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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 September 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 November 12, 2002.
Title Outstanding
Common Stock, $.20 par value 4,963,028
CITIZENS HOLDING COMPANY
THIRD QUARTER 2002 INTERIM FINANCIAL STATEMENTS
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Condition
September 30, 2002 and December 31, 2001
Consolidated Statements of Income
Three and nine months ended September 30, 2002 and 2001
Consolidated Statements of Comprehensive Income Three and nine
months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows
Nine months ended September 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
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART 1.CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
September 30, December 31,
ASSETS 2002 2001
--------------------------------
Cash and due from banks $ 20,060,689 $ 12,713,482
Interest bearing deposits with other banks 3,097,092 5,421,241
Federal Funds Sold 30,900,000 6,100,000
Investment securities available for sale, at fair value 171,852,768 122,567,180
Loans, net of allowance for loan losses of
$4,222,342 in 2002 and $3,375,000 in 2001 296,339,225 260,903,091
Premises and equipment, net 8,165,299 5,143,535
Other real estate owned, net 1,379,133 340,657
Accrued interest receivable 4,368,208 4,121,922
Cash value of life insurance 3,030,002 2,809,410
Goodwill and other intangible assets 7,028,719 2,974,023
Other assets 3,759,078 4,118,333
--------------------------------
TOTAL ASSETS $549,980,213 $427,212,874
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 94,357,905 $ 50,535,929
Interest-bearing NOW and money market accounts 122,439,958 91,656,150
Savings deposits 31,872,183 22,481,585
Certificates of deposit 215,721,719 194,635,343
--------------------------------
Total deposits 464,391,765 359,309,007
Accrued interest payable 948,988 1,415,513
Federal Home Loan Bank advances 24,841,080 14,628,788
Directors deferred compensation payable 1,156,428 1,079,191
Other liabilities 4,073,614 2,386,608
--------------------------------
Total liabilities 495,411,875 378,819,107
--------------------------------
Minority interest in consolidated subsidiary 1,363,891 1,212,199
--------------------------------
STOCKHOLDERS' EQUITY
Common stock; $.20 par value, 22,500,000 shares authorized, 4,963,028 shares
outstanding at September 30, 2002, and
at December 31, 2001 992,606 992,606
Additional paid-in capital 2,791,871 2,791,871
Retained earnings 46,241,045 43,240,017
Unrealized gain (loss) on securities available for sale, net of
deferred tax asset (liability) of $(1,663,706) in 2002 and ($89,295) in 2001 3,178,925 157,074
----------------------------
Total stockholders' equity 53,204,447 47,181,568
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $549,980,213 $427,212,874
============================
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---------------------------------------------------------
INTEREST INCOME:
Loan income including fees $5,743,278 $5,744,121 $16,737,634 $17,188,439
Investment securities 2,122,183 1,441,421 5,590,682 4,296,145
Other interest 25,466 213,211 166,360 357,356
---------------------------------------------------------
Total interest income 7,890,927 7,398,753 22,494,676 21,841,940
INTEREST EXPENSE:
Deposits 2,216,672 3,212,623 6,651,090 9,382,165
Other borrowed funds 290,253 204,264 700,346 1,009,207
---------------------------------------------------------
Total interest expense 2,506,925 3,416,887 7,351,436 10,391,372
---------------------------------------------------------
NET INTEREST INCOME 5,384,002 3,981,866 15,143,240 11,450,568
PROVISION FOR LOAN LOSSES 336,791 174,251 1,006,605 743,411
---------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,047,211 3,807,615 14,136,635 10,707,157
OTHER INCOME:
Service charges on deposit accounts 748,765 740,220 2,232,964 2,101,513
Other service charges and fees 237,125 143,246 486,342 360,388
Other income 167,524 182,464 483,433 632,360
--------------------------------------------------------
Total other income 1,153,414 1,065,930 3,202,739 3,094,261
OTHER EXPENSES:
Salaries and employee benefits 1,903,613 1,428,965 5,380,510 4,057,500
Occupancy expense 583,266 388,926 1,500,786 1,123,864
Other operating expense 1,190,342 661,130 3,111,197 2,020,497
Earnings applicable to minority interest 43,962 53,577 135,884 152,314
--------------------------------------------------------------
Total other expenses 3,721,183 2,532,598 10,128,377 7,354,175
--------------------------------------------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,479,442 2,340,947 7,210,997 6,447,243
PROVISION FOR INCOME TAXES 799,816 780,821 2,324,020 2,027,528
--------------------------------------------------------------
NET INCOME $1,679,626 $1,560,126 $4,886,977 $4,419,715
==============================================================
NET INCOME PER SHARE
-Basic $ 0.34 $ 0.31 $ 0.98 $ 0.89
==============================================================
-Diluted $ 0.34 $ 0.31 $ 0.98 $ 0.89
==============================================================
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
------------------------------------------------------------------
Net income $1,679,626 $1,560,126 $4,886,977 $4,419,715
Other comprehensive income, net of tax
Unrealized holding gains 1,208,241 750,513 3,044,631 1,375,359
Less reclassification adjustment for gains
included in net income 0 0 22,780 0
Total other comprehensive income 1,208,241 750,513 3,021,851 1,375,359
------------------------------------------------------------------
Comprehensive income $2,887,867 $2,310,639 $7,908,828 $5,795,074
==================================================================
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
2002 2001
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 4,636,328 $ 4,544,043
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 61,752,758 44,137,992
Proceeds from sale of investment securities 25,744,965 0
Purchases of investment securities -83,017,228 -50,233,304
Purchases of bank premises and equipment -1,699,000 -999,181
Decrease in interest bearing deposits with other banks 2,324,149 -10,263,116
Net (increase) in federal funds sold -22,700,000 -11,400,000
Cash paid on purchase of CB&T -12,284,319 0
Cash acquired in purchase of CB&T 2,879,581 0
Net (increase) decrease in loans -20,416,732 -9,173,262
Net Cash Used by Investing Activities -47,415,826 -37,930,871
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 47,142,969 68,840,782
Net (decrease) in ABE loans -342,605 -318,069
Increase (decrease) in TT&L Note Option 0 -700,000
Increase (decrease) in FHLB advances 5,212,292 -27,295,141
Increase in federal funds purchased 0 0
Payment of dividends -1,885,951 -1,406,219
Net Cash Provided by Financing Activities 50,126,705 39,121,353
Net Increase in Cash and Due from Banks 7,347,207 5,734,525
Cash and Due From Banks, beginning of year 12,713,482 10,415,155
Cash and Due from Banks, end of period 20,060,689 16,149,680
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 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 September 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 of 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:
(000's omitted)
Cash $ 2,880
Investments 50,620
Loans 15,019
Bank Premises and other assets 3,137
Deposits (57,939)
Other Liabilities (5,814)
----------------
Net Assets Acquired 7,903
Goodwill and other intangible assets 4,381
----------------
Purchase Price $ 12,284
================
The Corporation has completed its evaluation of the assets and
liabilities acquired and has allocated $1,846,909 of the $4,380,869
total intangible asset to core deposit intangibles and the remaining
$2,533,960 to goodwill. The core deposit intangible is to be amortized
at the rate of $15,391 per month until fully amortized, representing an
estimated economic life of 10 years. The amount of core deposit
amortization expense related to the Louisville purchase was $61,564
year to date at September 30, 2002. The operations of CB&T Capital
Corporation are included in the consolidated financial statements since
the acquisition date. The pro forma effect, had the acquisition
occurred on January 1, 2002, is not significant to the operation of the
Corporation
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.
Total amortization expense related to the core deposit intangible
assets for the period ended September 30, 2002 was $149,767 and
$326,173 for the three and nine month periods.
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 September 30, 2002, the Corporation had entered into
commitments with certain customers that had an unused balance of
$23,351,992 compared to $12,155,738 unused at December 31,
2001. There were $481,350 of letters of credit outstanding at September
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 Nine Months
Ended September 30, Ended September 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 37,699 13,092 33,766 13,914
-----------------------------------------------------------------------
Diluted weighted average
shares outstanding 5,000,727 4,976,120 4,996,794 4,976,942
Net income $1,679,626 $1,560,126 $4,886,977 $4,419,715
Net income per share-basic $ 0.34 $ 0.31 $ 0.98 $ 0.89
Net income per share-diluted $ 0.34 $ 0.31 $ 0.98 $ 0.89
6. 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.
7. 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 Corporation 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.
Goodwill amortization expense for the three and nine-month periods ended
September 30, 2002 was not material.
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 Corporation'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 Corporation's financial statements.
In October 2002, the FASB issued Standard No. 147 related to Acquisitions
of Certain Financial Institutions. The standard clarifies the
requirements of Standards No. 141 and 142 as they relate to business
combinations between financial institutions and makes the provisions of
Standard No. 144 applicable to long-term customer relationship intangible
assets. The standard is effective for transactions on or after October 1,
2002. Adopting the standard by the Corporation is not expected to have a
material effect on the Corporation'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 September 30, 2002 was 79.34%, at December 31, 2001 was 50.51%
and at September 30, 2001 was 51.18%. 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
$143,466,850 at September 30, 2002. At September 30, 2002, the Corporation had
unused and available $38,500,000 of its federal funds line of credit and
$118,703,763 of its line of credit with the Federal Home Loan Bank.
CAPITAL RESOURCES
The Corporation's equity capital was $53,204,447 at September 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 $1,885,951 or $0.38 per share were
paid year to date September 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
September 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 September 30, 2002
Total Capital $48,192,444 15.74% $24,491,951 *8.00% $30,614,939 *10.00%
(to Risk-Weighted Assets)
Tier 1 Capital 44,360,694 14.49% 12,245,976 *4.00% 18,368,963 *6.00%
(to Risk-Weighted Assets)
Tier 1 Capital 44,360,694 8.63% 20,569,967 *4.00% 25,712,459 *5.00%
(to Average Assets)
* denotes 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 Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
--------------------------------------------------------------------
Interest Income, including fees $7,890,927 $7,398,753 $22,494,676 $21,841,940
Interest Expense 2,506,925 3,416,887 7,351,436 10,391,372
--------------------------------------------------------------------
Net Interest Income 5,384,002 3,981,866 15,143,240 11,450,568
Provision for Loan Losses 336,791 174,251 1,006,605 743,411
Net Interest Income after
Provision for Loan Losses 5,047,211 3,807,615 14,136,635 10,707,157
Other Income 1,153,414 1,065,930 3,202,739 3,094,261
Other Expense 3,721,183 2,532,598 10,128,377 7,354,175
--------------------------------------------------------------------
Income before Provision For
Income Taxes 2,479,442 2,340,947 7,210,997 6,447,243
Provision for Income Taxes 799,816 780,821 2,324,020 2,027,528
--------------------------------------------------------------------
Net Income $1,679,626 $1,560,126 $ 4,886,977 $ 4,419,715
====================================================================
Net Income Per Share - Basic $0.34 $0.31 $0.98 $0.89
=============================================================
Net Income Per Share-Diluted $0.34 $0.31 $0.98 $0.89
=============================================================
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 12.45% and 12.93% and for the
three and nine months ended September 30, 2002, and 12.95% and 12.76% for the
three and nine months ended September 30, 2001.
The book value per share increased to $10.72 at September 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 nine months ended September 30,
2002, were $482,389,842 compared to $403,881,314 for the year ended December 31,
2001, and average equity increased to $51,393,933 for the nine months ended
September 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 4.69% for the three and nine months ended
September 30, 2002, compared to an annualized net interest margin of 4.15 % and
4.27% for the three and nine months ended September 30, 2001. Earnings assets
averaged $442,044,168 for the nine months ended September 30, 2002. This
represented an increase of $78,412,833, or 21.6%, over average earning assets of
$363,631,335 for the nine months ended September 30, 2001. The increase in
average earning assets results from the July 2001 Union Planters branch
acquisitions, the May 2002 CB&T Capital Corporation acquisition and normal bank
growth.
Net interest income was $5,384,002 and $15,143,240 for the three and nine month
periods in 2002, an increase of $1,402,136 and $3,692,672 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 nine 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 nine 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 Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
-----------------------------------------------------------------------
Interest and Fees $ 5,743,278 $ 5,744,121 $ 16,737,634 $ 17,188,439
Average Loans, Net of Unearned 298,847,893 255,065,732 284,188,886 251,942,868
Annualized Yield 7.69% 9.01% 7.85% 9.09%
The decreases in rates in the three and nine 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
September 30, December 31, Increase Increase
2002 2001 (Decrease) (Decrease)
-----------------------------------------------------------------------
BALANCES:
Gross Loans $303,084,694 $266,932,966 $36,151,728 13.54%
Allowance for Loan Losses 4,222,342 3,375,000 847,342 25.11%
Nonaccrual Loans 432,859 418,813 14,046 3.35%
Ratios:
Allowance for loan losses to
gross loans 1.39% 1.28%
Net loans charged off to
allowance for loan losses 23.84% 31.80%
The provision for loan losses for the three months ended September 30, 2002 was
$336,791, an increase of $162,540 or 93.3% over the $174,251 for the same period
in 2001. The provision for the nine months ended September 30, 2002 was
$1,006,605, an increase of $263,194 or 35.4% over the $743,411 for the nine
months ended September 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 reflect estimated loan losses as of the acquisition
date. This is in addition to the $1,006,605 that was added to the allowance as a
part of normal operations.
For the three months ended September 30, 2002, net loan losses charged to
allowance for loan losses totaled $336,791, an increase of $162,540 over the
same period in 2001. For the nine months ended September 30, 2002, net loan
losses charged to the allowance for loan losses totaled $1,006,605, an increase
of $263,194 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 nine 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 nine
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. However, in light of overall economic
conditions in the Corporation's geographic area and the nation as a whole, it is
possible that additional provisions for loan loss may be required.
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 September 30, 2002 increased
$87,484 or 8.2% over the same period in 2001 and for the nine months ended
September 30, 2002, increased $108,478, or 3.5% over the same period in 2001.
The increase in both the three-month and nine-month period was the result of
increased overdraft, returned check income and other service charges and
mortgage loan origination income.
OTHER EXPENSE
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. Other expenses for the three and nine months ended
September 30, 2002 were $3,721,183 and $10,128,377 compared to the $2,532,598
and $7,354,175 for the three and nine months ended September 30, 2001 for an
increase of $1,188,585 and $2,774,202 respectively. Salaries and benefits
increased to $1,903,613 and $5,380,510 for the three and nine months in 2002
from $1,428,965 and $4,057,500 for the same periods in 2001, an increase of
$474,648 or 33.2% and $1,323,010 or 32.6% 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. The Corporation's efficiency ratio for the
three and nine-month periods ended September 30, 2002 was 55.69% and 54.08%
compared to 48.25% and 48.57% for the same periods in 2001.
BALANCE SHEET ANALYSIS
Amount of Percent of
September 30, December 31, Increase Increase
2002 2001 (Decrease) (Decrease)
----------------------------------------------------------
Cash and Cash Equivalents $ 23,157,781 $ 18,134,723 $ 5,023,058 27.70%
Investment Securities 171,852,768 122,567,180 49,285,588 40.21%
Loans, net 296,339,225 260,903,091 35,436,134 13.58%
Total Assets 549,980,213 427,212,874 122,767,339 28.74%
Total Deposits 464,391,765 359,309,007 105,082,758 29.25%
Total Stockholders' Equity 53,204,447 47,181,568 6,022,879 12.77%
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 September
30, 2002 of $5,023,058 was the result of the addition of the cash required to
operate the three new Citizens Bank & Trust Company branches acquired in May
2002 and an increase in the Due from Bank balances related to large month end
cash letters.
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
$49,285,588 or 40.2% as a net 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 use of matured and paid down securities to fund new loans.
LOANS
Loan demand in the Corporation's service area began to strengthen as net loans
increased by $35,436,134 or 13.6% during the nine month period ended September
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
September 30, December 31, Increase Increase
2002 2001 (Decrease) Decrease)
--------------------------------------------------------
Noninteresting-bearing Deposits $ 94,357,905 $ 50,535,929 $ 43,821,976 86.71%
Interest-bearing Deposits 122,439,958 91,656,150 30,783,808 33.59%
Savings 31,872,183 22,481,585 9,390,598 41.77%
Certificates of Deposit 215,721,719 194,635,343 21,086,376 10.83%
--------------------------------------------------------
Total Deposits $464,391,765 $359,309,007 $105,082,758 29.25%
========================================================
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 AND SUBSIDIARY
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 September 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.
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.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Corporation carried out
an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in
Rule 13a-14(c) and Rule 15d-14(c) under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic SEC reports. There have been no significant changes in
the Corporation's internal controls or in other factors that could significantly
affect internal controls subsequent to the date the Corporation carried out its
evaluation.
PART II. - OTHER INFORMATION
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, 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 and also filed
as an exhibit to the Form 10-Q Quarterly Statement of the Corporation
(File No. 000-25221) filed on August 14, 2002 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 July 30, 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 June 30, 2002.
On August 14, 2002, the Corporation filed on Form 8-K under Item
7(c) and Item 9, the certifications of the Corporation's Chief Executive
Officer, Steve Webb, and Chief Financial Officer, Robert T. Smith,
pursuant to 18 U. S. C. (S) 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 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: November 12, 2002 DATE: November 12, 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Steve Webb, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citizens Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002
/s/ Steve Webb
----------------------------
Steve Webb
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert T. Smith, Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citizens Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002
/s/ Robert T. Smith
-----------------------
Robert T. Smith
Treasurer
(Chief Financial Officer)