ITEM 1. BUSINESS
BACKGROUND
Citizens Holding Company (the "Corporation") is a one-bank holding company that holds 96.64% of the outstanding shares of The Citizens Bank of Philadelphia, Mississippi (the "Bank"). The Corporation was incorporated under Mississippi law on February 16, 1982, at the direction of the Board of Directors of the Bank in order to facilitate the Bank's adoption of a one-bank holding company structure.
The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917 the Bank surrendered its national charter and obtained a state charter at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At December
31, 2000, the Bank was the largest bank headquartered in Neshoba County with total assets of $381,557,740 and total deposits of $290,268,948.
The principal executive office for both the Corporation and the Bank is located at 521 Main Street, Philadelphia, Mississippi 39350 and its telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Corporation reflect the Corporation's activities or operations through the Bank.
OPERATIONS
The Corporation, through the Bank, engages in a wide range of commercial and personal banking activities, including accepting demand, savings and time deposit accounts, making secured and unsecured loans, issuing letters of credit, originating mortgage loans, and providing personal and corporate trust services; and provides certain services that are closely related to commercial banking such as credit life insurance and title insurance for its loan customers.
Revenues from the Corporation's lending activities constitute the largest component of the Corporation's operating revenues. Such lending activities include commercial, real estate, installment (direct and indirect) and credit card loans. The Corporation's primary lending area is East Central Mississippi, specifically Neshoba, Newton, Leake, Scott, Attala, Lauderdale and Kemper counties and contiguous counties. The Corporation extends out-of-area credit only to borrowers who are considered to be low risk, and only on a very limited basis.
This seven county lending area is mainly rural with Meridian, at 41,036 in population, being the largest city. Agriculture and some light industry are a big part of the economy of this area. The largest employer in the Corporation's service area is the Mississippi Band of Choctaw Indians with their schools, manufacturing plants and their main source of income, The Silverstar Casino and Resort (the "Casino"). The Casino and its related services employs approximately 2,500 people from the Corporation's service area.
The Corporation has in the past and intends to continue to make most types of real estate loans, including, but not limited to, single and multi-family housing, farm loans, residential and commercial construction loans and loans for commercial real estate. Historically, approximately 63.3% of the Corporation's loan portfolio has been attributed to this category of lending. Another 15.7% of the Corporation's loan portfolio has been comprised of commercial, industrial and agricultural production loans, with consumer loans making up the remaining 21.0% of the total loan portfolio.
The Corporation's loan personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit that 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 the communication and pooling of knowledge, judgment and experience of its members.
Of course, all loans in the Corporation's portfolio are subject to risk based on the economy in the Corporation's area and also that of the nation. However, because the Corporation's local economy has been strong and unemployment has remained at historic lows, management continues to consider general risk levels to be low.
In addition to lending services, the Corporation provides a wide range of personal and corporate trusts and trust-related services, which include it serving as executor of estates, as trustee under testamentary and inter vivos trusts and various pension and other employee benefit plans, as the guardian of the estates of minors and incompetents, and as escrow agent under various agreements.
The Corporation offers discount brokerage services through First Tennessee Bank.
In 1996 the Corporation opened the Westside building in Philadelphia, Mississippi, replacing a smaller drive-up only facility. In early 1998, the Corporation opened a new full service facility in Kosciusko, Mississippi.
The Corporation also expanded its ability to offer its customers broader options with their mortgage loan needs in 1999 with the acquisition of the assets of Three D Mortgage Company, with locations in Philadelphia and Kosciusko, Mississippi. The Corporation's Mortgage Department originates mortgage loans that are sold to the secondary market.
Through such innovations as its VISA Checkcard program, the 24 Hour Phone Teller and its Internet site (http://www.thecitizensbankphila.com), the Corporation's customers have the ability to have easy and convenient access to their funds and account balances 24 hours a day, 7 days a week. Additionally, the Internet site enables the Corporation's customers to review their accounts in detail, make transfers between their accounts and pay bills from anywhere in the world.
EXECUTIVE OFFICERS
From 1978 until the present, Steve Webb has served as President and Chief Executive Officer of the Corporation and the Bank. In addition, Mr. Webb has served as a member of the Board of Directors of the Corporation from 1982 until the present and of the Bank from 1970 until the present. Mr. Webb currently serves as Chairman for the Boards of both the Corporation and the Bank.
Robert T. Smith has been employed by the Bank since 1986 and has been in his current position of Vice-President and Controller since January of 1987. In addition to his position with the Bank, in February of 1996, Mr. Smith was elected to serve as Treasurer of the Corporation.
EMPLOYEES
The Corporation has no compensated employees. At December 31, 2000, the Bank employed 144 full-time employees and 27 part-time employees. The Bank is not a party to any collective bargaining agreements, and employee relations are considered to be good.
SUPERVISION AND REGULATION
The Bank is chartered under the banking laws of the State of Mississippi and is subject to the supervision of, and is regularly examined by, the Department of Banking and Consumer Finance and the FDIC. The Corporation is a registered bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), and is subject to the supervision of the Federal Reserve Board ("FRB"). Certain legislation and regulations affecting the businesses of the Corporation and the Bank are discussed below.
General.
The FRB requires the Corporation to maintain certain levels of capital. The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, violates certain laws, regulations, or conditions imposed in writing by the FRB.
Capital Standards.
The FRB, FDIC and other federal banking agencies have established risk- based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a bank's operations.
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. 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%.
Prompt Corrective Action and Other Enforcement Mechanisms.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more of the prescribed minimum capital ratios. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well- capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The Corporation and Bank are classified as well capitalized under these guidelines.
Safety and Soundness Standards.
FDICIA also implemented certain specific restrictions on transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extension of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts.
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.
The Corporation's ability to pay dividends depends in large part on the ability of the Bank to pay dividends to the Corporation. Certain provisions of state law restrict the payment of dividends by a Mississippi state 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.
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.
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.
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. Effective May 1, 1997, Mississippi "opted in" to the interstate branching provision of the Interstate Act.
Community Reinvestment Act.
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 continues to be a factor in review of applications to merger, establishment of new branches or formation of bank holding companies. Different evaluation methods are used depending on the asset size of the bank.
The FDIC examined the Bank on March 12, 1997 and again most recently on June 1, 1999, for its performance under the CRA. The Bank was rated Satisfactory during both of these examinations. No discriminatory practices or illegal discouragement of applications were found.
Impact of Monetary Policies.
Banking is a business that 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. The nature and timing of any future changes in such policies and their impact on the Corporation cannot be predicted.
COMPETITION
The banking business is a highly competitive business. The Corporation's market area consists principally of Neshoba, Newton, Leake, Scott, Attala, Lauderdale and Kemper Counties in Mississippi, although the Corporation also competes with other financial institutions in those counties and in surrounding counties in Mississippi in obtaining deposits and providing many types of financial services. The Corporation competes with larger regional banks for the business of companies located in the Corporation's market area. A healthy economy, such as the Corporation's market area is experiencing, invites certain challenges, especially that of competition.
All financial institutions today are faced with the challenge of competing for customers' deposits, and the Bank is no exception. The Bank competes with savings and loan associations, credit unions, production credit associations and federal land banks and with finance companies, personal loan companies, money market funds and other non-depository financial intermediaries. Many of these financial institutions have resources many times greater than those of the Corporation. In addition, new financial intermediaries such as money-market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions.
Recent changes in federal and state law have resulted in, and are expected to continue to result in, increased competition. The reductions in legal barriers to the acquisition of banks by out-of-state bank holding companies resulting from implementation of the Interstate Act and other recent and proposed changes are expected to continue to further stimulate competition in the markets in which the Corporation operates, although it is not possible to predict the extent or timing of such increased competition.
Currently, there are approximately fourteen different financial institutions in the Corporation's market area competing for the same customer base. Despite these challenges, the Corporation has not only been able to maintain its market share, but has actually increased its share in recent years.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation, through the Bank, currently operates from its main office in downtown Philadelphia, and from 13 additional branches in Neshoba, Newton, Leake, Scott, Attala, Lauderdale and Kemper counties, all located in Mississippi. Information about these branches is set forth in the table below:
The Bank owns its main office and its branch offices, except for the Pearl River Branch Office and the Meridian Branch Office, which are leased. 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 related departments of the Corporation. The other branches range in size from nearly 4,000 square feet to 1,000 square feet.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine litigation incidental to their business, to which the Corporation or the Bank is a party or which any of its property is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Corporation's shareholders during the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET PRICE.
The Corporation's Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "CIZ." The stock began trading on the AMEX on October 19, 1999 and prior to that date was sold by private transactions between parties. At December 31, 2000, the Common Stock's closing price was $17.00.
On March 9, 2001, the shares of Common Stock were held of record by approximately 466 shareholders.
DIVIDENDS
Dividends for 2000 totaled $.425 per share compared to $.32 in 1999 and $.24 in 1998. These dividends reflect a 33% increase in 2000 over 1999 and a 33% increase in 1999 over 1998.
The Corporation declares dividends on a quarterly basis in March, June, September and December with payment following at the end of the month in which the dividend was declared.
Funds for the payment by the Corporation of cash dividends are obtained from dividends received by the Corporation from the Bank. Accordingly, the declaration and payment of
dividends by the Corporation depend upon the Bank's earnings and financial condition, general economic conditions, compliance with regulatory requirements, and other factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED STATISTICS
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information on the Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2000, 1999, and 1998, required by this Item 7 can be found under the headings "Management's Discussion and Analysis" and "Consolidated Financial Statements" in the 2000 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information on the Quantitative and Qualitative Disclosures about Market Risk, required by this Item 7A can be found under the headings "Quantitative and Qualitative Disclosures about Market Risk" in the 2000 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information on Financial Statements and Supplementary Data required by this Item 8 can be found under the headings "Management's Discussion and Analysis", "Consolidated Financial Statements" and "Quarterly Financial Trends" in the 2000 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report of Form 10-K. Such information is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of the Registrant required by this Item 10 can be found under the headings "Section 16(a) Beneficial Ownership Reporting Compliance", "Board of Directors", and Executive Compensation" in the Corporation's Definitive Proxy Statement dated March 29, 2001, relating to its 2001 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Executive Compensation paid by the Registrant required by this Item 11 can be found under the headings "Executive Compensation" and "Compensation of the Board of Directors" in the Corporation's Definitive Proxy Statement dated March 29, 2001, relating to its 2001 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding Security Ownership of Certain Beneficial Owners and Management can be found under the headings "Stock Ownership of Directors and Executive Officers" and "Ownership of Certain Beneficial Owners" in the Corporation's Definitive Proxy Statement dated March 29, 2001, relating to its 2001 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions can be found under the headings "Indebtedness of Related Parties" and "Interests of the Board of Directors" in the Corporation's Definitive Proxy Statement dated March 29, 2001, relating to its 2001 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Consolidated Financial Statements and Supplementary Information for years ended December 31, 1998, 1999 and 2000, which include the following:
(i) Independent Auditor's Report (ii) Consolidated Statements of Financial Condition (iii) Consolidated Statements of Income (iv) Consolidated Statements of Comprehensive Income (v) Consolidated Statements of Changes in Shareholders' Equity (vi) Consolidated Statements of Cash Flows (vii) Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
None.
(c) Exhibits required by Item 601 of Regulation S-K
3(i) Amended Articles of Incorporation of the Corporation * 3(ii) Amended and Restated Bylaws of the Corporation * 4 Rights Agreement between Citizens Holding Company * and The Citizens Bank of Philadelphia, Mississippi 10 Directors' Deferred Compensation Plan - Form of Agreement * 10(a) Citizens Holding Company 1999 Directors' Stock * Compensation Plan 10(b) Citizens Holding Company 1999 Employees' Long-Term * Incentive Plan 13 2000 Annual Report to Shareholders 21 Subsidiaries of Registrant * 27 Financial Data Schedule
* Filed as an exhibit to the Form 10 Registration Statement of the Corporation (File No. 000-25221) filed on December 30, 1998 and incorporated herein by reference, and also filed as an exhibit to Amendment No. 1 to Form 10 Registration Statement of the Corporation (File No. 000-25221) filed on June 21, 1999 and incorporated herein by reference.
(d) Financial Statement Schedules. None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Steve Webb --------------------- STEVE WEBB CHAIRMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR
By: /s/ Robert T. Smith --------------------- ROBERT T. SMITH TREASURER
DATE: March 21, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES CAPACITIES DATE
/s/ Don L. Fulton Director March 21, 2001
/s/ William M. Mars Director March 21, 2001
/s/ W. W. Dungan Director March 21, 2001
/s/ George R. Mars Director March 21, 2001
/s/ Steve Webb Director, President and March 21, 2001 Chief Executive Officer
/s/ David A. King Director March 21, 2001
EXHIBIT INDEX
3(i) Amended Articles of Incorporation of the Corporation * 3(ii) Amended and Restated Bylaws of the Corporation * 4 Rights Agreement between Citizens Holding Company * and The Citizens Bank of Philadelphia, Mississippi 10 Directors' Deferred Compensation Plan - Form of Agreement * 10(a) Citizens Holding Company 1999 Directors' Stock * Compensation Plan 10(b) Citizens Holding Company 1999 Employees' Long-Term * Incentive Plan 13 2000 Annual Report to Shareholders 21 Subsidiaries of Registrant *
* Filed as an exhibit to the Form 10 Registration Statement of the Corporation (File No. 000-25221) filed on December 30, 1998 and incorporated herein by reference, and also filed as an exhibit to Amendment No. 1 to Form 10 Registration Statement of the Corporation (File No. 000-25221) filed on June 21, 1999 and incorporated herein by reference.