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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-25221
CITIZENS HOLDING COMPANY
(exact name of Registrant as specified in its charter)
MISSISSIPPI 64-0666512
(State or other jurisdiction of (I. R. S. Employer Identification Number)
incorporation or organization)
521 Main Street, Philadelphia, MS 39350
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 601-656-4692
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes | | No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 12, 2002.
Title Outstanding
Common Stock, $.20 par value 4,963,028
CITIZENS HOLDING COMPANY
SECOND QUARTER 2002 INTERIM FINANCIAL STATEMENTS
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Condition
June 30, 2002 and December 31, 2001
Consolidated Statements of Income
Three and six months ended June 30, 2002 and 2001
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART 1. CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
June 30, December 31,
ASSETS 2002 2001
------------------------------
Cash and due from banks $ 18,727,807 $ 12,713,482
Interest bearing deposits with other banks 24,048 5,421,241
Federal Funds Sold 825,000 6,100,000
Investment securities available for sale, at fair value 176,032,872 122,567,180
Loans, net of allowance for loan losses of
$4,231,583 in 2002 and $3,375,000 in 2001 292,685,445 260,903,091
Premises and equipment, net 7,612,376 5,143,535
Other real estate owned, net 1,103,611 340,657
Accrued interest receivable 4,408,389 4,121,922
Cash value of life insurance 2,951,472 2,809,410
Goodwill (net) 6,753,136 2,974,023
Other assets 3,427,098 4,118,333
------------------------------
TOTAL ASSETS $514,551,254 $427,212,874
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 58,412,102 $ 50,535,929
Interest-bearing NOW and money market accounts 118,142,752 91,656,150
Savings deposits 32,384,655 22,481,585
Certificates of deposit 223,783,153 194,635,343
------------------------------
Total deposits 432,722,662 359,309,007
Accrued interest payable 1,061,940 1,415,513
Federal Home Loan Bank advances 19,173,148 14,628,788
Federal Funds Purchased 5,000,000 0
Directors deferred compensation payable 1,130,726 1,079,191
Other liabilities 3,144,643 2,386,608
------------------------------
Total liabilities 462,233,119 378,819,107
Minority interest in consolidated subsidiary 1,306,731 1,212,199
STOCKHOLDERS' EQUITY
Common stock; $.20 par value, 22,500,000 shares authorized, and 4,963,028 shares
outstanding at June 30, 2002, and
at December 31, 2001 1,006,125 1,006,125
Less: Treasury stock, at cost, 67,500 shares at
June 30, 2002 and at December 31, 2001 -239,400 -239,400
Additional paid-in capital 3,017,752 3,017,752
Retained earnings 45,256,243 43,240,017
Unrealized gain (loss) on securities available for sale, net of
deferred tax asset (liability) of $(1,300,651) in 2002 and ($89,295) in 2001 1,970,684 157,074
------------------------------
Total stockholders' equity 51,011,404 47,181,568
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $514,551,254 $427,212,874
==============================
See notes to consolidated financial statements.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
-----------------------------------------------------------
INTEREST INCOME:
Loan income including fees $5,671,767 $5,698,589 $10,994,356 $11,444,318
Investment securities 1,840,316 1,421,135 3,468,499 2,854,724
Other interest 61,197 64,327 140,894 144,145
-----------------------------------------------------------
Total interest income 7,573,280 7,184,051 14,603,749 14,443,187
INTEREST EXPENSE:
Deposits 2,163,111 3,103,452 4,434,418 6,169,542
Other borrowed funds 215,805 250,670 410,093 804,943
-----------------------------------------------------------
Total interest expense 2,378,916 3,354,122 4,844,511 6,974,485
-----------------------------------------------------------
NET INTEREST INCOME 5,194,364 3,829,929 9,759,238 7,468,702
PROVISION FOR LOAN LOSSES 435,318 449,391 669,814 569,160
-----------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,759,046 3,380,538 9,089,424 6,899,542
OTHER INCOME:
Service charges on deposit accounts 778,953 699,827 1,484,199 1,361,293
Other service charges and fees 116,308 105,585 249,217 217,142
Other income 147,931 317,596 315,909 449,896
-----------------------------------------------------------
Total other income 1,043,192 1,123,008 2,049,325 2,028,331
OTHER EXPENSES:
Salaries and employee benefits 1,803,864 1,296,362 3,476,897 2,628,535
Occupancy expense 481,095 371,586 917,520 734,938
Other operating expense 1,036,460 685,792 1,920,855 1,359,367
Earnings applicable to minority interest 43,541 51,095 91,922 98,737
-----------------------------------------------------------
Total other expenses 3,364,960 2,404,835 6,407,194 4,821,577
-----------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,437,278 2,098,711 4,731,555 4,106,296
PROVISION FOR INCOME TAXES 775,285 612,815 1,524,204 1,246,707
-----------------------------------------------------------
NET INCOME $1,661,993 $1,485,896 $3,207,351 $2,859,589
===========================================================
NET INCOME PER SHARE
-Basic $0.33 $0.30 $0.65 $0.57
===========================================================
-Diluted $0.33 $0.30 $0.64 $0.57
===========================================================
See notes to consolidated financial statements.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
-------------------------------------------------------------
Net income $1,661,993 $1,485,896 $3,207,351 $2,859,589
Other comprehensive income, net of tax
Unrealized holding gains (losses) 2,015,571 270,009 1,836,390 624,846
Less reclassification adjustment for gains
(losses) included in net income 22,780 0 22,780 0
Total other comprehensive income 1,992,791 270,009 1,813,610 624,846
-------------------------------------------------------------
Comprehensive income $3,654,784 $1,755,905 $5,020,961 $3,484,435
=============================================================
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
2002 2001
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $5,154,417 $4,104,324
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 32,917,639 24,512,517
Proceeds from sale of investment securities 25,744,965 0
Purchases of investment securities -112,128,296 -31,814,450
Purchases of bank premises and equipment -2,789,041 -304,174
Decrease in interest bearing deposits with other banks 5,397,193 -368,896
Net (increase) decrease in federal funds sold 5,275,000 -7,500,000
Premium paid on Bank purchase -3,955,920 0
Net (increase) decrease in loans -31,782,354 990,454
Net Cash Used by Investing Activities -81,320,814 -14,484,549
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 73,413,655 31,603,342
Net increase (decrease) in ABE loans 413,834 -144,928
Increase (decrease) in TT&L Note Option 0 -700,000
Increase (decrease) in FHLB advances 4,544,360 -27,000,000
Increase in federal funds purchased 5,000,000 7,500,000
Payment of dividends -1,191,127 -909,906
Net Cash Provided by Financing Activities 82,180,722 10,348,508
Net Increase (Decrease) in Cash and Due from Banks 6,014,325 -31,717
Cash and Due From Banks, beginning of year 12,713,482 10,415,155
Cash and Due from Banks, end of period 18,727,807 10,383,438
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2002
1. These interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. However, these financial statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The interim consolidated
financial statements are unaudited and reflect all adjustments and
reclassifications which, in the opinion of management, are necessary for a
fair presentation of the results of operations and financial condition of
the interim period. All adjustments and reclassifications are of a normal
and recurring nature. Results for the periods ending June 30, 2002 are not
necessarily indicative of the results that may be expected for any other
interim periods or for the year as a whole.
The interim consolidated financial statements of Citizens Holding Company
include the accounts of its 97.44% owned subsidiary, The Citizens Bank of
Philadelphia (collectively referred to as "the Corporation"). All
significant intercompany transactions have been eliminated in
consolidation.
2. Summary of Significant Accounting Policies. See note 1 of the Notes to
Consolidated Financial Statements of the Citizens Holding Company that were
included in the Form 10-K Annual Report filed March 28, 2002.
Investment Securities - The Corporation classifies all of its securities as
available-for-sale and carries them at fair value with unrealized gains or
losses reported as a separate component of capital, net of any applicable
income taxes. Realized gains or losses on the sale of securities
available-for-sale, if any, are determined on an identification basis. The
Corporation does not have any securities classified as Held for Trading or
Held to Maturity.
3. In May 2002, the Corporation acquired CB&T Capital Corporation, a one-bank
holding company, whose wholly-owned subsidiary was Citizens Bank & Trust
Company in Louisville, MS. The acquisition was undertaken by the
Corporation in order to gain entry into a geographic section of the state
of Mississippi that is contiguous to the Corporation's current markets and
in which the Corporation had very little market presence. The purchase
price of the net assets totaled approximately $12.3 million cash and was
based on a multiple approximately 1.505 times the book value, subject to
certain adjustments, of the acquired company. The Corporation based its
purchase price on several factors, including comparable transactions and
management's estimate of the value of entry into a strategically targeted
geographic area.
The follow is a summary of the assets and liabilities acquired:
Cash $ 2,880
Investments 50,620
Loans 15,019
Bank Premises and others assets 3,025
Deposits (57,939)
Other liabilities (5,127)
-------
Net assets acquired 8,478
Goodwill and other intangible assets $ 3,806
-------
Purchase Price $12,284
The Corporation has not yet completed its evaluation of all of the assets
and liabilities acquired, including the allocation of purchase price to
identifiable intangible assets. The impact on depreciation and amortization
expense for the quarter ended June 30, 2002 of any subsequent changes in
the allocation of the purchase price is not expected to be material.
4. In the ordinary course of business, the Corporation enters into commitments
to extend credit to its customers. The unused portion of these commitments
is not reflected in the accompanying financial statements. As of June 30,
2002, the Corporation had entered into commitments with certain customers
that had an unused balance of $17,221,798 compared to $12,155,738 unused at
December 31, 2001. There were $499,600 of letters of credit outstanding at
June 30, 2002 and $444,500 at December 31, 2001.
5. Net income per share - Basic, has been computed based on the weighted
average number of shares outstanding during each period. Net income per
share - Diluted, has been computed based on the weighted average number of
shares outstanding during each period plus the dilutive effect of
outstanding granted options. Basic weighted average shares have been
adjusted to reflect the five-for-one stock split on the common stock
effective January 1, 1999 and the three-for-two stock split that was
effective January 2, 2002. Earnings per share were computed as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----------------------------------------------------------
Basic weighted average
shares outstanding 4,963,028 4,963,028 4,963,028 4,963,028
Dilutive effect of granted options 32,297 12,438 32,268 11,331
----------------------------------------------------------
Diluted weighted average
shares outstanding 4,995,325 4,975,466 4,995,296 4,974,359
Net income $1,661,993 $1,485,896 $3,207,351 $2,859,589
Net income per share-basic $0.33 $0.30 $0.65 $0.57
Net income per share-diluted $0.33 $0.30 $0.64 $0.57
6. In July 2001, the Corporation completed the acquisition of two bank
branches located in Forest and Decatur, Mississippi from Union Planters
Bank. The Corporation acquired approximately $30.3 million in deposits,
$11.7 million in loans, and $15.4 million in cash and short-term
investments. The $2.5 million premium paid by the Corporation was allocated
primarily to a core deposit intangible asset.
In May 2002, the Corporation acquired Citizens Bank & Trust Company and
CB&T Capital Corporation of Louisville in a cash purchase of all of the
outstanding stock of CB&T Capital Corporation for $12.4 million. The
Corporation acquired $71.1 million in assets, of which $15.0 was loans,
$50.6 million was in investment securities and $1.8 million in bank
building and equipment. Also acquired in this transaction were $57.9
million of deposits.
Amortization expense related to the core deposit intangible assets for the
period ended June 30, 2002 was $176,406.
7. The Corporation is a party to lawsuits and other claims that arise in the
ordinary course of business, which are being vigorously contested. In the
regular course of business, Management evaluates estimated losses or costs
related to litigation, and the provision is made for anticipated losses
whenever Management believes that such losses are probable and can be
reasonably estimated. At the present time, Management believes, based on
the advice of legal counsel, that the final resolution of pending legal
proceedings will not have a material impact on the Corporation's
consolidated financial position or results of operations.
8. In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 "Business Combinations" and Statement No. 142, "Goodwill and other
Intangible Assets". FAS No. 141 requires that all business combinations
entered into after June 30, 2001 be accounted for under the purchase
method. FAS No. 142 requires that all intangible assets, including
goodwill, that result from business combinations be periodically (at least
annually) evaluated for impairment, with any resulting impairment loss
being charged against earnings. Also, under FAS No. 142, goodwill resulting
from any business combination
accounted for according to FAS No. 141 is not amortized, and the
amortization of goodwill related to business combinations entered into
prior to June 30, 2001 is discontinued effective, January 1, 2002. The
Company adopted the provisions of FAS No. 141 on July 1, 2001, and the
provisions of FAS No. 142 related to discontinuation of goodwill
amortization effective January 1, 2002
In June 2001, the FASB issued Standard No. 143 related to accounting for
asset retirement obligations. The new standard establishes accounting
standards for recognition and measurement of a liability for an asset
retirement obligation and associated asset retirement cost. The standard is
effective for fiscal years beginning after June 15, 2002. Adoption of this
statement will not have a material effect on the Company's financial
statements.
In August 2001, the FASB issued Standard No. 144 related to accounting for
the impairment or disposal of long-lived assets. The standard establishes
specific accounting standards related to long-lived assets to be held and
used, sold, or abandoned and those to be disposed of by exchange for
similar assets or distributed to owners. The standard is effective for
fiscal years beginning after December 31, 2001. Adoption of this standard
by the company is not expected to have a material effect on the Company's
financial statements.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Citizens Holding
Company and its 97.44% owned subsidiary, The Citizens Bank of Philadelphia
(collectively, the "Corporation").
LIQUIDITY
The Corporation has an asset and liability management program that assists
management in maintaining net interest margins during times of both rising and
falling interest rates and in maintaining sufficient liquidity. Liquidity of the
Corporation at June 30, 2002 was 48.1%, at December 31, 2001 was 50.51% and at
June 30, 2001 was 49.2%. Liquidity is the ratio of net deposits and short term
liabilities divided by net cash, short-term investments and marketable assets.
Management believes it maintains adequate liquidity for the Corporation's
current needs.
When the Corporation has more funds than it needs for its reserve requirements
or short-term liquidity needs, the Corporation increases its security
investments or sells federal funds. It is management's policy to maintain an
adequate portion of its portfolio of assets and liabilities on a short-term
basis to insure rate flexibility and to meet loan funding and liquidity needs.
The Corporation has secured and unsecured federal funds lines with correspondent
banks in the amount of $38,500,000. In addition, the Corporation has the ability
to draw on its line of credit with the Federal Home Loan Bank in excess of
$54,248,250 at June 30, 2002. At June 30, 2002, the Corporation had unused and
available $38,500,000 of its federal funds line of credit and $35,075,102 of its
line of credit with the Federal Home Loan Bank.
CAPITAL RESOURCES
The Corporation's equity capital was $51,011,404 at June 30, 2002. The main
source of capital for the Corporation has been the retention of net income.
On January 1, 1999, the Corporation issued a five-for-one (5:1) split to the
shareholders of the Corporation. This split increased the number of shares
outstanding to 3,308,750 from 661,750. The number of shares authorized increased
from 750,000 to 3,750,000 after the split. Additionally, the shareholders
approved an increase in authorized shares to 15,000,000 at the annual meeting
held April 13, 1999.
On January 2, 2002, the Corporation issued a three-for-two (3:2) split to the
shareholders of the Corporation. This split increased the number of outstanding
shares to 4,963,028
and increased the authorized shares from 15,000,000 to 22,500,000. Cash
dividends in the amount of $1,191,127 or $0.24 per share were paid year to date
June 30, 2002.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Total and Tier
1 capital (primarily common stock and retained earnings, less goodwill) to risk
weighted assets, and of Tier 1 capital to average assets. Management believes
that as of June 30, 2002, the Corporation meets all capital adequacy
requirements to which it is subject.
To Be Well
Capitalized Under
For Capital prompt Corrective
Actual Adequacy Purposes Actions Provisions
---------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------
As of June 30, 2002
Total Capital $47,274,799 16.09% $23,511,015 *8.00% $29,388,768 *10.00%
(to Risk-Weighted Assets)
Tier 1 Capital 43,594,314 14.83% 11,755,507 *4.00% 17,633,261 *6.00%
(to Risk-Weighted Assets)
Tier 1 Capital 43,594,314 9.19% 18,973,515 *4.00% 23,716,893 *5.00%
( to Average Assets)
- ------------
* Greater than
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Corporation and the related changes
between those periods:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
-----------------------------------------------------------------
Interest Income, including fees $7,573,280 $7,184,051 $14,603,749 $14,443,187
Interest Expense 2,378,916 3,354,122 4,844,511 6,974,485
-----------------------------------------------------------------
Net Interest Income 5,194,364 3,829,929 9,759,238 7,468,702
Provision for Loan Losses 435,318 449,391 669,814 569,160
Net Interest Income after
Provision for Loan Losses 4,759,046 3,380,538 9,089,424 6,899,542
Other Income 1,043,192 1,123,008 2,049,325 2,028,331
Other Expense 3,364,960 2,404,835 6,407,194 4,821,577
-----------------------------------------------------------------
Income before Provision For
Income Taxes 2,437,278 2,098,711 4,731,555 4,106,296
Provision for Income Taxes 775,285 612,815 1,524,204 1,246,707
------------------------------------------------------------
Net Income $1,661,993 $1,485,896 $3,207,351 $2,859,589
============================================================
Net Income Per Share - Basic $0.33 $0.30 $0.65 $0.57
============================================================
Net Income Per Share-Diluted $0.33 $0.30 $0.64 $0.57
============================================================
Net Income Per Share - Basic is calculated using weighted average number of
shares outstanding for the period. Net Income Per Share - Diluted is calculated
using the weighted average number of shares outstanding for the period, plus the
net dilutive effect of granted stock options determined using the treasury stock
method.
Annualized return on average equity (ROE) was 13.63% and 13.21% and for the
three and six months ended June 30, 2002, and 12.94% and 12.66% for the three
and six months ended June 30, 2001. The increase in ROE for this period was the
result of earnings growth that was greater than the rate of growth for equity.
The book value per share increased to $10.28 at June 30, 2002 compared to $9.51
at December 31, 2001. This increase is due to earnings exceeding dividends paid
during this period. Average assets for the six months ended June 30, 2002, were
$461,229,441 compared to $403,881,314 for the year ended December 31, 2001, and
average equity increased to $48,550,951 for the six months ended June 30, 2002,
from $47,663,502 for the year ended December 31, 2001. The increase in average
assets is due to the acquisition of the Union Planters branches in July 2001 and
the acquisition of Citizens Bank & Trust Company in May 2002.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Corporation's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid for deposits and borrowed funds. The net interest margin is net
interest income expressed as a percentage of average earning assets.
The annualized net interest margin was 4.79% and 4.71% for the three and six
months ended June 30, 2002, compared to an annualized net interest margin of
4.47 % and 4.37% for the three and six months ended June 30, 2001. Earnings
assets averaged $425,058,413 for the six months ended June 30, 2002. This
represented an increase of $71,415,480, or 20.2%, over average earning assets of
$353,642,933 for the six months ended June 30, 2001.
Net interest income was $5,194,364 and $9,759,238 for the three and six month
periods in 2002, an increase of $1,364,435 and $2,290,536 respectively over the
same periods in 2001. An increase in loan volume and investments in this period
contributed to this increase. A lower cost of deposits and other borrowed funds
during 2002 over the same period in 2001 also contributed to the increase in Net
Interest Income. Income from investment securities increased in the six month
period in 2002 as a result of both an increase in the principal balance of
investment securities and a shift in the mix of investments from lower yielding
U. S. Treasury Securities into higher yield mortgage backed products.
The added liquidity that resulted from the acquisition of the two Union Planters
Bank branches in the third quarter of 2001, together with a general increase in
deposits, permitted the Corporation to pay off a large portion of it borrowings
from the Federal Home Loan Bank, significantly decreasing interest expense on
other borrowings.
Other interest income decreased in the three and six month periods due to a
decrease in the interest rates on Federal Funds Sold.
The following table shows the interest and fees and corresponding yields for
loans only.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------------------------------------------------------------------
Interest and Fees $5,671,767 $5,698,589 $10,994,356 $11,444,318
Average Loans, Net of Unearned 287,872,919 249,637,526 276,737,899 250,355,556
Annualized Yield 7.88% 9.13% 7.95% 9.21%
The decreases in rates in the three and six month periods reflect the decrease
in all loan rates for both new and refinanced loans in the corresponding
periods.
CREDIT LOSS EXPERIENCE
As a natural corollary to the Corporation's lending activities, some loan losses
are to be expected. The risk of loss varies with the type of loan being made and
the creditworthiness of the borrower over the term of the loan. The degree of
perceived risk is taken into account in establishing the structure of, and
interest rates and security for, specific loans and for various types of loans.
The Corporation attempts to minimize its credit risk exposure by use of thorough
loan application and approval procedures.
The Corporation maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans which the Corporation's
management determines require further monitoring and supervision are segregated
and reviewed on a periodic basis. Significant problem loans are reviewed on a
monthly basis by the Corporation's Board of Directors.
The Corporation charges off that portion of any loan which management considers
to represent a loss. A loan is generally considered by management to represent a
loss in whole or in part when an exposure beyond the collateral value is
apparent, servicing of the unsecured portion has been discontinued or collection
is not anticipated based on the borrower's financial condition and general
economic conditions in the borrower's industry. The principal amount of any loan
which is declared a loss is charged against the Corporation's allowance for loan
losses.
The Corporation's allowance for loan losses is designed to provide for loan
losses which can be reasonably anticipated. The allowance for loan losses is
established through charges to operating expenses in the form of provisions for
loan losses. Actual loan losses or recoveries are charged or credited to the
allowance for loan losses. The amount of the allowance is determined by
management of the Corporation. Among the factors considered in determining the
allowance for loan losses are the current financial condition of the
Corporation's borrowers and the value of security, if any, for their loans.
Estimates of future economic conditions and their impact on various industries
and individual borrowers are also taken into consideration, as are the
Corporation's historical loan loss experience and reports of banking regulatory
authorities. Because these estimates, factors and evaluations are primarily
judgmental, no assurance can be given as to whether or not the Corporation will
sustain loan losses in excess or below its allowance or that subsequent
evaluation of the loan portfolio may not require material increases or decreases
in such allowance.
The following table summarizes the Corporation's allowance for loan losses for
the dates indicated:
Amount of Percent of
June 30, December 31, Increase Increase
2002 2001 (Decrease) (Decrease)
------------------------------------------------------------------
BALANCES:
Gross Loans $299,450,724 $266,932,966 $32,517,758 12.18%
Allowance for Loan Losses 4,231,583 3,375,000 856,583 25.38%
Nonaccrual Loans 362,948 418,813 -55,865 -13.34%
Ratios:
Allowance for loan losses to
gross loans 1.41% 1.28%
Net loans charged off to
allowance for loan losses 15.83% 31.80%
The provision for loan losses for the three months ended June 30, 2002 was
$435,318, a decrease of $14,073 over the $449,391 for the same period in 2001.
The provision for the six months ended June 30, 2002 was $669,814, an increase
of $100,654 or 17.7% over the $569,160 for the six months ended June 30, 2001.
The increase in the provision was
made to bring the allowance back to the desired level after the net charge-offs
for these periods. The allowance for loan losses was increased $856,583 as a
result of the acquisition of Citizens Bank & Trust Company. This addition to the
allowance for loan losses was made to maintain an adequate loan loss allowance
for the loans outstanding at June 30, 2002. This is in addition to the $669,814
that was added to the allowance as a part of normal operations.
For the three months ended June 30, 2002, net loan losses charged to allowance
for loan losses totaled $435,318, a decrease of $14,073 over the same period in
2001. For the six months ended June 30, 2002, net loan losses charged to the
allowance for loan losses totaled $669,814, an increase of $100,654 over the
same period in 2001. Increased net losses in consumer loans, commercial and
industrial loans and 1-4 family housing accounted for the majority of the
increased net loss in the three and six month period.
Management of the Corporation reviews with the Board of Directors the adequacy
of the allowance for possible loan losses on a quarterly basis. The loan loss
provision is adjusted when specific items reflect a need for such an adjustment.
Management believes that there were no material loan losses during the last six
months that have not been charged off. Management also believes that the
Corporation's allowance will be adequate to absorb probable losses inherent in
the Corporation's loan portfolio.
OTHER INCOME
Other operating income includes service charges on deposit accounts, wire
transfer fees, safe deposit box rentals and other revenue not derived from
interest on earning assets.
Other operating income for the three months ended June 30, 2002 decreased
$79,816 or 7.1% over the same period in 2001 and for the six months ended June
30, 2002, increased $20,994, or 1.0% over the same period in 2001. The increase
in the six-month period was the result of increased overdraft, returned check
income and other service charges and mortgage loan origination income. The
decrease in the three month comparison is due to the receipt of insurance
proceeds in the second quarter of 2001 on the death of a retired director
pursuant to a deferred compensation agreement.
OTHER EXPENSE
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. Other expenses for the three and six months ended
June 30, 2002 were $3,364,960 and $6,407,194 compared to the $2,404,835 and
$4,821,577 for the three and six months ended June 30, 2001 for an increase of
$960,125 and $1,585,617 respectively. Salaries and benefits increased to
$1,803,864 and $3,476,897 for the three and six months in 2002 from $1,296,362
and $2,628,535 for the same periods in 2001, an
increase of $507,502 or 39.1% and $848,362 or 32.3% respectively. Both the
increase in Other Expenses as a whole, and salaries and benefits specifically,
are the result of the growth of the Corporation, both from the acquisitions of
the Union Planters branches in July 2001 and Citizens Bank & Trust Company in
May 2002 and internal growth of the deposit base. Although expenses increased,
the Corporation's efficiency ratio for the three and six-month periods ended
June 30, 2002 was 52.86% and 53.18% compared to 46.61% and 48.73% for the same
periods in 2001.
BALANCE SHEET ANALYSIS
Amount of Percent of
June 30, December 31, Increase Increase
2002 2001 (Decrease) (Decrease)
-------------------------------------------------------------------
Cash and Cash Equivalents $18,751,855 $18,134,723 $617,132 3.40%
Investment Securities 176,032,872 122,567,180 53,465,692 43.62%
Loans, net 292,685,445 260,903,091 31,782,354 12.18%
Total Assets 514,551,254 427,212,874 87,338,380 20.44%
Total Deposits 432,722,662 359,309,007 73,413,655 20.43%
Total Stockholders' Equity 51,011,404 47,181,568 3,829,836 8.12%
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are made up of cash, balances at correspondent banks
and federal funds sold. The increase in cash and cash equivalents at June 30,
2002 of $617,132 was the result of the addition of the cash required to operate
the three new Citizens Bank & Trust Company branches acquired in May 2002.
INVESTMENT SECURITIES
The investment securities are made up of U. S. Treasury Notes, U. S. Agency
debentures, mortgage-backed securities, obligations of states, counties and
municipal governments and Federal Home Loan Bank Stock. Investments increased
$53,465,692 or 43.6% as a result of the acquisition of $50.6 million in
investment securities related to the purchase of Citizens Bank & Trust Company
in May 2002 and the need to invest excess liquidity.
LOANS
Loan demand in the Corporation's service area began to strengthen as net loans
increased by $31,782,354 or 12.2% during the six month period ended June 30,
2002. Of this increase, $15.0 million was acquired with the purchase of Citizens
Bank & Trust Company in May 2002. Residential housing loans continue to be in
demand along with commercial and industrial loans. No special loan programs were
initiated during this period.
DEPOSITS
The following shows the balance and percentage change in the various deposits:
Amount of Percent of
June 30, December 31, Increase Increase
2002 2001 (Decrease) (Decrease)
-------------------------------------------------------------------
Noninteresting-bearing Deposits $58,412,102 $50,535,929 $7,876,173 15.59%
Interest-bearing Deposits 118,142,752 91,656,150 26,486,602 28.90%
Savings 32,384,655 22,481,585 9,903,070 44.05%
Certificates of Deposit 223,783,153 194,635,343 29,147,810 14.98%
-------------------------------------------------------------------
Total Deposits $432,722,662 $359,309,007 $73,413,655 20.43%
===================================================================
The increase is the result of normal deposit growth and the acquisition of $57.9
million in deposits from Citizens Bank & Trust Company. Normal deposit growth
was influenced by the decline in the stock market and the need for more
conservative investments by our depositors. The Corporation does not have any
brokered deposits. There were no special deposit programs or incentives in place
during this period.
FORWARD LOOKING STATEMENTS
In addition to historical information, this report contains statements which
constitute forward-looking statements and information within the meaning of the
Private Securities Litigation Reform Act of 1995 which are based on management's
beliefs, plans, expectations, assumptions and on information currently available
to management. The words "may," "should," "expect," "anticipate," "intend,"
"plan," "continue," "believe," "seek," "estimate," and similar expressions used
in this report that do not relate to historical facts are intended to identify
forward-looking statements. These statements appear in a number of places in
this report, including, but not limited to, statements found in Item 1 "Notes to
Consolidated Financial Statements" and in Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations." 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 operation, performance, development and results of the
Corporation's business include, but are not limited to, 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 operate; (b) changes in the
legislative and regulatory environment that negatively impact the Corporation
through increased operating expenses; (c) increased competition from other
financial institutions; (d) the impact of technological advances; (e)
expectations about the movement of interest rates, including actions that may be
taken by the federal
Reserve Board in response to changing economic conditions; (f) changes in asset
quality and loan demand; (g) expectations about overall economic strength and
the performance of the economics in the Corporation's market area and (h) 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.
CITIZENS HOLDING COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Overview
The definition of market risk is the possibility of loss that could result from
adverse changes in market prices and rates. The Corporation has taken steps to
assess the amount of risk that is associated with its asset and liability
structure. The Corporation measures the potential risk on a regular basis and
makes changes to its strategies to manage these risks. The Corporation does not
participate in some of the financial instruments that are inherently subject to
substantial market risk.
Market/Interest Rate Risk Management
The primary purpose in managing interest rate risk is to effectively invest
capital and preserve the value created by the core banking business. The
Corporation utilizes an investment portfolio to manage the interest rate risk
naturally created through its business activities. The quarterly interest rate
risk report is used to evaluate exposure to interest rate risk, project earnings
and manage the composition of the balance sheet and its growth.
Static gap analysis is also used in measuring interest rate risk. An analysis of
the Corporation's repricing opportunities indicates a negative gap position over
the next three- and twelve -month periods which indicates that the Corporation
would benefit somewhat from a decrease in market interest rates. While interest
rates remained stable during the quarter ended June 30, 2002, during 2001 the
Corporation experienced an increased number of called investment securities
related to the decrease in interest rates that occurred throughout 2001. These
called securities generally were re-invested at lower yields. The Corporation's
interest bearing deposit liabilities have been substantially repriced to reflect
the current interest rate environment.
Other than the recent interest rate decreases, there have been no material
change in the Corporation's market risk since the end of the last fiscal year
end of December 31, 2001.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation held its Annual Meeting of Shareholders on April 23, 2002 at
3:30 p.m. at the Main Office of The Citizens Bank of Philadelphia, 521 Main
Street, Philadelphia, Mississippi. At this meeting there were 4,080,322 shares
or 82.2% of the Corporation's issued and outstanding shares of common stock
represented either in person or by proxy at the Annual Meeting.
The shareholders considered and voted upon a proposal to set the number of
directors to serve on the Board of Directors at twelve members. The shareholders
of the Corporation adopted this proposal by a vote of 4,077,435 for the
proposal, 2,887 shares against the proposal with no abstentions or broker
non-votes.
After the Annual Meeting, Don L. Fulton, Don L. Kilgore, Herbert A. King, and
David P. Webb continued as Class I Directors of the Corporation until their term
of office expires in 2003.
After the Annual Meeting, M. G. Bond, Karl Brantley, David A. King and Greg L.
McKee continued as Class II Directors of the Corporation until their term
expires in 2004.
An election was held to elect four Class III directors to a three-year term
expiring in 2005. The votes for each nominee were:
Shares Voted For Shares Withheld
George R. Mars 4,046,850 33,472
William M. Mars 4,051,995 28,327
W. W. Dungan 4,066,485 13,837
Steve Webb 4,066,485 13,837
The shareholders considered and voted upon a proposal to ratify the Horne CPA
Group as the Corporation's independent auditors for the fiscal year ending
December 31, 2002. The shareholders of the Corporation adopted this proposal by
a vote of 4,064,388 affirmative votes to 15,933 votes against with 1 abstention
and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2 Agreement and Plan of Share Exchange
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
* 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.
(b) Reports on Form 8-K.
The following reports on form 8-K were filed by the Corporation during
the last quarter of the period covered by this Form 10-Q:
On April 23, 2002, the Corporation filed on Form 8-K under
Item 7(a) and Item 9 a press release announcing the financial results
of the Corporation for the quarter ended March 31, 2002.
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.
CITIZENS HOLDING COMPANY
BY: /s/ Steve Webb BY: /s/ Robert T. Smith
--------------------------------- ----------------------------
Steve Webb Robert T. Smith
Chairman, President and Treasurer (Chief Financial
Chief Executive Officer and Accounting Officer)
DATE: August 12, 2002 DATE: August 12, 2002