152,905,538 156,760,846 (3,855,308) (2.46%)
------------ ------------ ------------ -----
Total Deposits $290,472,884 $282,242,228 $ 8,230,656 2.92%
============ ============ ============ =====
</TABLE>
The increase in deposits reflected in the above table is solely the result of
normal deposit growth for our service area. The Corporation does not have any
brokered deposits. There were no special deposit programs or incentives in
place during this period.
YEAR 2000
The Corporation has been diligent in preparing for the possible consequences of
the date change on January 1, 2000. The Board has reviewed these anticipated
consequences and has assigned a Y2K Coordinator to coordinate the review of the
Corporation's systems to make a determination of what adjustments will be
required. The Board has approved a budget for the solutions of these potential
problems in the amount of $376,713. At the time of this application $370,000 or
approximately 98% of this budget had been expended, with the remaining amount
budgeted for customer information and education. This is being done in the form
of radio and print advertisements and pamphlets inserted in the mailed out bank
statements. Although some other benefits were obtained from the upgrades to the
computer system, the main force behind the upgrade at this time was the need to
address the Y2K issue.
Although our computer hardware and software were certified Y2K compliant by the
respective vendors, the Corporation engaged the services of an outside
consultant to conduct an on-site test of the computer
54
<PAGE>
systems. Testing of the system was accomplished by forward dating the system
into the year 2000 and running sample transactions on these dates. During this
test, no abnormalities in processing were discovered due to this date change.
The Corporation will continue to monitor shared application software reviews to
keep abreast of the software's compliance with the Y2K event.
The Corporation's personal computers have been evaluated and replaced or updated
as needed. All other identified date sensitive equipment has been replaced or
converted as required to maintain Y2K compliance. The Corporation believes that
it has achieved its goal to have identified and corrected all potential Y2K
problems by June 30, 1999, but will continue to search for potential problem
areas and address them immediately, if any is found.
The Corporation currently requires that Y2K readiness be considered in the
credit decision process on all new loan customers. Loan customers that have
potential exposure would pose a credit risk if they have not addressed the
possibility of business interruptions due to Y2K. The Corporation's loan
personnel have identified the current loan customers with potential exposure and
have surveyed them to check on their progress in resolving any problems. This
process did not identify any problem area that might be of concern for the
Corporation.
Several problems could result for the Corporation as a result of Y2K failures.
Loss of electrical power, loss of communications and panic among the general
public would require special operating procedures. The Corporation has
formulated detailed plans to continue business in the event that any of these
situations occur. Special procedures are in place to handle customer requests
manually in case use of the computer is lost. Plans for clearing checks and
other cash items also have been made. Additional cash will be added to the
vault to handle the anticipated cash withdrawals in the fourth quarter of 1999.
CITIZENS HOLDING COMPANY QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
There have been no material change in the Corporation's market risk since the
end of the last fiscal year end of December 31, 1998.
OTHER INFORMATION
LEGAL PROCEEDINGS - None.
CHANGES IN SECURITIES - None.
DEFAULTS UPON SENIOR SECURITIES - None.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - See discussion of items
presented to and approved by the shareholders at the April 13, 1999
Annual Meeting, found under Item 11 herein.
OTHER INFORMATION - None.
55
<PAGE>
ITEM 3. PROPERTIES
The Corporation through the Bank, currently operates from its main office in
downtown Philadelphia, from 12 additional branches in Neshoba, Newton, Leake,
Scott, Attala, and Kemper counties and from its loan production office in
Lauderdale County, all located in Mississippi. Information about these branches
is set forth in the table below:
<TABLE>
<CAPTION>
BANKING
LOCATION/ FUNCTIONS
NAME OF OFFICE TELEPHONE NUMBER OFFERED
<S> <C> <C>
Main Office 521 Main Street Loans
Philadelphia, Mississippi Trust
(601) 656-4692
Eastside Branch 585 East Main Street Drive-up
Philadelphia, Mississippi
(601) 656-4976
Westside Branch 912 West Beacon Street Loans
Philadelphia, Mississippi 24 Hour Teller
(601) 656-4978
Northside Branch 720 Pecan Avenue 24 Hour Teller
Philadelphia, Mississippi
(601) 656-4977
Pearl River Branch Choctaw Shopping Center Drive-up
Philadelphia, Mississippi
(601) 656-4971
Union Branch Corner of Horne & Bank Loans
Philadelphia, Mississippi
(601) 774-9231
Carthage Main Office 219 West Main Street Loans
Carthage, Mississippi
(601) 267-4525
Crossroads Branch Intersection of Hwys 35 & 16 Drive-up
Carthage, Mississippi
(601) 267-4525
Madden Branch Highway 488 Deposits
Madden, Mississippi
(601) 267-7366
Sebastopol Branch Main Street Loans
Sebastopol, Mississippi
(601) 625-7447
DeKalb Branch Corner of Main & Bell Loans
DeKalb, Mississippi
(601) 743-2115
Kosciusko Branch 775 North Jackson Avenue Loans
Kosciusko, Mississippi 24-hour Teller
(601) 289-4356
Scooba Branch 1048 Johnston Street Loans
Scooba, Mississippi
(601) 476-8431
Meridian Office 1821 Hwy 39 North Loan Production
Meridian, Mississippi
(601) 693-8367
</TABLE>
56
<PAGE>
The Bank owns its main office and all its branch offices, except for the
Pearl River Branch, which is leased from the Mississippi Band of Choctaw Indians
and its Loan Production office in Meridian. The main office facility, originally
occupied in 1966, is used solely by the Corporation and the Bank. This facility
contains approximately 20,000 square feet and houses the executive offices and
all operations functions. The other branches range in size from nearly 4,000
square feet to 619 square feet.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) PRINCIPAL HOLDERS OF COMMON STOCK
At April 13, 1999, the Corporation had three shareholders that were the
beneficial owners of more than 5% of the common stock of the Corporation (the
"Common Stock") and are listed below:
(i) The Molpus Company
Philadelphia, Mississippi 39350
252,525 shares or 7.63%
<TABLE>
<CAPTION>
NAME/ADDRESS AMOUNT AND PERCENT
OF BENEFICIAL NATURE OF OF
Owner BENEFICIAL OWNERSHIP CLASS
----------------------------------- -------------------- -------
<S> <C> <C>
Richard H. Molpus, Jr. 63,131.25 25%
502 Valley View Drive
Philadelphia, MS 39350
Melanie Molpus Meyers 63,131.25 25%
same address as above
Nancy Molpus Pace 63,131.25 25%
same address as above
Dorothy Molpus Howorth 63,131.25 25%
same address as above
</TABLE>
(ii) Herbert A. King
Starkville, Mississippi
239,015 shares or 7.22%
(iii) George R. Mars
Philadelphia, Mississippi
194,210 shares or 5.8%
57
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of April 13, 1999 the number and percentage of
Common Stock beneficially owned by each Director of the Corporation and the Bank
and by all the Corporation's and the Bank's Directors and Executive Officer as a
group at April 13, 1999. Unless indicated otherwise in a footnote, the
Directors and Executive Officer possess sole voting and investment power with
respect to all shares shown.
<TABLE>
<CAPTION>
NAME OF COMMON STOCK PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- --------------------------------------- ------------------ -------------
<S> <C> <C>
M. G. Bond 33,085 1.00%
Karl Brantley 10,160 .31
W. W. Dungan 140,140(1) 4.24
Don Fulton 5,250 .16
Andy King 50,355(2) 1.52
Herbert A. King 239,015(3) 7.22
George R. Mars 194,210(4) 5.87
William M. Mars 12,335(5) .37
David P. Webb 14,075(7) .43
J. Steve Webb 90,305(6) 2.73
------- -----
All Directors and Executive Officers
as a group (10 persons) 788,830(8) 23.84
</TABLE>
- --------------
(1) Includes 94,500 shares owned by Mr. Dungan's spouse.
(2) Includes 890 shares owned by Mr. King's spouse and 1,460 shares owned by
his children.
(3) Includes 7,275 shares owned jointly by Mr. King's spouse, 42,920 owned by
his children; also includes 147,260 shares held in trust for his children.
(4) Includes 20,000 shares owned by Mr. Mars' spouse and 20,000 owned by his
child; also includes 45,795 shares owned by Mr. Mars' mother that he has
authority to vote.
(5) Includes 3,285 shares owned by Mr. Mars' spouse.
(6) Includes 170 shares owned by Mr. Webb's spouse and 90,000 shares held in a
limited partnership of which Mr. Webb is the managing general partner and
has the power to vote the stock in such capacity.
(7) David P. Webb is the son of J. Steve Webb.
(8) Includes 7,275 shares owned jointly with or of record by others with
Directors and Executive Officers; also includes 237,260 in various entities
controlled by Directors and 45,745 controlled by Power of Attorney.
58
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Directors and
executive officers of the Corporation and Bank. Unless otherwise indicated in a
footnote, each person has held the same or a comparable position with his
present employer for the last five years. As of April 13, 1999, the Directors
serve on a staggered Board, of staggered three year terms. The Officers of both
the Corporation and the Bank are all elected for terms of one year. The Board
has, by resolution, designated Steve Webb, Chairman, President and Chief
Executive Officer as the sole executive officer of the Corporation and the Bank.
<TABLE>
<CAPTION>
DIRECTOR OR
POSITIONS CURRENTLY EXECUTIVE OTHER
HELD WITH THE OFFICER PRINCIPAL
NAME AND AGE CORPORATION AND BANK SINCE OCCUPATION
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
M. G. Bond, 66 Director of the Corporation 1986 Retired, Mississippi
State Senator
Karl Brantley, 62 Director of the Corporation 1992 Plant Manager,
and the Bank U.S. Electrical
Motors,
Philadelphia
W. W. Dungan, 65 Director of the Corporation 1981(1) Partner,
and the Bank McDaniel
Timber Co.
Don Fulton, 52 Director of the Corporation 1994 President and
and the Bank General
Manager,
Nemanco, Inc.
Andy King, 44 Director of the Corporation 1997 Proprietor,
and the Bank Philadelphia
Motor Co.
Herbert A. King, 46 Director of the Corporation 1997 Engineer, King
and the Bank Engineering,
Inc.
George R. Mars, 59 Director of the Corporation 1977(1) Retired
and the Bank Proprietor,
Mars
Department
Store
William M. Mars, 61 Director of the Corporation 1977(1) Attorney, Mars,
and the Bank Mars and Mars
Attorneys
David P. Webb, 39 Director of the Corporation 1998 Attorney, Phelps
and the Bank Dunbar, L.L.P.
Joe Steve Webb, 67 Director, Chairman, 1970(1) Chairman, President
President and CEO of and CEO of
Corporation and the Bank Corporation and the
Bank
</TABLE>
(1) Year that Director was elected to the Board of The Citizens Bank of
Philadelphia. These Directors were elected to the Board of Citizens
Holding Company at the time it was formed in 1982.
59
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid for the
fiscal years indicated to the Corporation's and Bank's Chief Executive Officer
based on salary and bonus earned during fiscal 1998. Officers of the
Corporation receive their salary from the Bank.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND PRINCIPAL ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Steve Webb, Chairman, 1998 $130,000 $30,000 $22,741 (1)
President and CEO 1997 $125,000 $25,000 (2)
of the Corporation 1996 $115,062 $20,000 (2)
and the Bank
</TABLE>
(1) Represents matching contributions of $10,734 under The Citizens Bank
Profit Sharing and Savings Plan (the 401-k plan), Directors fees in the
amount of $10,925, and includes the value of the use of a company
automobile in the amount of $1,082.
(2) Information for previous years not required to be disclosed.
EMPLOYEES' LONG-TERM INCENTIVE PLAN
On April 13, 1999, the Corporation adopted the Citizens Holding Company
Employees' Long-Term Incentive Plan (the "Employees' Plan"). The Employees Plan
is intended to provide for the grant of shares of Common Stock in the form of
stock options and restricted stock, in accordance with usual and customary terms
and conditions. To that end, seven percent (7%) of the issued and outstanding
Common Stock, as the same may be determined from time to time, is available for
grant under the Employees Plan, which shares are authorized but unissued
shares, treasury shares or shares acquired on the open market. The only options
granted during this fiscal year were to Steve Webb. See table below.
The Board of Directors will administer the Employees' Plan.
60
<PAGE>
OPTION GRANTS UNDER EMPLOYEE PLAN DURING 1999 FISCAL YEAR
The following table presents information on the stock option grants that were
made during fiscal year 1999 to the Executive Officers of the Corporation,
pursuant to the Employee Plan. (Numbers of options and per share exercise
prices have been adjusted to reflect the five for one (5:1) split that occurred
January 1, 1999).
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF ANNUAL RATES OF STOCK PRICE
OPTIONS OPTIONS EXERCISE EXPIRATION APPRECIATION FOR OPTION TERM (1)
GRANTED GRANTED PRICE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Steve Webb-Initial Grant 2,800 13.12% 10.72 01/01/09 9,233.04 20,579.30
Annual Grant 1,000 4.52% 11.02 04/14/09 3,134.11 6,949.09
</TABLE>
(1) The amounts in the table are not intended to forecast possible future
appreciation, if any, of the Corporation's Common Stock. Actual gains, if
any, are dependent upon the future market price of the Corporation's Common
Stock and there can be no assurance that the amounts reflected in this
table will be achieved. Furthermore, because there is no established
market for the shares of Common Stock of the Corporation, there is no
accurate market value to assign as of the date of grant.
AGGREGATED OPTION EXERCISES TO DATE
At the time of this application, no options have been exercised under the
Employee Plan because no options are currently exercisable.
61
<PAGE>
DIRECTOR COMPENSATION
During 1998, all Directors of the Corporation received $725 per month regardless
of attendance at meetings or committee participation. In addition to this, all
Directors receive $125 for attending the monthly meetings. Those Directors that
serve on the Loan Committee receive an additional $50 per month.
Eight of the current Directors and one retired Director participate in a
Deferred Compensation Plan that was established in June 1986. The Plan provides
that a Director may defer a portion of his monthly fees for ten years in return
for a benefit to be paid when they attain the retirement age of 70. After the
ten year deferral period, the Director resumes receiving his full fee. The
deferral amount is increased each year by a percentage of the Moody's Average
Corporate Bond Rate for the month of October each year. Four of the Directors
(S. Webb, Dungan, G. Mars and Bond) receive a rate of 130% of the Moody's rate
and four (A. King, H. King, Brantley and Fulton) receive a rate of 100% of the
Moody's rate. Due to his age at the time of acceptance into the Plan, one
Director's benefits are defined and are not subject to the increases in the
Moody's rate. The Moody's Average Corporate Bond Rate for October 1998 was
6.77%. To fund the Plan, the Corporation purchased individual life insurance
policies for each of the participants.
PENSION PLAN
The Corporation maintains a 401-k plan, The Citizens Bank Profit Sharing and
Savings Plan and Trust (the "401-k plan"). All Employees who have attained the
age of 21 and completed one year of service are eligible to participate in the
401-k plan. The Corporation matches employee deferrals up to 6% of total
compensation (including any overtime and bonuses) and a discretionary
contribution to each participant is made regardless of deferral. This
contribution for 1998 was 2.7% of total compensation. The 401-k plan recognizes
a participant to be fully vested after five years in which the employee has at
least 1,000 hours of service.
DIRECTORS' STOCK COMPENSATION PLAN
On April 13, 1999, the Company adopted the Citizens Holding Company Directors'
Stock Compensation Plan (the "Directors' Plan"), to be effective as of January
1, 1999, providing for the grant of shares of $0.20 par value voting common
stock issued by this Company (the "Common Stock"), subject to usual and
customary terms and conditions. All non-employee Directors are eligible to
receive options under the Directors' Plan. To provide for utilization of the
Directors' Plan, 70,000 shares of Common Stock, (determined immediately after
the five-for-one (5:1) stock
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split approved by the Board of Directors effective as of January 1, 1999) were
made available for grant under the Directors' Plan. Such shares are authorized
but unissued shares, treasury shares or shares acquired on the open market, as
the same may be adjusted for stock splits, dividends or other adjustments in the
capitalization of this Company.
The Board of Directors will administer the Directors' Plan.
OPTION GRANTS UNDER THE DIRECTORS' PLAN DURING FISCAL YEAR 1999
Pursuant to the Directors' Plan, effective January 1, 1999, the Non-Employee
Directors were compensated with the grant of certain options. For the years of
service prior to January 1, 1999, options were granted at the rate of 100 per
year of service, otherwise the grants were all on the same terms and conditions.
On April 14, 1999, each Director was granted 1,000 options for the annual option
grant provided for in the Directors' Plan. The Directors' Plan further provides
that the options are first exercisable six months and one day from the date of
grant and must be exercised no later than ten years from the date of grant.
However, the options must be exercised within one year from the date of
cessation of service as a director. If a Director ceases to serve as a member
of the Board of Directors on account of Cause, Options granted hereunder which
are unexercised as of the occurrence of such Cause shall be forfeited.
AGGREGATED OPTION EXERCISES TO DATE
At the time of this application, no options have been exercised under the
Directors' Plan because no options are currently exercisable. The Initial Grant
Options cannot be exercised earlier than July 2, 1999 and the Annual Grant
Options cannot be exercised until October 15, 1999.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation has had, and expects to have in the future, banking transactions
in the ordinary course of its business with Directors, officers and their
associates. These transactions have been on substantially the same terms,
including interest rates, collateral, and repayment terms on extensions of
credit, as those prevailing at the same time for comparable transactions with
others and did not involve more than the normal risk of collectibility or
present other unfavorable features.
In the past several years, the Corporation has employed the legal services of
Phelps Dunbar, L.L.P., of which Mr. David Webb, a current Director of the
Corporation and Bank, is a partner. Phelps Dunbar has represented the
Corporation in various legal areas, including tax audits, pension plan
administration, civil lawsuit defense, and general corporate law. The
Corporation expects that the firm will continue to represent the Corporation in
similar matters in the future. In the opinion of management, the work performed
by Phelps Dunbar, L.L.P. is on terms comparable to the terms that would have
been reached with an unaffiliated party.
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ITEM 8. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine litigation
incidental to their business, to which the Corporation or the Bank is a party or
which any of its property is subject.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
MARKET PRICE
The Common Stock of the Corporation is fairly closely held and is not traded on
a regular basis, therefore, there is no established market for the shares of
common stock of the Corporation. According to the best knowledge of the
management of the Corporation, there have been only 30 sales transactions in
Common Stock since November 1996, at prices ranging from $7 to $12 per share, as
adjusted for the 5:1 stock split effective January 1, 1999. Management has not
verified the accuracy of the prices that have been reported. Because of the
lack of active trading of the Common Stock, these prices do not necessarily
reflect the prices at which the Common Stock would trade in an active market.
The Shares of Common Stock are currently held of record by approximately 485
shareholders.
DIVIDENDS
The Corporation paid cash dividends totaling $.17 per share in 1997 and $.24 per
share in 1998. The Corporation declares dividends on a semi-annual basis in
June and December with payment following at the end of that month.
Funds for the payment by the Corporation of cash dividends are obtained from
dividends received by the Corporation from the Bank. Accordingly, the
declaration and payment of dividends by the Corporation depend upon the Bank's
earnings and financial condition, general economic conditions, compliance with
regulatory requirements, and other factors.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None.
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ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The following summary of the terms of the common stock of the Corporation does
not purport to be complete and is qualified in its entirety by reference to the
Corporation's Articles of Incorporation and Bylaws, which are filed as Exhibits
to this Form 10.
AUTHORIZED BUT UNISSUED SHARES
As a result of a 5:1 stock split approved on October 27, 1998 and effective
January 1, 1999, the Corporation's Amended Articles of Incorporation authorized
the issuance of 3,750,000 shares of Common Stock, $.20 par value, of which
3,308,750 shares were issued and outstanding at April 13, 1999. However, at the
April 13, 1999 Annual Shareholders Meeting, the Shareholders voted to increase
the number of authorized shares to 15,000,000. Therefore, as of April 14, 1999,
15,000,000 shares were authorized and 3,308,750 were issued and outstanding.
The remaining authorized but unissued Shares of Common Stock may be issued upon
authorization of the Board of Directors without prior shareholder approval. If
additional shares of the Corporation are issued, the shareholders are not
entitled to subscribe for such additional shares in proportion to the number of
Shares of Common Stock owned by them prior to such issuance. Accordingly, the
shareholders of the Corporation could have their percentage ownership interest
in the Corporation diluted if these shares are issued in the future.
COMMON STOCK
VOTING RIGHTS
Except for (a) supermajority votes required to approve certain business
combinations and certain other specific matters to be discussed below and (b)
certain corporate actions that must be approved by a majority of the outstanding
votes of the relevant voting group under the Mississippi Business Corporation
Act, the affirmative vote of the holders of the majority of the votes cast at a
meeting at which a quorum is present is sufficient to approve matters submitted
for shareholder approval, except that Directors are elected by cumulative
voting.
DIVIDEND RIGHTS
The holders of shares of Common Stock are entitled to receive dividends as and
when declared by the Board of Directors from funds legally available for their
payment. A dividend may be paid by the Corporation only if, after paying such
dividend, (a) the Corporation would be able to pay its debts as they become due
in the usual course of business, and (b) the Corporation's total assets would
not be less than the sum of its total liabilities. Furthermore, because funds
for the payment of the dividends by the Corporation must come primarily from the
earnings of the Bank, restrictions on the amount of dividends that the Bank may
pay also restrict the amount of funds available for payment of dividends by the
Corporation. See Item 1. BUSINESS -- "Supervision and Regulation," and Item 9,
MARKET PRICE OF AND
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DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS --
"Dividends."
LIQUIDATION
Upon any liquidation, dissolution, or winding up of the affairs of the
Corporation, the holders of Common Stock are entitled to share ratably in the
assets legally available for distribution to the Common Shareholders.
OTHER MATTERS
Holders of the Common Stock do not have preemptive rights with respect to the
issuance of any securities of the Corporation. There are no sinking fund
provisions applicable to the Common Stock. All outstanding Shares of Common
Stock are, when issued, fully paid and nonassessable. Such shares are not
redeemable at the option of the Corporation or holders thereof.
The Corporation presently serves as the registrar and transfer agent of the
Corporation's Common Stock.
STAGGERED BOARD OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
The Corporation's Bylaws and Articles of Incorporation, both as amended, provide
for a staggered Board of Directors. Under this staggered Board of Directors,
the Board of Directors are divided into three classes of directors serving
staggered three-year terms.
A vacancy on the Board of Directors, including a vacancy created by an increase
in the number of directors, can be filled only at the annual shareholder meeting
succeeding the creation of the vacancy. Any director elected to the Board of
Directors to replace another director will hold office for the unexpired term of
the director he replaced. The holders of 75% of the voting power of the
Corporation's voting stock have the power to remove directors, but only the
shareholders voting at the next annual meeting of shareholders have the power to
fill the vacancies created by such removal.
Pursuant to shareholder action at the Annual Shareholder meeting held on April
13, 1999, any future amendment, repeal, or attempted adoption of any provision
inconsistent with the above provisions shall require the affirmative vote of the
holders of at least 75% of the voting power of the Corporation's voting stock.
ADOPTION OF THE MISSISSIPPI CONTROLLED SHARE ACT
The Corporation has elected, effective May 1, 1999, to be governed by the
Mississippi Controlled Share Act. In 1990, Mississippi adopted the Mississippi
Controlled Share Act in
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response to perceived abuses related to tender offers and other transactions
that result in a change of control of a corporation. The effect of adopting the
Mississippi Controlled Share Act is to deprive a person acquiring "controlled
shares" in an issuing public corporation from voting such shares unless approved
by the holders of a majority of the shares that are not "interested shares."
Basically, the term "controlled shares" is defined as the shares that when added
to the shares already held, either alone or as part of a group, would enable the
acquiror to have either (a) one-fifth or more but less than one-third of the
voting power; (b) one-third or more but less than a majority voting power; or
(c) a majority or more of all voting power. In the event of a controlled share
acquisition (the direct or indirect acquisition of ownership of voting power
over controlled shares), the acquiring person is required to file an acquiring
person's statement with the company setting forth the number of shares acquired
and certain other specified information. The company would then be required to
call a special shareholders meeting for the purpose of considering the voting
rights to be afforded the shares acquired or to be acquired in the controlled
shares acquisition. At the meeting, the voting rights to be afforded the
controlled shares are to be voted on by the voting shares other than the
"interested shares," defined to include the shares owned by the acquiring person
or group, the officers of the company, and any director of the corporation who
is an employee of the company. Unless approved by the vote of a majority of the
shares other than the interested shares, the controlled shares are afforded no
voting rights.
Pursuant to shareholder action at the Annual Shareholder meeting held on April
13, 1999, any future amendment, repeal, or attempted adoption of any provision
inconsistent with the Mississippi Controlled Share Act shall require the
affirmative vote of the holders of at least 75% of the voting power of the
Corporation's voting stock.
SHAREHOLDERS RIGHTS AGREEMENT
On April 13, 1999, the Shareholders of the Corporation adopted a Shareholder
Rights Agreement. The Shareholder Rights Agreement provides for the issuance of
rights to purchase additional shares of the Common Stock ("Rights") and contains
provisions that are designed to protect shareholders in the event of an
unsolicited attempt to acquire the Corporation. The implementation of the
Shareholder Rights Agreement increases the Board of Directors' ability to
represent effectively the interests of shareholders of the Corporation in the
event of an unsolicited acquisition proposal by enabling it, among other things,
to assure the various constituencies of the Corporation (i.e., its creditors,
customers, employees, etc.) that the Corporation's stability can be maintained
in a takeover environment. In addition, the Shareholder Rights Agreement will
give the Board of Directors more time and the opportunity to evaluate an offer
and exercise its good faith business judgment to take appropriate steps to
protect and advance shareholder interests by negotiating with the bidder,
auctioning the Corporation, implementing a recapitalization or restructuring
design as an alternative to the offer, or taking other action.
The Rights are not intended to prevent a takeover of the Corporation and will
not preclude a successful cash tender offer for all of the outstanding shares of
Common Stock coupled with a requirement for the tender of Rights formerly
attached to such shares. However, the Shareholder
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Rights Agreement should discourage most efforts to acquire the Corporation
(short of such an all inclusive tender offer) in a manner or on terms not
approved by the Board of Directors. The Rights may be redeemed by the
Corporation at a redemption price of $.001 per Right, and thus they should not
interfere with any merger or other business combination approved by the Board of
Directors nor affect any prospective offeror willing to negotiate in good faith
with the Board of Directors.
Distribution of the Rights will not in any way alter the financial strength of
the Corporation or interfere with its business plans. The distribution of the
Rights is not dilutive, does not effect reported earnings per share, is not
taxable either to the recipient or to the Corporation, and will not change the
way in which shareholders can currently trade shares of the Corporation's common
stock. However, under certain circumstances, more specifically described below,
exercise of the Rights may be dilutive or affect reported earnings per share.
Set forth below is a summary of specific provisions of the Shareholders Rights
Agreement.
DIVIDEND DECLARATION; PURCHASE PRICE. The Board of Directors of the Corporation
will declare a dividend distribution of one purchase right (a "Right") for each
outstanding share of Common Stock, $.20 par value (the "Common Stock"), of the
Corporation. The distribution will be payable on a future record date (the
"Rights Record Date") to the shareholders of record on that date and a Right
will be included with each new share of Common Stock issued after that date.
Each Right will entitle the registered holder to purchase from the Corporation
one share of Common Stock of the Corporation at a price of $150.00 per share
(the "Purchase Price"), subject to adjustment in specified circumstances.
COMMON STOCK CERTIFICATES EVIDENCING RIGHTS. Initially, the Rights are not
exercisable, and only become exercisable upon the occurrence of a Distribution
Date, as described below. Certificates for the Rights will not be sent to
shareholders, and the Rights will attach to and trade only together with the
Common Stock until the Distribution Date. Accordingly, Common Stock
certificates outstanding on the Rights Record Date evidence the Rights related
thereto, and Common Stock certificates issued after the Rights Record Date will
contain a notation incorporating the Rights Agreement by reference.
DISTRIBUTION DATE. The Rights will separate from the Common Stock ("Distribution
Date") upon the earlier of (i) ten business days following a public announcement
(the "Share Acquisition Date") that a person or group of affiliated or
associated persons (an "Acquiring Person"), other than the Corporation or
certain other exempt persons, has acquired or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding Common Stock of the
Corporation, or (ii) ten business days following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer by any
person or group of affiliated or associated persons, (after the acquisition of
20% or more that person also being an
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"Acquiring Person") other than the Corporation or certain other exempt persons,
the consummation of which would result in the beneficial ownership by a person
or group of affiliated or associated persons of 20% or more of such outstanding
Common Stock.
ISSUANCE OF RIGHT CERTIFICATES; EXPIRATION OF RIGHTS. If the Distribution Date
occurs, then as soon as practical following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights from and after the Distribution Date. The Rights will expire ten (10)
years from the date they are declared (the "Expiration Date"), unless earlier
redeemed by the Corporation as described below.
RIGHT TO BUY CORPORATION COMMON STOCK AT HALF PRICE. Unless the Rights are
earlier redeemed, in the event that a person (other than an exempt person)
becomes the beneficial owner of 20% or more of the Corporation's Common Stock
then outstanding, then proper provision will be made so that each holder of a
Right (other than Rights that were beneficially owned by the Acquiring Person,
which will thereafter be void) will thereafter have the right to receive, upon
exercise, Common Stock having a value equal to two times the Purchase Price. In
other words, a shareholder who owned one right to buy a share of stock at $150
per share would have the right to buy $300 worth of stock (valued at the public
market price at that time) for a purchase of $150.
RIGHT TO BUY ACQUIRING CORPORATION STOCK AT HALF PRICE. Similarly, unless the
Rights are earlier redeemed, in the event that, after there is an Acquiring
Person, (i) the Corporation were to be acquired in a merger or other business
combination transaction in which the Corporation was not the surviving
corporation or in which the Corporation's outstanding Common Stock were changed
or exchanged for stock or assets of another person or (ii) fifty percent (50%)
or more of the Corporation's consolidated assets or earning power were to be
sold (other than transactions in the ordinary course of business), proper
provision will be made so that each holder of a Right (other than Rights that
were beneficially owned by the Acquiring Person, which will thereafter be void)
will thereafter have the right to receive, upon exercise, shares of common stock
of the acquiring company having a value equal to two times the Purchase Price.
REDEMPTION. At any time on or prior to the close of business on the earlier of
(i) the Expiration Date, or (ii) the occurrence of an event whereby the Rights
are exercisable for Common Stock of the Corporation (or of the Acquiring
Corporation, as the case may be), the Corporation may redeem the Rights in
whole, but not in part, at a price of $.001 per Right ("Redemption Price").
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Immediately upon the action of the Board of Directors authorizing redemption of
the rights, the right to exercise the Rights will terminate and the only right
of the holders of Rights will be to receive the Redemption Price.
NO SHAREHOLDERS' RIGHTS PRIOR TO EXERCISE. Until a Right is exercised, the
holder thereof, as such, will have no rights as a shareholder of the Corporation
(other than rights resulting from such holder's ownership of Common Stock),
including, without limitation, the right to vote or to receive dividends.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Article VI of the Corporation's Bylaws filed as an exhibit
to this Form 10, which contains certain indemnification provisions pursuant to
authority contained in the Mississippi Business Corporation Act.
In addition, the Corporation also maintains insurance coverage for the benefit
of Directors and officers with respect to many types of claims that may be made
against them, some of which claims are in addition to those described in Article
VI of the Bylaws.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Information for years
ended December 31, 1996, 1997 and 1998, identified in Item 15(a), and attached
immediately after the Exhibit List, are hereby filed as part of this Form 10,
and consist of the following:
(i) Independent Auditor's Report
(ii) Consolidated Statements of Financial Condition
(iii) Consolidated Statements of Income
(iv) Consolidated Statements of Comprehensive Income
(v) Consolidated Statements of Changes in Shareholders' Equity
(vi) Consolidated Statements of Cash Flows
(vii) Notes to Consolidated Financial Statements
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The Interim Unaudited Financial Statements and Supplementary Information for the
second-quarter ended June 30, 1999, included under 2B of Item 2 hereof are also
filed as part of this Form 10 and consist of the following:
(i) Consolidated Financial Statements
(ii) Unaudited Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
(iii) Unaudited Consolidated Statements of Income
Six months ended June 30, 1999 and 1998
(iv) Unaudited Consolidated Statements of Comprehensive Income
Six months ended June 30, 1999 and 1998
(v) Unaudited Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998
(vi) Notes to Unaudited Consolidated Financial Statements
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective December 31, 1998, A. T. Williams, CPA ("Williams"), the Corporation's
prior accountant, declined to stand as the Corporation's accountant because the
Corporation was seeking to register its Common Stock under Section 12(g) of the
Securities Exchange Act of 1934, as amended. A copy of Williams' letter is
attached to this filing as Exhibit 16. Therefore, the Board of Directors, after
reviewing proposals from several accounting firms, on January 15, 1999, retained
The Horne Group as the new accountant for the Corporation. The Horne Group was
responsible for preparing the audited financial statements of the Corporation
for the year ending December 31, 1998.
The Horne Group's reports on the financial statement of the Corporation for the
year ending December 31, 1998 did not contain any adverse opinions or
disclaimers of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. Moreover, there were no disagreements on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope of procedure between The Horne Group and the
Corporation during the 1998 calendar year, or during any subsequent interim
period during 1999.
Williams' reports on the financial statements of the Corporation for the years
ending December 31, 1996 and December 31, 1997 did not contain any adverse
opinions or disclaimers of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. Moreover, there were no
disagreements on any matter of accounting principles or
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practices, financial statement disclosure, or auditing scope of procedure
between Williams and the Corporation during the 1996 and 1997 calendar years, or
during any subsequent interim period during 1998.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements filed as part of this Form 10
The following are included in Item 13 of this Form 10, and are attached
immediately after the Exhibit List:
Consolidated Financial Statements and Supplementary Information for years ended
December 31, 1996, 1997 and 1998, which include the following:
(i) Independent Auditor's Report
(ii) Consolidated Statements of Financial Condition
(iii) Consolidated Statements of Income
(iv) Consolidated Statements of Comprehensive Income
(v) Consolidated Statements of Changes in Shareholders' Equity
(vi) Consolidated Statements of Cash Flows
(vii) Notes to Consolidated Financial Statements
Included under 2B of Item 2 are Interim Unaudited Consolidated Financial
Statements and Supplementary Information for the second-quarter ended June 30,
1999, which include the following:
(i) Unaudited Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
(ii) Unaudited Consolidated Statements of Income
Six months ended June 30, 1999 and 1998
(iii) Unaudited Consolidated Statements of Comprehensive Income
Six months ended June 30, 1999 and 1998
(iv) Unaudited Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998
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(v) Notes to Unaudited Consolidated Financial Statements
(b) Exhibits filed as part of this Form 10
The following Exhibits are hereby filed as part of this Form 10:
*3(i) Amended Articles of Incorporation of the Corporation
*3(ii) Amended and Restated Bylaws of the Corporation
*4 Rights Agreement between Citizens Holding Company
and The Citizens Bank of Philadelphia, Mississippi
*10 Directors' Deferred Compensation Plan - Form of
Agreement
*10(a) Citizens Holding Company 1999 Directors' Stock
Compensation Plan
*10(b) Citizens Holding Company 1999 Employees' Long-Term
Incentive Plan
16 CPA Letter
*21 Subsidiaries of Registrant
27 Financial Data Schedule
(c) Financial Statement Schedules
None
* These Exhibits were previously filed with Form 10. Only Exhibit 16 and an
updated Financial Data Schedule are attached hereto.
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Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated this the 9th day of August, 1999.
CITIZENS HOLDING COMPANY
By: /S/STEVE WEBB
-----------------------------------------
STEVE WEBB, CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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EXHIBIT INDEX
EXHIBIT NUMBER: DESCRIPTION:
- -------------- -----------
*3(i) Amended Articles of Incorporation of the Corporation
*3(ii) Amended and Restated Bylaws of the Corporation
*4. Rights Agreement between Citizens Holding Company
and The Citizens Bank of Philadelphia, Mississippi
*10. Directors' Deferred Compensation Plan - Form of
Agreement
*10(a) Citizens Holding Company 1999 Directors' Stock
Compensation Plan
*10(b) Citizens Holding Company 1999 Employees' Long-Term
Incentive Plan
16. CPA Letter
*21 Subsidiaries of Registrant
27 Financial Data Schedule
* These Exhibits were previously filed with Form 10. Only Exhibit 16 and an
updated Financial Data Schedule are attached hereto.
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A. T. WILLIAMS
Certified Public Accountant
322 Byrd Avenue, P. O. Box 606
Philadelphia, Mississippi 39350
______
601-656-2742
FAX 656-2760
Member Member
American Institute of Mississippi Society of
Certified Public Accountants Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Citizens Holding Company
Philadelphia, Mississippi
I have audited the accompanying consolidated statements of financial condition
of Citizens Holding Company and Subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Citizens Holding
Company and Subsidiary as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ A. T. Williams
July 2, 1998
<PAGE>
CITIZENS HOLDING COMPANY
AND SUBSIDIARY
Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
Independent Auditor's Report 1
- --------------------------------------------------------------------------------
Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Comprehensive Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 23
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
HORNE Members of the American Institute of Certified Public Accountants
C*P*A Mississippi Society of Certified Public Accountants
GROUP Tennessee Society of Certified Public Accountants
A Professional Association Texas Society of Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Citizens Holding Company
Philadelphia, Mississippi
We have audited the accompanying consolidated balance sheets of Citizens Holding
Company and Subsidiary as of December 31, 1998, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated balance sheet of
Citizens Holding Company and Subsidiary at December 31, 1997 and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the years ended December 31, 1997 and 1996 were audited by
other auditors whose report, dated July 2, 1998, expressed an unqualified
opinion on those financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
missstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by a
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens
Holding Company and Subsidiary as of December 31, 1998 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Horne CPA Group
February 26, 1999
<PAGE>
<TABLE>
<CAPTION>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,234,594 $ 10,025,883
Interest bearing deposits with other banks 1,063,244 147,441
Federal funds sold 4,500,000 5,500,000
Securities Available for Sale, at Fair Value (amortized cost
of $90,079,947 in 1998, and $66,328,556 in 1997) 91,538,504 67,292,272
Loans, net of allowance for loan losses of
$2,900,000 in 1998 and $2,700,000 in1997 208,449,416 191,604,716
Bank premises, furniture, fixtures and equipment, net 4,433,652 4,250,819
Real estate acquired by foreclosure 57,094 9,920
Accrued interest receivable 3,697,109 3,153,868
Cash value of life insurance 2,516,361 2,217,613
Goodwill (net) 716,862 783,870
Other assets 2,024,973 1,647,599
----------------------------------
Total Assets $ 334,231,809 $ 286,634,001
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 37,983,554 $ 35,526,426
Interest bearing NOW and money market accounts 68,391,505 56,904,291
Interest bearing time deposits 156,760,846 139,364,724
Interest bearing savings deposits 19,106,323 17,188,104
----------------------------------
Total deposits 282,242,228 248,983,545
Federal funds purchased 10,000,000 -
Accrued interest payable 1,274,059 1,316,057
Income taxes payable - current - 34,029
Directors deferred compensation payable 718,868 630,311
Treasury tax & loan 700,000 700,000
ABE loans 2,416,327 2,488,319
Other Liabilities 225,389 155,507
----------------------------------
Total Liabilities 297,576,871 254,307,768
----------------------------------
Minority interest 1,199,628 1,105,752
Stockholders' Equity
Common stock, $1 par value, authorized
750,000 shares; 670,750 shares issued 670,750 670,750
Additional paid in capital 3,353,127 3,353,127
Accumulated other comprehensive income, net of
income taxes of $495,909 in 1998 and $327,663 in 1997 929,885 613,392
Retained earnings 30,740,948 26,822,612
----------------------------------
35,694,710 31,459,881
Less cost of treasury stock - 9,000 shares
in 1998 and 1997 (239,400) (239,400)
----------------------------------
Total Stockholders' Equity 35,455,310 31,220,481
----------------------------------
Total Liabilities and Stockholders' Equity $ 334,231,809 $ 286,634,001
==================================
</TABLE>
See accompanying notes.
2
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $ 18,305,619 $ 17,104,693 $ 15,341,060
Investment securities
Taxable 4,212,634 4,034,214 4,274,824
Non-taxable 418,787 238,050 323,318
Other 614,469 129,141 315,304
--------------------------------------------------
Total Interest Income 23,551,509 21,506,098 20,254,506
--------------------------------------------------
Interest Expense
Deposits 10,397,077 9,659,139 8,679,540
Other borrowed funds 463,051 333 4,257
--------------------------------------------------
Total Interest Expense 10,860,128 9,659,472 8,683,797
--------------------------------------------------
Net Interest Income 12,691,381 11,846,626 11,570,709
Provision for loan losses (846,466) (740,309) (790,761)
--------------------------------------------------
Net interest income after provision
for loan losses 11,844,915 11,106,317 10,779,948
--------------------------------------------------
Non-Interest Income
Service charges on deposit accounts 2,177,631 1,933,769 1,788,211
Other service charges and fees 427,008 263,137 254,985
Other income 716,011 793,220 642,873
--------------------------------------------------
Total Non-Interest Income 3,320,650 2,990,126 2,686,069
--------------------------------------------------
Non-Interest Expense
Salaries and employee benefits 4,663,908 4,027,335 3,875,368
Occupancy expense 533,091 339,234 327,670
Equipment expense 693,107 626,165 514,206
Net bond losses 18,941 116,859 47,382
Earnings applicable to minority 163,662 165,121 160,995
Other expense 1,893,738 1,771,461 1,739,181
--------------------------------------------------
Total Non-Interest Expense 7,966,447 7,046,175 6,664,801
--------------------------------------------------
Income Before Income Taxes 7,199,118 7,050,269 6,801,216
Income tax expense 2,486,682 2,560,695 2,407,001
--------------------------------------------------
Net Income $ 4,712,436 $ 4,489,573 $ 4,394,216
==================================================
Net income per share of common stock $ 1.42 $ 1.36 $ 1.33
==================================================
Average shares outstanding 3,308,750 3,308,750 3,308,750
</TABLE>
See accompanying notes.
3
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 4,712,436 $ 4,489,573 $ 4,394,216
Other comprehensive income, net of tax
Unrealized holding gains (losses)
during period 297,552 418,185 (45,206)
Less reclassification adjustment for
gains included in net income (18,941) (116,849) (47,382)
--------------------------------------------------
Total other comprehensive income 316,493 535,034 2,176
--------------------------------------------------
Comprehensive Income $ 5,028,929 $ 5,024,607 $ 4,396,392
==================================================
</TABLE>
See accompanying notes.
4
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 4,712,436 $ 4,489,573 $ 4,394,216
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 450,039 402,071 366,170
Amortization of goodwill 67,008 67,008 67,008
Amortization of premiums and accretion
of discounts on investment securities (46,683) (106,504) (72,776)
Provision for loan losses 846,466 740,309 790,761
Investment securities losses 18,940 116,859 47,382
Gain on sale of land - - (55,000)
Deferred income tax benefit (113,214) (117,793) (215,067)
Net earnings applicable to minority interest 93,876 142,120 135,903
(Increase) decrease in real estate
acquired by foreclosure (47,174) 122,306 84,941
Increase in accrued interest receivable (543,241) (264,105) (188,474)
Increase in cash value of life insurance (298,748) (309,709) (291,856)
Increase in other assets (439,529) (491,427) (227,152)
Increase (decrease) in income taxes payable (34,029) (132,429) 303,308
Increase (decrease) in accrued interest payable (41,998) 189,296 23,641
Increase in directors deferred compensation 88,557 64,304 73,106
Increase in other liabilities 69,882 13,275 24,273
---------------------------------------------------
Net Cash Provided By
Operating Activities 4,782,588 4,925,154 5,260,384
---------------------------------------------------
Cash Flows from Investing Activities
Proceed from maturities of securities available-for-sale 18,965,865 11,911,072 20,586,470
Proceed from sales of securities available-for-sale 11,812,981 23,211,856 5,620,828
Purchases of investment securities (54,505,473) (29,112,960) (22,628,459)
Proceeds from sale of land 80,000
Purchases of bank premises, furniture, fixtures and
equipment (632,872) (873,137) (457,959)
Increase in interest bearing deposits
with other banks (915,803) (114,017) (6,207)
Net (increase) decrease in federal funds sold 1,000,000 (5,400,000) 9,350,000
Net decrease in loans (17,691,166) (15,078,380) (22,329,428)
---------------------------------------------------
Net Cash Used By Investing Activities (41,966,468) (15,455,566) (9,784,755)
---------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in federal funds purchased 10,000,000 (8,800,000) 8,800,000
Net increase (decrease) in deposits 33,258,683 19,540,826 (9,234,663)
Net increase (decrease) in ABE Loans (71,992) 226,740 1,284,225
Dividends paid to stockholders (794,100) (562,487) (496,313)
Redeemed debentures - (32,696) (32,695)
---------------------------------------------------
Net Cash Provided By Financing Activities 42,392,591 10,372,383 320,554
---------------------------------------------------
Net Increase (Decrease) in Cash
and Due from Banks 5,208,711 (158,029) (4,203,817)
Cash and due from banks, beginning of year 10,025,883 10,183,912 14,387,729
---------------------------------------------------
Cash and due from banks, end of year $ 15,234,594 $ 10,025,883 $ 10,183,912
===================================================
Supplemental Disclosures of Cash
Flow Information
Cash Paid for
Interest $ 10,902,126 $ 9,470,176 $ 8,660,156
===================================================
Income taxes $ 2,647,655 $ 2,810,917 $ 2,317,212
===================================================
Supplemental Schedule of Noncash Activities
Unrealized gain on securities
available for sale $ 494,841 $ 840,556 $ 3,081
===================================================
Decrease in deferred income tax asset on
unrealized gain on securities $ (168,246) $ (285,790) $ (1,047)
===================================================
Minority interest on unrealized
(gain) loss on securities $ (10,102) $ (19,732) $ 142
===================================================
</TABLE>
See accompanying notes.
5
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER ADDITIONAL OTHER
OF SHARES COMMON PAID IN COMPREHENSIVE RETAINED TREASURY
ISSUED STOCK CAPITAL INCOME EARNINGS STOCK TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 639,248 $ 639,248 $ 3,353,127 $ 76,182 $ 19,029,125 $ (239,400) $ 22,858,282
Net income - - - - 4,394,216 - 4,394,216
Stock dividend 31,502 31,502 - - (31,502) - -
Dividends paid - - - - (496,313) - (496,313)
Other comprehensive income - - - 2,176 - - 2,176
-------------------------------------------------------------------------------------------------
Balance, December 31, 1996 670,750 670,750 3,353,127 78,358 22,895,526 (239,400) 26,758,361
Net income - - - - 4,489,573 - 4,489,573
Dividends paid - - - - (562,487) - (562,487)
Other comprehensive income - - - 535,034 - - 535,034
-------------------------------------------------------------------------------------------------
Balance, December 31, 1997 670,750 670,750 3,353,127 613,392 26,822,612 (239,400) 31,220,481
Net income - - - - 4,712,436 - 4,712,436
Dividends paid - - - - (794,100) - (794,100)
Other comprehensive income - - - 316,493 - - 316,493
-------------------------------------------------------------------------------------------------
Balance, December 31, 1998 670,750 $ 670,750 $ 3,353,127 $ 929,885 $ 30,740,948 $ (239,400) $ 35,455,310
=================================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
- -----------------------------------------
The accounting policies of Citizens Holding Company and Subsidiary conform to
generally accepted accounting principles and to general practices within the
banking industry. At December 31, 1998, 1997 and 1996, the consolidated
financial statements of Citizens Holding Company include the accounts of its
96.59% owned subsidiary, The Citizens Bank (collectively referred to as "the
Company"). All significant intercompany transactions have been eliminated in
consolidation.
Nature of Business
- ------------------
Citizens Bank operates under a state bank charter and provides general banking
services. As a state bank, the bank is subject to regulations of the
Mississippi Department of Banking and Consumer finance and the Federal Deposit
Insurance Corporation. Citizens Holding Company is subject to the regulations
of the Federal Reserve. The area served by Citizens Bank is Neshoba County,
Mississippi, and the immediately surrounding areas. Services are provided at
several branch offices.
Fair Value of Financial Instruments
- -----------------------------------
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments", requires disclosure of financial
instruments' fair values, as well as the methodology and significant assumptions
used in estimating fair values. These requirements have been incorporated
throughout the notes to the consolidated financial statements. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Statement No. 107
excludes certain financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation and may not be indicative of amounts that
might ultimately be realized upon disposition or settlement of those assets and
liabilities.
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. CONTINUED
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A portion of the Company's loan portfolio consists of loans secured by
residential property in the East Central Mississippi area. The regional economy
depends heavily on light industry, agriculture and the gambling industry.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of a substantial portion of the
carrying amount of foreclosed real estate are susceptible to changes in local
market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
Trust Assets
- ------------
Assets held by the trust department of The Citizens Bank in fiduciary or agency
capacities are not assets of the Bank and are not included in these statements
of financial condition.
Cash and Due from Banks
- -----------------------
Cash and due from banks consist of cash on hand, demand deposits with banks, and
time deposits maturing within three months. Cash flows from loans originated by
the Bank, deposits, and federal funds purchased and sold are reported at net in
the statement of cash flows.
Securities Available-for-Sale
- -----------------------------
Securities available-for-sale are reported at fair value with unrealized gains
and losses net of income taxes, reported as other comprehensive income. Fair
values for securities are based on quoted market prices where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. Gains or losses on the sale of securities are
determined using the specific identification method. The bank classifies its
portfolio of U.S. Treasury notes, U.S. Government and Agency securities, taxable
state and municipal obligations, and mortgage-backed securities as securities
available for sale.
8
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. CONTINUED
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings. The amortization of premiums and
accretion of discounts are recognized in interest income, using the interest
method.
Loans and Allowances for Loan Losses
- ------------------------------------
Loans are reported at the principal amount outstanding, net of unearned
discounts and unearned finance charges. Unearned discounts on installment loans
are recognized as income over the terms of the loans by a method which
approximates the interest method. Unearned finance charges and interest on
commercial loans are recognized based on the principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses. The allowance represents an amount, which, in management's judgment,
will be adequate to absorb probable losses on existing loans that may become
uncollectible. Management's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans. These
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, current economic conditions that may affect the
borrowers' ability to pay, overall portfolio quality, and a review of specific
problem loans.
The Bank generally discontinues the accrual of interest income when a loan
becomes 90 days past due as to principal or interest; however, management may
elect to continue the accrual when the estimated net realizable value of
collateral is sufficient to cover the principal balance and the accrued
interest. Interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. Any
unpaid interest previously accrued on nonaccrual loans is reversed from income
to charges to the allowance for loan losses. Interest income, generally, is not
recognized on specific impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are applied as a reduction of
the loan principal balance. Interest income on other nonaccrual loans is
recognized only to the extent of interest payments received.
The fair values of loans, as disclosed in Note 16, are estimated for portfolios
of loans with similar financial characteristics. The fair values of certain
mortgage loans, such as one-to-four family residential properties, are based on
quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair values
of other types of loans are estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
9
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. CONTINUED
Bank Premises, Furniture, Fixtures, and Equipment
- -------------------------------------------------
Bank premises and equipment are stated at cost less accumulated depreciation
computed on the straight-line basis for buildings and on an accelerated method
for fixtures and equipment.
Real Estate Acquired by Foreclosure
- -----------------------------------
Real estate acquired by foreclosure consists of properties repossessed by the
Company on foreclosed loans. These assets are stated at the lower of the
outstanding loan amount (including accrued interest, if any) or fair value based
on appraised value at the date acquired less estimated costs to sell. Losses
arising from the acquisition of such property are charged against the allowance
for loan losses; declines in value resulting from subsequent reappraisals or
losses resulting from disposition of such property are expensed.
Deposits
- --------
The fair values of deposits with no stated maturity, such as noninterest-bearing
demand deposits, NOW accounts, MMDA products and savings accounts are, by
definition, equal to the amount payable on demand. This amount is commonly
referred to as the carrying value. Fair values for certificates of deposit
approximates carrying value.
Income Taxes
- ------------
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of nontaxable income such as interest on state and
municipal securities) and deferred taxes on temporary differences between the
amount of taxable and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax asset and liabilities are expected to be realized or settled as
described in FASB Statement No. 109, "Accounting for Income Taxes". As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision of income taxes.
The Company and its subsidiary file a consolidated Federal income tax return.
Its subsidiary provides for income taxes on a separate return basis, and remits
to the Company amounts determined to be currently payable.
10
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. CONTINUED
Net Income Per Share
- --------------------
Net income per share of common stock is computed by dividing net income by the
weighted average number of common shares outstanding during the period. The
weighted average number of shares outstanding was 3,308,750 for each of the
years ended December 31, 1998, 1997 and 1996, respectively.
Off-Balance-Sheet Financial Instruments
- ---------------------------------------
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, and letters of
credit. Such financial instruments are recorded in the financial statements
when they become payable.
Goodwill
- --------
Goodwill, which resulted from the acquisition of the Kosciusko and Scooba
branches, is being amortized over an estimated useful life of fifteen years.
Investment - Insurance Company
- ------------------------------
The Company is accounting for its investment in New South Life Insurance
Company, a 20% owned affiliate, by the equity method of accounting. The
Company's share of the net income of the affiliate is recognized as income in
the Company's income statement and added to the investment account, and
dividends received from the affiliate are treated as a reduction of the
investment account.
The fiscal year of New South Life Insurance Company ends on November 30 and the
Company follows the practice of recognizing the net income of the affiliate on
that basis.
The investment, which is included in other assets, totaled $895,443 and $705,432
at December 31, 1998 and 1997, respectively. Income from the investment for the
years ended December 31, 1998, 1997 and 1996 included in other income totaled
$190,011, $176,114 and $142,943, respectively.
11
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. INVESTMENT SECURITIES
The carrying amounts of investment securities as shown in the consolidated
statements of financial condition and their approximate market values at
December 31 were as follows:
1998
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
U.S. Treasury Direct $ 36,837,158 $ 1,042,087 $ 110 $ 37,879,135
U.S. Agency 15,637,483 119,048 - 15,756,531
Mortgage backed securities 23,424,118 161,449 29,365 23,556,202
State, County and Municipals 13,262,688 201,894 36,446 13,428,136
Federal Home Loan Bank Stock 918,500 - - 918,500
---------------------------------------------------
$ 90,079,947 $ 1,524,478 $ 65,921 $ 91,538,504
===================================================
1997
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
U.S. Treasury Direct $ 30,752,250 $ 592,665 $ 50 $ 31,344,865
U.S. Agency 15,198,263 78,290 15,881 15,260,672
Mortgage backed securities 14,111,650 234,961 10,209 14,336,402
State, County and Municipals 4,755,893 105,710 21,770 4,839,833
Federal Home Loan Bank Stock 1,510,500 - - 1,510,500
---------------------------------------------------
$ 66,328,556 $ 1,011,626 $ 47,910 $ 67,292,272
===================================================
U. S. Government and municipal securities with a carrying amount of $72,253,231
(market value $73,659,355) at December 31, 1998, and $61,301,916 (market value
$61,301,916) at December 31, 1997 were pledged to secure public and trust
deposits and for other purposes as required by law.
Total gross realized gains and gross realized losses from the sale of investment
securities for each of the years ended December 31 were:
1998 1997 1996
- -----------------------------------------------------------------
Gross realized gains $ 3,408 $ 51,990 $ -
Gross realized losses (22,349) (168,849) (47,382)
------------------------------------
$ (18,941) $ (116,859) $(47,382)
====================================
12
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. CONTINUED
The carrying amounts and fair values of the maturities of investment securities
at December 31, 1998 were as follows:
CARRYING FAIR
AMOUNT VALUE
- ---------------------------------------------------------------
Due in one year or less $ 24,341,068 $ 24,523,898
Due in one to five years 48,285,982 49,484,997
Due from five to ten years 9,010,667 9,106,202
Due after ten years 8,442,230 8,423,408
-------------------------------
$ 90,079,947 $ 91,538,504
===============================
The amortized cost and fair value of mortgaged-backed securities are presented
by contractual maturity in the preceding table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
NOTE 3. LOANS
The components of loans in the consolidated balance sheets were as follows:
1998 1997
CARRYING CARRYING
AMOUNT AMOUNT
- ----------------------------------------------------------------------
Commercial, financial and agricultural $ 98,956,147 $ 90,690,515
Real estate - construction 6,644,663 4,533,188
Real estate - mortgage 58,637,604 54,119,088
Consumer 49,733,697 47,465,549
------------------------------
213,972,111 196,808,340
------------------------------
Unearned discount (2,622,695) (2,503,626)
Allowance for loan losses (2,900,000) (2,700,000)
------------------------------
Loans, net $ 208,449,416 $ 191,604,716
==============================
Changes in the reserve for possible loan losses were summarized as follows:
1998 1997
- ----------------------------------------------------------------------
Balance at January 1 $ 2,700,000 $ 2,500,000
Recoveries on loans previously charged-off 233,278 247,689
Loans charged-off (879,744) (787,998)
Provision charged to expense 846,466 740,309
------------------------------
Balance at December 31, $ 2,900,000 $ 2,700,000
==============================
13
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. CONTINUED
Loans on nonaccrual status amounted to approximately $649,353, $344,000 and
$215,241 at December 31, 1998, 1997 and 1996, respectively. The effect of such
loans was to reduce net income by approximately $135,049, $32,305 and $21,261 in
1998,1997 and1996, respectively. No loans have been recognized as impaired in
conformity with FASB Statement 114 for 1998 and 1997.
NOTE 4. PREMISES, FURNITURE, FIXTURES AND EQUIPMENT
Components of premises, furniture, fixtures and equipment included in the
consolidated balance sheets at December 31, 1998, 1997 and 1996 were as follows:
1998 1997
- ------------------------------------------------------------------
Cost
Land $ 746,968 $ 746,968
Buildings 5,498,898 5,357,170
Furniture & equipment 4,129,692 3,638,547
--------------------------
Total cost 10,375,558 9,742,685
Less accumulated depreciation 5,941,906 5,491,866
--------------------------
Bank premises, furniture, fixtures
and equipment, net $ 4,433,652 $ 4,250,819
==========================
Depreciation expense amounted to $450,039, $402,071 and $366,170 for the years
ended December 31, 1998, 1997 and 1996, respectively.
NOTE 5. INCOME TAXES
The consolidated provision for income taxes consisted of the following:
1998 1997
- ------------------------------------------------------------------
Currently payable
Federal $ 2,370,478 $ 2,422,779
State 229,418 255,709
--------------------------
2,599,896 2,678,488
Deferred federal (benefit) (113,214) (117,793)
--------------------------
Total income tax expense $ 2,486,682 $ 2,560,695
==========================
14
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. CONTINUED
The differences between the federal statutory rate and the effective tax rates
for 1998, 1997 and 1996 were as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Federal tax based on statutory rate $ 2,447,700 $ 2,310,150 $ 2,218,167
State income tax 151,416 255,708 277,195
Change due to:
Tax exempt investment interest (146,507) (82,050) (113,676)
Minority interest 46,424 56,141 54,738
Other, net (12,351) 20,745 (29,424)
----------------------------------------
Income taxes $ 2,486,682 $ 2,560,695 $ 2,407,000
========================================
The net deferred tax asset at December 31 consisted of the following:
1998 1997
- --------------------------------------------------------------------------------
Allowance for loan losses $ 763,493 $ 635,139
Deferred compensation liability 244,415 214,306
Other real estate 7,401 5,510
Investment securities basis (141,037) (94,910)
Unrealized gain or loss on available
for sale securities (495,909) (327,663)
-------------------------
$ 378,363 $ 432,382
=========================
The net deferred tax assets is included in other assets. A valuation allowance
was not considered necessary at December 31, 1998 and 1997.
NOTE 6. DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of
$100,000, was approximately $59,600,591 and $44,823,621 in 1998 and 1997,
respectively.
At December 31, 1998, the scheduled maturities of time deposits are were
follows:
- --------------------------------------------------------------------------------
1999 $ 142,285,782
2000 10,260,749
2001 4,056,182
2003 158,133
-------------
$ 156,760,846
=============
15
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. INVESTMENT IN NEW SOUTH LIFE INSURANCE COMPANY
Condensed financial information of New South Life Insurance Company as of
November 30, 1998 and 1997 and for the years ended November 30, 1998, 1997 and
1996 was as follows:
1998 1997
- --------------------------------------------------------------------------------
Assets
Cash $ 358,153 $ 254,246
Investments 4,846,909 4,309,958
Deferred acquisition costs 781,928 556,062
Other assets 835 77,334
-------------------------
Total assets $ 5,987,825 $ 5,197,600
=========================
Liabilities and Stockholders' Equity
Unearned premium reserves $ 1,885,097 $ 1,916,933
Claims liability 135,613 192,456
Income taxes payable 139,678 84,182
Other liabilities 48,617 18,366
-------------------------
2,209,005 2,211,937
-------------------------
Common stock 250,000 250,000
Preferred stock 400,000 400,000
Paid-in capital 600,000 600,000
Retained earnings 2,528,820 1,735,663
-------------------------
3,778,820 2,985,663
-------------------------
Total liabilities and stockholders' equity $ 5,987,825 $ 5,197,600
=========================
1998 1997 1996
- -------------------------------------------------------------------------------
Income
Insurance premiums earned $ 358,633 $ 1,402,455 $ 1,255,656
Investment income 69,870 227,066 201,283
-------------------------------------
Total income 428,503 1,629,521 1,456,939
-------------------------------------
Expenses
Claims incurred 13,030 311,134 268,177
Commissions and service
fees incurred 165,619 466,469 433,156
Other expenses 15,266 63,999 43,774
Income taxes 50,436 166,300 249,124
-------------------------------------
Total expenses 244,351 1,007,902 994,231
-------------------------------------
Net income $ 184,152 $ 621,619 $ 462,708
=====================================
16
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. SUMMARIZED FINANCIAL INFORMATION OF CITIZENS HOLDING COMPANY
Summarized financial information of Citizens Holding Company, parent company
only, at December 31, 1998, 1997 and 1996, was as follows:
Balance Sheets
December 31, 1998, 1997 and 1996
1998 1997 1996
- --------------------------------------------------------------------------------
Assets
Cash $ 278,156 $ 199,029 $ 256,539
Investment securities
available-for-sale 1,308,605 1,201,250 1,047,992
Investment in bank subsidiary 33,975,863 29,882,806 25,508,774
Other assets 21,235 24,737 20,789
-----------------------------------------
Total assets $ 35,583,859 $ 31,307,822 $26,834,094
=========================================
Liabilities
Income taxes payable - current $ 50,424 $ 66,820 $ 23,038
Other liabilities 78,126 20,521 52,695
-----------------------------------------
128,550 87,341 75,733
-----------------------------------------
Stockholders' Equity 35,455,309 31,220,481 26,758,361
-----------------------------------------
Total liabilities and
stockholders' equity $ 35,583,859 $ 31,307,822 $26,834,094
=========================================
Income Statements
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
- --------------------------------------------------------------------------------
Interest income Assets $ 88,827 $ 81,086 $ 58,500
Interest expense 1,151 333 4,257
-----------------------------------------
Net interest income 87,676 80,753 54,243
-----------------------------------------
Other income
Other 114,201 31,504 34,827
Equity in undistributed earnings
of subsidiary 4,634,119 4,462,364 4,350,859
-----------------------------------------
Total other income 4,748,320 4,493,868 4,385,686
-----------------------------------------
Other expense 77,138 18,228 22,676
-----------------------------------------
Income before income taxes 4,758,858 4,556,393 4,417,253
-----------------------------------------
Income tax benefit 46,423 66,820 23,038
-----------------------------------------
Net income $ 4,712,435 $ 4,489,573 $ 4,394,215
=========================================
17
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. CONTINUED
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 4,712,435 $ 4,489,573 $ 4,394,215
Adjustments to reconcile net income to
net cash provided by operating
activities
(Increase) decrease in other assets 3,502 (3,948) 18,892
Increase (decrease) in income
taxes payable (16,396) 43,782 5,594
Increase (decrease) in other
liabilities 57,605 (32,174) (28,122)
----------------------------------------
Net cash provided by
operating activities 4,757,146 4,497,233 4,390,579
----------------------------------------
Cash Flows from Investing Activities
Increase in investment securities
available for sale 209,138 381,777 (137,012)
Increase in investment in bank subsidiary (4,093,057) (4,374,032) (3,668,916)
----------------------------------------
Net cash used by
operative activities (3,883,919) (3,992,255) (3,805,928)
----------------------------------------
Cash Flows from Financing Activities
Dividends paid to stockholders (794,100) (562,488) (496,313)
----------------------------------------
Net increase or (decrease) in cash 79,127 (57,510) 88,338
Cash, beginning of year 199,029 256,539 168,201
----------------------------------------
Cash, end of year $ 278,156 $ 199,029 $ 256,539
========================================
</TABLE>
NOTE 9. LEASES
The Bank leases computer equipment and some branch facilities under operating
leases. Rent expense was $43,767, $43,611 and $36,430 for 1998, 1997 and 1996,
respectively. At December 31, 1998, the future minimum lease commitments for
leases which have terms in excess of 1 year are:
1999 $ 9,250
18
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Bank has made loans to its directors
and significant stockholders and their 10% or more owned businesses. As of
December 31, 1998, 1997 and 1996, these loans totaled $2,412,957 and $2,254,333,
respectively. During 1998, new loans to such related parties amounted to
$844,720 and repayments amounted to $734,211. The Bank has received commissions
related to credit life insurance for the years ending December 31, 1998, 1997
and 1996 totaling $108,382, $61,686 and $45,174, respectively.
NOTE 11. PROFIT SHARING PLAN
The Bank has a profit sharing and savings plan in effect for substantially all
full-time employees.
Under the profit sharing and savings plan, the Bank automatically contributes an
amount equal to 2.7% of each participant's base salary to the plan. A
participant, in addition, may elect to make contributions to the plan. The Bank
matches 100% of employee contributions up to a limit of 6% of each employee's
salary.
The Bank's contributions to the profit sharing plan in 1998, 1997 and 1996,
respectively, totaled $238,104, $217,932 and $196,675.
NOTE 12. CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and letters of credit have been granted to
customers in the Bank's market area. All such customers are depositors of the
Bank. Investments in state and municipal securities also involve governmental
entities within the Bank's market area. The concentrations of credit by type of
loan are set forth in Note 3. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Letters of credit were
granted primarily to commercial borrowers.
At times the Bank has balances in due from bank accounts in excess of federal
deposit insurance limits.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees and commitments to extend credit, that are
not reflected in the accompanying consolidated financial statements. At
December 31, 1998, 1997 and 1996, a summary of such commitments and contingent
liabilities is as follows:
19
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. CONTINUED
1998 1997 1996
- --------------------------------------------------------------------------------
Commitments to extend credit $ 20,702,966 $ 16,283,342 $ 11,836,931
Letters of credit 290,025 362,000 1,134,132
------------------------------------------------
$ 20,992,991 $ 16,645,342 $ 12,971,063
================================================
Commitments to extend credit, and letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Bank's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extension of credit that are recorded on the consolidated
statements of financial condition. Because these instruments have fixed
maturity dates, and because many of them expire without being drawn upon, they
do not generally present any significant liquidity risk to the Bank. The Bank's
experience has been that approximately fifty-four percent of loan commitments
are drawn upon by customers. When letters of credit are utilized, a significant
portion of such utilization is on an immediate payment basis. The Bank has not
been required to perform on any financial guarantees during the past two years.
The Bank has not incurred any losses on its commitments in 1998, 1997 or 1996.
NOTE 14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory--and possibly additional discretionary--actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"adequately capitalized" the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since the notification that management believes have
changed the institution's category.
20
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. CONTINUED
The Bank's (rounded to the nearest thousand) capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
----------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital
(to Risk-Weighted Assets) $ 37,606,000 18.13% $ 16,595,000 8.0% $ 20,744,000 10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 35,009,000 16.88% $ 8,297,000 4.0% $ 12,446,000 6.0%
Tier I Capital
(to average Assets) $ 35,009,000 10.61% $ 13,204,000 4.0% $ 16,504,000 5.0%
</TABLE>
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value estimates, methods and assumptions used by the Bank in estimating
its fair value disclosures for financial instruments were:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 15,234,594 $ 15,234,594 $ 10,025,883 $ 10,025,883
Interest bearing
deposits with banks 1,063,244 1,063,244 147,441 147,441
Federal Funds Sold 4,500,000 4,500,000 5,500,000 5,500,000
Securities available for sale 91,538,504 91,538,504 67,292,272 67,292,272
Loans receivable 208,449,416 209,080,983 191,604,716 191,316,224
Accrued interest receivable 3,697,109 3,697,109 3,153,868 3,153,866
Financial Liabilities
Deposits 282,942,228 28,942,228 249,683,545 249,683,545
Federal funds purchased 10,000,000 10,000,000 - -
ABE loans 2,416,327 2,416,327 2,488,319 2,488,319
Off Balance Sheet
Instruments
Commitments to extend credit - -
Letters of Credit 2,900 3,620
</TABLE>
CASH AND DUE FROM BANKS: The carrying amounts reported in the balance sheet for
cash and short-term instruments approximate those assets' fair values.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
21
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. CONTINUED
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans (e.g., commercial real estate and rental
property mortgage loans, commercial and industrial loans, financial institution
loans, and agricultural loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value.
DEPOSIT LIABILITIES: The fair values for demand deposits, NOW and money market
accounts and savings accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term money market accounts and time deposits
approximate their fair values at the reporting date. Fair values for fixed-rate
time deposits are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
LONG-TERM BORROWINGS: The fair values of the Bank's long-term borrowings (other
than deposits) are estimated using discounted cash flow analyses, based on the
Bank's current incremental borrowing rates for similar types of borrowing
arrangements.
SHORT-TERM BORROWINGS: The carrying amounts of other borrowed funds approximate
their fair values.
OFF-BALANCE SHEET INSTRUMENTS: The fair value of commitments to extend credit
and letters of credit are estimated using fees currently charged to enter into
similar agreements.
NOTE 16. YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue, and is
developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail or miscalculate. The Company is heavily dependent on computer processing
that is date-sensitive in the conduct of its business activities.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Company's financial statements.
22
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17. COMMON STOCK SPLIT
On January 1, 1999, the Company reduced the par value of its common stock from
$1 per share to $.20 per share and issued the 2,647,000 additional shares
necessary to effect a 5-for-1 common stock split. The earnings per common share
for the years ended December 31, 1998, 1997 and 1996 have been retroactively
adjusted for this split as if it occurred on January 1, 1996.
NOTE 18. NEW ACCOUNTING PRONOUNCEMENT ADOPTED
The Financial Accounting Standards Board issued Statement No. 130 which requires
the reporting and display of comprehensive income and its components in the
financial statements. The statement requires that an enterprise (1) classify
items of other comprehensive income by their nature in the financial statements
and (b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. The Company adopted Statement No. 130 during the current
year.
23
<PAGE>
[Exhibit 16]
A. T. WILLIAMS
CERTIFIED PUBLIC ACCOUNTANT
322 Byrd Avenue, P.O. Box 606
Philadelphia, Mississippi 39350
Tel.: 601-656-2742
Fax : 601-656-2760
MEMBER MEMBER
AMERICAN INSTITUTE OF MISSISSIPPI SOCIETY OF
CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS
Mr. J. Steve Webb
Citizens Holding Company
The Citizens Bank of Philadelphia
Post Office Box 209
Philadelphia, MS 39350
RE: CERTIFIED PUBLIC ACCOUNTING SERVICES
Dear Mr. Webb:
You have requested that I provide you with official documentation of my
decision to decline to stand as the external auditor for Citizens Holding
Company (the "Holding Company") and The Citizens Bank of Philadelphia (the
"Bank"). It is my understanding this official documentation is required of the
Securities and Exchange Commission.
Therefore, please accept this correspondence as official documentation of
my decision to decline to stand as the external auditor for the Holding Company
and the Bank. My decision was based solely on my opinion that it would be in
the best interest of the Holding Company and the Bank for an accounting firm
experienced with the accounting and reporting requirements of the Securities and
Exchange Commission and the American Stock Exchange to be engaged. My decision
was effective December 31, 1998, and it is my understanding your new external
auditor, Horne CPA Group, was engaged to begin their services to the Holding
Company and the Bank with the audit for 1998.
Finally, with regard to the Form 10 filed by the Holding Company on June
21, 1999, as amended by Amendment Number 1 to the Form 10 filed on or about
August 11, 1999, I have reviewed Item 14 entitled "Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure." I am in complete
agreement with the statements made by management in Item 14 of both the original
Form 10 and as supplemented in Amendment Number 1 to Form 10.
Very truly yours
/s/ A. T. Williams
A. T. Williams, CPA
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 11,453 15,235
<INT-BEARING-DEPOSITS> 725 1,063
<FED-FUNDS-SOLD> 800 4,500
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 96,395 91,539
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 224,107 211,349
<ALLOWANCE> 3,000 2,900
<TOTAL-ASSETS> 345,245 334,232
<DEPOSITS> 290,473 282,242
<SHORT-TERM> 700 700
<LIABILITIES-OTHER> 3,625 2,265
<LONG-TERM> 12,765 12,416
0 0
0 0
<COMMON> 671 671
<OTHER-SE> 35,777 34,785
<TOTAL-LIABILITIES-AND-EQUITY> 345,245 334,232
<INTEREST-LOAN> 9,509 18,488
<INTEREST-INVEST> 2,692 4,869
<INTEREST-OTHER> 157 615
<INTEREST-TOTAL> 12,358 23,972
<INTEREST-DEPOSIT> 4,987 10,397
<INTEREST-EXPENSE> 299 10,860
<INTEREST-INCOME-NET> 7,071 13,112
<LOAN-LOSSES> 383 846
<SECURITIES-GAINS> 3 (19)
<EXPENSE-OTHER> 3,858 7,730
<INCOME-PRETAX> 4,367 7,363
<INCOME-PRE-EXTRAORDINARY> 2,880 4,712
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,880 4,712
<EPS-BASIC> 0.75 1.42
<EPS-DILUTED> 0.75 1.42
<YIELD-ACTUAL> 4.5 4.38
<LOANS-NON> 381 649
<LOANS-PAST> 1,812 1,641
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,900 2,700
<CHARGE-OFFS> 413 879
<RECOVERIES> 130 233
<ALLOWANCE-CLOSE> 3,000 2,900
<ALLOWANCE-DOMESTIC> 1,650 1,600
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,350 1,300
</TABLE>
