<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-25221
CITIZENS HOLDING COMPANY
(exact name of Registrant as specified in its charter)
MISSISSIPPI 64-0666512
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
521 Main Street, Philadelphia , MS 39350
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: 601-656-4692
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.20 par value American Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act if
1934 during the preceding 12 months (or for such shorted period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES ( X ) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 29, 2000
Common stock, $.20 par value 3,308,750 Shares
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on February 29, 1999 was $ 43,782,685.00.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference to Part
I, II, and III of the Form 10-K report: 1999 Annual Report to Shareholders
(Part II) and the Definitive Proxy Statement dated March 24, 2000 for
Registrant's Annual Meeting of Stockholders to be held April 25, 2000 (Part
III).
<PAGE>
<TABLE>
<CAPTION>
CITIZENS HOLDING COMPANY
FORM 10-K
INDEX
PAGE
----
PART I
<S> <C> <C>
ITEM 1. BUSINESS..................................................................... 1
ITEM 2. PROPERTIES................................................................... 16
ITEM 3. LEGAL PROCEEDINGS............................................................ 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS..... 18
ITEM 6. SELECTED FINANCIAL DATA...................................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................ 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................... 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................... 21
ITEM 11. EXECUTIVE COMPENSATION....................................................... 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............... 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............. 21
SIGNATURES............................................................................... 23
</TABLE>
<PAGE>
CITIZENS HOLDING COMPANY
FORM 10-K
PART I
In addition to historical information, this report contains statements
which constitute forward-looking statements and information which are based on
management's beliefs, plans, expectations and assumptions and on information
currently available to management. The words "may," "should," "expect,"
"anticipate," "intend," "plan," "continue," "believe," "seek," "estimate," and
similar expressions used in this report that do not relate to historical facts
are intended to identify forward-looking statements. These statements appear in
a number of places in this report, including, but not limited to, statements
found in Item 1 "Business" and in Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operation." All phases of the Company's
operations are subject to a number of risks and uncertainties. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements.
Among the factors that could cause actual results to differ materially are the
risks and uncertainties discussed in this report, including, without
limitation, the portions referenced above, and the uncertainties set
forth from time to time in the Company's other public reports and filings and
public statements, many of which are beyond the control of the Company, and
any of which, or a combination of which, could materially affect the results
of the Company's operations and whether forward-looking statements made by the
Company ultimately prove to be accurate.
ITEM 1. BUSINESS
BACKGROUND
Citizens Holding Company (the "Corporation") is a one-bank holding company
that holds 96.62% 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 Bank was opened on February 8, 1908 as The First National Bank of
Philadelphia. 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. At December 31, 1999, the Bank was the
largest bank headquartered in Neshoba County with total assets of
$361,380,374.00 and total deposits of $284,707,511.00.
The principal executive office for both the Corporation and the Bank is
located at 521 Main Street, Philadelphia, Mississippi 39350 and its telephone
number is (601) 656-4692. All references hereinafter to the activities or
operations of the Corporation reflect the Corporation's acting or operating
through the Bank.
<PAGE>
OPERATIONS
The Corporation, through the Bank, (i) engages in a wide range of
commercial and personal banking activities, including accepting demand deposits,
accepting savings and time deposit accounts, making secured and unsecured loans,
issuing letters of credit, originating mortgage loans, and provides personal and
corporate trust services; (ii) engages in certain non-banking activities closely
related to banking; and (iii) owns certain other business corporations that are
not banks, subject to applicable laws and regulations.
Revenues from the Corporation's lending activities constitute the largest
component of the Corporation's operating revenues. Such lending activities
include commercial, real estate, installment (direct and indirect), and credit
card loans. The Corporation's primary lending area is 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 lending 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. Historically, approximately 62% of the Corporation's
loan portfolio has been attributed to this category of lending. Another 16% of
the Corporation's loan portfolio has been comprised of commercial, industrial
and agricultural production loans, with Consumer loans making up the remaining
22% of the total loan portfolio.
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.
Of course, all loans in the Corporation's portfolio are subject to risk
based on the economy in the Corporation's area and also that of the nation.
However, because the
<PAGE>
Corporation's local economy has been strong and unemployment has remained at
historic lows, management continues to consider general risk levels to be low.
In addition to lending services, the Corporation provides a wide range of
personal and corporate trusts and trust-related services, which include it
serving as executor of estates, as trustee under testamentary and inter vivos
trusts and various pension and other employee benefit plans, as the 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. For example,
in 1996 the Corporation opened the Westside building in Philadelphia,
Mississippi, replacing a smaller drive-up only facility. In early 1998, the
Corporation opened a new full service facility in Kosciusko, Mississippi.
The Corporation also expanded its ability to offer its customers broader
options with their mortgage loan needs in 1999 with the acquisition of the
assets of Three D Mortgage Company, with locations in Philadelphia and
Kosciusko, Mississippi. Three D is a mortgage company that originates mortgage
loans to be sold to the secondary market.
Through such innovations as its VISA Checkcard program, the 24 Hour Phone
Teller and the Internet site (http://www.thecitizensbankphila.com) the
Corporation's customers have the ability to have easy and convenient access to
their funds and account balances 24 hours a day, 7 days a week. Additionally,
the Internet site enables the Corporation's customers to review their accounts
in detail, make transfers between their accounts, and pay bills from anywhere in
the world.
EXECUTIVE OFFICERS
From 1978 until the present, Steve Webb has served as President and Chief
Executive Officer of the Corporation and the Bank. In addition, Mr. Webb has
served as a member of the Board of Directors of the Corporation from 1982 until
the present and of the Bank from 1970 until the present. Mr. Webb currently
serves as Chairman for the Boards of both the Corporation and the Bank.
Robert T. Smith has been employed by the Bank since 1986 and has been in
his current position of Vice-President and Controller since January of 1987. In
addition to his position with the Bank, in February of 1996, Mr. Smith was
elected to serve as Treasurer of the Corporation.
<PAGE>
EMPLOYEES
The Corporation has no compensated employees. At December 31, 1999, the
Bank employed 142 full-time employees and 28 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 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
<PAGE>
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 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
<PAGE>
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
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
<PAGE>
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.
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
<PAGE>
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 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,
<PAGE>
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 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
acquirer 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.
<PAGE>
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.
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
<PAGE>
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 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."
<PAGE>
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 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.
<PAGE>
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 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.
ITEM 2. 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:
<PAGE>
BANKING
LOCATION/ FUNCTIONS
NAME OF OFFICE TELEPHONE NUMBER OFFERED
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
Union, 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
<PAGE>
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
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 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's shareholders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Price.
The Corporation's Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol "CIZ." The stock began trading on the AMEX on October
19, 1999 and prior to that date was sold by private transactions between
parties. At December 31, 1999, the
<PAGE>
Common Stock's closing price was $21.00. Since listing with AMEX, the stock has
traded as high as $29.25 and as low as $20.00. The high price of $29.25 occurred
on the first day of trading. Since listing with AMEX, the Company's stock has
traded in the $20.00 to $25.00 per share range.
The Shares of Common Stock are currently held of record by approximately
485 shareholders.
Dividends
Dividends for 1999 totaled $.32 per share compared to $.24 in 1998 and $.17
in 1997. These dividends reflect a 33% increase in 1999 over 1998 and a 41%
increase in 1998 over 1997. 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 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED STATISTICS
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
SUMMARY OF EARNINGS
- -------------------
<S> <C> <C> <C> <C> <C>
Total Interest Income $ 25,024 $ 23,551 $ 21,506 $ 20,255 $ 17,945
Total Interest Expense 10,974 10,860 9,659 8,684 7,727
Provision for loan losses 849 846 740 791 604
Non-interest income 3,574 3,320 2,990 2,686 2,433
Non-interest expense 8,361 7,966 7,046 6,665 6,379
Income tax expense 2,793 2,487 2,561 2,407 2,046
Net Income 5,621 4,712 4,490 4,394 3,622
PER SHARE DATA
- --------------
Earnings-basic and diluted $ 1.70 $ 1.42 $ 1.36 $ 1.33 $ 1.15
Cash dividends 0.32 0.24 0.17 0.15 0.14
Book value at year end 11.35 10.72 9.44 8.09 7.25
SELECTED YEAR END ACTUAL BALANCES
- ---------------------------------
Loans, net of unearned income $234,349 $211,349 $191,605 $177,005 $154,380
Allowance for possible loan losses (3,100) (2,900) (2,700) (2,500) (2,300)
Investment securities 102,451 91,539 67,292 72,472 76,022
Total assets 362,790 334,232 286,634 270,679 264,453
Deposits 284,462 282,242 248,984 229,443 238,677
Long term borrowings 10,000 10,000 0 33 65
Shareholders' equity 37,546 35,455 31,220 26,758 22,858
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SELECTED YEAR END AVERAGE BALANCES
- ----------------------------------
Loans, net of unearned income $221,165 $202,228 $186,843 $168,542 $141,192
Allowance for possible loan losses (2,974) (2,701) (2,523) (2,342) (2,103)
Investment securities 97,219 79,401 70,023 76,138 75,847
Total assets 347,613 314,896 279,961 271,241 242,024
Deposits 288,176 268,514 242,459 238,358 216,479
Long term borrowings 10,000 7,630 3 35 127
Shareholders' equity 37,603 33,513 28,920 24,610 21,195
SELECTED RATIOS
- ---------------
Return on average assets 1.62% 1.50% 1.60% 1.62% 1.50%
Return on average equity 14.95% 14.08% 15.24% 17.77% 17.15%
Dividend payout 18.84% 16.85% 12.52% 11.29% 12.15%
Equity to year end assets 10.35% 10.61% 10.89% 9.89% 8.64%
Total risk-based capital to
risk-adjusted assets 18.81% 18.13% 17.02% 15.84% 14.78%
Leverage capital ratio 11.06% 10.61% 10.46% 9.43% 8.38%
Efficiency ratio 45.48% 48.01% 45.56% 45.29% 49.02%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information on the Management's Discussion and Analysis of Financial
Condition and Results of Operations as of December 31, 1999, 1998 and 1997,
required by this Item 7 can be found under the headings "Management's Discussion
and Analysis" and "Consolidated Financial Statements" in the 1999 Annual Report
to Shareholders, a copy of which is attached hereto as Exhibit 13, and which is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information on the Quantitative and Qualitative Disclosures about Market
Risk, required by this Item 7A can be found under the headings "Management's
Discussion and Analysis" and "Consolidated Financial Statements" in the 1999
Annual Report to Shareholders, a copy of which is attached hereto as Exhibit 13,
and which is incorporated herein by reference.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information on Financial Statements and Supplementary Data required by this
Item 8 can be found under the headings "Management's Discussion and Analysis"
and "Consolidated Financial Statements" in the 1999 Annual Report to
Shareholders, a copy of which is attached hereto as Exhibit 13, and which is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information on any Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure required by this Item 9 can be found under
the heading "Management's Discussion and Analysis" in the 1999 Annual Report to
Shareholders, a copy of which is attached hereto as Exhibit 13, and which is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of the
Registrant required by this Item 10 can be found under the heading "Proposal I:
Election of Class I Directors" in the Definitive Proxy Statement dated March 24,
2000, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Executive Compensation paid by the Registrant
required by this Item 11 can be found under the headings "Executive
Compensation" and "Option Grants under Employee Plan During 1999 Fiscal Year" in
the Proxy Statement dated March 24, 2000, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding Security Ownership of Certain Beneficial Owners and
Management can be found under the heading "Stock Ownership of Directors and
Executive Officers" in the Definitive Proxy Statement dated March 24, 2000, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions can
be found under the heading "Certain Relationships and Related Transactions" in
the Definitive Proxy Statement dated March 24, 2000, and is incorporated herein
by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Consolidated Financial Statements and Supplementary Information for
years ended December 31, 1997, 1998 and 1999, 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
(b) Reports on Form 8-K.
None.
(c) Exhibits required by Item 601 of Regulation S-K
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 *
13 1999 Annual Report to Shareholders
16 CPA Letter *
21 Subsidiaries of Registrant *
27 Financial Data Schedule
* Filed as an exhibit to the Form 10 Registration Statement of the
Corporation (File No. 000-25221) filed on December 30, 1998 and incorporated
herein by reference, and also filed as an exhibit to Amendment No. 1 to Form 10
Registration Statement of the Corporation (File No. 000-25221) filed on June 21,
1999 and incorporated herein by reference.
(d) Financial Statement Schedules.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Steve Webb
--------------
STEVE WEBB
CHAIRMAN, CHIEF EXECUTIVE
OFFICER, PRESIDENT AND DIRECTOR
By: /s/ Robert T. Smith
-------------------
ROBERT T. SMITH
TREASURER
DATE: MARCH 21, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
SIGNATURES CAPACITIES DATE
/s/ Willis W. Dungan Director March 21, 2000
/s/ David A. King Director March 21, 2000
/s/ George R. Mars Director March 21, 2000
/s/ Don L. Fulton Director March 21, 2000
/s/ Steve Webb Director, President March 21, 2000
Chief Executive Officer
/s/ David P. Webb Director March 21, 2000
/s/ Karl Brantley Director March 21, 2000
/s/ M. G. Bond Director March 21, 2000
/s/ William M. Mars Director March 21, 2000
/s/ Herbert A. King Director March 21, 2000
<PAGE>
EXHIBIT 13
1999 ANNUAL REPORT TO SHAREHOLDERS
CITIZENS HOLDING COMPANY
1999
Annual Report
<PAGE>
TABLE OF CONTENTS
Message to Stockholders........................... 2
Committed to Service.............................. 4
Management's Discussion and Analysis.............. 6
Consolidated Financial Statements................. 28
Citizens Holding Company Officers and Directors... 56
Bank Officers..................................... 57
Locations......................................... 58
Financial Information............................. 59
1
<PAGE>
Message to Stockholders
Dear Stockholder:
As you can tell when you look over this report, it is much longer and is in more
detail than any annual report you have received in the past. This expanded
report is the direct result of the increased disclosure requirements of the
Securities and Exchange Commission and the American Stock Exchange. This has
been a busy year for Citizens Holding Company and one that can be best described
as a learning experience.
It has been a good year as we increased assets 8.51% and increased net profit by
19.29%. We had record earnings in 1999 of $5,621,356.14 although rising
interest rates made it difficult to maintain our net interest spread. We had
good results with our efforts to control expenses and in the process maintained
an excellent efficiency ratio of 45.48%. We had a return on average assets
(ROA) of 1.62% and a return on average equity (ROE) of 14.95%. Because of our
increased profits, we raised our dividend 33% to $.32 per share. According to
an independent financial institution appraiser, we are one of the top-performing
banks in the southeastern United States.
You must be asking if we are performing so well, why has our stock price
declined since being listed on the AMEX in October 1999? As I previously
stated, listing our stock has been a learning experience for us. We have come
to realize that forces over which we have no control affect the price of our
stock. Most, if not all bank stocks have declined in price lately under the
threat of rising interest rates. Even though we cannot control these outside
influences on our stock price, we have to find ways to make our company more
attractive to the investors who are looking for value in the stock market.
In order to broaden the purchases of our stock and give more depth to the
market, we must get our message out about our sustained high performance.
Although we have consistently outperformed 90% of the banks in our peer group,
the market has not given us credit for our performance. In order to make your
company stand out from the rest, your staff has begun to schedule meetings with
analysts of various brokerage firms, both regional and national. We are well
known in East Central Mississippi but you who live outside our market area can
also help by spreading the good news about your Bank.
We are constantly expanding the products we offer to our customers. In the past
we have initiated full service Internet banking, 24-hour phone teller, ATM's and
a variety of other deposit services. We have invested in a credit life
insurance company and this last year began offering title insurance services.
As we go forward in the year 2000, we will continue to seek other opportunities
to increase other non-interest income.
While we are not satisfied with the current stock price and trading volume, we
know that our stock is selling for more per share and more shares are being
traded now than before we went on the exchange, in fact, a lot more. We
previously stated our reasons for going on the exchange was to make your
investment more liquid and to ultimately enhance the value of your stock. We
feel that this goal has been accomplished.
2
<PAGE>
Even though we are pleased with reaching these objectives, we cannot rest on
what we have accomplished but must work hard toward having a great year in 2000.
I would like to again thank you for your interest in Citizens Holding Company.
Sincerely
/s/ Steve Webb
Steve Webb
Chairman, President and Chief Executive Officer
3
<PAGE>
Committed to Service
Our customers are not just faces we see everyday, but are individuals we value
as friends. We respond to our customers needs with integrity and a professional
manner.
For 91 years, we've invested our energy and resources to help build a financial
institution that you can be proud of. We strive to continue to be the best
community bank in Mississippi, and to increase the value of your investment as a
stockholder.
In addition to our focus on community banking, we continue to provide our
customers with the latest in banking technology. Customers can access their
accounts through our Internet web site, ATM's, Citizens Bank Visa debit card, or
by calling our 24 hour PhoneTeller.
Our nHome Internet banking site has been highly successful, and usage has
exceeded our expectations. Our customers enjoy the freedom to access their
accounts, transfer funds, pay bills or reorder checks in the privacy of their
home or office.
We also offer nBusiness an effective Internet cash management tool for our
business customers. Business customers armed only with an Internet browser can
securely access all business account information, disburse funds, draft
customers, anticipate account debits, stop payments, pay employees, and view
graphic presentations of the company's cash position. Importantly, the business
owner systems managers can restrict access to specified functions, reports, and
accounts, as well as create special profiles to share confidential information
with those with privileged access.
You can visit us at www.thecitizensbankphila.com.
Customers don't have to worry about getting to the bank before it closes
anymore. They can access their bank accounts anywhere in the world 24 hours a
day, 7 days a week.
The Bank has thirteen full service banking locations in six counties in East
Central Mississippi and a loan production office located in Meridian,
Mississippi. During 1999 we purchased Three D Mortgage Company and began
offering long-term mortgage loans. The Bank now offers title insurance services
through its subsidiary, Title Services, LLC. We also offer commercial lending,
consumer lending, credit cards, merchant credit card services, discount
brokerage service, trust service, and ACH origination.
The Citizens Bank is committed to making a difference in our communities. We
accomplish this goal through employee volunteerism and contributions. Our staff
members participate annually in many worthwhile charities and community projects
including but not limited to:
American Cancer Society United Way
American Heart Association Mississippi Blood Services
4-H Club Special Olympics
American Diabetic Association Cystic Fibrosis Foundation
Annual Christmas Parades Local Chamber of Commerce
Rotary Club Shriners
Lions Club Business Professional
4
<PAGE>
Women's Club
The Citizens Bank offers an annual scholarship to East Central Community College
and academic scholarships to local Junior Miss programs. The Bank also sponsors
students to Boys State and Girls State. We also conduct educational seminars on
student loan services at local high schools. We provide educational information
on mortgages, IRAs and trust services to the communities we serve.
Local elementary teachers bring students to the bank each year on field trips.
The Bank provides each elementary student with coin savers to emphasize the
importance of saving money. High school students visit the bank during regular
classroom hours and meet with bank officers and account service representatives.
Students are instructed on how to open checking accounts, balance their
checkbook and the importance of maintaining good credit ethics. They are
encouraged to ask open-end questions about checking accounts and student loan
products that are available.
Our philosophy is to give of our selves and our resources to make better
communities for generations to come.
On October 19, 1999, Steve Webb sounded the bell to begin trading of Citizens
Holding Company Stock on the American Stock Exchange. The trading or "ticker"
symbol is "CIZ". We have a very strong capital position and the decision to go
public was made to offer liquidity to our stockholders.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 1999, 1998 and 1997
OVERVIEW
The Company achieved improved levels of financial performance again in 1999
that included increased profits and asset growth for the period. Total assets
at the end of 1999 were $362,789,702, an increase of 8.5% over 1998.
Net income after taxes of the Company for 1999 increased by 19.29% over
1998 to $5,621,356. For the last ten years the Company has experienced a
continued trend of increased earnings. This record income for 1999 produced
diluted earnings per share of $1.70 compared to $1.42 for 1998 and $1.36 for
1997.
The Company's Return on Average Assets (ROA) and Return on Equity (ROE)
compare favorably with regional and national peer groups. ROA was 1.62% in 1999
compared to 1.50% in 1998 and 1.60% in 1997. ROE was 14.95% in 1999, 14.08% in
1998 and 15.24% in 1997. ROA and ROE increased in 1999 due in large part to an
increase in net interest earnings. ROE had declined for the last three years
prior to 1999 due to the impact of increased retained earnings that caused the
capital levels to rise. During this period, the leverage capital ratio
increased from 9.43% in 1996 to 11.06% in 1999.
FORWARD LOOKING STATEMENTS
This Annual Statement made by the Company, as well as other filings,
reports and press releases made or issued by the Company and the Bank, and oral
statements made by executive officers of the Company 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 Company and the Bank do
business, and (b) expectations for increased revenues and earnings for the
Company 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" provision 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 Company 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 operation, performance, development and results of the Company'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 Company operates; (b) changes in the legislative and
regulatory environment that negatively impact the Company and Bank through
increased operating expenses; (c) increased competition from other financial
institutions; (d) the impact of technological advances; and (e) other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. The Company does not undertake any obligation to update or
revise any forwarding-looking statements subsequent to the date on which they
are made.
The following selected data has been taken from the Company's consolidated
financial statements and should be read in conjunction with the consolidated
financial statements and related notes included elsewhere. The major components
of the Company's operating results for the past five years are summarized in
Table 1 - Five Year Financial Summary. All dollar references in this report are
in thousands except for per share data.
TABLE 1 - FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED STATISTICS
(amounts in thousands, except percent and per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
SUMMARY OF EARNINGS
- -------------------
<S> <C> <C> <C> <C> <C>
Total Interest Income $ 25,024 $ 23,551 $ 21,506 $ 20,255 $ 17,945
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total Interest Expense 10,974 10,860 9,659 8,684 7,727
Provision for loan losses 849 846 740 791 604
Non-interest income 3,574 3,320 2,990 2,686 2,433
Non-interest expense 8,361 7,966 7,046 6,665 6,379
Income tax expense 2,793 2,487 2,561 2,407 2,046
Net Income 5,621 4,712 4,490 4,394 3,622
PER SHARE DATA
Earnings-basic and diluted $ 1.70 $ 1.42 $ 1.36 $ 1.33 $ 1.15
Cash dividends 0.32 0.24 0.17 0.15 0.14
Book value at year end 11.35 10.72 9.44 8.09 7.25
SELECTED YEAR END ACTUAL BALANCES
Loans, net of unearned income $234,349 $211,349 $194,304 $177,005 $154,380
Allowance for possible loan losses (3,100) (2,900) (2,700) (2,500) (2,300)
Investment securities 102,451 91,539 67,292 72,472 76,022
Total assets 362,790 334,232 286,634 270,679 264,453
Deposits 284,462 282,242 248,984 229,443 238,677
Long term borrowings 10,000 10,000 0 33 65
Shareholders' equity 37,546 35,455 31,220 26,758 22,858
SELECTED YEAR END AVERAGE BALANCES
Loans, net of unearned income $221,165 $202,228 $186,843 $168,542 $141,192
Allowance for possible loan losses (2,974) (2,701) (2,523) (2,342) (2,103)
Investment securities 97,219 79,401 70,023 76,138 75,847
Total assets 347,613 314,896 279,961 271,241 242,024
Deposits 288,176 268,514 242,459 238,358 216,479
Long term borrowings 10,000 7,630 3 35 127
Shareholders' equity 37,603 33,513 28,920 24,610 21,195
SELECTED RATIOS
Return on average assets 1.62% 1.50% 1.60% 1.62% 1.50%
Return on average equity 14.95% 14.08% 15.24% 17.77% 17.15%
Dividend payout 18.84% 16.85% 12.52% 11.29% 12.15%
Equity to year end assets 10.35% 10.61% 10.89% 9.89% 8.64%
Total risk-based capital to
risk-adjusted assets 18.81% 18.13% 17.02% 15.84% 14.78%
Leverage capital ratio 11.06% 10.61% 10.46% 9.43% 8.38%
Efficiency ratio 45.48% 48.01% 45.56% 45.29% 49.02%
</TABLE>
NET INTEREST INCOME
Net interest income is the most significant component of the Company'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.
Net interest income or margin improved $1,357,977 in 1999 over 1998. This
increase was caused by a combination of lower rates paid on interest bearing
accounts during the first part of the year and an increase in the volume of
higher yielding assets such as loans. Loan demand during 1999 was exceptionally
strong and allowed the Company to move surplus liquidity out of typically lower
yielding Federal Funds Sold to fund increases in the loan portfolio.
7
<PAGE>
TABLE 2 - AVERAGE BALANCE SHEETS AND INTEREST RATES
<TABLE>
<CAPTION> Average Balance Income/Expense Yield/Rate
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Commercial Loans $199,537 $181,931 $167,628 $17,138 $16,122 $15,033 8.59% 8.86% 8.97%
Installment Loans (Net) 20,751 20,297 19,552 2,199 2,185 2,073 10.60% 10.77% 10.60%
-------- -------- -------- ------- ------- ------- ----- ----- -----
Total Loans 220,288 202,228 187,180 19,337 18,307 17,106 8.78% 9.05% 9.14%
Investment Securities
Taxable 80,074 70,801 63,333 4,729 4,213 4,117 5.91% 5.95% 6.50%
Tax-exempt 16,143 8,600 5,345 1,191 565 350 7.38% 6.57% 6.55%
-------- -------- -------- ------- ------- ------- ----- ----- -----
Total Investment Securities 96,218 79,401 68,678 5,920 4,778 4,467 6.15% 6.02% 6.50%
Federal Funds Sold and Other 3,541 11,380 2,190 172 614 129 4.78% 5.32% 5.81%
-------- -------- -------- ------- ------- ------- ----- ----- -----
Total Interest Earning Assets 320,047 293,009 258,048 25,429 23,699 21,702 7.94% 8.09% 8.41%
-------- -------- -------- ------- ------- ------- ----- ----- -----
Non-Earning Assets 27,566 21,887 21,913
-------- -------- --------
Total Assets $347,613 $314,896 $279,961
======== ======== ========
Deposits:
Interest-bearing Demand Dep $ 77,820 $ 68,330 $ 57,281 $ 2,099 $ 1,958 $ 1,590 2.70% 2.87% 2.78%
Savings 19,481 18,201 17,313 603 678 675 3.10% 3.72% 3.90%
Time 153,497 147,074 132,742 7,385 7,761 7,192 4.81% 5.28% 5.42%
-------- -------- -------- ------- ------- ------- ----- ----- -----
Total Deposits 250,799 233,605 207,336 10,087 10,397 9,457 4.02% 4.45% 4.56%
Borrowed Funds
Short-term Borrowings 5,805 635 4,148 323 33 202 5.49% 5.13% 4.80%
Long-term Borrowings 10,000 7,630 0 564 430 0 5.56% 5.56% 0.00%
-------- -------- -------- ------- ------- ------- ----- ----- -----
Total Borrowed Funds 15,805 8,265 4,148 887 463 202 5.53% 5.53% 4.80%
-------- -------- -------- ------- ------- ------- ----- ----- -----
Total Interest-Bearing
Liabilities 266,604 241,870 211,484 10,974 10,860 9,659 4.11% 4.49% 4.57%
Non-Interest Bearing Liabilities
Demand Deposits 37,378 34,909 34,995
Other Liabilities 6,028 4,604 4,562
Shareholder's Equity 37,603 33,513 28,920
-------- -------- --------
Total Liabilities and
Shareholder's Equity $347,613 $314,896 $279,961
======== ======== ========
INTEREST RATE SPREAD 3.83% 3.60% 3.84%
===== ===== =====
NET INTEREST INCOME $14,454 $12,839 $12,043
======= ======= =======
NET INTEREST MARGIN 4.52% 4.38% 4.67%
===== ===== =====
</TABLE>
Table 3 - Net Interest Earning Assets illustrates net interest earning assets
and liabilities for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
TABLE 3 - NET INTEREST EARNING ASSETS
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Average interest earning assets $320,047 $293,009 $258,048
Average interest bearing liabilities 269,280 241,870 211,484
-------- -------- --------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net interest earning assets $ 50,767 $ 51,139 $ 46,564
======== ======== ========
</TABLE>
Table 4 - Volume and Rate Analysis depicts the dollar effect of volume and rate
changes from 1997 through 1999. 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. Non-
accruing 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%.
<TABLE>
<CAPTION>
TABLE 4 - VOLUME/RATE ANALYSIS
1999 change from 1998 1998 change from 1997
Volume Rate Total Volume Rate Total
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,576 ($546) $1,030 $1,367 ($166) $1,201
Taxable Securities 546 (30) 516 448 (352) 96
Non-Taxable Securities 556 70 626 213 2 215
FHLB Account (42) (14) (56) 77 10 87
Federal Funds Sold (333) (53) (386) 410 (12) 398
------ ------ ------ ------ ----- ------
TOTAL INTEREST INCOME 2,303 (573) 1,730 2,515 (518) 1,997
------ ------ ------ ------ ----- ------
INTEREST EXPENSE
Interest-bearing demand deposits 256 (115) 141 317 51 368
Savings Deposits 39 (114) (75) 33 (30) 3
Time Deposits 309 (685) (376) 756 (187) 569
Short-term borrowings 179 10 189 (183) 14 (169)
Long-term borrowings 230 5 235 430 0 430
------ ------ ------ ------ ----- ------
TOTAL INTEREST EXPENSE 1,013 (899) 114 1,353 (152) 1,201
------ ------ ------ ------ ----- ------
NET INTEREST INCOME $1,290 $ 326 $1,616 $1,162 ($366) $ 796
====== ====== ====== ====== ===== ======
</TABLE>
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
The provision for possible loan losses represents charges against
operations to establish reserves for possible loan losses contained in the
Company's loan portfolio. This expense is determined by a number of factors
including historical loan losses, assessment of specific credit weaknesses
within the portfolio, assessment of the prevailing economic climate, and other
factors that may affect the overall condition of the loan portfolio. The
provision was $849,344 in 1999, $846,466 in 1998 and $740,309 in 1997. At the
end of 1999, the reserve for loan losses was $3,100,000, an amount that
management considers to be sufficient to protect against future loan losses.
Activity in the allowance for loan losses is reflected in Table 5 -
Analysis of Allowance for Loan Losses. 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>
<CAPTION>
TABLE 5 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 2,900 $ 2,700 $ 2,500 $ 2,300 $ 2,100
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
LOANS CHARGED-OFF
Commercial and agricultural 320 364 326 287 163
Real estate 74 10 13 41 72
Consumer 460 434 383 377 350
Credit card 62 71 66 51 17
-------- -------- -------- -------- --------
TOTAL CHARGE-OFFS 916 879 788 756 602
CHARGE-OFFS RECOVERED
Commercial and agricultural 122 55 89 41 76
Real estate 0 3 0 0 22
Consumer 130 147 145 115 100
Credit card 15 28 14 9 0
-------- -------- -------- -------- --------
TOTAL RECOVERIES 267 233 248 165 198
-------- -------- -------- -------- --------
Net loans charged-off 649 646 540 591 404
Current year provision 849 846 740 791 604
-------- -------- -------- -------- --------
BALANCE AT END OF YEAR $ 3,100 $ 2,900 $ 2,700 $ 2,500 $ 2,300
======== ======== ======== ======== ========
Loans at year end $234,349 $211,349 $191,605 $177,005 $154,380
Ratio of allowance to loans
at year end 1.32% 1.37% 1.41% 1.41% 1.49%
Average loans $220,288 $202,228 $187,180 $168,542 $141,192
Ratio of net loans charged-off
to average loans 0.29% 0.32% 0.29% 0.35% 0.29%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Commercial and Agricultural $ 550 $ 500 $ 450 $ 400 $ 350
Real Estate 350 300 300 250 200
Consumer 900 800 750 700 650
Unallocated 1,300 1,300 1,200 1,150 1,100
------ ------ ------ ------ ------
Total $3,100 $2,900 $2,700 $2,500 $2,300
====== ====== ====== ====== ======
</TABLE>
COMPOSITION OF LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural 15.64% 15.34% 13.15% 13.75% 15.72%
Real estate 62.32% 60.80% 62.81% 63.08% 60.60%
Consumer 21.03% 22.74% 23.25% 22.41% 22.99%
Other 1.01% 1.12% 0.79% 0.76% 0.69%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
10
<PAGE>
Nonperforming assets and relative percentages to loan balances are
presented in Table 6 - Nonperforming Assets. Nonperforming loans include non-
accrual loans, restructured loans, and loans delinquent 90 days or more. Loans
are classified as non-accrual 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.
<TABLE>
<CAPTION>
TABLE 6 - NONPERFORMING ASSETS
As of December 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 390 $ 649 $ 344 $ 171 $ 91
Loans 90 days or more past due 1,643 1,641 1,862 1,731 1,303
------- ------- ------- ------- -------
TOTAL NONPERFORMING LOANS $ 2,033 $ 2,290 $ 2,206 $ 1,902 $ 1,394
======= ======= ======= ======= =======
Nonperforming as a percent of loans 0.87% 1.08% 1.15% 1.07% 0.90%
Other real estate owned 292 57 10 132 217
OREO as a percent of loans 0.15% 0.03% 0.01% 0.07% 0.14%
Allowance as a percent of
nonperforming loans 152.48% 126.64% 122.39% 131.44% 164.99%
</TABLE>
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 1999, 1998, and 1997.
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.
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.
11
<PAGE>
NON-INTEREST INCOME AND EXPENSE
A listing of non-interest income and expense from 1997 through 1999 and
percentage changes between years is included in Table 7 - Non-interest Income
and Expense.
<TABLE>
<CAPTION>
TABLE 7 - NON-INTEREST INCOME & EXPENSE
% CHANGE % CHANGE
1999 FROM '98 1998 FROM '97 1997
--------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
NON-INTEREST INCOME
Income from fiduciary activities $ 2 100.00% $ 1 -66.67% $ 3
Service charges on deposit accounts 2,372 8.91% 2,178 12.62% 1,934
Other operating income 1,200 5.17% 1,141 8.36% 1,053
------ ------ ------ ------ ------
TOTAL NON-INTEREST INCOME $3,574 7.65% $3,320 11.04% $2,990
====== ====== ====== ====== ======
NON-INTEREST EXPENSE
Salaries and employee benefits $4,656 -0.17% $4,664 15.82% $4,027
Occupancy expense 1,365 11.34% 1,226 27.05% 965
Other operating expense 2,340 12.72% 2,076 1.07% 2,054
------ ------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE $8,361 4.96% $7,966 13.06% $7,046
====== ====== ====== ====== ======
</TABLE>
Non-interest income typically consists of service charges on checking
accounts and other financial services. With continued pressure on net interest
income, the Company has sought to increase its non-interest income through the
expansion of fee income and the development of new services. Currently, the
Company's main sources of non-interest income are service charges on checking,
safe deposit box rentals, credit life insurance premiums, and income
contributions from the Company's credit life insurance subsidiary.
Non-interest income for 1999 was $3,574,259, an increase of $253,609 or
7.65% over 1998. This increase was attributable to increases in checking account
service charges related to volume increases, an increase in the number of safe
deposit boxes rented, and another year of increased income from its credit life
subsidiary.
Similarly, non-interest income rose by $330,524 or 11.04% in 1998 over
1997. This increase was also due to increased fees from the addition of more
deposit accounts and good earnings growth from the credit life subsidiary.
Non-interest expenses consist of salaries and benefits, occupancy expense
and other overhead expenses incurred by the Company in the transaction of its
business. Non-interest expense rose $393,850 or 4.95% in 1999 over 1998 and
rose $920,272 in 1998 over 1997. In part the unusual increase in 1998 was due
to the expense of Year 2000 preparations and related actions, and the effect of
an extra biweekly payroll incurred in 1998 due to the timing of the payroll
periods.
In 1999 the Company's efficiency ratio was 45.48% compared to 48.01% in
1998 and 45.56% in 1997. The efficiency ratio is calculated by dividing non-
interest expense by the sum of net interest income, on a fully tax equivalent
basis, and non-interest income. The ability to control overhead expenses, while
at the same time increasing earning assets, has contributed to the increased net
income levels enjoyed by the Company.
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
12
<PAGE>
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 33.19%, 34.54% and 36.32% in 1999,
1998 and 1997, respectively. Further tax information regarding the Corporation
is disclosed in Note 5 to the consolidated financial statements.
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 1999, the Corporation classified all of its
securities as available-for-sale.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, " Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measures those instruments at fair
value. In 1999, SFAS No. 133 was amended to extend its effective date such that
it is applicable to financial statements for all fiscal quarters beginning after
June 15, 1999. Management does not believe that the implementation of SFAS No.
133 will have any impact on the financial statements of the Company because the
Company does not engage in derivative or hedging activities.
Table 8 - Securities and Security Maturity Schedule summarizes the carrying
value of securities from 1997 through 1999 and the maturity distribution at
December 31, 1999, 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
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U. S. Treasuries $ 41,428 $37,879 $31,345
U. S. Agencies 18,670 15,757 15,261
Mortgage Backed 19,466 23,556 14,336
States, municipals and other 22,887 14,347 6,350
-------- ------- -------
TOTAL SECURITIES AVAILABLE-FOR-SALE $102,451 $91,539 $67,292
-------- ------- -------
SECURITIES HELD-TO-MATURITY
TOTAL SECURITIES HELD-TO-MATURITY $ 0 $ 0 $ 0
-------- ------- -------
TOTAL SECURITIES $102,451 $91,539 $67,292
======== ======= =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SECURITIES MATURITY SCHEDULE
1 year and less 1 to 5 years 5 to 10 years over 10 years
Balance Rate Balance Rate Balance Rate Balance Rate
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U. S. Treasury $13,987 5.99% $27,441 5.94% $ 0 0.00% $ 0 0.00%
U. S. Agencies 0 0.00% 6,046 6.27% 10,794 6.48% 1,830 6.47%
Mortgage-backed 0 0.00% 127 5.62% 1,838 6.44% 17,501 5.57%
States, municipal and other (1) 2,805 8.08% 4,383 7.14% 2,627 7.47% 13,072 7.95%
------- ---- ------- ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE $16,792 6.34% $37,997 6.13% $15,259 6.65% $32,403 6.58%
======= ==== ======= ==== ======= ==== ======= ====
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%.
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 1999 and
1998 was a result of the swing in the interest rate environment during that
period, in conjunction with the change in the portfolio mix.
LOANS
The loan portfolio constitutes the major earning asset of the Company and
in the opinion of management offers the best alternative for maximizing interest
spread above the cost of funds. The Company's loan personnel has 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.
In general, the loan growth experienced in 1999 was due to a continuation
of the overall growth in the area that is served by the Company. 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 $8,738,416 or 14.90% in 1999,
$4,518,516 or 8.35% in 1998, and $3,203,000 or 6.29% in 1997.
Commercial and agricultural loans also showed large growth during this
period. These loans grew $13,678,000 or 13.8% in 1999, $8,266,000 or 9.11% in
1998, and $9,601,000 or 11.84% in 1997. 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.
14
<PAGE>
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 growth of loans 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.
<TABLE>
<CAPTION>
TABLE 9 - LOANS OUTSTANDING
AT DECEMBER 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $112,634 $ 98,956 $ 90,690 $ 81,089 $ 66,781
Real estate - construction 7,157 6,645 4,533 5,826 6,174
Real estate - mortgage 67,376 58,637 54,119 50,916 47,481
Consumer 49,840 49,734 47,466 44,015 38,482
-------- -------- -------- -------- --------
TOTAL LOANS $237,007 $213,972 $196,808 $181,846 $158,918
======== ======== ======== ======== ========
</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>
<CAPTION>
TABLE 10 - LOAN LIQUIDITY
LOAN MATURITIES AT DECEMBER 31, 1999
1 YEAR 1 - 5 OVER 5
AND LESS YEARS YEARS Total
------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
All loans-net of unearned $93,607 $123,171 $17,571 $234,349
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
SENSITIVITY TO CHANGES IN INTEREST RATES
1 - 5 OVER 5
YEARS YEARS
----------- ------------
<S> <C> <C>
Fixed rates $112,201 $12,444
Variable rates 10,970 5,127
-------- -------
$123,171 $17,571
======== =======
</TABLE>
DEPOSITS
The Corporation offers a wide variety of deposit services to individual and
commercial customers, such as non-interest-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.
Time deposits continue to be the largest single source of the Corporation's
deposit base.
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>
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ------- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing $ 37,378 $ 34,909 $ 34,995
Interest-bearing demand 77,820 2.69% 68,330 2.87% 57,281 2.78%
Savings 19,481 3.09% 18,201 3.73% 17,313 3.90%
Certificates of deposit 153,497 4.81% 147,074 5.28% 132,742 5.42%
-------- ---- -------- ---- -------- ----
Total Deposits $288,176 3.50% $268,514 3.88% $242,331 3.90%
======== ==== ======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
MATURITY RANGES OF TIME DEPOSITS
WITH BALANCES OF $100K OR MORE AT DECEMBER 31, 1999
1999
------------
<S> <C>
3 months or less $23,543
3 through 6 months 12,281
6 through 12 months 18,807
over 12 months 1,290
-------
$55,921
=======
</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).
<TABLE>
<CAPTION>
TABLE 12 - SHORT-TERM BORROWINGS
As of December 31,
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Year-end balance of federal funds purchased $10,600 $ 0 $ 0
Year-end balance of FHLB borrowings 13,100 0 0
Year-end balance of treasury tax and loan note 700 700 700
------- ----- ------
$24,400 $ 700 $ 700
======= ===== ======
Maximum month-end balance of federal
funds purchased $13,500 $ 300 $4,300
Maximum month-end balance of Federal
Home Loan Bank borrowings $13,100 $ 0 $8,600
Maximum month-end balance of Treasury
Tax and Loan Note $ 700 $ 700 $ 700
Average balance of short term borrowings $ 5,805 $ 635 $4,148
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Weighted average rate of borrowings 5.48% 5.20% 4.87%
</TABLE>
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 $85,948,000
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 1999, had long-term debt in the amount of
$10,000,000 to the Federal Home Loan Bank for advances and $2,727,004 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, 1999 is listed below.
Less than one year $ 0
One year to three years 1
Over three years 12,726
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 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, 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 1999
and 1998.
<TABLE>
<CAPTION>
TABLE 13 - FUNDING USES AND SOURCES
1999 1998
---------- ----------
Average Increase/ (Decrease) Average Increase/ (Decrease)
Balance Amount Percent Balance Amount Percent
-------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FUNDING USES
Loans $220,288 $18,060 8.93% $202,228 $ 33,686 19.99%
Taxable securities 80,074 9,273 13.10% 70,801 1,500 2.16%
Tax-exempt securities 16,143 7,543 87.71% 8,600 2,584 42.95%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Bank stock 1,002 (140) -12.26% 1,142 321 39.10%
Federal funds sold 2,823 (6,981) -71.21% 9,804 4,092 71.64%
-------- ------- ------ -------- -------- --------
$320,330 $27,755 9.49% $292,575 $ 42,183 16.85%
======== ======= ====== ======== ======== ========
FUNDING SOURCES
Non-interest-bearing deposits $ 37,378 $ 2,469 7.07% $ 34,909 ($2,985) -7.88%
Interest-bearing demand and
savings deposits 97,301 10,770 12.45% 86,531 1,814 2.14%
Time Deposits 153,497 6,423 4.37% 147,074 31,327 27.07%
Short-term borrowings 5,805 5,170 814.17% 635 (2,694) -80.93%
Long-term debt 12,676 5,046 66.13% 7,630 7,595 21700.00%
-------- ------- ------ -------- -------- --------
$306,657 $29,878 10.79% $276,779 $ 35,057 14.50%
======== ======= ====== ======== ======== ========
</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.
<TABLE>
<CAPTION>
TABLE 14 - LIQUIDITY AND INTEREST RATE SENSITIVITY
At December 31, 1999
1 - 90 91 - 365 1 - 5 Over
Days Days Years 5 years Total
-------- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $ 60,356 $ 52,779 $104,846 $ 9,337 $227,318
Investment securities 11,416 21,236 40,163 27,099 99,914
Federal Home Loan Bank Account 182 0 0 0 0
Federal Funds Sold 0 0 0 0 0
--------- --------- -------- ------- --------
$ 71,954 $ 74,015 $145,009 $36,436 $327,232
========= ========= ======== ======= ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 74,860 $ 0 $ 0 $ 0 $ 74,860
Savings deposits 19,949 0 0 0 19,949
Time deposits 62,507 85,226 4,989 0 152,722
Short term borrowings 24,400 0 0 0 24,400
Long term borrowings 0 0 0 10,000 10,000
--------- --------- -------- ------- --------
TOTAL INTEREST BEARING LIABILITIES $ 181,716 $ 85,226 $ 4,989 $10,000 $281,931
========= ========= ======== ======= ========
Rate sensitive gap (109,762) (11,211) 140,020 26,436 45,301
Rate sensitive cumulative gap (109,762) (120,973) 19,047 45,483
Cumulative gap as a percentage of
total earning assets -33.54% -36.97% 5.82% 13.90%
</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.
18
<PAGE>
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 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, 1999 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 RESOURCES
The Company and Bank are subject to various regulatory capital guidelines
as required by federal and state banking agencies. 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 Company and the Bank meet all the capital
requirements as of December 31, 1999, as noted below in Table 15 - Capital
Ratios, and are well-capitalized under the guidelines established by the banking
regulators. To be well-capitalized, the Company and Bank must maintain the
prompt corrective action capital guidelines described above.
<TABLE>
<CAPTION>
TABLE 15 - CAPITAL RATIOS
At December 31,
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Tier 1 capital
Shareholders' equity $ 37,546 $ 35,456 $ 31,221
Less: Intangibles (650) (717) (784)
Add/less: Unrealized loss/(gain) on securities 1,542 (930) (613)
Add: Minority interest in equity accounts of
unconsolidated subsidiaries 1,261 1,200 1,106
-------- -------- --------
TOTAL TIER 1 CAPITAL $ 39,699 $ 35,009 $ 30,930
======== ======== ========
Total capital
Tier 1 capital 39,699 35,009 30,930
Allowable allowance for loan losses 2,826 2,597 2,356
-------- -------- --------
TOTAL CAPITAL $ 42,525 $ 37,606 $ 33,286
======== ======== ========
RISK WEIGHTED ASSETS $226,078 $207,437 $188,098
======== ======== ========
AVERAGE ASSETS (FOURTH QUARTER) $358,940 $330,079 $283,195
======== ======== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
RISK BASED RATIOS
<S> <C> <C> <C>
TIER 1 17.56% 16.88% 16.44%
======== ======== ========
TOTAL CAPITAL 18.81% 18.13% 17.70%
======== ======== ========
LEVERAGE RATIOS 11.06% 10.61% 10.92%
======== ======== ========
</TABLE>
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.
CHANGE IN ACCOUNTANTS
Effective December 31, 1998, A. T. Williams, CPA, declined to stand as
external auditor based solely on his opinion that it would be in the best
interest of the Company to engage an accounting firm experienced with the
accounting and reporting requirements of the Securities and Exchange Commission
and The American Stock Exchange. Therefore, on December 31, 1998 Horne CPA
Group was engaged to provide audit and tax services for the Company beginning
with the audit and tax returns for the year ended December 31, 1998.
Management is not aware of any disagreements with either of the accountants
for the period of time covered by the financials included in this report. The
Horne CPA Group was selected by the Audit Committee after evaluating several
firms with SEC experience and was approved by the Board of Directors of the
Company.
STOCK DIVIDEND AND PRICE INFORMATION
The Company's common stock is listed on the American Stock Exchange (AMEX)
under the symbol "CIZ". The stock began trading on the AMEX on October 19, 1999
and prior to that date was sold by private transactions between a buyer and a
seller. At December 31, 1999, the Company's common stock closing price was
$21.00. Since listing with AMEX, the stock has traded as high as $29.25 and as
low as $20.00. The high price of $29.25 occurred on October 19, 1999.
Book value for a share of the Company's common stock at December 31, 1999
was $11.35, up from $10.72 in 1998 and $9.44 in 1997. The year-end market price
for the Company's common stock of $21.00 per share represents 185% of the
Company's book value at the end of the year and reflects a total market
capitalization of $69.5 million. Using the year-end market price and 1999
earnings per share, the Company's common stock closed the year trading at a
price/earnings multiple of 12.4.
20
<PAGE>
Consolidated Financial Statements for
Years Ended December 31, 1999, 1998 and 1997
CITIZENS HOLDING COMPANY
AND SUBSIDIARY
Philadelphia, Mississippi
Consolidated Audited Financial Statements
Years Ended December 31, 1999, 1998, and 1997
21
<PAGE>
CONTENTS
Independent Auditor's Report 1
Consolidated 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 - 7
Notes to Consolidated Financial Statements 8 - 27
22
<PAGE>
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, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for the years 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 audits. 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 year then ended were audited by
other auditors whose report, dated July 2, 1998, expressed an unqualified
opinion on those financial statements.
We conducted our audits 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 misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 1999 and 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, 1999 and 1998, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
Jackson, Mississippi
January 28, 2000
23
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,312,028 $ 15,234,594
Interest bearing deposits with other banks 182,042 1,063,244
Federal funds sold - 4,500,000
Securities Available for Sale, at Fair Value (amortized
cost of $104,799,083 in 1999, and $90,079,947 in 1998) 102,451,360 91,538,504
Loans, net of allowance for loan losses of
$3,100,000 in 1999 and $2,900,000 in 1998 231,248,551 208,449,416
Bank premises, furniture, fixtures and equipment, net 4,410,976 4,433,652
Real estate acquired by foreclosure 291,508 57,094
Accrued interest receivable 3,683,849 3,697,109
Cash value of life insurance 2,828,265 2,516,361
Goodwill (net) 649,854 716,862
Other assets 3,731,269 2,024,973
--------------------------------------
Total Assets $362,789,702 $334,231,809
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand deposits $ 37,090,779 $ 37,983,554
Interest bearing NOW and money market accounts 74,616,711 68,391,505
Interest bearing time deposits 152,722,496 156,760,846
Interest bearing savings deposits 20,031,653 19,106,323
--------------------------------------
Total deposits 284,461,639 282,242,228
Federal funds purchased 10,600,000 10,000,000
Federal Home Loan Bank advances 23,100,000 -
Accrued interest payable 1,242,916 1,274,059
Directors deferred compensation payable 812,130 718,868
Treasury tax & loan 700,000 700,000
ABE loans 2,727,004 2,416,327
Other Liabilities 339,403 225,389
--------------------------------------
Total Liabilities 323,983,092 297,576,871
--------------------------------------
Minority interest 1,260,649 1,199,628
Stockholders' Equity
Common stock, $.20 par value, authorized
15,000,000 shares; 3,353,750 shares issued 670,750 670,750
Additional paid in capital 3,353,127 3,353,127
Accumulated other comprehensive income, net of income
taxes (tax benefit) of $(821,577) in 1999 and $495,909 in 1998 (1,542,020) 929,885
Retained earnings 35,303,504 30,740,948
--------------------------------------
37,785,361 35,694,710
Less cost of treasury stock - 45,000 shares
in 1999 and 1998 (239,400) (239,400)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
Total Stockholders' Equity 37,545,961 35,455,310
--------------------------------------
Total Liabilities and Stockholders' Equity $362,789,702 $334,231,809
======================================
</TABLE>
See accompanying notes.
25
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $19,336,895 $18,305,619 $17,104,693
Investment securities
Taxable 4,728,655 4,212,634 4,034,214
Non-taxable 786,337 418,787 238,050
Other 171,683 614,469 129,141
---------------------------------------------------------------
Total Interest Income 25,023,570 23,551,509 21,506,098
---------------------------------------------------------------
Interest Expense
Deposits 10,087,438 10,397,077 9,659,139
Other borrowed funds 886,774 463,051 333
---------------------------------------------------------------
Total Interest Expense 10,974,212 10,860,128 9,659,472
---------------------------------------------------------------
Net Interest Income 14,049,358 12,691,381 11,846,626
Provision for loan losses (849,344) (846,466) (740,309)
---------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 13,200,014 11,844,915 11,106,317
---------------------------------------------------------------
Non-Interest Income
Service charges on deposit accounts 2,371,809 2,177,631 1,933,769
Other service charges and fees 560,049 427,008 263,137
Other income 642,401 716,011 793,220
---------------------------------------------------------------
Total Non-Interest Income 3,574,259 3,320,650 2,990,126
---------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits 4,656,363 4,663,908 4,027,335
Occupancy expense 552,348 533,091 339,234
Equipment expense 813,000 693,107 626,165
Net bond losses 55 18,941 116,859
Earnings applicable to minority 196,475 163,662 165,121
Other expense 2,142,056 1,893,738 1,771,461
---------------------------------------------------------------
Total Non-Interest Expense 8,360,297 7,966,447 7,046,175
---------------------------------------------------------------
Income before income taxes 8,413,976 7,199,118 7,050,268
Income tax expense 2,792,620 2,486,682 2,560,695
---------------------------------------------------------------
Net Income $ 5,621,356 $ 4,712,436 $ 4,489,573
===============================================================
Net Income Per Share of
Common stock (Basic and
Diluted) $ 1.70 $ 1.42 $ 1.36
===============================================================
Average Shares Outstanding:
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C>
Basic 3,308,750 3,308,750 3,308,750
===============================================================
Diluted 3,316,023 3,308,750 3,308,750
===============================================================
</TABLE>
See accompanying notes.
27
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 5,621,356 $ 4,712,436 $ 4,489,573
-----------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
NET OF TAX
UNREALIZED HOLDING GAINS (LOSSES)
DURING YEAR (2,471,959) 297,552 418,185
LESS RECLASSIFICATION ADJUSTMENT FOR
LOSSES INCLUDED IN NET INCOME (54) (18,941) (116,849)
-----------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME
INCOME (LOSS) (2,471,905) 316,493 535,034
-----------------------------------------------------------
COMPREHENSIVE INCOME $ 3,149,451 $ 5,028,929 $ 5,024,607
===========================================================
</TABLE>
See accompanying notes.
28
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated
Number of Additional Other
Shares Common Paid-In Comprehensive Retained Treasury
Issued Stock Capital Income Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income - - - 5,621,356 - 5,621,356
Dividends paid - - - (1,058,800) - (1,058,800)
5 for 1 stock split 2,683,000 - - - - - -
Other comprehensive
income (loss) - - - (2,471,905) - - (2,471,905)
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
Balance, December 31, 1999 3,353,750 670,750 3,353,127 (1,542,020) $ 35,303,504 $ (239,400) $ 37,545,961
===========================================================================================
</TABLE>
See accompanying notes.
30
<PAGE>
Page 1 of 2
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 5,621,356 $ 4,712,436 $ 4,489,573
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 526,778 450,039 402,071
Amortization of goodwill 67,008 67,008 67,008
Amortization of premiums and accretion
of discounts on investment securities (68,773) (46,683) (106,504)
Provision for loan losses 849,345 846,466 740,309
Investment securities losses 54 18,940 116,859
Deferred income tax benefit (49,041) (113,214) (117,793)
Net earnings applicable to minority interest 61,021 93,876 142,120
(Increase) decrease in real estate
acquired by foreclosure (234,414) (47,174) 122,306
(Increase) decrease in accrued interest 13,260 (543,241) (264,105)
receivable
Increase in cash value of life insurance (311,904) (298,748) (309,709)
Increase in other assets (322,880 (439,529) (491,427)
Increase (decrease) in income taxes payable - (34,029) (132,429)
Increase (decrease) in accrued interest payable (31,143) (41,998) 189,296
Increase in directors deferred compensation 93,262 88,557 64,304
Increase in other liabilities 114,014 69,882 13,275
----------------------------------------------------
Net Cash Provided by Operating Activities 6,327,943 4,782,588 4,925,154
----------------------------------------------------
Cash Flows from Investing Activities
Proceeds from maturities of securities available
for sale 19,931,583 18,965,865 11,911,072
Proceeds from sales of securities available for
sale 3,998,853 11,812,981 23,211,856
Purchases of investment securities (38,580,853) (54,505,473) (29,112,960)
Purchases of bank premises, furniture, fixtures
and equipment (504,102) (632,872) (873,137)
Decrease (increase) in interest bearing deposits
with other banks 881,202 (915,803) (114,017)
Net (increase) decrease in federal funds sold 4,500,000 1,000,000 (5,400,000)
Net decrease in loans (23,648,480) (17,691,166) (15,078,380)
----------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net Cash Used by Investing Activities (33,421,797) (41,966,468) (15,455,566)
----------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in federal funds purchased 600,000 10,000,000 (8,800,000)
Net increase (decrease) in deposits 2,219,411 33,258,683 19,540,826
Net increase (decrease) in ABE loans 310,677 (71,992) 226,740
Dividends paid to stockholders (1,058,800) (794,100) (562,487)
Redeemed debentures - (32,696)
Net increase in Federal Home Loan Bank advances 23,100,000
----------------------------------------------------
Net Cash Provided by Financing Activities 25,171,288 42,392,591 10,372,383
----------------------------------------------------
Net Increase (Decrease) in Cash
and Due from Banks (1,922,566) 5,208,711 (158,029)
Cash and due from banks, beginning of year 15,234,594 10,025,883 10,183,912
----------------------------------------------------
Cash and due from banks, end of year $ 13,312,028 $ 15,234,594 $ 10,025,883
====================================================
</TABLE>
32
<PAGE>
Page 2 of 2
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid for
Interest $ 11,005,355 $ 10,902,126 $ 9,470,176
====================================================
Income taxes $ 2,923,786 $ 2,647,655 $ 2,810,917
====================================================
Supplemental Schedule of Noncash Activities
Unrealized gain (loss)on securities
available for sale $ (3,806,280) $ 494,841 $ 840,556
====================================================
Increase (decrease) in deferred income tax asset on
unrealized gain on securities $ 1,317,486 $ (168,246) $ (285,790)
====================================================
Minority interest on unrealized (gain) loss on
securities $ 16,889 $ (10,102) $ (19,732)
====================================================
</TABLE>
See accompanying notes.
33
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
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, 1999, 1998, and 1997, the consolidated
financial statements of Citizens Holding Company include the accounts of its
96.62 percent 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.
34
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
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 gaming 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
35
<PAGE>
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.
36
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
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 15, 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.
37
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
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
approximate 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
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 assets 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.
38
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. CONTINUED
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. The weighted
average number of shares outstanding was 3,308,750 for each of the years ended
December 31, 1999, 1998 and 1997. Diluted net income per share is based on the
weighted average number of shares of common stock outstanding for the periods,
including dilutive potential common equivalent shares which reflect the dilutive
effect of the Company's outstanding stock options. Dilutive common equivalent
shares for the year ended December 31, 1999 were 7,273, all attributable to
stock options. There were no common equivalent shares outstanding in 1998 or
1997.
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 15 years.
Investment - Insurance Company
The Company is accounting for its investment in New South Life Insurance
Company, a 20 percent 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 $1,110,278 and
$895,443 at December 31, 1999 and 1998, respectively. Income from the
investment for the years ended December 31, 1999, 1998, and 1997 included in
other income totaled $214,835, $190,011, and $176,114, respectively.
Reclassifications
39
<PAGE>
Certain reclassifications were made to the financial statement amounts from the
prior year in order to facilitate comparability.
40
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
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 market values at December 31 were as
follows:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Direct $ 41,601,900 $ 98,168 $ 271,728 $ 41,428,340
U.S. Agency 19,275,580 21,994 627,733 18,669,841
Mortgage-backed securities 19,940,076 40,789 515,006 19,465,859
State, county and municipals 22,697,527 29,515 1,123,722 21,603,320
Federal Home Loan Bank stock 1,284,000 - 1,284,000
--------------------------------------------------------------------------------
$104,799,083 $ 190,466 $2,538,189 $102,451,360
================================================================================
1998
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
================================================================================
</TABLE>
U.S. Government and municipal securities with a carrying amount of
$83,889,814 (market value $82,166,708) December 31, 1999, and $72,253,231
(market value $73,659,355) at December 31, 1998, 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:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $ 3,713 $ 3,408 $ 51,990
Gross realized losses (3,767) (22,349) (168,849)
-----------------------------------------------------------
$ (54) $(18,941) $(116,859)
===========================================================
</TABLE>
41
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. CONTINUED
The carrying amounts and fair values of the maturities of investment securities
at December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 26,997,011 $ 26,509,321
Due in one to five years 47,436,007 47,008,298
Due from five to ten years 14,978,095 14,448,579
Due after ten years 15,387,970 14,485,162
---------------------------------------
$104,799,083 $102,451,360
=======================================
</TABLE>
The amortized cost and fair value of mortgage-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:
<TABLE>
<CAPTION>
1999 1998
CARRYING Carrying
AMOUNT Amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $112,634,451 $ 98,956,147
Real estate - construction 7,156,904 6,644,663
Real estate - mortgage 67,376,020 58,637,604
Consumer 49,839,705 49,733,697
----------------------------------------
237,007,080 213,972,111
Unearned discount (2,658,529) (2,622,695)
Allowance for loan losses (3,100,000) (2,900,000)
----------------------------------------
Loans, Net $231,248,551 $208,449,416
========================================
</TABLE>
42
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. CONTINUED
Changes in the reserve for possible loan losses were summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $2,900,000 $2,700,000 $2,500,000
Recoveries on loans previously charged-off 267,311 233,278 247,689
Loans charged-off (916,656) (879,744) (787,998)
Provision charged to expense 849,345 846,466 740,309
----------------------------------------------------------
Balance at December 31 $3,100,000 $2,900,000 $2,700,000
==========================================================
</TABLE>
Loans on nonaccrual status amounted to approximately $389,876, $649,353, and
$344,000 at December 31, 1999, 1998, and 1997, respectively. The effect of such
loans was to reduce net income by approximately $109,970, $135,049, and $32,305
in 1999, 1998, and 1997, respectively. No loans have been recognized as
impaired in conformity with FASB Statement 114 for 1999 and 1998.
NOTE 4. PREMISES, FURNITURE, FIXTURES AND EQUIPMENT
Components of premises, furniture, fixtures and equipment included in the
consolidated balance sheets at December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cost
Land $ 792,918 $ 746,968
Buildings 4,767,375 4,506,080
Furniture and equipment 4,326,548 4,129,692
---------------------------------------
Total Cost 9,886,841 9,382,740
Less accumulated depreciation 5,475,865 4,949,088
---------------------------------------
Bank Premises, Furniture, Fixtures
and Equipment, Net $4,410,976 $4,433,652
=======================================
</TABLE>
Depreciation expense amounted to $526,778, $450,039, and $402,071 for the years
ended December 31, 1999, 1998, and 1997, respectively.
43
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INCOME TAXES
The consolidated provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable
Federal $2,590,386 $2,370,478 $2,422,779
State 251,275 229,418 255,709
------------------------------------------------------------
2,841,661 2,599,896 2,678,488
Deferred federal (benefit) (49,041) (113,214) (117,793)
------------------------------------------------------------
Total Income Tax Expense $2,792,620 $2,486,682 $2,560,695
============================================================
</TABLE>
The differences between the federal statutory rate and the effective tax rates
for 1999, 1998, and 1997, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax based on statutory rate $2,860,752 $2,447,700 $2,310,150
State income tax 165,841 151,416 255,708
Change due to
Tax-exempt investment interest (301,076) (146,507) (82,050)
Minority interest 66,801 46,424 56,141
Other, net 302 (12,351) 20,745
----------------------------------------------------------
Income Taxes $2,792,620 $2,486,682 $2,560,695
==========================================================
</TABLE>
The net deferred tax asset at December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 823,642 $ 763,493
Deferred compensation liability 276,124 244,415
Other real estate 18,650 7,401
Investment securities basis (196,116) (141,037)
Unrealized gain or loss on available
for sale securities 821,577 (495,909)
--------------------------------------
$1,743,877 $ 378,363
======================================
</TABLE>
The net deferred tax assets are included in other assets. A valuation allowance
was not considered necessary at December 31, 1999 and 1998.
44
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of
$100,000, was approximately $55,921,436 and $59,600,591 in 1999 and 1998,
respectively.
The scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
- -----------------------------------------------------------
<S> <C>
2000 $140,714,009
2001 8,371,936
2002 3,518,442
2003 87,854
2004 30,255
------------
$152,722,496
============
</TABLE>
NOTE 7. FEDERAL HOME LOAN BANK ADVANCES
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are collateralized by all the Bank's stock in the FHLB and qualifying
first mortgage loans. Advances at December 31, 1999 consist of $13.1 million
repayable in 90 days or less at interest rates of 5.85 percent to 5.96 percent
and $10 million in long-term advances due in 2008, callable in 5 years at the
rate of 5.457 percent to 5.66 percent.
NOTE 8. INVESTMENT IN NEW SOUTH LIFE INSURANCE COMPANY
Condensed financial information of New South Life Insurance Company as of
December 31, 1999 and 1998, and for the years ended December 31, 1999, 1998, and
1997, was as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 260,856 $ 358,153
Investments 5,438,949 4,846,909
Deferred acquisition costs 700,460 781,928
Other assets 7,748 835
-------------------------------------
Total Assets $6,408,013 $5,987,825
=====================================
</TABLE>
45
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CONTINUED
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Unearned premium reserves $1,688,368 $1,885,097
Claims liability 150,751 135,613
Income taxes payable 50,372 139,678
Other liabilities 6,080 48,617
-----------------------------------
1,895,571 2,209,005
-----------------------------------
Common stock 250,000 250,000
Preferred stock 400,000 400,000
Paid-in capital 600,000 600,000
Retained earnings 3,262,442 2,528,820
-----------------------------------
4,512,442 3,778,820
-----------------------------------
Total Liabilities and Stockholders' Equity $6,408,013 $5,987,825
===================================
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Insurance premiums earned $1,309,027 $1,446,975 $1,402,455
Investment income 307,820 269,637 227,066
-----------------------------------------------------------
Total Income 1,616,847 1,716,612 1,629,521
-----------------------------------------------------------
Expenses
Claims incurred 249,230 216,568 311,134
Commissions and service
fees incurred 617,445 412,283 466,469
Other expenses 91,292 76,639 63,999
Income taxes (74,742) 217,391 166,300
-----------------------------------------------------------
Total Expenses 883,225 922,881 1,007,902
-----------------------------------------------------------
Net Income $ 733,622 $ 793,731 $ 621,619
===========================================================
</TABLE>
46
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. SUMMARIZED FINANCIAL INFORMATION OF CITIZENS HOLDING COMPANY
Summarized financial information of Citizens Holding Company, parent company
only, at December 31, 1999 and 1998, and for the years ended December 31, 1999,
1998, and 1997, was as follows:
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 245,872 $ 278,156
Investment securities available for sale 1,253,316 1,308,605
Investment in bank subsidiary 36,077,743 33,975,863
Other assets 34,775 21,235
--------------------------------------
Total Assets $37,611,706 $35,583,859
======================================
Liabilities
Income taxes payable - current $ 60,745 $ 50,424
Other liabilities 5,000 78,126
--------------------------------------
65,745 128,550
Stockholders' equity 37,545,961 35,455,309
--------------------------------------
Total Liabilities and Stockholders' Equity $37,611,706 $35,583,859
======================================
</TABLE>
Income Statements
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 81,743 $ 88,827 $ 81,086
Interest expense - 1,151 333
--------------------------------------------------------
Net Interest Income 81,743 87,676 80,753
--------------------------------------------------------
Other Income
Other 54,701 114,201 31,504
Equity in undistributed earnings
of subsidiary 5,592,799 4,634,119 4,462,364
--------------------------------------------------------
Total Other Income 5,647,500 4,748,320 4,493,868
--------------------------------------------------------
Other expense 93,566 77,138 18,228
--------------------------------------------------------
Income before Income Taxes 5,635,677 4,758,858 4,556,393
Income tax benefit 14,321 46,423 66,820
--------------------------------------------------------
Net Income $5,621,356 $4,712,435 $4,489,573
========================================================
</TABLE>
47
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONTINUED
Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $5,621,356 $4,712,435 $4,489,573
Adjustments to reconcile net income to
net cash provided by operating
activities
(Increase) decrease in other assets (13,540) 3,502 (3,948)
Increase (decrease) in income
taxes payable 10,321 (16,396) 43,782
Increase (decrease) in other
liabilities (73,126) 57,605 (32,174)
----------------------------------------------------------
Net Cash Provided by Operating
Activities 5,545,011 4,757,146 4,497,233
----------------------------------------------------------
</TABLE>
Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Investing Activities
Increase in investment securities
available for sale $(2,416,615) $ 209,138 $ 381,777
Increase in investment in bank subsidiary (2,101,880) (4,093,057) (4,374,032)
-----------------------------------------------------------
Net Cash Used by Operating
Activities (4,518,495) (3,883,919) (3,992,255)
-----------------------------------------------------------
Cash Flows from Financing Activities
Dividends paid to stockholders (1,058,800) (794,100) (562,488)
-----------------------------------------------------------
Net Increase (Decrease) in Cash (32,284) 79,127 (57,510)
Cash, beginning of year 278,156 199,029 256,539
-----------------------------------------------------------
Cash, end of year $ 245,872 $ 278,156 $ 199,029
===========================================================
</TABLE>
48
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. LEASES
The Bank leases computer equipment and some branch facilities under operating
leases. Rent expense was $48,000, $43,767, and $43,611 for 1999, 1998, and
1997, respectively. At December 31, 1999, the future minimum lease commitments
for leases which have terms in excess of one year are:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
- ------------------------------------------------
<S> <C>
2000 $ 54,000
2001 54,000
2002 54,000
2003 54,000
2004 14,000
--------
$230,000
========
</TABLE>
NOTE 11. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Bank has made loans to its directors
and significant stockholders and their 10 percent or more owned businesses. As
of December 31, 1999 and 1998, these loans totaled $1,177,156 and $2,412,957,
respectively. During 1999, new loans to such related parties amounted to
$2,724,776, and repayments amounted to $4,071,705. The Bank has received
commissions related to credit life insurance for the years ended December 31,
1999, 1998, and 1997, totaling $107,331, $108,382, and $61,686, respectively.
NOTE 12. 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 percent of each participant's base salary to the plan. A
participant may elect to make contributions to the plan. The Bank matches 100
percent of employee contributions up to a limit of 6 percent of each employee's
salary.
The Bank's contributions to the profit sharing plan and savings plan in 1999,
1998, and 1997, totaled $251,875, $238,104, and $217,932, respectively.
49
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. 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 14. 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, 1999, 1998, and 1997, a summary of such commitments and contingent
liabilities is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit $19,964,616 $20,702,966 $16,283,342
Letters of credit 334,025 290,025 362,000
---------------------------------------------------------
Total $20,298,641 $20,992,991 $16,645,342
=========================================================
</TABLE>
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 54 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 1999, 1998, or 1997.
50
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. 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, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1999, 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.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
- --------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital
(to Risk-Weighted Assets) $42,525,339 18.81% $18,090,000 8.0% $22,612,512 10.0%
Tier I Capital
(to Risk-Weighted Assets) $39,698,775 17.56% $ 9,045,005 4.0% $13,567,508 6.0%
Tier I Capital
(to average Assets) $39,698,775 11.06% $14,359,801 4.0% $17,949,751 5.0%
</TABLE>
51
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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>
1999 1998
-------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 13,312,028 $ 13,312,028 $ 15,234,594 $ 15,234,594
Interest bearing
deposits with banks 182,042 182,042 1,063,244 1,063,244
Federal funds sold - - 4,500,000 4,500,000
Securities available for sale 102,451,360 102,451,360 91,538,504 91,538,504
Loans receivable 231,248,551 228,248,614 208,449,416 209,080,983
Accrued interest receivable 3,683,849 3,683,849 3,697,109 3,697,109
Financial Liabilities
Deposits $284,461,639 $284,461,639 $282,942,228 $282,942,228
Federal funds purchased 10,600,000 10,600,000 10,000,000 10,000,000
Federal Home Loan Bank
advances 23,100,000 23,100,000 - -
ABE loans 2,727,004 2,727,004 2,416,327 2,416,327
Off-Balance-Sheet
Instruments
Commitments to extend
credit - - - -
Letters of credit - - - 2,900
</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.
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.
52
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. CONTINUED
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 17. YEAR 2000 ISSUE
January 1, 2000, passed without the Company experiencing any significant Year
2000 related disruptions or financial data processing problems. The Company
continues to diligently monitor its computer systems and computer-generated
data, as well as its interactions with outside service organizations,
correspondent banks, and customers for indications of erroneous information on
other Year 2000 issues.
NOTE 18. 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 2,683,000 additional shares
necessary to effect a 5-for-1 common stock split. The earnings per common share
for the years ended December 31, 1998 and 1997 have been retroactively adjusted
for this split as if it occurred on January 1, 1997.
53
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. STOCK OPTIONS
The Company has a directors' stock compensation plan and employees' long-term
incentive plan. Under the directors' plan the Company may grant options up to
70,000 shares of common stock. The price of each option shall be equal to the
market price determined as of the option grant date. Options granted are
exercisable after 6 months and shall expire after 10 years. Under the
employees' incentive plan the Company may grant options up to 7 percent of the
total number of shares of common stock which may be issued and outstanding.
Incentive options must be granted within 10 years of the adoption of the plan
and shall expire no later than 10 years from the grant date. The exercise price
shall be equal to the market price of the Company's stock on the date of grant.
The Company applies APB Opinion 25 in accounting for the compensation and long-
term incentive plan. Accordingly, compensation cost related to options granted
during the year ending December 31, 1999 was immaterial. Had compensation cost
been determined on the basis of fair value pursuant to FASB Statement No. 123
using publicly traded share prices as a basis of determining fair values, net
income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1999
- -----------------------------------------------------------
<S> <C>
Net Income
As reported $5,621,356
Proforma $5,482,356
Basic Earnings Per Share
As reported $ 1.70
Proforma $ 1.66
Diluted Earnings Per Share
As reported $ 1.70
Proforma $ 1.65
</TABLE>
The fair value of each option is estimated on the grant date using the Black-
Scholes option pricing model. The following assumptions were made in estimating
fair value:
<TABLE>
<CAPTION>
Assumption Directors' Plan
- ------------------------------------------------------------------------
<S> <C>
Dividend yield 1.5%
Risk-free interest rate 6.25%
Expected life 5 years
Expected volatility 20.43%
</TABLE>
54
<PAGE>
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 1999, 1998, and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. CONTINUED
Following is a summary of the status of the plans for the year ending December
31, 1999.
<TABLE>
<CAPTION>
Directors' Plan Employees' Plan
---------------------------------- ------------------------------------
Weighted Weighted
Number Average Number Average
Of Exercise Of Exercise
Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1999 - $ - - $ -
Granted 15,400 10.90 3,900 10.80
Exercised - - - -
Forfeited - - - -
------------------------------------------------------------------------------
Outstanding at December 31, 1999 15,400 10.90 3,900 10.80
==============================================================================
Options exercisable at December 31,
1999 15,400 $10.90 3,900 $10.80
==============================================================================
Weighted average fair value of
options granted during year
ended December 31, 1999 $11.22 $11.22
====== ======
</TABLE>
55
<PAGE>
Citizens Holding Company Officers and Directors:
Officers:
Steve Webb - Chairman & President
Carolyn K. Mckee - Secretary
Robert T. Smith - Treasurer
Directors:
M. G. Bond
William M. Mars
Steve Webb
Willis W. Dungan
George R. Mars
David P. Webb
Karl Brantley
Herbert A. King
Don L. Fulton
David A. King
56
<PAGE>
BANK OFFICERS
Steve Webb
Chairman & President
Danny Hicks
Vice President
Robert T. Smith
Vice President & Controller
Erdis Chaney
Vice President & Cashier
Tim Lofton
Vice President
Greg McKee
Vice President
Randy Cheatham
Vice President
Mike Guthrie
Vice President
Joe Foster
Vice President & Trust Officer
Murray Johnson
Vice President
Jackie Hester
Vice President & Marketing
Kaye Johnson
Vice President
Darrell Bates
Assistant Vice President
David Sharp
Assistant Vice President
Jean T. Fulton
Assistant Cashier
Lucille M. Myatt
Assistant to the President
Carolyn K. McKee
Student Loan Officer
Gayle Sharp
Assistant Cashier
Mark Majure
Assistant Cashier
Beth Branning
Assistant Cashier
Pat Stokes
Assistant Cashier
Adriana Burt
Assistant Cashier
CARTHAGE BRANCH
Mike Brooks
President
Billie Nell Dowdle
Vice President
Byron Hines
Vice President
Margaret Thompson
Assistant Cashier
Judy Kuntz
Assistant Cashier
Carol Wright
Assistant Cashier
SEBASTOPOL BRANCH
Linda Bennett
President
UNION BRANCH
Robert C. Palmer, Jr.
President
Karen Hatch
Assistant Cashier
DEKALB BRANCH
Howard Hutcherson
President
Steven Lockley
Vice President
KOSCIUSKO BRANCH
Steve Cain
President
SCOOBA BRANCH
Fran Knight
Vice President
MERIDIAN LOAN PRODUCTION OFFICE
Charles Young
Vice President & Manager
MORTGAGE LOAN DEPARTMENT
David Blair, Jr.
Vice President & Manager
57
<PAGE>
LOCATIONS:
THE CITIZENS BANK
MAIN OFFICE
521 Main Street
Philadelphia, MS 39350
601.656.4692
WESTSIDE BRANCH
912 West Beacon Street
Philadelphia, MS 39350
601.656.4978
NORTHSIDE BRANCH
720 Pecan Avenue
Philadelphia, MS 39350
601.656.4977
EASTSIDE BRANCH
585 East Main Street
Philadelphia, MS 39350
601.656.4976
PEARL RIVER BRANCH
Choctaw Shopping Center
Highway 16 West
Philadelphia, MS 39350
601.656.4971
UNION BRANCH
Corner of Horne & Bank Street
Union, MS 39365
601.656.4879
601.774.9231
CARTHAGE MAIN OFFICE
219 West Main Street
Carthage, MS 39051
601.267.4525
CROSSROADS BRANCH
Intersection of Highways 35 & 16
Carthage, MS 39051
601.267.4525
MADDEN BRANCH
Highway 488
Madden, MS 39109
601.267.7366
SEBASTOPOL BRANCH
17561 Highway 21
Sebastopol, MS 39359
601.625.7447
DEKALB BRANCH
Corner of Main & Bell Street
Dekalb, MS 39328
601.743.2115
KOSCIUSKO BRANCH
775 North Jackson Street
Kosciusko, MS 39090
601.289.4356
SCOOBA BRANCH
1048 Johnson Street
Scooba, MS 39358
601.476.8431
MERIDIAN LOAN PRODUCTION OFFICE
1821 Highway 39 North
Meridian, MS 39301
601.693.8367
INTERNET BANKING
http://www.thecitizensbankphila.com
PHONE TELLER
1.800.397.0344
58
<PAGE>
FINANCIAL INFORMATION:
CORPORATE HEADQUARTERS
521 Main Street
P. O. Box 209
Philadelphia, MS 39350
601.656.4692
ANNUAL STOCKHOLDERS MEETING
The Annual Stockholders meeting of Citizens Holding Company, Inc. will be held
Tuesday, April 25, 2000 at 3:30 P.M. at the main office of The Citizens Bank,
521 Main Street, Philadelphia, Mississippi.
STOCK REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street - 46th Floor
New York, NY 10005
FORM 10-K
The Annual Report on Form 10-K, filed with the Securities and Exchange
Commission, is available to stockholders upon request to the Treasurer of
Citizens Holding Company.
FINANCIAL CONTACT
Robert T. Smith
Treasurer
P.O. Box 209
Philadelphia, MS 39350
601.656.4692
59
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 13,312 15,235
<INT-BEARING-DEPOSITS> 182 1,063
<FED-FUNDS-SOLD> 0 4,500
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 102,451 91,539
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 234,349 211,349
<ALLOWANCE> 3,100 2,900
<TOTAL-ASSETS> 362,790 334,232
<DEPOSITS> 284,462 282,242
<SHORT-TERM> 24,400 700
<LIABILITIES-OTHER> 2,631 2,265
<LONG-TERM> 12,727 12,416
0 0
0 0
<COMMON> 671 671
<OTHER-SE> 36,875 34,785
<TOTAL-LIABILITIES-AND-EQUITY> 362,790 334,232
<INTEREST-LOAN> 19,337 18,306
<INTEREST-INVEST> 5,515 4,631
<INTEREST-OTHER> 172 615
<INTEREST-TOTAL> 25,024 23,552
<INTEREST-DEPOSIT> 10,087 10,397
<INTEREST-EXPENSE> 10,974 10,860
<INTEREST-INCOME-NET> 14,049 12,691
<LOAN-LOSSES> 849 846
<SECURITIES-GAINS> 0 (19)
<EXPENSE-OTHER> 8,361 7,966
<INCOME-PRETAX> 8,414 7,199
<INCOME-PRE-EXTRAORDINARY> 5,621 4,712
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,621 4,712
<EPS-BASIC> 1.70 1.42
<EPS-DILUTED> 1.70 1.42
<YIELD-ACTUAL> 4.52 4.38
<LOANS-NON> 390 649
<LOANS-PAST> 1,643 1,641
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,900 2,700
<CHARGE-OFFS> 916 879
<RECOVERIES> 267 233
<ALLOWANCE-CLOSE> 3,100 2,900
<ALLOWANCE-DOMESTIC> 1,800 1,600
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,300 1,300
</TABLE>
