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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) Of The Securities
Exchange Act of 1934
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CITIZENS HOLDING COMPANY
State of Incorporation--Mississippi
IRS Employer Identification Number--64-0666512
Address of Principal Executive Offices:
521 Main Street
Philadelphia, MS 39350
Registrant's Telephone Number, including area code: (601) 656-4692
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS TO BE SO NAME OF EACH EXCHANGE ON WHICH
REGISTERED EACH CLASS IS TO BE REGISTERED
None None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES, $.20 PAR VALUE PER SHARE
(TITLE OF CLASS)
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ITEM 1. BUSINESS
GENERAL
Citizens Holding Company (the "Corporation") is a one-bank holding company
that holds 113,203 or 96.59% of the outstanding shares of The Citizens Bank of
Philadelphia, Mississippi (the "Bank"). The Corporation was incorporated under
Mississippi law on February 16, 1982, at the direction of the Board of
Directors of the Bank in order to facilitate the Bank's adoption of a one-bank
structure. The Corporation offered one share of common stock and four $5
debentures for each share of Bank stock. At this initial offering, 99,825
shares or 85.17% of the outstanding shares were exchanged for Corporation
shares. Subsequent to the initial offering, the Corporation has purchased
13,378 shares to increase the number of shares owned to the current level.
Prior to its acquisition of the Bank's stock, the Corporation conducted no
business or operations. The Corporation's principal office is located at 521
Main Street, Philadelphia, MS 39350 and its telephone number is (601) 656-
4692.
As a bank holding company, the Corporation engages in commercial banking
through its sole banking subsidiary and can engage in certain non-banking
activities closely related to banking and own certain other business
corporations that are not banks, subject to applicable laws and regulations.
All references hereinafter to the activities or operations of the Corporation
reflect the Corporation's acting or operating through the Bank.
The Bank was opened on February 8, 1908 as The First National Bank of
Philadelphia with $50,000 in capital and a $5,000 surplus. In 1917 the Bank
surrendered its national charter and obtained a state charter at which time
the name of the Bank was changed to The Citizens Bank of Philadelphia. The
Bank's principal executive offices are also located at 521 Main Street,
Philadelphia, MS 39350, and its telephone number is (601) 656-4692. At
December 31, 1997, the Bank was the largest bank headquartered in Neshoba
County with total assets of $285,441,000 and total deposits of $249,183,000.
OPERATIONS
The Corporation, through the Bank, engages in a wide range of commercial and
personal banking activities, including accepting demand deposits (including
Now and Money Market Accounts), accepting savings and time deposit accounts,
making secured and unsecured loans to corporations, individuals and others,
issuing letters of credit, originating mortgage loans, and providing personal
and corporate trust services.
The Corporation's lending services include commercial, real estate,
installment (direct and indirect), and credit card loans. Revenues from the
Corporation's lending activities constitute the largest component of the
Corporation's operating revenues.
The loan portfolio constitutes the major earning asset of the Corporation
and offers the best alternative for maximizing interest spread above the cost
of funds. The Corporation's loan personnel have the authority to extend credit
under guidelines established and approved by the Board of Directors. Any
aggregate credit which exceeds the authority of the loan officer is forwarded
to the loan committee for approval. The loan committee is composed of various
Bank directors, including the Chairman. All aggregate credits that exceed the
loan committee's lending authority are presented to the full Board of
Directors for ultimate approval or denial. The loan committee not only acts as
an approval body to ensure consistent application of the Corporation's loan
policy but also provides valuable insight through communication and pooling of
knowledge, judgment and experience of its members.
The Corporation's primary lending area generally includes East Central
Mississippi, specifically Neshoba, Newton, Leake, Scott, Attala and Kemper
counties and contiguous counties. The Corporation extends out-of-area credit
only to borrowers who are considered to be low risk, and only on a very
limited basis.
The Corporation provides a wide range of personal and corporate trusts and
trust-related services, including serving as executor of estates, as trustee
under testamentary and inter vivos trusts and various pension and other
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employee benefit plans, as guardian of the estates of minors and incompetents,
and as escrow agent under various agreements.
The Corporation offers discount brokerage services through First Tennessee
Bank.
The Corporation is continually introducing new products and services as
permitted by the regulatory authorities and desired by the public. In late
1997, the Corporation completed construction on a new branch building in
Kosciusko, MS. This full service facility was opened in early 1998 and allows
the Corporation to compete with other banks in this area. In 1996 the
Corporation opened the new Westside building in Philadelphia, MS. This
building replaced a smaller drive-up facility. The Corporation began a VISA
Checkcard program in early 1997 to provide its customers with access to their
checking account 24 hours a day from all locations that accept VISA cards.
This, in conjunction with our 24 Hour Phone Teller, allows the Corporation's
customers to have easy and convenient access to their funds and account
balances 24 hours a day, 7 days a week. In addition to allowing customers the
above mentioned access, the Corporation is accessible via the Internet
(http://www.thecitizensbankphila.com). This website provides the Corporation's
customers the ability to review their accounts in detail, make transfers
between their accounts, and pay bills from anywhere in the world.
EMPLOYEES
The Corporation has no compensated employees. At December 31, 1997, the Bank
employed 131 full-time employees and 30 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 bank holding company within the meaning of the Bank
Holding Company Act ("BHC Act"), is registered as such with 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. See
"Capital Standards" herein. 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. See, "Prompt Corrective Action and Other Enforcement Mechanisms"
herein.
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. Thus, the Corporation is required
to obtain the prior approval of the FRB before it acquires, mergers or
consolidates with any bank, or bank holding company. Any company seeking to
acquire, merge or consolidate with the Corporation also would be required to
obtain the FRB's approval.
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
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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 the possible adverse effects
associated with such activity.
The FRB generally prohibits a bank holding company from declaring or paying
a cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that
might adversely affect a bank holding company's financial position. The FRB's
policy is that 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 dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition.
Transactions between the Corporation, the Bank and any future subsidiaries
of the Corporation are subject to a number of other restrictions. FRB policies
forbid the payment by bank subsidiaries of management fees which are
unreasonable in amount or exceed the fair market value of the services
rendered (or, if no market exists, actual costs plus a reasonable profit).
Additionally, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit, sale or lease of property, or furnishing of services. Subject to
certain limitations, depository institution subsidiaries of bank holding
companies may extend credit to, invest in the securities of, purchase assets
from, or issue a guarantee, acceptance, or letter of credit on behalf of, an
affiliate, provided that the aggregate of such transactions with affiliates
may not exceed 10% of the capital stock and surplus of the institution, and
the aggregate of such transactions with all affiliates may not exceed 20% of
the capital stock and surplus of such institution. The Corporation may only
borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, the Corporation may not sell a low-quality asset to a
depository institution subsidiary.
CAPITAL STANDARDS
The FRB, FDIC and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets, and
transactions, such as letters of credit and recourse arrangements, which are
reported as off-balance sheet items. 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 certain other instruments with some characteristics of equity. The
inclusion of elements of Tier 2 capital are subject to certain 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
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would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios
that apply across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
The following table represents the capital ratios for the Corporation and
the Bank as of December 31, 1997:
THE THE
CORPORATION BANK
RATIO RATIO REQUIREMENT
----------- ----- -----------
Risk-based Capital Ratio:
Total Capital............................ 17.70% 17.06% 8.00%
Tier 1 Capital........................... 16.44% 15.80% 4.00%
Tier 1 Capital Leverage Ratio:............. 10.92% 10.49% 4.00%
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; nor (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.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of FDICIA. An
insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well-capitalized":
Total risk-based capital of 10% or more;
Tier 1 risk-based ratio capital of 6% or more; and
Leverage ratio of 5% or more.
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"Adequately Capitalized":
Total risk-based capital of at least 8%;
Tier 1 risk-based ratio capital of at least 4%; and
Leverage ratio of at least 4%.
"Undercapitalized":
Total risk-based capital less than 8%;
Tier 1 risk-based ratio capital less than 4%; and
Leverage ratio less than 4%.
"Significantly Undercapitalized":
Total risk-based capital less than 6%;
Tier 1 risk-based ratio capital less than 3%; and
Leverage ratio less than 3%.
"Critically Undercapitalized":
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as well-
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be closely
monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a
guarantee of performance issued by the holding company. Further restrictions
and sanctions are required to be imposed on insured depository institutions
that are critically undercapitalized. The most important additional measure is
that the appropriate federal banking agency is required to either appoint a
receiver for the institution within 90 days or obtain the concurrence of the
FDIC in another form of action.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a prima facie showing by the
agency that such relief is appropriate. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action
against the holding company.
The Corporation and the Bank are classified as "well-capitalized" under the
above guidelines.
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
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undercapitalized institutions, the use of brokered deposits and the aggregate
extension of credit by a depository institution to an executive officer,
director, principal stockholder 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. The agencies issued the final rule in the form of
guidelines only for operational, managerial and compensation standards and
reissued for comment proposed standards related to asset quality and earnings
which are less restrictive than the earlier proposal in November, 1993. Unlike
the earlier proposal, the guidelines under the final rule do not apply to
depository institution holding companies and the stock valuation standard was
eliminated. 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 stockholders if the dividend would place
undue pressure on the capital of its subsidiary banks or if the dividend could
be funded only through additional borrowings or other arrangements that might
adversely affect the financial position of the bank holding company.
Specifically, a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to
fully fund each consistent with its capital 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 ability of the
Bank to pay dividends is subject to restrictions set forth in the Mississippi
banking laws and regulations of the FDIC.
The payment of dividends by a Mississippi state bank is further 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.
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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.
Also, 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. The FDIC is authorized to borrow up to $30 billion from the U.S.
Treasury; borrow from the Federal Financing Bank up to 90% of the fair market
value of assets of institutions that are acquired by the FDIC as receiver; and
borrow from depository institutions that are members of the BIF. Any
borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves
of $1.25 for each $100 of insured deposits. FDICIA also provides authority for
special assessments against insured deposits.
As required by FDICIA, the FDIC has adopted a risk-based assessment system
for deposit insurance premiums. Under this system, depository institutions are
charged anywhere from zero to $.27 for every $100 in insured domestic
deposits, based on such institutions' capital levels and supervisory subgroup
assignment. The FDIC's rules set forth which supervisory subgroup assignments
are made by the FDIC, the assessment classification review procedure, provide
for the assignment of new institutions to the "well-capitalized" assessment
group, set forth when an institution is to make timely adjustments as
appropriate, and set forth the basis, and report data, on which capital group
assignments are made for insured branches of foreign banks, and expressly
address the treatment of certain lifeline accounts for which special
assessment treatment is given.
The BIF reached its required 1.25 reserve ratio in 1995, and in response the
FDIC reduced deposit insurance assessment rates on BIF-insured deposits to
historic low levels. Legislation 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 in effect for the first six months of 1997 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 for the period.
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 Federal Reserve
Board may not be granted for a proposed interstate acquisition if after the
acquisition, the acquiror on a consolidated basis would control more than 10%
of the total
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deposits nationwide or would control more than 30% of deposits in the state
where the acquiring institution is located. The deposit concentration state
limit does not apply for initial acquisitions in a state and, in every case,
may be waived by the state regulatory authority. Interstate acquisitions are
subject to compliance with the Community Reinvestment Act ("CRA"). States are
permitted to impose age requirements not to exceed five years on target banks
for interstate acquisitions.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Interstate branching by consolidation of banks
was permitted beginning June 1, 1997, except in states that have passed
legislation prior to that date "opting-out" of interstate branching. If a
state opted-out prior to June 1, 1997, then banks located in that state may
not participate in interstate branching. A state may opt in to interstate
branching by bank consolidation or by de novo branching by passing appropriate
legislation. The laws of the host state regarding community reinvestment, fair
lending, consumer protection (including usury limits) and establishment of
branches shall apply to the interstate branches.
De novo branching by an out-of-state bank is not permitted unless the host
state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
Effective May 1, 1997, Mississippi "opted in" to the interstate branching
provision of the Interstate Act.
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.
If an interstate bank decides to close a branch located in a low- or
moderate-income area, it must comply with additional branch closing notice
requirements. The appropriate regulatory agency is authorized to consult with
community organizations to explore options to maintain banking services in the
affected community where the branch is to be closed.
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
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was evaluated by an assessment of the institution's methods for determining,
and efforts to meet, the credit needs of such borrowers. This system was
highly criticized by depository institutions and their trade groups as
subjective, inconsistent and burdensome, and by consumer representatives for
its alleged failure to aggressively penalize poor CRA performance by financial
institutions. The revised CRA regulations emphasize an assessment of actual
performance rather than of the procedures followed by a bank, to evaluate
compliance with the CRA. Overall CRA compliance continues to be rated across a
four-point scale from "outstanding" to "substantial noncompliance," and
continue to be a factor in review of applications to merger, establishment of
new branches or formation of bank holding companies. In addition, any bank
rated in "substantial noncompliance" with the revised CRA regulations may be
subject to enforcement proceedings. Different evaluation methods are used
depending on the asset size of the bank.
The "lending, investments and service test method" is applicable to all
banks with more than $250 million in assets which are not wholesale or limited
purpose banks and do not elect to be evaluated by the "strategic plan
assessment method" which is discussed below. Central to this method is the
requirement that such banks collect and report to their primary federal bank
regulators detailed information regarding home mortgage, small business and
farm and community development loans which is then used to evaluate CRA
compliance. At the bank's option, data regarding consumer loans and any other
loan distribution it may choose to provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending practices
to meet low and moderate income credit needs and, at the bank's election,
lending by affiliates or through consortia or third parties in which the bank
has an investment interest; (ii) investment performance by measure of the
bank's "qualified investments," that is, the extent to which the bank's
investments, deposits, membership shares in a credit union, or grants
primarily to benefit low or moderate income individuals and small businesses
and farms, address affordable housing or other needs not met by the private
market, or assist any minority or women-owned depository institution by
donating, selling on favorable terms or providing on a rent-free basis any
branch of the bank located in a predominantly minority neighborhood; and (iii)
service performance by evaluating the demographic distribution of the bank's
branches and ATMs, its record of opening and closing them, the availability of
alternative retail delivery systems (such as telephone banking, banking by
mail or at work, and mobile facilities) in low and moderate income geographies
and to low- and moderate-income individuals, and (given the characteristics of
the bank's service area(s) and its capacity and constraints) the extent to
which the bank provides "community development services" (services which
primarily benefit low and moderate income individuals or small farms and
businesses or address affordable housing needs not met by the private market)
and their innovativeness and responsiveness.
Any bank may request to be evaluated by the "strategic plan assessment
method" by submitting a strategic plan for review and approval. Such a plan
must involve public participation in its preparation, and contain measurable
goals for meeting low and moderate income credit needs through lending,
investments and provision of services. Such plans generally will be evaluated
by measuring strategic plan goals against standards similar to those which
will be applied in evaluating a bank according to the "lending, investments
and service test method."
The federal financial institution regulatory agencies issued a final rule
effective as of January 1, 1996, to make certain technical corrections to the
revised CRA regulations. Among other matters, the rule clarifies the
transition from the former CRA regulations to the revised CRA regulations by
confirming that when an institution either voluntarily or mandatorily becomes
subject to the performance tests and standards of the revised regulations, the
institution must comply with all of the requirements of the revised
regulations and is no longer subject to the provisions of the former CRA
regulations.
The Federal Deposit Insurance Corporation last examined the Bank on March
12, 1997, for its performance under the CRA. The CRA requires that in
connection with its examination of a financial institution, each federal
9
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 this examination.
This 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 was found. The Bank has invested in a sizeable
amount of local community development issuances.
INTER-CORPORATION BORROWINGS
Bank holding companies are also restricted as to the extent to which they
and their subsidiaries can borrow or otherwise obtain credit from one another
or engage in certain other transactions. The "covered transactions" that an
insured depository institution and its subsidiaries are permitted to engage in
with their nondepository affiliates are limited to the following amounts: (i)
in the case of any one such affiliate, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries cannot
exceed 10% of the capital stock and the surplus of the insured depository
institution; and (ii) in the case of all affiliates, the aggregate amount of
covered transactions of the insured depository institution and its
subsidiaries cannot exceed 20% of the capital stock and surplus of the insured
depository institution. In addition, extensions of credit that constitute
covered transactions must be collateralized in prescribed amounts.
"Covered transactions" are defined by statute to include a loan or extension
of credit to the affiliate, a purchase of securities issued by an affiliate, a
purchase of assets from the affiliate (unless otherwise exempted by the
Federal Reserve Board), the acceptance of securities issued by the affiliate
as collateral for a loan and the issuance of a guarantee, acceptance, or
letter of credit for the benefit of an affiliate. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
IMPACT OF MONETARY POLICIES
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits
and other borrowings, and the interest rate earned by banks on loans,
securities and other interest-earning assets comprises the major source of
banks' earnings. Thus, the earnings and growth of banks are subject to the
influence of economic conditions generally, both domestic and foreign, and
also to the monetary and fiscal policies of the United States and its
agencies, particularly the FRB. The FRB implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open-market
dealings in United States government securities, by adjusting the required
level of reserves for financial institutions subject to reserve requirements
and through adjustments to the discount rate applicable to borrowings by banks
which are members of the FRB. The actions of the FRB in these areas influence
the growth of bank loans, investments and deposits and also affect interest
rates. The nature and timing of any future changes in such policies and their
impact on the Corporation cannot be predicted. In addition, adverse economic
conditions could make a higher provision for loan losses a prudent course and
could cause higher loan loss charge-offs, thus adversely affecting the
Corporation's net earnings.
COMPETITION
The banking business is highly competitive. The Corporation's market area
consists principally of Neshoba, Newton, Leake, Scott, Attala and Kemper
Counties in Mississippi, although the Corporation also competes with
10
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.
The Bank also 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.
FORWARD-LOOKING STATEMENTS
This Form 10 and future filings made by the Corporation with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Corporation and the Bank, and oral statements made by
executive officers of the Corporation and Bank, may include forward-looking
statements relating to such matters as (a) assumptions concerning future
economic and business conditions and their effect on the economy in general
and on the markets in which the Corporation and the Bank do business, and (b)
expectations for increased revenues and earnings for the Corporation and Bank
through growth resulting from acquisitions, attraction of new deposit and loan
customers and the introduction of new products and services. Such forward-
looking statements are based on assumptions rather than historical or current
facts and, therefore, are inherently uncertain and subject to risk.
To comply with the terms of a "safe harbor" provided by the Private
Securities Litigation Reform Act of 1995 that protects the making of such
forward-looking statements from liability under certain circumstances, the
Corporation notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development and results of the Corporation's and Bank's business include the
following: (a) the risk of adverse changes in business conditions in the
banking industry generally and in the specific markets in which the
Corporation operates; (b) changes in the legislative and regulatory
environment that negatively impact the Corporation and Bank through increased
operating expenses; (c) increased competition from other financial and non-
financial institutions; (d) the impact of technological advances; and (e)
other risks detailed from time to time in the Corporation's filings with the
Securities and Exchange Commission. The Corporation does not undertake any
obligation to update or revise any forward-looking statements subsequent to
the date on which they are made.
11
ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the Corporation's financial condition as of December 31, 1997
and 1996 and results of operations for each of the three years in the period
ended December 31, 1997. The information should be used in conjunction with
the accompanying consolidated financial statements and footnotes contained
elsewhere in this document. Dollar amounts in tables are presented in
thousands.
INTRODUCTION AND OVERVIEW
The Corporation, through the Bank as its sole subsidiary, conducts business
in thirteen commercial bank offices located in Neshoba, Newton, Leake, Scott,
Attala, and Kemper counties, Mississippi, and a loan production office located
in Lauderdale county, also in Mississippi. The Bank is engaged in a variety of
financial services, including accepting deposits; making commercial and
consumer loans, making mortgage loans; and providing personal trust services.
The Mississippi counties which the Corporation primarily serves have
benefitted from increasingly strong economies over the past few years. In
July, 1995, the Mississippi Band of Choctaw Indians opened the Silverstar
Casino and Resort on the Reservation in west Neshoba County. This complex has
grown in the past three years to not only a casino but a 512 room hotel, 2,500
seat convention center and 36 holes of championship golf. Because the Casino
is not regulated by the State of Mississippi, exact figures are not released
to the public about the amount of play in the Casino, but industry analysts
have estimated it to be equal to all four of the casinos in Vicksburg,
Mississippi. In addition to the Silverstar, the Tribe has numerous industries
and is the largest employer in Neshoba County.
The region served by the Corporation is largely agricultural with a moderate
amount of light industrial plants. In the past several years, the chicken
industry has expanded greatly in the western part of the service area. The
Corporation has been involved in this growth through its lending to individual
farmers for construction of chicken houses and the related support facilities.
Timber is also an important part of the economy in this six county area. In
addition to the local land and timber owners, Philadelphia is home to two
moderate size lumber mills and numerous timber equipment dealers and is within
a short distance to several others.
A healthy economy, such as these six counties are currently enjoying,
invites certain challenges, especially that of competition. All financial
institutions today are faced with the challenge of competing for customers'
deposits. Brokerage houses offer a diverse number of non-traditional deposit
products, the most common being mutual funds. Direct competition from banks,
thrifts, and credit unions has increased dramatically over the years.
Currently, there are approximately fourteen different financial institutions
in this market competing for the same customer base. Given these challenges,
the Corporation has been able to not only maintain its current market share,
but increase it in recent years.
In an effort to be more competitive in today's technological climate, the
Corporation has offered its customers the latest innovations in banking
service. The Corporation is currently offering, VISA Debit cards, a 24 hour
Phone Teller service and Internet Banking, and is constantly monitoring its
customer base to determine if any additional services are in demand.
In addition to the above new services, the Corporation has upgraded its
facilities over the last several years where needed. In 1996, the Corporation
opened the new Westside branch in Philadelphia, MS. This new building offers
full deposit services, loan officers, safe deposit box operations and a 24
hour Automatic Teller Machine, replacing a drive-up only facility. In early
1998, the Corporation opened the new Kosciusko, MS Branch on Jackson Avenue,
relocating from the court square in Kosciusko. This new construction allowed
the Corporation to offer many services that were physically impossible to
offer from the downtown location, such as drive-up banking, safe deposit boxes
and a 24 hour Automatic Teller Machine.
12
Although the Corporation has made acquisitions in the last five years, there
are currently no pending mergers or acquisitions. However, management does
plan to aggressively pursue any such opportunities, either branch locations or
entire banks, as they may become available. Management anticipates additional
acquisitions or mergers with like-minded community banks may occur in the
future. The Statements in this paragraph relating to potential mergers or
acquisitions are forward-looking statements which may or may not be accurate
due to the impossibility of predicting future events.
As technology continues to make its impact in the world and affect the way
the Corporation operates on a daily basis, both on a professional and personal
level, the Corporation remains committed to meeting the challenges of today's
information age. In addition to providing its customers with access to their
checking account information by the use of Phone Teller, we offer VISA debit
cards that are good anywhere VISA cards are accepted. The Corporation recently
began offering customers the ability to bank from anywhere served by the World
Wide Web through our Internet web site at http://www.thecitizensbankphila.com.
Management believes that the technological advances will continue at an ever
increasing pace and they are committed to keep the Corporation in step with
these advances.
Y2K AWARENESS AND PREPARATION
The Corporation has been diligent in preparing for the possible consequences
of the date change on January 1, 2000. The Board has reviewed these
anticipated consequences and has assigned a Y2K Coordinator to coordinate the
review of the Corporation's systems to make a determination of what
adjustments will be required. An outside consultant has tested all major
computer applications and the system programs and the mainframe processor have
been updated for Y2K. In the event the Corporation's efforts to adjust its
mainframe are inadequate, contingency plans for offsite processing have been
made and tested.
The Corporation's personal computers are currently being evaluated and will
be either replaced or updated as needed. All other date sensitive equipment is
being replaced or converted as required to maintain Y2K compliance. The
Corporation has set a goal to have identified and corrected all potential Y2K
problems by June 30, 1999. The estimated cost to the Corporation for the
testing of all equipment, new equipment purchases and necessary adjustments to
this equipment is approximately $250,000.
13
FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS AND RELATED STATISTICS
(Dollar references in thousands except per share data)
The following selected data has been taken from the Corporation's
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere.
OVERVIEW OF OPERATIONS
The major components of the Corporation's operating results for the past
five years are summarized in Table 1--Five Year Financial Summary.
TABLE 1--FIVE YEAR FINANCIAL SUMMARY
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
SUMMARY OF OPERATIONS
Interest income--tax equivalent
(1).............................. 21,588 20,369 18,041 14,068 12,785
Interest expense.................. 9,659 8,684 7,727 4,935 4,768
------- ------- ------- ------- -------
Net interest income-tax
equivalent..................... 11,929 11,685 10,314 9,133 8,017
Tax equivalent adjustment (1)..... (82) (114) (96) (80) (93)
------- ------- ------- ------- -------
Net interest income............. 11,847 11,571 10,218 9,053 7,924
Provision for loan losses......... 740 791 604 592 591
------- ------- ------- ------- -------
Net interest income after
provision for loan losses...... 11,107 10,780 9,614 8,461 7,333
Noninterest income................ 2,990 2,686 2,433 2,460 1,848
Noninterest expenses.............. 7,046 6,665 6,379 5,899 5,636
------- ------- ------- ------- -------
Income before income taxes...... 7,051 6,801 5,668 5,022 3,545
Income tax expense................ 2,561 2,407 2,046 1,804 1,336
------- ------- ------- ------- -------
NET INCOME........................ 4,490 4,394 3,622 3,218 2,209
======= ======= ======= ======= =======
PER SHARE DATA (2)
Net income........................ $ 6.78 $ 6.64 $ 5.75 $ 5.11 $ 4.30
Cash dividends.................... 0.85 0.75 0.70 0.75 0.15
Shareholders' equity, end of
year............................. 47.18 40.44 34.54 29.21 22.69
SELECTED ACTUAL YEAR-END BALANCES
Total assets...................... 286,634 270,679 264,453 215,939 184,120
Earning assets.................... 266,762 251,518 241,495 202,586 170,076
Investment securities available
for sale......................... 67,292 72,472 76,022 5,899 0
Investment securities held to
maturity......................... 0 0 0 71,991 56,572
Loans............................. 191,605 177,005 154,380 123,715 108,865
Allowance for loan losses......... (2,700) (2,500) (2,300) (2,100) (1,925)
Total deposits.................... 248,984 229,443 238,677 186,784 164,479
Noninterest-bearing demand
deposits......................... 35,526 34,353 35,492 31,213 22,153
Interest-bearing demand deposits.. 56,904 54,960 75,857 44,105 39,487
Savings deposits.................. 17,188 16,994 15,617 14,426 13,608
Time deposits..................... 139,365 123,136 111,711 97,039 89,231
Long term borrowings.............. 0 33 65 198 2,169
Shareholders' equity.............. 31,221 26,758 22,858 19,331 15,017
14
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
SELECTED AVERAGE BALANCES
Total assets..................... 279,961 271,241 242,024 204,720 184,184
Earning assets................... 259,036 250,670 224,492 187,257 170,621
Securities....................... 70,023 76,138 75,847 68,199 54,823
Loans............................ 186,843 168,542 141,192 113,628 103,053
Allowance for loan losses........ 2,523 2,342 2,103 1,927 1,870
Total deposits................... 242,459 238,358 216,479 182,707 164,620
Noninterest-bearing demand
deposits........................ 34,718 37,894 34,213 29,607 22,429
Interest-bearing demand
deposits........................ 57,406 68,036 59,134 45,126 39,905
Savings deposits................. 17,594 16,681 15,154 14,556 13,860
Time deposits.................... 132,741 115,747 107,978 93,418 88,426
Long-term borrowings............. 3 35 127 292 2,214
Shareholders' equity............. 28,920 24,610 21,195 18,391 14,278
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits................ 76.95% 76.16% 64.68% 65.34% 65.02%
Return on average assets......... 1.60% 1.62% 1.50% 1.61% 1.20%
Return on average equity......... 15.24% 17.77% 17.15% 17.41% 15.35%
Dividend payout ratio............ 12.52% 11.29% 12.15% 14.33% 3.49%
Leverage capital ratio........... 10.92% 9.88% 8.74% 9.20% 8.39%
Efficiency ratio (3)............. 45.56% 45.29% 49.02% 50.24% 56.47%
OTHER DATA
Number of employees (FTE)........ 138 137 133 122 118
Average common shares
outstanding..................... 661,750 661,750 630,248 630,248 513,392
Cash dividends declared.......... 562 496 441 473 77
- --------
(1) Net interest income has been presented on both a tax equivalent and no
basis. Tax equivalent basis was calculated using a 34% tax rate for all
periods presented. The tax equivalent adjustment reverses the tax
equivalent basis in order to present net interest income reflected in the
consolidated financial statements.
(2) Per share data has been retroactively adjusted to give effect for stock
dividends and splits.
(3) The efficiency ratio is calculated by dividing noninterest income expense
by the sum of net interest income, on a fully tax equivalent basis, and
noninterest income
The Corporation earned $4,490,000 or $6.78 per share, for 1997, compared to
$4,394,000 or $6.64 per share, for 1996. The 2.2% increase in earnings in 1997
over the prior year period reported in 1996 was lower than prior year
increases due to the decrease in net interest margin during 1997. The increase
in income was due mainly to the increase in the asset size of the Corporation.
Earnings in 1996 were 21.3% higher than the $3,622,000 or $5.75 per share
recorded in 1995. This increase in earnings was due mainly to an increase in
the interest income of the Corporation. This increase was partially the result
of a very strong loan demand in the Corporation's service area. Percentage
wise, noninterest expense items increased less that noninterest income during
this period. Net charge-offs as a percentage of loans outstanding also
decreased during this period.
NET INTEREST INCOME
Net interest income is the most significant component of the Corporation's
earnings. Net interest income is the difference between interest and fees
realized on earning assets, primarily loans and securities, and interest paid
on deposits and other borrowed funds. The net interest margin is this
difference expressed as a percentage of average earning assets. Net interest
income is determined by several factors, including the volume of earning
assets and liabilities, and the mix of earning assets and liabilities and
interest rates. Although there are a certain number of these factors which can
be controlled by management policies and actions, certain other factors, such
as the general level of credit demand, Federal Reserve Board monetary policy,
and changes in tax law are beyond the control of management. Tables 1 through
4 are an integral part in analyzing the components of net interest
15
income and the changes which have occurred between the time periods presented.
Table 1--Five Year Financial Summary shows the corporation's net interest
income from 1993 through 1997. Table 2--Average Balance Sheets and Interest
Rates represent the major components of interest earning assets and interest-
bearing liabilities. For analytical purposes, interest income presented in the
table has been adjusted to a tax equivalent basis assuming a 34% tax rate for
all years. The tax equivalent adjustment recognizes the income tax savings
when comparing taxable and tax-exempt assets.
TABLE 2--AVERAGE BALANCE SHEETS AND INTEREST RATES
YEARS ENDED DECEMBER 31
-----------------------------------------------------
1997 1996
-------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
------ -------- -------- ------- -------- -------- -------
INTEREST EARNING ASSETS
Securities
Taxable............... 63,333 4,117 6.50% 68,692 4,325 6.30%
Tax-exempt (1)........ 5,345 350 6.55% 6,539 463 7.08%
-------- ------ ----- -------- ------ -----
Total securities.... 68,678 4,467 6.50% 75,231 4,788 6.36%
Loans (2)
Commercial............ 167,628 15,033 8.97% 149,697 13,365 8.93%
Installment........... 19,552 2,073 10.60% 18,394 1,979 10.76%
-------- ------ ----- -------- ------ -----
Total loans......... 187,180 17,106 9.14% 168,091 15,344 9.13%
Federal Home Loan Bank
Account............... 78 4 5.13% 40 3 7.50%
Federal funds sold..... 2,112 125 5.92% 5,768 313 5.43%
-------- ------ ----- -------- ------ -----
TOTAL EARNING ASSETS.. 258,048 21,702 8.41% 249,130 20,448 8.21%
NONINTEREST EARNING
ASSETS
Allowance for loan
losses................ (2,523) (2,343)
Premises and
equipment............. 3,915 3,837
Cash and due from
banks................. 11,821 13,020
Accrued interest and
other assets.......... 8,700 7,597
-------- --------
TOTAL ASSETS.......... $279,961 $271,241
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
-----------------------------
INTEREST BEARING
LIABILITIES
Deposits
Interest-bearing
demand deposits...... 57,281 1,590 2.78% 67,906 1,794 2.64%
Savings deposits...... 17,313 675 3.90% 16,397 639 3.90%
Time deposits......... 132,742 7,192 5.42% 115,746 6,027 5.21%
-------- ------ ----- -------- ------ -----
Total interest-
bearing deposits... 207,336 9,457 4.56% 200,049 8,460 4.23%
Borrowed funds
Short-term borrowing.. 4,148 202 4.87% 4,114 220 5.35%
Long-term debt........ 0 0 0.00% 35 4 11.43%
-------- ------ ----- -------- ------ -----
Total borrowed
funds.............. 4,148 202 4.87% 4,149 224 5.40%
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES............ 211,484 9,659 4.57% 204,198 8,684 4.25%
====== ===== ====== =====
NONINTEREST-BEARING
LIABILITIES
Noninterest-bearing
demand deps........... 34,995 38,175
Accrued interest and
other liabs........... 4,562 4,258
Shareholders' equity... 28,920 24,610
-------- --------
TOTAL SHAREHOLDERS AND
SHAREHOLDERS' EQUITY... $279,961 $271,241
======== ========
NET INTEREST INCOME AND
INTEREST RATE SPREAD... 12,043 3.84% 11,764 3.96%
====== ===== ====== =====
NET INTEREST
MARGIN............. 4.67% 4.72%
===== =====
16
YEAR ENDED DECEMBER 31
1995
--------------------------
AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE
------ -------- -------- -------
INTEREST EARNING ASSETS
Securities
Taxable............................................ 69,437 4,516 6.50%
Tax-exempt (1)..................................... 5,713 402 7.04%
-------- ------ -----
Total securities................................. 75,150 4,918 6.54%
Loans (2)
Commercial......................................... 124,103 11,013 8.87%
Installment........................................ 17,043 1,807 10.60%
-------- ------ -----
Total loans...................................... 141,146 12,820 9.08%
Federal Home Loan Bank Account...................... 28 2 7.14%
Federal funds sold.................................. 7,315 412 5.63%
-------- ------ -----
TOTAL EARNING ASSETS................................ 223,639 18,152 8.12%
NONINTEREST EARNING ASSETS
Allowance for loan losses........................... (2,103)
Premises and equipment.............................. 3,075
Cash and due from banks............................. 10,706
Accrued interest and other assets................... 6,707
--------
TOTAL ASSETS........................................ $242,024
========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Interest-bearing demand deps....................... 59,017 1,487 2.52%
Savings deposits................................... 15,156 564 3.72%
Time deposits...................................... 108,000 5,586 5.17%
-------- ------ -----
Total interest-bearing deps...................... 182,173 7,637 4.19%
Borrowed funds
Short-term borrowing............................... 1,245 76 6.10%
Long-term debt..................................... 127 13 10.24%
Total borrowed funds............................. 1,372 89 6.49%
-------- ------ -----
TOTAL INTEREST-BEARING LIABILITIES................. 183,545 7,726 4.21%
======== ====== =====
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deps..................... 34,490
Accrued interest and other liabs.................... 2,794
Shareholders' equity................................ 21,195
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $242,024
========
NET INTEREST INCOME AND INTEREST RATE SPREAD........ 10,426 3.91%
====== =====
NET INTEREST MARGIN................................. 4.66%
=====
- --------
(1) Interest income on tax-exempt securities and loans has been adjusted to a
tax equivalent basis using a marginal federal income tax rate of 34% for
all years. Tax equivalent security adjustments were $89 for 1997, $117 for
1996, and $102 for 1995. Tax equivalent loan adjustments were $1 for 1997,
$4 for 1996, and $4 for 1995.
(2) Nonaccrual loans are included in average loan balances.
17
Table 3--Net Interest Earning Assets illustrates net interest earning assets
and liabilities for 1997, 1996 and 1995.
TABLE 3--NET INTEREST EARNING ASSETS
1997 1996 1995
-------- -------- --------
Average interest earning assets..................... $258,048 $249,130 $223,639
Average interest bearing liabilities................ 211,484 204,198 183,545
-------- -------- --------
NET INTEREST EARNING ASSETS..................... $ 46,564 $ 44,932 $ 40,094
======== ======== ========
Table 4--Volume and Rate Analysis depicts the dollar effect of volume and
rate change from 1995 through 1997. Variances which were not specifically
attributable to volume or rate were allocated proportionately between rate and
volume using the absolute values of each for a basis for the allocation.
Nonaccruing loans were included in the average loan balances used in
determining the yields.
Interest income on tax-exempt securities and loans has been adjusted to a
tax equivalent basis using a marginal federal income tax rate of 34%.
TABLE 4--VOLUME/RATE ANALYSIS
1997 CHANGE FROM 1996 CHANGE FROM
1996 DUE TO 1995 DUE TO
------------------- -------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
INTEREST INCOME
Loans................................ 1,745 17 1,762 2,460 64 2,524
Securities
Taxable............................. (346) 138 (208) (47) (144) (191)
Tax-exempt.......................... (78) (35) (113) 59 2 61
Federal Home Loan Bank Account....... 2 (1) 1 1 0 1
Federal funds sold................... (216) 28 (188) (84) (15) (99)
----- ---- ----- ----- ---- -----
TOTAL INTEREST INCOME................ 1,107 147 1,254 2,389 (93) 2,296
INTEREST EXPENSE
Interest-bearing demand deps......... (295) 91 (204) 236 71 307
Savings deposits..................... 36 0 36 48 27 75
Time deposits........................ 922 243 1,165 403 38 441
Short-term borrowings................ 2 (20) (18) 153 (9) 144
Long-term borrowings................. (4) 0 (4) (11) 2 (9)
----- ---- ----- ----- ---- -----
TOTAL INTEREST EXPENSE............... 661 314 975 829 129 958
----- ---- ----- ----- ---- -----
NET INTEREST INCOME.................. 446 (167) 279 1,560 (222) 1,338
===== ==== ===== ===== ==== =====
Net interest for 1997 on a tax equivalent basis was 2.37% higher than that
for 1996, while the net interest margin for 1997 was 4.67% compared to 4.72%
for 1996. Tax equivalent net interest income for 1996 was 12.83% higher versus
that for 1995 while the net interest margin increased to 4.72% from 4.66% in
1995.
The increase in net interest income during 1997 was predominantly a result
of increases in earning asset volume. The loan growth experienced in 1997 was
due to a continuing strong loan demand in our service area. This increase in
interest income was partially offset by volume increases in interest-bearing
liabilities. The earning asset yield increased to 8.41% in 1997, compared to
8.21% in the previous year, predominately through the loan portfolio, where
the increase in loan volume as a percent of earning assets provided a higher
yield relative to the yield on other earning assets. The average yield on
loans increased to 9.14% in 1997 compared to
18
the 1996 yield of 9.13%. Although there was a slight decrease in the
investment securities average balance, the average yield increased to 6.50% in
1997 from 6.36% in 1996. Total interest-bearing liabilities increased in 1997
primarily due to continued strong growth in our area. The deposit growth
combined with slightly higher interest rates paid resulted in a 4.57% total
interest-bearing rate for 1997, compared to the 4.25% rate in 1996.
Net interest income in 1996 increased 12.83% due mainly to an increase in
the volume of interest-bearing assets. The earning asset yield increased to
8.21% in 1996 compared to 8.12% in 1995 as a result of increases in the volume
and rate of loans during this period and a slight decrease in the
traditionally lower yielding federal funds sold and securities portfolio. Like
earning assets, interest-bearing liabilities showed good growth in average
balances, but the interest rates paid on deposits and other borrowed funds
increased only slightly from 4.19% in 1995 to 4.23% in 1996, increasing the
rate on total interest-bearing liabilities to 4.25% in 1996 compared to the
1995 rate of 4.21%.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed by management to be sufficient to absorb loses inherent in
the credit portfolio. Factors considered in establishing an appropriate
allowance include: a careful assessment of the financial condition of the
borrower; a realistic determination for the value and adequacy of underlying
collateral; the condition of the local economy and the condition of the
specific industry of the borrower; a comprehensive analysis of the levels and
trends of loan categories; and review of delinquent and classified loans.
The Corporation maintains a comprehensive loan review program to evaluate
loan administration, credit quality, and loan documentation. This program also
includes a regular review of problem loan ("watch") reports, delinquencies,
and charge-offs. The adequacy of the allowance for loan losses is evaluated on
a quarterly basis. This evaluation focuses on specific loan reviews, changes
in the type and volume of the loan portfolio given the current and forecasted
economic conditions, and historical loss experience. Any one of the following
conditions may necessitate a review of a specific loan: a question of whether
the customer's cash flow or net worth may not be sufficient to repay the loan;
the loan has been criticized in a regulatory examination; the accrual of
interest has been suspended; serious delinquency; or other reasons where
either the ultimate collectibility of the loan is in question or the loan has
other special or unusual characteristics which require special monitoring.
Activity in the allowance for loan losses is reflected in Table 5--Analysis
of Allowance for Loan Losses. The recorded values of loans and leases actually
removed from the consolidated balance sheets are referred to as charge-offs
and, after netting out recoveries on previously charged-off assets, become net
charge-offs. The Corporation's policy is to charge-off loans, when, in
management's opinion, the loan is deemed uncollectible, although concerted
efforts are made to maximize recovery.
19
TABLE 5--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE AT BEGINNING OF
YEAR....................... $ 2,500 $ 2,300 $ 2,100 $ 1,925 $ 1,772
LOANS CHARGED-OFF
Commercial and
agriculture.............. 326 287 163 245 335
Real estate............... 13 41 72 159 74
Installment............... 383 377 350 203 290
Credit card............... 66 51 17 0
-------- -------- -------- -------- --------
TOTAL CHARGE-OFFS....... 788 756 602 607 699
CHARGE-OFFS RECOVERED
Commercial and
agriculture.............. 89 41 76 72 94
Real estate............... 0 0 22 0 28
Installment............... 145 115 100 117 139
Credit card............... 14 9 0 0 0
-------- -------- -------- -------- --------
TOTAL RECOVERIES ....... 248 165 198 189 261
-------- -------- -------- -------- --------
Net loans charged-off....... 540 591 404 418 438
Current year provision...... 740 791 604 593 591
-------- -------- -------- -------- --------
BALANCE AT END OF YEAR...... $ 2,700 $ 2,500 $ 2,300 $ 2,100 $ 1,925
======== ======== ======== ======== ========
Loans at year end........... $191,605 $177,005 $154,380 $123,715 $108,865
Ratio of allowance to loans
at year end................ 1.41% 1.41% 1.49% 1.70% 1.77%
Average loans............... $186,843 $168,542 $141,192 $113,628 $103,053
Ratio of net loans charged-
off to average loans....... 0.29% 0.35% 0.29% 0.37% 0.43%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, 1997
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Unallocated.................................. $2,700 $2,500 $2,300 $2,100 $1,925
------ ------ ------ ------ ------
Total.................................... $2,700 $2,500 $2,300 $2,100 $1,925
====== ====== ====== ====== ======
COMPOSITION OF LOAN PORTFOLIO BY TYPE AT DECEMBER 31, 1997
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Commercial and agricultural............. 13.15% 13.75% 15.72% 17.69% 17.68%
Real estate............................. 62.81% 63.08% 60.60% 58.49% 58.97%
Installment............................. 23.25% 22.41% 22.99% 23.19% 22.97%
Other................................... 0.79% 0.76% 0.69% 0.63% 0.38%
------ ------ ------ ------ ------
TOTAL............................... 100.00% 100.00% 100.00% 100.00% 100.00%
Nonperforming assets and relative percentages to loan balances are presented
in Table 6--Nonperforming Assets. The level of nonperforming loans and leases
is an important element in assessing asset quality and the relevant risk in
the credit portfolio. Nonperforming loans include nonaccrual loans,
restructured loans, and loans delinquent 90 days or more. Loans are classified
as nonaccrual when management believes that collection of interest is
doubtful, typically when payments are past due over 90 days, unless well
secured and in the process of collection. Another element associated with
asset quality is other real estate owned (OREO), which represents properties
acquired by the Corporation through loan defaults by customers.
20
TABLE 6--NONPERFORMING ASSETS
AS OF DECEMBER 31
------------------------------
1997 1996 1995 1994
------ ------ ------ ------
PRINCIPAL BALANCE
Nonaccrual................ $ 344 $ 171 $ 91 $ 117
90 days or more past due.. 1,862 1,731 1,303 511
------ ------ ------ ------
TOTAL NONPERFORMING
LOANS.................. $2,206 $1,902 $1,394 $ 628
Nonperforming as a percent
of loans................. 1.15% 1.07% 0.90% 0.51%
Other real estate owned... 10 132 217 321
OREO as a percent of
loans.................... 0.01% 0.07% 0.14% 0.26%
Allowance as a percent of
nonperforming loans...... 122.39% 131.44% 164.99% 334.39%
The consolidated provision for loan losses was $740,000 for 1997, $791,000
for 1996, and $604,000 for 1995. During that time period, asset quality
continued to improve even though nonperforming loans increased during this
period. Net charge-offs remained the same percentage wise from 1995 to 1997.
The allowance as a percent of loans has remained relatively the same for this
period. The amount of the future year's provisions for loan losses will be
subject to adjustment based on the future evaluations of the loss reserve
adequacy.
Total nonperforming loans and nonperforming loans as a percent of loans have
been in an increasing trend over the past five years, causing significant
decreases in the allowance as a percent of nonperforming loans. During this
period, nonaccrual loan balances increased slightly due to an aggressive
attitude taken by the Corporation in transferring loans to nonaccrual status.
Statements of Financial Accounting Standard No. 114 and 118, "Accounting by
Creditors for Impairment of a Loan," became effective January 1, 1995. These
statements changed the way loan loss allowance estimates were to be made for
problem loans. In general, when it is determined that all principal and
interest due under the contractual terms of a loan are not fully collectible,
management must value the loan using discounted future expected cash flows.
Management has not classified any loans using the impaired loan criteria.
Application of this statement should not have a material effect on the
Corporation's financial statements.
The decrease in other real estate owned was primarily the result of a strong
real estate market in our area and the sale of a large commercial property.
All other real estate owned is carried by the Corporation at the lower of cost
or fair value.
Management believes loans classified for regulatory purposes as loss,
doubtful, substandard, or special mention 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.
All watch list loans are subject to additional scrutiny and monitoring. The
Corporation's philosophy encourages loan officers to identify borrowers that
should be monitored in this fashion and believe this process ultimately
results in the identification of problem loans in a more timely fashion.
21
At December 31, 1997, the Corporation had a total of $4,268,426 of loans on
its watch list which were not included in impaired or nonperforming loans.
NON-INTEREST INCOME AND EXPENSE
A listing of noninterest income and expense from 1995 through 1997 and
percentage changes between years is included in Table 7--Noninterest Income
and Expense.
TABLE 7--NONINTEREST INCOME & EXPENSE
% CHANGE % CHANGE
1997 FROM '96 1996 FROM '95 1995
------ -------- ------ -------- ------
NONINTEREST INCOME
Income from fiduciary activities........ $ 3 200.00% $ 1 0.00% $ 1
Service charges on deposit account...... 1,934 8.17% 1,788 14.18% 1,566
Other operating income.................. 667 18.89% 561 8.30% 518
------ ------ ------ ------ ------
TOTAL NONINTEREST INCOME.............. $2,604 10.81% $2,350 12.71% $2,085
NONINTEREST EXPENSE
Salaries and employee benefits.......... $3,949 3.32% $3,822 11.01% $3,443
Occupancy expense....................... 1,256 30.02% 966 7.93% 895
Other operating expense................. 1,535 -6.74% 1,646 -10.64% 1,842
------ ------ ------ ------ ------
TOTAL NONINTEREST EXPENSE............. $6,740 4.76% $6,434 4.11% $6,180
====== ====== ====== ====== ======
Noninterest income increased 10.81% to $2,604,000 in 1997 compared to
$2,350,000 in 1996. The primary source of noninterest income was income from
service charges on deposit accounts. This increase was due to the increase in
the number and dollar amount of checking accounts opened during this period.
Other operating income grew 18.89% in 1997 from 1996 due in part to the
increase in income from the investment in New South Life Insurance Company.
New South Life is a credit life company that is 20% owned by the Corporation.
Income from New South was $176,114 in 1997 compared to $142,949 in 1996.
Noninterest income increased 12.71% in 1996 compared to 1995. Service
charges on deposit accounts increased 14.18%, again due to an increase in the
number of new customers being serviced and an increase in fee related
activities. The growth in New South Life accounted for most of the 8.30%
increase in other income from 1995 to 1996.
Total noninterest expense increased 4.76% to $6,740,000 in 1997 compared to
$6,434,000 in 1996. As a percentage of average total assets, total noninterest
expense was 2.41% in 1997 compared to 2.37% in 1996. Salaries and employee
benefits increased 3.32% during 1997 due mainly to annual salary adjustments.
Occupancy and equipment expense increased 30.02% during 1997, as a result of
the first full year of operation of the new Philadelphia, MS Westside branch,
purchases of new equipment and increases in the maintenance costs of the
equipment.
Other operating expenses was $1,535,000 in 1997, compared to $1,646,000 in
1996, a decrease of 6.74%. Several expenses experienced decreases during this
period including, FDIC assessment and travel.
Noninterest expense increased 4.11% in 1996 compared to 1995. The 11.01%
increase in salaries and employee benefits during 1996 can be attributed to
annual salary adjustments and to the first full year for employees for the
Scooba, MS branch and additional staff that was hired for the new
Philadelphia, MS Westside branch. Occupancy expenses increased to $966,000 in
1996 from $895 in 1995 or 7.93%. The increase was caused by the increase in
phone service required, utilities cost and building repairs.
22
Other operating expense decreased from $1,646,000 in 1996 to $1,842,000 in
1995. A large part of this decrease was the $177,077 decrease in FDIC
insurance for 1996 that resulted from the BIF reaching its congressionally
mandated capitalization level of 1.25% of insured deposits in 1995. As a
result of the BIF reaching its capitalization goal, subsequent ongoing deposit
insurance premiums were greatly reduced. During the third quarter of 1996, the
FDIC instituted a one-time special assessment against all deposits insured by
the SAIF. A small portion of the Corporation's deposits are insured under SAIF
as a result of the acquisition of the Kosciusko, MS branch from the Resolution
Trust Corporation in April, 1994. The Corporation, therefore, was subject to
$28,640 in the special assessment. Given the current level of deposits,
premiums are not expected to significantly increase in the future. The
statements in this paragraph are forward-looking which may or may not be
accurate due to the impossibility of predicting future congressional or
regulatory actions or the future capitalization levels of the insurance funds.
INCOME TAXES
The Corporation records a provision for income taxes currently payable,
along with a provision for those taxes in the future. Such deferred taxes
arise from differences in timing of certain items for financial statement
reporting rather than income tax reporting. The major difference between the
effective tax rate applied to the Corporation's financial statement income and
the federal statutory rate of 34% is interest on tax-exempt securities and
loans.
The Corporation's effective tax rate was 35.05%, 34.02%, and 34.82% in 1997,
1996 and 1995, respectively. Further tax information regarding the Corporation
can be found in Note 7 to the consolidated financial statements.
FINANCIAL CONDITION
Securities
On January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and accordingly classified certain of its securities as
available-for-sale. In December 1995, the Corporation transferred the
remainder of its held-to-maturity securities to available-for-sale during the
moratorium period granted by FASB. At December 1997, the Corporation
classified all of its securities as available-for-sale.
Securities held-to-maturity are those which the Corporation has both the
positive intent and ability to hold to maturity, and are reported at amortized
cost. Securities available-for-sale are those which the Corporation may decide
to sell if needed for liquidity, asset/liability management, or other reasons.
Securities available-for-sale are reported at fair value, with unrealized
gains and losses included as a separate component of equity, net of tax. The
Corporation does not maintain any securities for trading purposes.
Table 8--Securities and Security Maturity Schedule summarizes the carrying
value of securities from 1995 through 1997 and the maturity distribution at
December 31, 1997, 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.
23
TABLE 8--SECURITIES
1997 1996 1995
------- ------- -------
SECURITIES AVAILABLE FOR SALE
U.S. Treasuries....................................... $31,345 $ 5,181 $ 5,751
U.S. Agencies......................................... 15,261 26,449 25,998
Mortgage Backed....................................... 14,336 33,598 36,852
States, political subdivisions and others............. 6,350 7,244 7,421
------- ------- -------
TOTAL SECURITIES AVAILABLE FOR SALE.................... $67,292 $72,472 $76,022
SECURITIES HELD TO MATURITY
U.S. Treasuries....................................... $ 0 $ 0 $ 0
U.S. Agencies......................................... 0 0 0
Mortgage Backed....................................... 0 0 0
States, political subdivisions and others............. 0 0 0
------- ------- -------
TOTAL SECURITIES HELD TO MATURITY...................... $ 0 $ 0 $ 0
TOTAL SECURITIES....................................... $67,292 $72,472 $76,022
======= ======= =======
SECURITIES MATURITY SCHEDULE
1 YEAR OR LESS 1 TO 5 YEARS 5 TO 10 YEARS OVER 10 YEARS
--------------- --------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- ------- ------- -------
AVAILABLE FOR SALE
U.S. Treasury.......... 1,499 5.50% 29,846 5.69% 0 0.00% 0 0.00%
U.S. Agencies.......... 399 5.69% 9,056 6.12% 5,806 6.25% 0 0.00%
Mortgage-backed........ 872 6.55% 1,220 7.59% 1,728 7.04% 10,516 7.14%
States, Municipal and
Other (1)............. 2,315 8.72% 2,712 6.87% 1,005 7.49% 318 11.21%
------ ---- ------- ---- ------ ---- ------- -----
TOTAL AVAILABLE FOR
SALE................... $5,085 7.16% $42,834 5.91% $8,539 6.56% $10,834 7.26%
====== ==== ======= ==== ====== ==== ======= =====
TOTAL HELD TO MATURITY.. $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00%
====== ==== ======= ==== ====== ==== ======= =====
- --------
(1) Average rates were calculated on tax equivalent basis using a marginal
federal income tax rate of 34% and a state tax rate of 5%.
The majority of the securities portfolio is composed of U.S. Treasury
securities, Federal agency securities, state municipal securities (tax
exempt), and mortgage-backed securities.
The securities portfolio carries varying degrees of risk. Investments in
U.S. Treasury and Federal agency securities have little or no credit risk.
Mortgage-backed securities are substantially issues of Federal agencies.
Obligations of states and political subdivisions are the areas of highest
potential credit exposure in the portfolio. This risk is minimized through the
purchase of high quality investments. When purchased, obligations of states
and political subdivisions and corporate bonds must have a credit rating by
Moody's or Standard & Poors of A or better. Substantially all of these
investments were rated A or better at December 31, 1997. The risk of non-rated
municipal bonds is minimized by limiting the amounts invested and by investing
in local issues. Management believes the non-rated securities are of high
quality. No securities of an individual issuer, excluding U.S. government and
its agencies, exceeded 10% of the Corporation's shareholders' equity as of
December 31, 1997. The Corporation does not use off-balance sheet derivative
financial instruments as defined in SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments."
Although total earning assets have increased over the past years, the
security portfolio balances have remained relatively stable. Total securities
were $67,292,000, $72,472,000 and $76,022,000 as of December 31, 1997, 1996,
and 1995, respectively.
24
In the first half of 1997, the Corporation sold $23,228,375 in agency and
mortgage-backed securities in an effort to supply suitable collateral for our
largest governmental depositor. The Corporation was able to take advantage of
the market at that time and to make the swap with a minimum of loss on the
sale of the securities. This loss was recovered by an increase in the yield of
the purchased securities. The Corporation invested the proceeds from this sale
in U.S. Treasury obligations.
There was very little change in the mix of investment securities from 1995
to 1996. The security balances decreased from $76,022,000 in 1995 to
$72,472,000 in 1996. This reduction was the result of a strong loan demand and
the need for additional loan funds.
The Corporation, realizing the need to maintain flexibility in its
investment accounts, transferred all of its investments into the Available-
for-sale classification during the one-time transfer period in accordance with
Financial Accounting Standards Board Special Report on Implementation of SFAS
115.
U.S. Agencies increased approximately $451,000 between 1996 and 1995, while
mortgage-backed U.S. Treasury securities decreased approximately $3,824,000
during this same period. The change in portfolio mix was due to the interest
rate environment and the need to sell the small remainder portions of
mortgage-backed securities. During this period of declining interest rates and
increasing bond prices, the Corporation reduced the prepayment risk associated
with holding mortgage-backed securities by rotating out of such securities and
investing in U.S. Agency category securities with comparable yields and more
predictable prepayment characteristics.
As of December 31, 1997, the Corporation did not have any structured notes
in its portfolio. As of December 31, 1996, and 1995, the security portfolio
held structured notes totaling $3,459,000 and $5,576,000, respectively. The
investment policy has specific guidelines describing the types and
characteristics of acceptable structured notes for the Corporation's
portfolio. All structured notes are U.S. Government Agency issues.
Management's security strategy includes utilizing proceeds from the maturity
or sale of short-term securities, adjustable rate instruments, and easily
marketable securities to fund a portion of the continuing growth of the loan
portfolio. Tax-free and intermediate taxable bonds are used to further enhance
earnings. As of December 31, 1997, 100% of the total investment security
portfolio was classified in the available-for-sale category, which allows
flexibility in the asset/liability management function. As noted earlier, sell
strategies are executed, on occasion, when the interest rate environment
provides the opportunity to boost the overall portfolio performance.
Although the change in equity due to market value fluctuations in the
available-for-sale portfolio is not used in the Tier 1 capital calculation,
the change which occurred in the unrealized gain/loss on securities between
1997 and 1996 was a result of the swing in the interest rate environment
during that period, in conjunction with the change in the portfolio mix.
Although there was a significant change in the unrealized gain/loss on
securities between 1997 and 1996, management considers these changes to be
temporary in nature.
LOANS
The loan portfolio constitutes the major earning asset of the Corporation
and offers the best alternative for maximizing interest spread above the cost
of funds. The Corporation's loan personnel have the authority to extend credit
under guidelines established and approved by the Board of Directors. Any
aggregate credit which exceeds the authority of the loan officer is forwarded
to the loan committee for approval. The loan committee is composed of various
directors, including the Chairman. All aggregate credits which exceed the loan
committee's lending authority are presented to the full Board of Directors for
ultimate approval or denial. The loan committee not only acts as an approval
body to ensure consistent application of the Corporation's loan policy but
also provides valuable insight through communication and pooling of knowledge,
judgment, and experience of its members.
25
The Corporation's primary lending area generally includes East Central
Mississippi, specifically Neshoba, Newton, Leake, Scott, Attala and Kemper
Counties, and contiguous counties. The Corporation extends out-of-area credit
only to borrowers who are considered to be low risk, and only on a very
limited basis.
In general, the loan growth experienced in 1997 was due to a continuation of
the overall growth in the area that is served by the Corporation. The opening
of the Silverstar Casino and Resort 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 $3,203,000,
or 6.29%, in 1997 and grew by $3,435,000, or 7.23%, in 1996.
Commercial and agricultural loans also showed large growth during this
period. These loans grew $9,601,000, or 11.84%, in 1997 and $14,308,000, or
21.43%, in 1996. This increase was not caused solely by the influence of the
casino in the area, but was due in part to an increase in the number of
chicken house loans made in this period.
Commercial and agricultural loans are the largest segment of the loan
portfolio and, by nature, bear a higher degree of risk. Management is aware of
the increasing trend in this category and believes the lending practices,
policies, and procedures surrounding this loan category are adequate to manage
this risk.
Table 9--Loans Outstanding reflects outstanding balances by loan type for
the past five years. Additional loan information is presented in Note 4 to the
consolidated financial statements.
TABLE 9--LOANS OUTSTANDING
AT DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Commercial and agricultural....... $ 90,690 $ 81,089 $ 66,781 $ 51,476 $ 46,363
Real estate--construction......... 4,533 5,826 6,174 3,006 1,957
Real estate--mortgage............. 54,119 50,916 47,481 39,825 34,777
Consumer.......................... 47,466 44,015 38,482 31,102 27,210
-------- -------- -------- -------- --------
TOTAL LOANS..................... $196,808 $181,846 $158,918 $125,409 $110,307
======== ======== ======== ======== ========
Table 10--Loan Liquidity and Sensitivity to Changes in Interest Rates
reflects the maturity schedule or repricing frequency of all loans. Also
indicated are fixed and variable rate loans maturing after one year for all
loans.
TABLE 10--LOAN LIQUIDITY
LOAN MATURITIES AT DECEMBER 31, 1997
1 YEAR
AND 1-5 OVER 5
LESS YEARS YEARS TOTAL
------- ------- ------- --------
All loans..................................... $77,877 $98,305 $20,626 $196,808
======= ======= ======= ========
SENSITIVITY TO CHANGES IN INTEREST RATES
Fixed rates................................. 80,345 13,611
Variable rates.............................. 17,960 7,015
------- -------
TOTAL..................................... $98,305 $20,626
======= =======
26
DEPOSITS
The Corporation offers a wide variety of deposit services to individual and
commercial customers, such as noninterest-bearing and interest-bearing
checking accounts, savings accounts, money market deposit accounts, and
certificates of deposit. The deposit base provides the major funding source
for earning assets. Total average deposits have shown steady growth over the
past few years, increasing 1.72% and 10.11% in 1997 and 1996, respectively.
The decrease shown in interest-bearing demand accounts and the increase in
certificates of deposit in 1997 are the result of a change in deposit choices
by customers and not as a result of any particular incentive. Time deposits
continue to be the largest single source of the Corporation's deposit base.
A five 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
1997 1996 1995
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
Noninterest-bearing......... 34,717 37,895 34,165
Interest-bearing demand..... 57,406 2.78% 68,036 2.64% 59,158 2.52%
Savings..................... 17,594 3.90% 16,681 3.90% 15,156 3.72%
Certificates of deposit..... 132,742 5.42% 115,746 5.19% 108,000 5.17%
-------- ---- -------- ---- -------- ----
$242,459 3.91% $238,358 3.55% $216,479 3.53%
======== ==== ======== ==== ======== ====
MATURITY RANGES OF TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE AT DECEMBER 31
1997
-------
3 months or less.................................................. $19,463
3 through 6 months................................................ 7,985
6 through 12 months............................................... 13,761
over 12 months.................................................... 4,397
-------
$45,606
=======
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 12--SHORT-TERM BORROWINGS
AS OF DECEMBER 31
----------------------
1997 1996 1995
------ ------ ------
Year-end balance of federal funds purchased............. $ 0 $8,800 $ 0
Year-end balance of FHLB borrowings..................... 0 0 0
Year-end balance of treasury tax and loan note.......... 700 438 329
------ ------ ------
$ 700 $9,238 $ 329
====== ====== ======
Average balance of short term borrowings................ $4,148 $4,114 $1,245
Weighted average rate of borrowings..................... 4.87% 5.34% 6.13%
27
As of December 31, 1997, the Corporation's short-term borrowings consisted
only of the treasury tax open-end note in the amount of $700,000. As of
December 31, 1996, the Corporation had, in addition to the TT&L note in the
amount of $438,000, federal funds purchased in the amount of $8,800,000. The
Corporation foresees short-term borrowings to be a continued source of
liquidity and will continue to use these borrowings as a method to fund short-
term needs. The Corporation has the capacity to borrow up to $55 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 statements in this paragraph relating to the future use of these
borrowings are forward-looking statements which may or may not be accurate due
to the impossibility of predicting future events.
The Corporation currently does not have any long-term debt and has not had
any since the last of its debentures matured on January 31, 1997 in the amount
of $32,695. The maturity schedule of these debentures for the last year years
is listed below.
MATURED YEAR-END
AMOUNT BALANCE
------- --------
1997..................................................... $32,695 $ 0
1996..................................................... 32,695 32,695
1995..................................................... 32,695 65,390
LIQUIDITY AND RATE SENSITIVITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available to meet financial commitments on a timely
basis. These commitments include honoring withdrawals by depositors, funding
credit obligations to borrowers, servicing long-term obligations, making
shareholder dividend payments, paying operating expenses, funding capital
expenditures, and maintaining reserve requirements.
Interest rate risk is the exposure to Corporation earnings and capital from
changes in future interest rates. All financial institutions assume interest
rate risk as an integral part of normal operations. Managing and measuring the
interest rate risk is the process that ranges from reducing the exposure of
the Corporation's interest margin regarding swings in interest rates to
assuring that there are sufficient capital and liquidity to support future
balance sheet growth.
The asset/liability committee is responsible for managing liquidity issues
and interest rate risk, among other matters. Various interest rate movements
are factored into a simulation model to assist the asset/liability committee
in assessing interest rate risk. The committee analyzes the results of the
simulation model to formulate strategies to effectively manage the interest
rate risk that may exist.
The liquidity of the parent company is dependent on the receipt of dividends
from the banking subsidiary. Certain restrictions exist regarding the transfer
of funds from the subsidiary as explained in Item 1. Management expects that
in the aggregate, the banking subsidiary will continue to have the ability to
provide adequate funds to the parent company.
The banking subsidiary's source of funding is predominantly core deposits
consisting of both commercial and individual deposits, maturities of
securities, repayments of loan principal and interest, and federal funds
purchased, and long-term borrowing from the FHLB. The deposit base is
diversified between individual and commercial accounts which helps avoid
dependence on large concentrations of funds. The Corporation does not solicit
certificates of deposit from brokers. The primary sources of liquidity on the
asset side of the balance sheet are federal funds sold and securities
classified as available-for-sale. All of the investment securities portfolio
are classified in the available-for-sale category, and are available to be
sold, should liquidity needs arise. Table 13--Funding Uses and Sources details
the main components of cash flows for 1997 and 1996.
28
TABLE 13--FUNDING USES AND SOURCES
1997 1996
------------------------------- -------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
AVERAGE ---------------------- AVERAGE ----------------------
BALANCE AMOUNT PERCENT BALANCE AMOUNT PERCENT
-------- ---------- ---------- -------- ---------- ----------
FUNDING USES
Loans................. $186,843 $ 18,301 10.86% $168,542 $ 27,350 19.37%
Taxable securities 63,333 (5,968) -8.61% 69,301 (141) -0.20%
Tax-exempt securities 5,345 (671) -11.15% 6,016 303 5.30%
Federal Home Loan
Bank................. 1,345 524 63.82% 821 129 18.64%
Federal funds sold.... 2,112 (3,600) -63.03% 5,712 (1,603) -21.91%
-------- ---------- --------- -------- ---------- ---------
TOTAL USES.......... $258,978 $ 8,586 3.43% $250,392 $ 26,038 11.61%
======== ========== ========= ======== ========== =========
FUNDING SOURCES
Noninterest-bearing
deposits............. $ 34,718 $ (3,176) -8.38% $ 37,894 $ 3,681 10.76%
Interest-bearing
demand and savings
deposits............. 75,000 (9,717) -11.47% 84,717 10,429 14.04%
Time Deposits......... 132,741 16,994 14.68% 115,747 7,769 7.19%
Short-term
borrowings........... 4,148 819 24.60% 3,329 2,085 167.60%
Long-term debt........ 3 (32) -91.43% 35 (92) -72.44%
-------- ---------- --------- -------- ---------- ---------
TOTAL SOURCES....... $246,610 $ 4,888 2.02% $241,722 $ 23,872 10.96%
======== ========== ========= ======== ========== =========
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 timeframes. 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 14--LIQUIDITY AND INTEREST RATE SENSITIVITY AT DECEMBER 31, 1997
1-90 91-365 1-5 OVER
DAYS DAYS YEARS 5 YEARS TOTAL
-------- ------- -------- ------- --------
INTEREST EARNING ASSETS
Loans........................ $ 57,168 $46,224 $ 81,060 $ 7,153 $191,605
Investment securities........ 12,131 4,783 44,304 4,563 65,781
Federal Home Loan Bank
stock....................... 0 0 0 1,511 1,511
Federal funds sold .......... 5,500 0 0 0 5,500
-------- ------- -------- ------- --------
TOTAL INTEREST EARNING
ASSETS.................... $ 74,799 $51,007 $125,364 $13,227 $264,397
======== ======= ======== ======= ========
INTEREST BEARING LIABILITIES
Interest bearing demand
deposits.................... $ 57,100 $ 0 $ 0 $ 0 $ 57,100
Savings deposits............. 17,188 0 0 0 17,188
Time deposits................ 59,360 75,992 4,013 0 139,365
Short term borrowings........ 700 0 0 0 700
-------- ------- -------- ------- --------
TOTAL INTEREST BEARING
LIABILITIES............... $134,348 $75,992 $ 4,013 $ 0 $214,353
======== ======= ======== ======= ========
Rate sensitive gap............. (59,549) (24,985) 121,351 13,227 50,044
Rate sensitive cumulative gap.. (59,549) (84,534) 36,817 50,044
Cumulative gap as a percentage
of total earning assets....... -22.52% -31.97% 13.92% 18.93%
29
The purpose of the above table is to measure interest rate risk utilizing
the repricing intervals of interest sensitive assets and liabilities. Rate
sensitive gaps constantly change as funds are acquired and invested and as
rates change. Rising interest rates are likely to increase net interest income
in a positive gap position while falling interest rates are beneficial in a
negative gap position.
The above rate sensitivity analysis places interest-bearing demand and
savings deposits in the shortest maturity category because these liabilities
do not have defined maturities. If these deposits were placed in a maturity
distribution representative of the Corporation's deposit base history, the
shortfall of the negative rate sensitive gap position would be reduced in the
1-to-90 day timeframe.
The Corporation's large negative cumulative gap position in the one year
time period as of December 31, 1997 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 the next twelve months;
and (3) a significant portion of the Corporation's loans maturing after one
year. A decline in the interest rate environment would enhance earnings, while
an increase in interest rates would have the opposite effect on corporate
earnings. The effect would be mitigated by the fact that interest-bearing
demand and savings deposits may not be immediately affected by changes in
general interest rates.
CAPITAL ADEQUACY
The Corporation and Bank are subject to various regulatory capital
guidelines as required by federal and state banking agencies. These guidelines
define the various components of core capital and assign risk weights to
various categories of assets.
Tier 1 capital consists of shareholders' equity less goodwill, core deposit
intangible, and the unrealized gain or loss on securities available-for-sale,
as defined by bank regulators. The definition of Tier 2 capital includes the
amount of allowance for loan losses which does not exceed 1.25% of gross risk-
weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital.
The minimum requirements under the capital guidelines are a 4.00% leverage
ratio (Tier 1 capital dividend by average assets less intangible assets and
unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1
capital divided by risk-weighted assets), and a 8.00% total capital ratio
(Tier 1 capital plus Tier 2 capital dividend by risk-weighted assets).
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal regulatory agencies to define capital tiers. These are: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio
of at least 6.00%, and a total capital ratio of at least 10.00%, and a
leverage ratio of at least 5.00% and not be under a capital directive order.
Failure to meet capital requirements can initiate regulatory action that could
have a direct material effect on the Corporation's financial statements. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions, asset growth, and
expansion is limited, in addition to the institution being required to submit
a capital restoration plan.
Management believes the Corporation and the Bank meet all the capital
requirements as of December 31, 1997, as noted below in Table 15--Capital
Ratios, and is well-capitalized under the guidelines established by the
banking regulators. To be well-capitalized, the Corporation and Bank must
maintain the prompt corrective action capital guidelines described above.
Exclusive of the effect of the unrealized gains/losses on securities
component, which is driven by the interest rate environment, the Corporation's
shareholders' equity increased $3,928,000, or 14.72% in 1997. The Corporation
increased the amount of dividends paid to $562,000 in 1997 compared to
$496,000 in 1996, an increase of $66,000 or 13.31%. The higher dividend
payout, in addition to the stock dividend declared in 1996, represent
management's effort to increase the value and return of each shareholder's
investment in the Corporation.
30
At December 31, 1997, management was not aware of any current
recommendations by banking regulatory authorities which, if they were to be
implemented, would have, or are reasonably likely to have, a material effect
on the Corporation's consolidated liquidity, capital resources or operations.
TABLE 15--CAPITAL RATIOS
AT DECEMBER 31
------------------
1997 1996
-------- --------
Tier 1 capital
Tier 1 capital Shareholders' equity...................... $ 31,221 $ 26,758
Less: Intangibles........................................ (784) (851)
Add/less: Unrealized loss/(gain)......................... (613) (78)
Add: Minority interest in equity accounts of
unconsolidated subsidiaries............................. 1,106 944
-------- --------
TOTAL TIER 1 CAPITAL..................................... $ 30,930 $ 26,773
======== ========
Total capital
Tier 1 capital........................................... 30,930 26,773
Allowable allowance for loan losses...................... 2,356 2,205
-------- --------
TOTAL CAPITAL............................................ $ 33,286 $ 28,978
======== ========
RISK WEIGHTED ASSETS....................................... $188,098 $176,077
======== ========
AVERAGE ASSETS (FOURTH QUARTER)............................ $283,195 $271,087
======== ========
RISK BASED RATIOS
TIER 1................................................... 16.44% 15.21%
======== ========
TOTAL CAPITAL............................................ 17.70% 16.46%
======== ========
LEVERAGE RATIOS............................................ 10.92% 9.88%
======== ========
PENDING CHARGES
Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting
for Transfers and Servicing Financial Assets and Extinguishments of
Liabilities," has been issued and will apply to some transactions in 1997 and
others in 1998. SFAS 125 establishes standards for determining the
circumstances under which transfers of financial assets should be considered
sales or as secured borrowing and when a liability should be considered
extinguished, and addresses the accounting requirements for servicing
financial assets, including mortgage servicing rights. The Corporation does
not expect SFAS 125 to have a material impact on the consolidated financial
statements in 1997; however, the Statement will be followed in the future
should the Corporation begin to originate mortgage servicing rights.
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.
31
ITEM 3. PROPERTIES
The Corporation through the Bank, currently operates from its main office in
downtown Philadelphia, from 12 additional branches in Neshoba, Newton, Leake,
Scott, Attala, and Kemper counties and from its loan production office in
Lauderdale county, all located in Mississippi. Information about these
branches is set forth in the table below:
BANKING
FUNCTIONS
NAME OF OFFICE LOCATION/TELEPHONE NUMBER OFFERED
-------------- ---------------------------- ---------------
Main Office........................ 521 Main Street Loans
Philadelphia, MS Trust
(601) 656-4692
Eastside Branch.................... 585 East Main Street Drive-up
Philadelphia, MS
(601) 656-4976
Westside Branch.................... 912 West Beacon Street Loans
Philadelphia, MS 24 Hour Teller
(601) 656-4978
Northside Branch................... 720 Pecan Avenue 24 Hour Teller
Philadelphia, MS
(601) 656-4977
Pearl River Branch................. Choctaw Shopping Center Drive-up
Philadelphia, MS
(601) 656-4971
Union Branch....................... Corner of Horne & Bank Loans
Philadelphia, MS
(601) 774-9231
Carthage Main Office............... 219 West Main Street Loans
Carthage, MS
(601) 267-4525
Crossroads Branch.................. Intersection of Hwys 35 & 16 Drive-up
Carthage, MS
(601) 267-4525
Madden Branch...................... Highway 488 Deposits
Madden, MS
(601) 267-7366
Sebastopol Branch.................. Main Street Loans
Sebastopol, MS
(601) 625-7447
DeKalb Branch...................... Corner of Main & Bell Loans
DeKalb, MS
(601) 743-2115
Kosciusko Branch................... 775 North Jackson Avenue Loans
Kosciusko, MS 24-hour Teller
(601) 289-4356
Scooba Branch...................... 1048 Johnston Street Loans
Scooba, MS
(601) 476-8431
Meridian Office.................... 1821 Hwy 39 North Loan Production
Meridian, MS
(601) 693-8367
32
The Bank owns its main office and all its branch offices, except for the
Pearl River Branch, which is leased from the Mississippi Band of Choctaw
Indians and its Loan Production office in Meridian. The main office facility,
originally occupied in 1966, is used solely by the Corporation and the Bank.
This facility contains approximately 20,000 square feet and houses the
executive offices and all operations functions. The other branches range in
size from nearly 4,000 square feet to 619 square feet.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Principal Holders of Common Shares
At November 18, 1998, the Corporation had three shareholders that were the
beneficial owner of more than 5% of the common shares of the Corporation (the
"Common Shares") and are listed below:
The Molpus Company
Philadelphia, MS 39350
50,505 shares or 7.63%
Herbert A. King
Starkville, MS
47,803 shares or 7.22%
George R. Mars
Philadelphia, MS
38,842 shares or 5.8%
(b) Security Ownership of Management
The following table sets forth the number and percentage of Common Shares
beneficially owned by each Director of the Corporation and the Bank and by all
the Corporation's and the Bank's Directors and executive officer as a group at
November 18, 1998. Unless indicated otherwise in a footnote, the Directors and
executive officer possess sole voting and investment power with respect to all
shares shown.
COMMON SHARES
BENEFICIALLY
OWNED AT PERCENT
NOVEMBER 18, OF
NAME OF BENEFICIAL OWNER 1998 CLASS
------------------------ ------------- -------
M. G. Bond.......................................... 6,617 1.00%
Karl Brantley....................................... 2,032 .31
W. W. Dungan........................................ 28,028(1) 4.24
Don Fulton.......................................... 1,050 .16
Andy King........................................... 10,071(2) 1.52
Herbert A. King..................................... 47,803(3) 7.22
George R. Mars...................................... 38,842(4) 5.87
William M. Mars..................................... 2,447(5) .37
David P. Webb....................................... 2,815 .43
J. Steve Webb....................................... 18,061(6) 2.73
------- -----
All Directors as a group (10 persons)............... 157,766(7) 23.84
- --------
(1) Includes 18,900 shares owned by Mr. Dungan's spouse.
(2) Includes 178 shares owned by Mr. King's spouse and 292 shares owned by his
children.
(3) Includes 1,455 shares owned jointly by Mr. King's spouse, 8,584 owned by
his children; also includes 29,452 shares held in trust for his children.
(4) Includes 4,000 shares owned by Mr. Mars' spouse and 4,000 owned by his
child; also includes 9,149 shares owned by Mr. Mars' mother that he has
authority to vote.
(5) Includes 657 shares owned by Mr. Mars' spouse.
(6) Includes 34 shares owned by Mr. Webb's spouse and 18,000 shares held in a
limited partnership of which Mr. Webb is the managing general partner and
has the power to vote the stock in such capacity.
(7) Includes 1,455 shares owned jointly with or of record by others with
Directors and Executive Officers; also includes 47,452 in various entities
controlled by Directors and 9,149 controlled by Power of Attorney.
33
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Directors and
executive officers of the Corporation and Bank. Unless otherwise indicated in
a footnote, each person has held the same or a comparable position with his
present employer for the last five years. The Directors and Officers of both
the Corporation and the Bank are all elected for terms of one year. The Board
has, by resolution, designated Steve Webb, Chairman, President and Chief
Executive Officer as the sole executive officer of the Corporation and the
Bank.
POSITIONS CURRENTLY DIRECTOR OR
HELD WITH THE EXECUTIVE OTHER PRINCIPAL
NAME AND AGE CORPORATION AND BANK OFFICER SINCE OCCUPATION
------------ -------------------- ------------- ---------------
M. G. Bond, 66....... Director of the 1986 Retired, Mississippi
Corporation and the State Senator
Bank
Karl Brantley, 62.... Director of the 1992 Plant Manager, U.S.
Corporation and the Electrical Motors,
Bank Philadelphia
W. W. Dungan, 65..... Director of the 1981(1) Partner, McDaniel Timber
Corporation and the Company
Bank
Don Fulton, 52....... Director of the 1994 President and General
Corporation and the Manager, Nemanco, Inc.
Bank
Andy King, 44........ Director of the 1997 Proprietor, Philadelphia
Corporation and the Motor Company
Bank
Herbert A. King, 46.. Director of the 1997 Engineer, King
Corporation and the Engineering, Inc.
Bank
George R. Mars, 59... Director of the 1977(1) Retired Proprietor, Mars
Corporation and the Department Store
Bank
William M. Mars, 61.. Director of the 1977(1) Attorney, Mars, Mars and
Corporation and the Mars Attorneys
Bank
David P. Webb, 39.... Director of the 1998 Attorney, Phelps Dunbar
Corporation and the
Bank
Joe Steve Webb, 66... Director, Chairman, and 1970(1) Chairman, President and
the President and CEO CEO of Corporation and
of Corporation and the the Bank
Bank
- --------
(1) Year that Director was elected to the Board of The Citizens Bank of
Philadelphia. These Directors were elected to the Board of Citizens
Holding Company at the time it was formed in 1982.
34
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid for
the fiscal years indicated to the Corporation's and Bank's Chief Executive
Officer based on salary and bonus earned during fiscal 1997. Officers of the
Corporation receive their salary from the Bank.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- ------- ------------
J. Steve Webb, Chairman.................... 1997 $125,000 $25,000 $23,640(1)
President and CEO of the 1996 $115,062 $20,000 (2)
Corporation and the Bank 1995 $108,200 $15,000 (2)
- --------
(1) Represents matching contributions of $12,264 under The Citizens Bank
Profit Sharing and Savings Plan (the 401-k plan), Directors fees in the
amount of $10,275, and includes the value of the use of a company
automobile in the amount of $1,101.
(2) Information for previous years not required to be disclosed.
DIRECTOR COMPENSATION
During 1998, all Directors of the Corporation received $725 per month
regardless of attendance at meetings or committee participation. In addition
to this, all Directors receive $125 for attending the monthly meetings. Those
Directors that serve on the Loan Committee receive an additional $50 per
month.
Eight of the current Directors and one retired Director participate in a
Deferred Compensation Plan that was established in June 1986. The Plan
provides that a Director may defer a portion of his monthly fees for ten years
in return for a benefit to be paid when they attain the retirement age of 70.
After the ten year deferral period, the Director resumes receiving his full
fee. The deferral amount is increased each year by a percentage of the Moody's
Average Corporate Bond Rate for the month of October each year. Four of the
Directors (S. Webb, Dungan, G. Mars and Bond) receive a rate of 130% of the
Moody's rate and four (A. King, H. King, Brantley and Fulton) receive a rate
of 100% of the Moody's rate. Due to his age at the time of acceptance into the
Plan, one Director's benefits are defined and are not subject to the increases
in the Moody's rate. The Moody's Average Corporate Bond Rate for October 1998
was 6.77%. To fund the Plan, the Corporation purchased individual life
insurance policies for each of the participants.
PENSION PLAN
The Corporation maintains a 401-k plan, The Citizens Bank Profit Sharing and
Savings Plan and Trust (the "401-k plan"). All Employees who have attained the
age of 21 and completed one year of service are eligible to participate in the
401-k plan. The Corporation matches employee deferrals up to 6% of total
compensation (including any overtime and bonuses) and a discretionary
contribution to each participant is made regardless of deferral. This
contribution for 1998 was 2.7% of total compensation. The 401-k plan
recognizes a participant to be fully vested after five years in which the
employee has at least 1,000 hours of service.
PROPOSED ACTIONS
The Company desires to enhance shareholder value and provide long-term
incentives to directors, senior executives and other of its key employees by
providing such directors, executives and employees the opportunity to
participate in stock-based incentive compensation programs. To this end, the
Directors have undertaken a significant review of the options available to
them. As a result of that review and after much discussion, the Directors plan
to introduce the following topics to the Shareholders for vote and approval at
the next annual meeting of the Shareholders, scheduled for April 13, 1999:
35
Adoption of Directors' Stock Compensation Plan
The Company will recommend that the Shareholders consider and approve
adoption of the Citizens Holding Company Directors' Stock Compensation Plan
(the "Directors' Plan"), to be effective as of January 1, 1999, providing for
the grant of shares of $0.20 par value voting common stock issued by this
Company (the "Common Stock"), subject to usual and customary terms and
conditions. To provide for utilization of the Directors' Plan, 70,000 shares
of Common Stock, (determined immediately after the five-for-one (5:1) stock
split approved by this Board of Directors effective as of January 1, 1999)
will be made available for grant under the Directors' Plan. Such shares will
be authorized but unissued shares, treasury shares or shares acquired on the
open market, as the same may be adjusted for stock splits, dividends or other
adjustments in the capitalization of this Company. See, "Description of
Registered Securities to be Issued, Stock Split," herein.
The Board of Directors will administer the Directors' Plan.
Adoption of Employees' Long-Term Incentive Plan
The Board of Directors will recommend that the Shareholders consider and
approve adoption of the Citizens Holding Company Employees' Long-Term
Incentive Plan (the "Employees' Plan"). The Employees Plan is intended to
provide for the grant of shares of Common Stock in the form of stock options
and restricted stock, in accordance with usual and customary terms and
conditions. To that end, seven percent (7%) of the issued and outstanding
Common Stock, as the same may be determined from time to time, shall be
available for grant under the Employees Plan, which shares shall be authorized
but unissued shares, treasury shares or shares acquired on the open market.
The Board of Directors will administer the Employees' Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation has had, and expects to have in the future, banking
transactions in the ordinary course of its business with Directors, officers
and their associates. These transactions have been on substantially the same
terms, including interest rates, collateral, and repayment terms on extensions
of credit, as those prevailing at the same time for comparable transactions
with others and did not involve more than the normal risk of collectibility or
present other unfavorable features.
In the past several years, the Corporation has employed the legal services
of Phelps Dunbar, L.L.P., of which Mr. David Webb, a current Director of the
Corporation and Bank, is a partner. Phelps Dunbar has represented the
Corporation in various legal areas, including tax audits, pension plan
administration, civil lawsuit defense, and general corporate law. The
Corporation expects that the firm will continue to represent the Corporation
in similar matters in the future.
ITEM 8. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine
litigation incidental to their business, to which the Corporation or the Bank
is a party or which any of its property is subject.
None.
36
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET PRICE
The Common Shares of the Corporation are fairly closely held and are not
traded on a regular basis. According to the best of the knowledge of the
corporate management, there have been only 30 sales transactions in Common
Shares since 11/96, at prices ranging from $35 to $60 per share. The most
recent trade known to management of the Corporation occurred 8/28/98 at a
price of $47 per share. Management has not verified the accuracy of the prices
that have been reported. Because of the lack of active trading of the Common
Shares, these prices do not necessarily reflect the prices at which the Common
Shares would trade in an active market.
The Common Shares are currently held of record by approximately 485
shareholders.
DIVIDENDS
The Corporation paid cash dividends totaling $.75 per share in 1996 and $.85
per share in 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.
There are no restrictions on the payment of dividends and other
distributions by a Mississippi corporation. However, there are restrictions on
the amount of dividends that can be paid by a bank under Mississippi law. As a
general rule, a bank may declare a dividend in an amount deemed expedient by
the board of directors of the bank. Any such dividend, however, may not (1)
impair the capital stock of the bank, (2) be in amount greater than the
remainder of undivided profits then on hand after deducting losses, bad debts,
depreciation, all other expenses, and the proper transfer to earned surplus,
if applicable, (3) 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, a bank may not make any capital distribution,
including payment of dividends, if after making such distribution the bank
would be in any of the "under-capitalized" categories under the FDIC's prompt
Corrective Action regulations.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The following summary of the terms of the capital shares of the Corporation
does not purport to be complete and is qualified in its entirety by reference
to the Corporation's Articles of Incorporation and Bylaws, which are filed as
Exhibits to this Form 10.
AUTHORIZED BUT UNISSUED SHARES
The Corporation's Amended Articles of Incorporation authorize the issuance
of 750,000 Common Shares, $1.00 par value, of which 670,750 shares were issued
and 670,750 were outstanding at December 10, 1998. The Board of Directors, at
a meeting held on October 27, 1998, authorized a five-to-one (5:1) stock split
to be effective January 1, 1999. Therefore, effective January 1, 1999,
3,750,000 Common Shares will be authorized $.20 par value, of which 3,353,750
Common Shares will be issued and 3,353,750 Common Shares outstanding.
37
The remaining authorized but unissued Common Shares may be issued upon
authorization of the Board of Directors without prior shareholder approval. If
additional shares of the Corporation are issued, the shareholders are not
entitled to subscribe for such additional shares in proportion to the number
of Common Shares owned by them prior to such issuance. Accordingly, the
shareholders of the Corporation could have their percentage ownership interest
in the Corporation diluted if these shares are issued in the future.
STOCK-SPLIT
At a meeting of the Board of Directors, held on October 27, 1998, the Board
unanimously voted to cause a 5-to-1 split of the Common Shares of the
Corporation. This split was approved by all necessary parties on October 27,
1998 with a future effective date of January 1, 1999. As of December 10, 1998,
670,750 Common Shares are issued and 670,750 Common Shares are outstanding.
Effective January 1, 1999, 3,750,000 Common Shares will be authorized $.20 par
value, of which 3,353,750 Common Shares will be issued and 3,353,750 Common
Shares outstanding.
COMMON SHARES
Voting rights
Except for (a) supermajority votes required to approve certain business
combinations and certain other proposed matters to be discussed below and (b)
certain corporate actions that must be approved by a majority of the
outstanding votes of the relevant voting group under the Mississippi Business
Corporation Act, the affirmative vote of the holders of the majority of the
votes cast at a meeting at which a quorum is present is sufficient to approve
matters submitted for shareholder approval, except that Directors are elected
by a plurality of the votes cast.
Dividend Rights
The holders of Common Shares are entitled to receive dividends as and when
declared by the Board of Directors from funds legally available for their
payment. A dividend may be paid by the Corporation only if, after paying such
dividend, (a) the Corporation would be able to pay its debts as they become
due in the usual course of business, and (b) the Corporation's total assets
would not be less than the sum of its total liabilities. Furthermore, because
funds for the payment of the dividends by the Corporation must come primarily
from the earnings of the Bank, restrictions on the amount of dividends that
the Bank may pay also restrict the amount of funds available for payment of
dividends by the Corporation. See Item 1. DESCRIPTIONS OF BUSINESS--
"Regulation and Supervision," and Item 9, MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS--"Dividends."
Liquidation
Upon any liquidation, dissolution, or winding up of the affairs of the
Corporation, the holders of Common Shares are entitled to share ratably in the
assets legally available for distribution to the Common Shareholders.
Other Matters
Holders of the Common Shares do not have preemptive rights with respect to
the issuance of any securities of the Corporation. There are no sinking fund
provisions applicable to the Common Shares. All outstanding Common Shares are,
when issued, fully paid and nonassessable. Such shares are not redeemable at
the option of the Corporation or holders thereof.
The Corporation presently serves as the registrar and transfer agent of the
Corporation's Common Shares.
Proposed Provisions for Inclusion in the Corporation's Articles and Bylaws
The Board of Directors has approved and will recommend for approval by the
Shareholders at the next annual meeting, scheduled for April 13, 1999, that
the Corporation's Articles of Incorporation and Bylaws be
38
amended to include certain provisions. Even though these provisions are
sometimes referred to as "anti-takeover," the real intent of these provisions
is to prevent an unfriendly suitor from using coercive tactics which can force
shareholders to sell at an amount below fair value. The provisions are
intended to require the suitor to negotiate with the Board of Directors, a
result which the Board believes enhances shareholder value. These provisions
may also have the effect of making the removal of current management more
difficult. The nature of those amendments, as to be proposed, will be
described below.
Staggered Board of Directors; Filling Vacancies on the Board of Directors
Currently the Corporation's Bylaws provide that all of the members of the
Board of Directors are elected annually at the shareholders' meeting. The
proposal contains recommendations that the shareholders consider for approval
an amendment to the Articles of Incorporation and Bylaws providing for a
staggered Board of Directors. Under a staggered Board of Directors, the Board
of Directors would be divided into three classes of directors serving
staggered three-year terms.
Currently the Corporation's Bylaws and the Mississippi Business Corporation
Act provide that a vacancy on the Board of Directors, including a vacancy
created by an increase in the number of directors, may be filled by the
shareholders at an annual meeting or at a special meeting called for that
purpose, and that the newly elected director(s) shall serve until the
expiration of the term of the predecessor director.
Under the proposed Amendment to the Articles of Incorporation, and amended
and restated provisions of the Bylaws, a vacancy on the Board of Directors,
including a vacancy created by an increase in the number of directors, can be
filled only at the annual shareholder meeting succeeding the creation of the
vacancy. In addition, such provision provides that any director elected to the
Board of Directors to replace another director will hold office for the
unexpired term of the director he replaced. The proposed provision would give
the holders of 75% of the voting power of the Corporation's voting stock,
voting together as a single class, the power to remove directors, but only the
shareholders voting at the next annual meeting of shareholders would have the
power to fill the vacancies created by such removal.
Adoption of the Mississippi Controlled Share Act
In 1990, Mississippi adopted the Mississippi Controlled Share Act in
response to perceived abuses related to tender offers and other transactions
that result in a change of control of a corporation. The effect of adopting
the Mississippi Controlled Share Act is to deprive a person acquiring
"controlled shares" in an issuing public corporation from voting such shares
unless approved by the holders of a majority of the shares that are not
"interested shares." Basically, the term "controlled shares" is defined as the
shares that when added to the shares already held, either alone or as part of
a group, would enable the acquiror to have either (a) one-fifth or more but
less than one-third of the voting power; (b) one-third or more but less than a
majority voting power; or (c) a majority or more of all voting power. In the
event of a controlled share acquisition (the direct or indirect acquisition of
ownership of voting power over controlled shares), the acquiring person is
required to file an acquiring person's statement with the company setting
forth the number of shares acquired and certain other specified information.
The company would then be required to call a special shareholders meeting for
the purpose of considering the voting rights to be afforded the shares
acquired or to be acquired in the controlled shares acquisition. At the
meeting, the voting rights to be afforded the controlled shares are to be
voted on by the voting shares other than the "interested shares," defined to
include the shares owned by the acquiring person or group, the officers of the
company, and any director of the corporation who is an employee of the
company. Unless approved by the vote of a majority of the shares other than
the interested shares, the controlled shares are afforded no voting rights.
Shareholders Rights Agreement
The Shareholder Rights Agreement provides for the issuance of rights to
purchase additional shares of the Common Stock ("Rights") and contains
provisions that are designed to protect shareholders in the event of an
unsolicited attempt to acquire the Corporation. The implementation of the
Shareholder Rights Agreement
39
increases the Board of Directors' ability to represent effectively the
interests of shareholders of the Corporation in the event of an unsolicited
acquisition proposal by enabling it, among other things, to assure the various
constituencies of the Corporation (i.e., its creditors, customers, employees,
etc.) that the Corporation's stability can be maintained in a takeover
environment. In addition, the Shareholder Rights Agreement will give the Board
of Directors more time and the opportunity to evaluate an offer and exercise
its good faith business judgment to take appropriate steps to protect and
advance shareholder interests by negotiating with the bidder, auctioning the
Corporation, implementing a recapitalization or restructuring design as an
alternative to the offer, or taking other action.
The Rights are not intended to prevent a takeover of the Corporation and
will not preclude a successful cash tender offer for all of the outstanding
shares of Common Stock coupled with a requirement for the tender of Rights
formerly attached to such shares. However, the Shareholder Rights Agreement
should discourage most efforts to acquire the Corporation (short of such an
all inclusive tender offer) in a manner or on terms not approved by the Board
of Directors. The Rights may be redeemed by the Corporation at a redemption
price of $.001 per Right, and thus they should not interfere with any merger
or other business combination approved by the Board of Directors nor affect
any prospective offeror willing to negotiate in good faith with the Board of
Directors.
Distribution of the Rights will not in any way alter the financial strength
of the Corporation or interfere with its business plans. The distribution of
the Rights is not dilutive, does not effect reported earnings per share, is
not taxable either to the recipient or to the Corporation, and will not change
the way in which shareholders can currently trade shares of the Corporation's
common stock. However, under certain circumstances, more specifically
described below, exercise of the Rights may be dilutive or affect reported
earnings per share. Set forth below is a summary of specific provisions of the
Shareholders Rights Agreement.
Dividend Declaration; Purchase Price. The Board of Directors of the
Corporation will declare a dividend distribution of one purchase right (a
"Right") for each outstanding share of Common Stock, $.20 par value (the
"Common Stock"), of the Corporation. The distribution will be payable on a
future record date (the "Rights Record Date") to the shareholders of record
on that date and a Right will be included with each new share of Common
Stock issued after that date. Each Right will entitle the registered holder
to purchase from the Corporation one share of Common Stock of the
Corporation at a price of $150.00 per share (the "Purchase Price"), subject
to adjustment in specified circumstances.
Common Stock Certificates Evidencing Rights. Initially, the Rights are
not exercisable, and only become exercisable upon the occurrence of a
Distribution Date, as described below. Certificates for the Rights will not
be sent to shareholders, and the Rights will attach to and trade only
together with the Common Stock until the Distribution Date. Accordingly,
Common Stock certificates outstanding on the Rights Record Date evidence
the Rights related thereto, and Common Stock certificates issued after the
Rights Record Date will contain a notation incorporating the Rights
Agreement by reference.
Distribution Date. The Rights will separate from the Common Stock
("Distribution Date") upon the earlier of (i) ten business days following a
public announcement (the "Share Acquisition Date") that a person or group
of affiliated or associated persons (an "Acquiring Person"), other than the
Corporation or certain other exempt persons, has acquired or obtained the
right to acquire, beneficial ownership of 20% or more of the outstanding
Common Stock of the Corporation, or (ii) ten business days following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer by any person or group of affiliated or associated persons,
(after the acquisition of 20% or more that person also being an "Acquiring
Person") other than the Corporation or certain other exempt persons, the
consummation of which would result in the beneficial ownership by a person
or group of affiliated or associated persons of 20% or more of such
outstanding Common Stock.
Issuance of Right Certificates; Expiration of Rights. If the Distribution
Date occurs, then as soon as practical following the Distribution Date,
separate certificates evidencing the Rights ("Right Certificates")
40
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and such separate Right Certificates
alone will evidence the Rights from and after the Distribution Date. The
Rights will expire ten (10) years from the date they are declared (the
"Expiration Date"), unless earlier redeemed by the Corporation as described
below.
Right to Buy Corporation Common Stock at Half Price. Unless the Rights
are earlier redeemed, in the event that a person (other than an exempt
person) becomes the beneficial owner of 20% or more of the Corporation's
Common Stock then outstanding, then proper provision will be made so that
each holder of a Right (other than Rights that were beneficially owned by
the Acquiring Person, which will thereafter be void) will thereafter have
the right to receive, upon exercise, Common Stock having a value equal to
two times the Purchase Price. In other words, a stockholder who owned one
right to buy a share of stock at $150 per share would have the right to buy
$300 worth of stock (valued at the public market price at that time) for a
purchase of $150.
Right to Buy Acquiring Corporation Stock at Half Price. Similarly, unless
the Rights are earlier redeemed, in the event that, after there is an
Acquiring Person, (i) the Corporation were to be acquired in a merger or
other business combination transaction in which the Corporation was not the
surviving corporation or in which the Corporation's outstanding Common
Stock were changed or exchanged for stock or assets of another person or
(ii) fifty percent (50%) or more of the Corporation's consolidated assets
or earning power were to be sold (other than transactions in the ordinary
course of business), proper provision will be made so that each holder of a
Right (other than Rights that were beneficially owned by the Acquiring
Person, which will thereafter be void) will thereafter have the right to
receive, upon exercise, shares of common stock of the acquiring company
having a value equal to two times the Purchase Price.
Redemption. At any time on or prior to the close of business on the
earlier of (i) the Expiration Date, or (ii) the occurrence of an event
whereby the Rights are exercisable for Common Stock of the Corporation (or
of the Acquiring Corporation, as the case may be), the Corporation may
redeem the Rights in whole, but not in part, at a price of $.001 per Right
("Redemption Price"). Immediately upon the action of the Board of Directors
authorizing redemption of the rights, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
No Shareholders' Rights Prior to Exercise. Until a Right is exercised,
the holder thereof, as such, will have no rights as a shareholder of the
Corporation (other than rights resulting from such holder's ownership of
Common Stock), including, without limitation, the right to vote or to
receive dividends.
Increase Shareholder Vote for Amendment or Repeal of Proposed Amendments
Under the Mississippi Business Corporation Act, amendments to a
corporation's Articles of Incorporation require the approval of shareholders,
which is ordinarily given if the number of votes cast in favor exceed the
number of votes cast against. Under the provisions stated above, the
concurrence of the holders of at least 75% of the voting power of the
Corporation's voting stock would be required for the amendment or repeal of,
or the adoption of any provisions inconsistent with, any of the above
provisions. The requirement of an increased shareholder vote for amendment of
the provisions is designed to prevent a shareholder with a majority of the
Corporation's stock from avoiding the requirements of such provisions by
simply amending all the provisions again.
Increase in Authorized Shares
After taking into account the stock split, the Corporation will have
authorized shares of 3,750,000 with 3,353,750,000 shares issued and
outstanding. In order for the Shareholders' Rights Agreement to be effective,
it will be necessary for the Corporation to increase its authorized shares to
allow the Corporation to issue additional shares, if required, under the
Agreement. The proposed amendments would increase the authorized shares to
15,000,000 shares at .20c par value per share. This increase is intended to
provide the Corporation sufficient shares to utilize in the event the
Shareholders Rights Agreement is triggered and also to utilize in potential
future acquisitions of other financial institutions.
41
Potential Disadvantages to Shareholders
Although the purpose of these provisions is to ensure fair treatment of
shareholders in the event of certain mergers, tender offers, or other attempts
to acquire control of the Corporation (a "takeover"), the provisions regarding
business combinations (as well as the provisions providing for the division of
the Board of Directors into classes of Directors serving staggered terms) may
have certain adverse effects in that they may make more difficult the
accomplishment of certain takeovers at prices or on terms that some
shareholders may consider beneficial, impede the assumption of control by
principal shareholders in some cases, or make more difficult the removal of
current management even if favorable by a majority of the shareholders.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Article VI of the Corporation's Bylaws filed as an
exhibit to this Form 10, which contains certain indemnification provisions
pursuant to authority contained in the Mississippi Business Corporation Act.
In addition, the Corporation also maintains insurance coverage for the
benefit of Directors and officers with respect to many types of claims that
may be made against them, some of which claims are in addition to those
described in Article VI of the Bylaws.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Attached.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in accountants of the Corporation or the Bank
during the 24-month period prior to December 10, 1998, or subsequently. The
Corporation's current accountant, A. T. Williams, CPA ("Williams"), has
indicated that once the Corporation is registered with the Securities Exchange
Commission he will no longer be able to handle the Corporation's accounting
matters. Williams' reports on the financial statements of the Corporation for
the years ending December 31, 1996 and December 31, 1997 did not contain any
adverse opinions or disclaimers of opinion, and were not qualified or modified
as to uncertainty, audit scope or accounting principles. Moreover, there were
no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope of procedure between
Williams and the Corporation during the 1996 and 1997 calendar years, or
during any subsequent interim period during 1998.
The Board of Directors has requested and is currently reviewing proposals
from several accounting firms and anticipates employing a new accounting firm
for the Corporation in the next 30-45 days.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a)Financial Statements filed as part of this Form 10
The following are included in Item 13 of this Form 10:
Consolidated Financial Statements and Supplementary Information for years
ended December 31, 1997 and 1996.
(a) Independent Auditor's Report
(b) Consolidated Statements of Financial Condition
(c) Consolidated Statements of Income
(d) Consolidated Statements of Comprehensive Income
(e) Consolidated Statements of Changes in Stockholders' Equity
(f) Consolidated Statements of Cash Flows
(g) Notes to Consolidated Financial Statements
42
(b)Exhibits filed as part of this Form 10
The Exhibits described in the Exhibit List immediately following the
signature page of this Form 10 (which is incorporated by reference) are hereby
filed as part of this Form 10.
(c)Financial Statement Schedules
None
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated this the day of December, 1998.
CITIZENS HOLDING COMPANY
By: _________________________________
Title: ______________________________
43
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3(i) Articles of Incorporation of the Corporation, as amended
3(ii) Bylaws of the Corporation
10 Material Contract:
--Directors Deferred Compensation Plan and Form of Agreement
21 Subsidiaries
27 Financial Data Schedule
44
CITIZENS HOLDING COMPANY
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
YEARS ENDED DECEMBER 31, 1997 AND 1996
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
TABLE OF CONTENTS
PAGE
-----
Independent Auditor's Report.............................................. 1
Consolidated Financial Statements:
Consolidated Statements of Financial Condition.......................... 2-3
Consolidated Statements of Income....................................... 4
Consolidated Statements of Comprehensive Income......................... 5
Consolidated Statements of Changes in Stockholders' Equity.............. 6
Consolidated Statements of Cash Flows................................... 7-9
Notes to Consolidated Financial Statements................................ 10-23
[LETTERHEAD OF A.T. WILLIAMS APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Citizens Holding Company
Philadelphia, Mississippi
I have audited the accompanying consolidated statements of financial
condition of Citizens Holding Company and Subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Holding
Company and Subsidiary as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ A. T. Williams
July 2, 1998
F-1
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 RESTATED
------ --------------- ---------------
Cash and due from banks...................... $ 10,025,883.07 $ 10,183,911.77
Interest bearing deposits with other banks... 147,441.00 33,423.77
Federal funds sold........................... 5,500,000.00 100,000.00
Investment Securities (Note 3)
Securities available for sale.............. 67,292,271.54 72,472,038.77
Loans receivable............................. 194,304,715.52 179,504,590.98
Less allowance for loan losses............... (2,700,000.00) (2,500,000.00)
--------------- ---------------
Net loans (Note 4)......................... 191,604,715.52 177,004,590.98
Properties and equipment (net)(Note 5)....... 4,250,819.42 3,779,753.57
Accrued interest receivable.................. 3,153,867.63 2,889,762.37
Prepaid expenses............................. 174,020.15 119,782.63
Deferred income tax.......................... 432,382.16 600,379.04
Other real estate............................ 9,920.31 132,226.04
Cash value of life insurance................. 2,217,613.14 1,907,904.64
Goodwill (net)............................... 783,869.78 850,877.90
Other assets................................. 1,041,196.86 604,007.96
--------------- ---------------
TOTAL ASSETS............................. $286,634,000.58 $270,678,659.44
=============== ===============
See notes to consolidated financial statements.
F-2
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 RESTATED
------------------------------------ --------------- ---------------
LIABILITIES
Deposits
Demand..................................... $ 35,526,425.76 $ 34,352,691.80
NOW and money market accounts.............. 56,904,290.76 54,959,997.60
Time deposits.............................. 139,364,724.26 123,135,577.37
Savings.................................... 17,188,103.80 16,994,452.26
--------------- ---------------
Total deposits........................... 248,983,544.58 229,442,719.03
Federal funds purchased...................... -- 8,800,000.00
Accrued liabilities.......................... 155,507.08 142,232.05
Accrued interest payable..................... 1,316,056.84 1,126,761.27
Income taxes payable--current................ 34,029.41 166,458.50
Treasury tax and loan........................ 700,000.00 437,946.94
Debentures (Note 9).......................... -- 32,695.00
Directors deferred compensation payable...... 630,310.95 566,007.29
ABE loans.................................... 2,488,318.75 2,261,578.62
--------------- ---------------
Total Liabilities........................ 254,307,767.61 242,976,398.70
--------------- ---------------
Minority interest............................ 1,105,752.11 943,900.01
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value
Authorized 750,000 shares; 670,750 shares
issued.................................. 670,750.00 670,750.00
Paid in capital............................ 3,353,127.00 3,353,127.00
Retained earnings.......................... 26,822,611.77 22,895,525.85
Net unrealized gain on securities available
for sale, net of tax of $327,663.31 in
1997 and $41,873.71 in 1996............... 613,392.09 78,357.88
Treasury stock--9,000 shares, at cost...... (239,400.00) (239,400.00)
--------------- ---------------
Total Stockholders' Equity............... 31,220,480.86 26,758,360.73
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $286,634,000.58 $270,678,659.44
=============== ===============
See notes to consolidated financial statements.
F-3
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
-------------- --------------
INTEREST INCOME
Loans....................................... $17,104,693.40 $15,341,060.16
Investment securities:
Taxable................................... 4,034,213.44 4,274,823.57
Exempt from Federal income tax............ 238,050.11 323,318.35
-------------- --------------
4,272,263.55 4,598,141.92
Federal funds sold.......................... 124,850.58 312,938.94
Deposits with banks......................... 4,290.74 2,365.22
-------------- --------------
Total Interest Income..................... 21,506,098.27 20,254,506.24
-------------- --------------
INTEREST EXPENSE
Deposits.................................... 9,659,138.51 8,679,540.14
Debentures and notes........................ 333.24 4,256.64
-------------- --------------
Total Interest Expense.................... 9,659,471.75 8,683,796.78
-------------- --------------
NET INTEREST INCOME........................... 11,846,626.52 11,570,709.46
Provision for possible loan losses............ (740,308.74) (790,760.64)
-------------- --------------
Net interest income after provision for
possible loan losses......................... 11,106,317.78 10,779,948.82
-------------- --------------
OTHER INCOME
Service charges on deposit accounts......... 1,933,769.15 1,788,210.89
Fees for trust services..................... 3,043.06 510.00
Loan servicing fees......................... 155,178.58 168,420.15
Other service charges and fees.............. 263,137.26 254,984.63
Other income (Note 12)...................... 634,998.18 473,943.25
-------------- --------------
Total Other Income........................ 2,990,126.23 2,686,068.92
-------------- --------------
OTHER EXPENSE
Salaries and employee benefits.............. 4,027,334.86 3,875,368.00
Occupancy expense........................... 339,233.91 327,669.80
Equipment expense........................... 626,165.41 514,206.19
Net bond losses............................. 116,859.45 47,381.58
Earnings applicable to minority interest.... 165,120.67 160,994.64
Other expense (Note 13)..................... 1,771,461.10 1,739,181.26
-------------- --------------
Total Other Expense....................... 7,046,175.40 6,664,801.47
-------------- --------------
Income Before Income Taxes.................... 7,050,268.61 6,801,216.27
Income tax expense (Note 7)................... 2,560,695.19 2,407,000.70
-------------- --------------
NET INCOME.................................... $ 4,489,573.42 $ 4,394,215.57
============== ==============
Net income per share of common stock.......... $ 6.78 $ 6.64
============== ==============
Average shares outstanding.................... 661,750 661,750
============== ==============
See notes to consolidated financial statements.
F-4
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------- -------------
Net income......................................... $4,489,573.42 $4,394,215.57
Unrealized gains on securities (net of income taxes
of $285,789.60 in 1997 and $1,047.28 in 1996)..... 535,034.21 2,175.91
------------- -------------
COMPREHENSIVE INCOME............................... $5,024,607.63 $4,396,391.48
============= =============
See notes to consolidated financial statements.
F-5
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET
UNREALIZED
GAIN ON
SECURITIES
COMMON PAID IN RETAINED TREASURY AVAILABLE
STOCK CAPITAL EARNINGS STOCK FOR SALE
----------- ------------- -------------- ------------- -----------
Balance at December 31,
1995................... $639,248.00 $3,353,127.00 $19,029,124.78 $(239,400.00) $ 76,181.97
Additions:
Net income for 1996... -- -- 4,394,215.57 -- --
Stock dividend--5%.... 31,502.00 -- (31,502.00) -- --
Net change in
unrealized
appreciation on
securities available
for sale, net of tax
of $1,047.28......... -- -- -- -- 2,175.91
Reductions:
Cash dividends paid--
$0.75/share.......... -- -- (496,312.50) -- --
----------- ------------- -------------- ------------- -----------
Balance at December 31,
1996................... $670,750.00 $3,353,127.00 $22,895,525.85 $(239,400.00) $ 78,357.88
Additions:
Net income for 1997... -- -- 4,489,573.42 -- --
Net change in
unrealized
appreciation on
securities available
for sale, net of tax
of $285,789.60....... -- -- -- -- 535,034.21
Reductions:
Cash dividends paid--
$0.85/share.......... -- -- (562,487.50) -- --
----------- ------------- -------------- ------------- -----------
Balance at December 31,
1997................... $670,750.00 $3,353,127.00 $26,822,611.77 $(239,400.00) $613,392.09
=========== ============= ============== ============= ===========
See notes to consolidated financial statements.
F-6
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 RESTATED
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income..................................... $4,489,573.42 $4,394,215.57
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................. 402,071.01 366,169.92
Amortization of goodwill..................... 67,008.12 67,008.12
Accretion of investment securities........... (106,503.53) (72,776.25)
Loan loss provision.......................... 740,308.74 790,760.64
Deferred income taxes........................ (117,792.72) (215,067.17)
Net earnings applicable to minority
interest.................................... 142,119.67 135,902.64
Net investment securities losses............. 116,859.45 47,381.58
Increase in prepaid expenses................. (54,237.52) (28,231.18)
Decrease in other real estate................ 122,305.73 84,940.90
Increase in cash value of life insurance..... (309,708.50) (291,856.18)
Increase in other assets..................... (437,188.90) (198,918.96)
Increase (decrease) in income taxes payable.. (132,429.09) 303,307.66
Increase in accrued liabilities.............. 13,275.03 24,273.18
Increase in treasury tax and loan............ 262,053.06 108,603.09
Increase in accrued interest payable......... 189,295.57 23,641.02
Gain on disposal of land..................... -- (55,000.00)
Increase in director's deferred
compensation................................ 64,303.66 73,106.47
------------- -------------
Total adjustments............................ 961,739.78 1,163,245.48
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 5,451,313.20 5,557,461.05
------------- -------------
See notes to consolidated financial statements.
F-7
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 RESTATED
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest bearing deposits with
other banks............................... $ (114,017.23) $ (6,206.86)
(Increase) decrease in federal funds sold.. (5,400,000.00) 9,350,000.00
Purchases of securities available for
sale...................................... (29,112,959.81) (22,628,458.84)
Proceeds from sales of securities available
for sale.................................. 23,211,855.68 5,620,827.82
Proceeds from maturities of securities
available for sale........................ 11,911,071.68 20,586,469.92
Increase (decrease) in federal funds
purchased................................. (8,800,000.00) 8,800,000.00
Increase in loans.......................... (15,340,433.28) (22,438,030.66)
Purchase of furniture and equipment........ (329,815.36) (284,576.35)
Addition to buildings and land............. (543,321.50) (173,383.32)
Proceeds from sale of land................. -- 80,000.00
Increase in accrued interest receivable.... (264,105.26) (188,473.78)
ABE loans.................................. 226,740.13 1,284,224.96
--------------- ---------------
NET CASH PROVIDED (USED) IN INVESTING
ACTIVITIES................................ (24,554,984.95) 2,392.89
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits........ 19,540,825.55 (9,234,663.20)
Payments of dividends...................... (562,487.50) (496,312.50)
Redeemed debentures........................ (32,695.00) (32,695.00)
--------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES................................ 18,945,643.05 (9,763,670.70)
--------------- ---------------
Net decrease in cash and due from banks...... (158,028.70) (4,203,816.76)
Cash and due from banks at January 1......... 10,183,911.77 14,387,728.53
--------------- ---------------
CASH AND DUE FROM BANKS AT DECEMBER 31....... $ 10,025,883.07 $ 10,183,911.77
=============== ===============
See notes to consolidated financial statements.
F-8
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 RESTATED
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest................................... $ 9,470,176.18 $ 8,660,155.76
============== ==============
Income taxes............................... $ 2,810,917.00 $ 2,317,212.00
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Recorded unrealized gain on securities....... $ 840,556.24 $ 3,081.28
============== ==============
Decrease in deferred income tax asset on
unrealized gain on securities............... $ (285,789.60) $ (1,047.28)
============== ==============
Minority interest on unrealized (gain) loss
on securities............................... $ (19,732.43) $ 141.91
============== ==============
See notes to consolidated financial statements.
F-9
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens Holding Company and
Subsidiary conform with generally accepted accounting principles and practices
within the banking industry. The following summarizes significant accounting
policies:
GENERAL. Citizens Holding Company was incorporated on February 15, 1982. The
Company owns 113,018 of the 117,200 outstanding shares of The Citizens Bank of
Philadelphia, Mississippi.
The Citizens Bank operates at thirteen locations in the towns of
Philadelphia, Carthage, Union, Sebastopol, Madden, DeKalb, Scooba and
Kosciusko.
USE OF 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.
CONSOLIDATION. The consolidated financial statements include the accounts of
Citizens Holding Company and its 96.43% owned subsidiary, The Citizens Bank.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
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.
INVESTMENTS IN SECURITIES. The Bank's investments in securities are
classified and accounted for as securities available for sale.
Declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary have resulted in write-downs of the
individual securities to their fair value. The related write-downs have been
included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
Premiums and discounts are recognized in income using the interest method
over the period to maturity.
LOANS. Loans are stated at the amount of the unpaid principal, reduced by
unearned income and an allowance for loan losses. Unearned income on
installment loans is recognized as income over the terms of the loans.
Interest on other loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding.
Loan origination fees are recognized in income when received.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent
cash payments are received.
F-10
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses charged to expenses. Loans are charged
against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. The allowance is based on
management's evaluation of the loan portfolio considering economic conditions,
volume and composition of the loan portfolio, past experience and other
relevant factors.
BANK PREMISES AND EQUIPMENT. Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed on the straight-line
basis for buildings and on an accelerated method for fixtures and equipment.
Expenditures for maintenance and repairs are charged against income and
renewals and betterments are capitalized. Depreciable lives were 20-39 years
for buildings and 5-7 years for fixtures and equipment.
OTHER REAL ESTATE OWNED. Other real estate properties, acquired principally
through foreclosure, are stated at the lower of cost or estimated fair value.
INCOME TAXES. Provisions for income taxes are based on amounts reported in
the statements of income (after exclusion of non-taxable income such as
interest on state and municipal securities) and include deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes.
COMPENSATED ABSENCES. Compensated absences are not material and have not
been accrued.
NET INCOME PER SHARE OF COMMON STOCK. Net income per share of common stock
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period.
CASH AND CASH EQUIVALENTS. For the purpose of presentation in the Statements
of Cash Flows, cash and cash equivalents are defined as those amounts included
in the balance sheet caption "Cash and Due from Banks."
INTEREST INCOME ON LOANS. Interest on loans is accrued and credited to
income based on the principal amount outstanding. The accrual of interest on
loans is discontinued when, in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they become
due. Upon such discontinuance, all unpaid accrued interest is reversed.
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 a life of fifteen years.
RECLASSIFICATIONS. ABE Loans are presented as liabilities in these financial
statements. They were netted against loans receivable in past years. The 1996
amounts have been reclassified to conform with 1997 classifications. Such
reclassifications had no effect on reported net income.
F-11
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 2. 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:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets:
Cash and due from banks.. $ 10,025,883 $ 10,025,883 $ 10,183,912 $ 10,183,912
Interest bearing deposits
with banks.............. 147,441 147,441 33,424 33,424
Federal Funds Sold....... 5,500,000 5,500,000 100,000 100,000
Securities available for
sale.................... 67,292,272 67,292,272 72,472,039 72,472,039
Loans receivable......... 191,604,716 191,316,224 177,004,591 175,297,226
Accrued interest
receivable.............. 3,153,868 3,153,866 2,889,762 2,889,762
Financial Liabilities:
Deposits................. $248,983,545 $248,983,545 $229,442,719 $229,442,719
Other borrowed funds..... 700,000 700,000 437,947 437,947
Debentures............... -- -- 32,695 34,719
Federal funds purchased.. -- -- 8,800,000 8,800,000
ABE loans................ 2,488,319 2,488,319 2,261,579 2,261,579
Off Balance Sheet
Instruments:
Commitments to extend
credit.................. $ 1,384,088 $ 1,006,142
Letters of Credit........ 1,358 4,253
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.
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.
F-12
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
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 current interest rates and
committed rates.
NOTE 3. INVESTMENT SECURITIES
The carrying amounts of investment securities as shown in the consolidated
statements of financial condition and their approximate market values at
December 31 were as follows:
1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
GROSS GAINS LOSSES FAIR VALUE
-------------- ------------- ---------- --------------
AVAILABLE FOR SALE
U. S. Treasury Direct... $30,752,250.19 $ 592,665.00 $ 50.00 $31,344,865.19
U. S. Agency............ 15,198,262.54 78,290.27 15,881.00 15,260,671.81
Mortgage backed
securities............. 14,111,650.38 234,961.00 10,209.00 14,336,402.38
State, County and
Municipals............. 4,755,893.16 105,709.00 21,770.00 4,839,832.16
Federal Home Loan Bank
Stock.................. 1,510,500.00 -- -- 1,510,500.00
-------------- ------------- ---------- --------------
$66,328,556.27 $1,011,625.27 $47,910.00 $67,292,271.54
============== ============= ========== ==============
1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
GROSS GAINS LOSSES FAIR VALUE
-------------- ----------- ----------- --------------
AVAILABLE FOR SALE
U.S. Treasury Direct.... $ 5,171,405.58 $ 11,864.00 $ 2,499.04 $ 5,180,770.54
U.S. Agency............. 26,565,590.77 82,278.00 198,486.93 26,449,381.84
Mortgage backed
securities............. 33,442,818.81 314,814.00 160,048.00 33,597,584.81
State, County and
Municipals............. 6,050,464.58 134,590.00 59,353.00 6,125,701.58
Federal Home Loan Bank
Stock.................. 1,118,600.00 -- -- 1,118,600.00
-------------- ----------- ----------- --------------
$72,348,879.74 $543,546.00 $420,386.97 $72,472,038.77
============== =========== =========== ==============
U.S. Government and municipal securities with a carrying amount of
$61,301,916 (market value $61,301,916) at December 31, 1997 and $65,214,677
(market value $65,214,677) at December 31, 1996 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:
1997 1996
---------- ------
GROSS REALIZED GAINS
U. S. Agency................................................. $ 2,815.65 $ --
Mortgage backed securities................................... 49,173.94 --
---------- ------
$51,989.59 $ --
========== ======
F-13
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
GROSS REALIZED LOSSES
U. S. Agency........................................... $ 88,085.71 $ 26,937.27
Mortgage backed securities............................. 80,763.33 20,444.31
----------- -----------
$168,849.04 $ 47,381.58
=========== ===========
The carrying amounts and fair values of the maturities of investment
securities at December 31, 1997 were as follows:
CARRYING
AMOUNT FAIR VALUE
-------------- --------------
Due in one year or less.......................... $18,425,490.90 $18,425,490.90
Due in one to five years......................... 44,303,515.65 44,303,515.65
Due from five to ten years....................... 4,494,097.09 4,494,097.09
Due after ten years.............................. 69,167.90 69,167.90
-------------- --------------
$67,292,271.54 $67,292,271.54
============== ==============
NOTE 4. LOANS
The components of loans in the consolidated balance sheets are as follows:
1997 1996
-------------------------------- --------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- --------------- --------------- ---------------
Commercial, financial
and agricultural....... $ 90,690,515.27 $ 89,426,763.95 $ 81,088,722.36 $ 79,095,891.77
Real estate--
construction........... 4,533,188.44 4,457,787.10 5,826,595.30 5,684,707.54
Real estate--mortgage... 54,119,087.54 53,156,175.36 50,915,769.31 49,514,229.23
Consumer................ 47,465,548.85 46,779,121.76 44,014,916.62 43,343,809.36
--------------- --------------- --------------- ---------------
196,808,340.10 193,819,848.17 181,846,003.59 177,638,637.90
Unearned discount....... (2,503,624.58) (2,503,624.58) (2,341,412.61) (2,341,412.61)
Allowance for loan
losses................. (2,700,000.00) -- (2,500,000.00) --
--------------- --------------- --------------- ---------------
Loans, net.............. $191,604,715.52 $191,316,223.59 $177,004,590.98 $175,297,225.29
=============== =============== =============== ===============
Changes in the reserve for possible loan losses are summarized as follows:
1997 1996
------------- -------------
Balance at January 1,............................. $2,500,000.00 $2,300,000.00
------------- -------------
Recoveries on loans previously charged-off........ 247,689.09 165,219.76
Loans charged-off................................. (787,997.83) (755,980.40)
------------- -------------
Net charge-offs................................... (540,308.74) (590,760.64)
Provision charged to expense...................... 740,308.74 790,760.64
------------- -------------
Balance at December 31,........................... $2,700,000.00 $2,500,000.00
============= =============
Loans on nonaccrual status amounted to approximately $344,000.47 at December
31, 1997 and $215,241.49 at December 31, 1996. The effect of such loans was to
reduce net income by approximately $32,305.01 in 1997 and $21,261.33 in 1996.
No loans have been recognized as impaired in conformity with FASB Statement
114 for 1997 and 1996.
F-14
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 5. PROPERTIES AND EQUIPMENT
Components of properties and equipment included in the consolidated balance
sheets at December 31, 1997 and 1996 were as follows:
1997 1996
------------- -------------
Cost
Land............................................. $ 746,968.26 $ 746,968.26
Buildings........................................ 5,357,170.34 4,813,848.84
Furniture & equipment............................ 3,638,546.85 3,323,266.49
------------- -------------
Total cost..................................... 9,742,685.45 8,884,083.59
Less accumulated depreciation...................... 5,491,866.03 5,104,330.02
------------- -------------
Bank premises and equipment, net................... $4,250,819.42 $3,779,753.57
============= =============
Depreciation expense amounted to $402,071.01 and $366,169.92 for the years
ended December 31, 1997 and 1996, respectively.
NOTE 6. OTHER REAL ESTATE
Other real estate is presented net of allowances of $16,205.87 and
$42,023.96 at December 31, 1997 and 1996, respectively. Activity in the
allowance for losses on other real estate is as follows:
Balance at December 31, 1995....................................... $ 47,459.24
Provision charged to income...................................... 33,249.96
Charge-offs, net of recoveries................................... (38,685.24)
-----------
Balance at December 31, 1996....................................... 42,023.96
Provision charged to income...................................... 3,825.24
Charge-offs, net of recoveries................................... (29,643.33)
-----------
Balance at December 31, 1997....................................... $ 16,205.87
===========
NOTE 7. INCOME TAXES
The consolidated provision for income taxes consisted of the following:
1997 1996
------------- -------------
Currently payable
Federal......................................... $2,422,779.34 $2,344,873.18
State........................................... 255,708.57 277,194.69
------------- -------------
2,678,487.91 2,622,067.87
Deferred federal (benefit)........................ (117,792.72) (215,067.17)
------------- -------------
Total income tax expense.......................... $2,560,695.19 $2,407,000.70
============= =============
F-15
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
The differences between the federal statutory rate and the effective tax
rates for 1997 and 1996 were as follows:
1997 1996
------------- -------------
Federal tax based on statutory rate............... $2,310,150.41 $2,218,167.34
State income tax.................................. 255,708.57 277,194.69
Change due to:
Tax exempt investment interest.................. (82,050.42) (113,675.60)
Minority interest............................... 56,141.03 54,738.18
Other, net...................................... 20,745.60 (29,423.91)
------------- -------------
Income taxes...................................... $2,560,695.19 $2,407,000.70
============= =============
Deferred tax assets at December 31 consist of the following:
1997 1996
----------- -----------
Allowance for loan losses........................... $635,139.37 $492,167.41
Deferred compensation liability..................... 214,305.72 192,442.48
Other real estate................................... 5,510.00 14,288.15
Investment securities basis......................... (94,909.62) (56,645.29)
Unrealized gain or loss on available for sale
securities......................................... (327,663.31) (41,873.71)
----------- -----------
$432,382.16 $600,379.04
=========== ===========
NOTE 8. DEPOSITS
The aggregate amount of time deposits, each with a minimum denomination of
$100,000, was approximately $44,823,620.64 and $35,089,752.89 in 1997 and
1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
1998..................................................... $125,624,245.31
1999..................................................... 7,587,897.82
2000..................................................... 6,122,581.13
2001..................................................... 30,000.00
---------------
$139,364,724.26
===============
NOTE 9. DEBENTURES
In January 1997, the Company paid in full the final $32,695 on the Class D
12% debentures issued in 1982. Interest expense on the debentures was $333.24
and $4,256.64 in 1997 and 1996, respectively.
F-16
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 10. LEASES
The Bank leases computer equipment and some branch facilities under
operating leases. Rent expense was $43,611 and $36,430 for 1997 and 1996,
respectively. At December 31, 1997, the future minimum lease commitments for
leases which have terms in excess of 1 year are:
1998.............................................................. 19,140
1999.............................................................. 9,250
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% or more owned businesses.
As of December 31, 1997 and 1996, these loans totaled $2,362,452.21 and
$2,254,333.07, respectively. During 1997, new loans to such related parties
amounted to $2,275,238.81 and repayments amounted to $2,167,119.67. The amount
of deposits from related parties held by the Bank at December 31, 1997 and
1996 was $2,384,856.06 and $1,676,732.95, respectively.
NOTE 12. OTHER INCOME
The components of other income are as follows:
1997 1996
----------- -----------
Income from New South Life............................. $176,114.00 $142,949.00
Other recoveries....................................... 118,318.99 38,053.89
Other income........................................... 85,507.46 105,297.09
Accreted taxable discount.............................. 83,523.87 51,204.90
Dividend income FHLB................................... 80,151.69 54,184.32
Credit life premiums................................... 61,686.95 59,568.55
Accreted tax exempt discount........................... 22,979.66 21,571.35
Split dollar life...................................... 5,883.66 --
Brokerage fees......................................... 831.90 1,114.15
----------- -----------
$634,998.18 $473,943.25
=========== ===========
F-17
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 13. OTHER EXPENSE
Components of other expense are as follows:
1997 1996
------------- -------------
Office supplies.................................... $ 269,751.74 $ 254,198.78
Advertising........................................ 172,533.97 173,437.34
Miscellaneous expense.............................. 169,640.95 142,095.71
Postage............................................ 167,157.91 164,952.52
State, county & municipal taxes.................... 151,676.45 135,201.76
Telephone.......................................... 149,742.67 154,198.66
Other losses....................................... 140,236.92 137,076.89
Travel............................................. 101,244.71 112,269.51
Legal & professional............................... 80,661.94 47,588.18
Amortization of goodwill........................... 67,008.12 67,008.12
Dues & subscriptions............................... 61,463.74 47,650.27
FDIC & State Assessment............................ 58,102.11 73,105.01
Insurance.......................................... 57,883.97 40,920.24
Donations.......................................... 30,340.29 24,318.86
Deferred compensation expense...................... 26,520.99 34,742.30
Loan collection expense............................ 21,505.80 33,416.45
Meals & entertainment.............................. 19,673.02 21,153.74
Sales & Use tax.................................... 9,119.32 5,415.28
Cash short & over.................................. 8,765.93 4,489.53
Cleaning supplies.................................. 7,555.55 11,648.26
Bond portfolio expense............................. 875.00 1,575.00
Split dollar life insurance........................ -- 52,718.85
------------- -------------
$1,771,461.10 $1,739,181.26
============= =============
NOTE 14. PROFIT SHARING PLAN
The Bank has a profit sharing and savings plan in effect for substantially
all full-time employees.
Under the profit sharing and savings plan, the Bank automatically
contributes an amount equal to 2.7% of each participant's base salary to the
plan. A participant, in addition, may elect to make contributions to the plan.
The Bank matches 100% of employee contributions up to a limit of 6% of each
employee's salary.
Contributions to the profit sharing plan in 1997 and 1996, respectively,
totaled $383,693 and $347,286 of which $217,932 and $196,675 was made by the
Bank and $165,761 and $150,611 was made by employees, respectively.
NOTE 15. 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 4. 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.
F-18
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 16. 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, 1997 and 1996, a summary of such commitments and
contingent liabilities is as follows:
1997 1996
-------------- --------------
Commitments to extend credit..................... $16,283,341.60 $11,836,930.78
Letters of credit................................ 362,000.00 1,134,132.00
-------------- --------------
$16,645,341.60 $12,971,062.78
============== ==============
Commitments to extend credit, and letters of credit all include exposure to
some credit loss in the event of nonperformance of the customer. The Bank's
credit policies and procedures for credit commitments and financial guarantees
are the same as those for extension of credit that are recorded on the
consolidated statements of financial condition. Because these instruments have
fixed maturity dates, and because many of them expire without being drawn
upon, they do not generally present any significant liquidity risk to the
Bank. The Bank's experience has been that approximately fifty-four percent of
loan commitments are drawn upon by customers. When letters of credit are
utilized, a significant portion of such utilization is on an immediate payment
basis. The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1997 or 1996.
NOTE 17. 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, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as adequately 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.
F-19
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
The Bank's actual capital amounts and ratios are also presented in the
table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES: PROVISIONS:
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ----- ----------- -----
As of December 31, 1997:
Total Capital (to
Risk-Weighted
Assets).............. $31,913,008 17.02% $14,997,503 >8.0% $18,746,688 >10.0%
Tier I Capital (to
Risk-Weighted
Assets).............. $29,569,648 15.77% $ 7,498,751 >4.0% $11,248,127 > 6.0%
Tier I Capital (to
Average Assets)...... $29,569,648 10.46% $11,303,560 >4.0% $14,129,450 > 5.0%
As of December 31, 1996:
Total Capital (to
Risk-Weighted
Assets).............. $27,705,968 15.84% $13,991,762 >8.0% $17,489,703 >10.0%
Tier I Capital (to
Risk-Weighted
Assets).............. $25,519,755 14.59% $ 6,995,881 >4.0% $10,493,822 > 6.0%
Tier I Capital (to
Average Assets)...... $25,519,755 9.43% $10,827,200 >4.0% $13,534,000 > 5.0%
> = Greater than or equal to.
NOTE 18. SUBSEQUENT EVENTS
The Bank is a defendant in a legal proceeding arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of the matter is not expected to have a
material adverse effect on the consolidated financial condition of the Bank.
F-20