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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 March 31, 2003
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 or 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 by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 9, 2003.
Title Outstanding
Common Stock, $.20 par value 4,974,578
CITIZENS HOLDING COMPANY
FIRST QUARTER 2003 INTERIM FINANCIAL STATEMENTS
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Condition
March 31, 2003 and December 31, 2002
Consolidated Statements of Income
Three months ended March 31, 2003 and 2002
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002
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 I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
March 31, December 31,
2003 2002
-------------------------------
ASSETS
Cash and due from banks $ 20,342,831 $ 19,769,712
Interest bearing deposits with other banks 730,571 1,365,649
Federal Funds Sold 14,200,000 2,300,000
Investment securities available for sale, at fair value 161,686,609 162,276,305
Loans, net of allowance for loan losses of
$4,401,715 in 2003 and $4,222,342 in 2002 324,069,956 303,952,527
Premises and equipment, net 9,727,497 9,399,942
Other real estate owned, net 881,960 1,286,409
Accrued interest receivable 4,351,078 4,111,199
Cash value of life insurance 3,236,695 3,162,848
Intangible Assets (net) 6,793,607 6,813,774
Other assets 3,396,398 4,011,753
-------------------------------
TOTAL ASSETS $ 549,417,202 $ 518,450,118
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 70,606,029 $ 59,761,550
Interest-bearing NOW and money market accounts 135,745,512 122,717,966
Savings deposits 33,911,932 33,216,006
Certificates of deposit 223,507,592 217,072,653
-------------------------------
Total deposits 463,771,065 432,768,175
Accrued interest payable 870,511 955,720
Federal Home Loan Bank advances 24,368,275 24,606,135
Directors deferred compensation payable 1,194,855 1,182,406
Other liabilities 3,431,510 3,779,163
-------------------------------
Total liabilities 493,636,216 463,291,599
Minority interest in consolidated subsidiary 1,346,706 1,375,960
STOCKHOLDERS' EQUITY
Common stock; $.20 par value, 22,500,000 shares authorized,
4,974,578 shares outstanding at March 31, 2003 and
at December 31, 2002 994,916 994,916
Additional paid-in capital 2,899,331 2,899,331
Retained earnings 47,780,349 46,956,638
Accumulated other comprehensive income, net of
deferred tax liability of $1,421,655 in 2003 and
$1,549,508 in 2002 2,759,684 2,931,674
-------------------------------
Total stockholders' equity 54,434,280 53,782,559
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 549,417,202 $ 518,450,118
===============================
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three months
ended March 31,
2003 2002
-------------------------------
INTEREST INCOME:
Loan income including fees $ 5,826,158 $ 5,322,589
Investment securities 1,498,012 1,628,183
Other interest 15,330 79,697
-------------------------------
Total interest income 7,339,500 7,030,469
INTEREST EXPENSE:
Deposits 1,847,829 2,271,307
Other borrowed funds 326,496 194,288
-------------------------------
Total interest expense 2,174,325 2,465,595
-------------------------------
NET INTEREST INCOME 5,165,175 4,564,874
PROVISION FOR LOAN LOSSES 375,000 234,496
-------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,790,175 4,330,378
OTHER INCOME:
Service charges on deposit accounts 770,637 705,246
Other service charges and fees 170,026 132,909
Other income 164,287 167,978
-------------------------------
Total other income 1,104,950 1,006,133
OTHER EXPENSES:
Salaries and employee benefits 1,931,828 1,673,033
Occupancy expense 690,865 436,425
Other operating expense 1,040,833 884,395
Earnings applicable to minority interest 39,293 48,381
-------------------------------
Total other expenses 3,702,819 3,042,234
-------------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,192,306 2,294,277
PROVISION FOR INCOME TAXES 672,717 748,919
-------------------------------
NET INCOME $ 1,519,589 $ 1,545,358
===============================
NET INCOME PER SHARE
-Basic $ 0.31 $ 0.31
===============================
-Diluted $ 0.30 $ 0.31
===============================
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months
ended March 31,
2003 2002
-------------------------------
Net income $ 1,519,589 $ 1,545,358
Other comprehensive income (Loss), net of tax
Unrealized holding gains (losses) (171,990) (179,181)
Reclassification adjustment for (gains)
losses included in net income 0 0
Total other comprehensive income (Loss) (171,990) (179,181)
-------------------------------
Comprehensive income $ 1,347,599 $ 1,366,177
===============================
CITIZENS HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months
ended March 31,
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $ 2,055,125 $ 1,722,163
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 17,478,192 11,723,006
Proceeds from sale of investment securities 0 0
Purchases of investment securities -17,033,770 -17,320,395
Purchases of bank premises and equipment -567,555 -44,924
Decrease in interest bearing deposits with other banks 635,078 -5,183,606
Net (increase) decrease in federal funds sold -11,900,000 -2,600,000
Net increase in loans -20,296,802 -8,916,515
Net Cash Used by Investing Activities -31,684,857 -22,342,434
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 31,002,890 31,783,417
Net increase (decrease) in ABE loans 134,262 61,639
Increase in FHLB advances -237,860 -226,416
Payment of dividends -696,441 -595,575
Net Cash Provided by Financing Activities 30,202,851 31,023,065
Net Increase (Decrease) in Cash and Due from Banks 573,119 10,402,794
Cash and Due From Banks, beginning of year 19,769,712 12,713,482
Cash and Due from Banks, end of period 20,342,831 23,116,276
CITIZENS HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2003
1. These interim consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles.
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 period ending March 31,
2003 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 97.52% 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 31, 2003.
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 (5,848)
---------------
Net Assets Acquired 7,869
Goodwill and other intangible assets 4,415
---------------
Purchase Price $ 12,284
===============
The Corporation has completed its evaluation of the assets and
liabilities acquired and has allocated $1,846,909 of the $4,414,509
total intangible asset to core deposit intangibles and the remaining
$2,567,600 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 $46,173 year
to date at March 31, 2003. 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 March 31, 2003 was $134,376.
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 March 31,
2003, the Corporation had entered into commitments with certain
customers that had an unused balance of $24,942,495 compared to
$29,079,857 unused at December 31, 2002. There were $479,850 of letters
of credit outstanding at March 31, 2003 and December 31, 2002.
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:
March 31, March 31,
2003 2002
-------------------------------
Basic weighted average
shares outstanding 4,974,578 4,963,028
Dilutive effect of granted options 28,797 32,007
-------------------------------
Diluted weighted average
shares outstanding 5,003,375 4,995,035
Net income $ 1,519,589 $ 1,545,358
Net income per share-basic $ 0.31 $ 0.31
Net income per share-diluted $ 0.30 $ 0.31
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. At March 31, 2003, the Corporation had two stock-based compensation
plans, which are the 1999 Employees' Long-Term Incentive Plan and the
1999 Directors' Stock Compensation Plan. The Corporation accounts for
those plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant. The
fair value of each option granted is estimated on the date of the grant
using the Black-Sholes option-pricing model. The following table
illustrates the effect on net income and earnings per share if the
Corporation had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123 ,
"Accounting for Stock-Based Compensation," for the three months ended
March 31, 2003 and 2002.
Three months ended
March 31,
2003 2002
-------------------------------
Net income, as reported $ 1,519,589 $ 1,545,358
Deduct: Stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (59,200) (60,085)
-------------------------------
Pro forma net income $ 1,460,389 $ 1,485,273
===============================
Basic earnings per share: As reported $ 0.31 $ 0.31
Pro forma 0.29 0.30
Diluted earnings per share: As reported 0.30 0.31
Pro forma 0.29 0.30
8. In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," was issued. Statement No. 146 requires that a
liability for a cost associated with an exit or disposal activity be
recorded when it is incurred and can be measured at fair value. The
statement was adopted by the Corporation effective January 1, 2003 and
has had no material impact on the financial position or results of the
operations of the Corporation.
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 did not
have a material effect on the Corporation's financial statements.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," was issued. FIN No. 45
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements regarding its
obligations under certain guarantees that it has issued. FIN No. 45 also
clarifies the requirement of the guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of this interpretation were adopted
by the Corporation effective January 1, 2003. The adoption of FIN No. 45
should have no material impact on the financial statements of the
Corporation.
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 97.52% 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 March 31, 2003 was 72.73%, at December 31, 2002 was 75.24% and at
March 31, 2002 was 53.40%. 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
$140,424,653 at March 31, 2003. At March 31, 2003, the Corporation had unused
and available $38,500,000 of its federal funds line of credit and $116,056,378
of its line of credit with the Federal Home Loan Bank.
CAPITAL RESOURCES
The Corporation's equity capital was $54,434,280 at March 31, 2003. 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. In December 2002,
certain employees exercised stock options for 11,550 shares that brought the
number of outstanding shares to 4,974,578. Cash dividends in the amount of
$696,441 or $0.14 per share were paid year to date March 31, 2003.
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 March 31, 2003, 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 March 31, 2003
Total Capital $ 48,998,480 14.89% $ 26,329,210 >8.00% $ 32,911,512 >10.00%
(to Risk-Weighted Assets)
Tier 1 Capital 44,880,988 13.64% 13,164,605 >4.00% 19,746,907 >6.00%
(to Risk-Weighted Assets)
Tier 1 Capital 44,880,988 8.57% 20,937,973 >4.00% 26,172,466 >5.00%
(to Average Assets)
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
ended March 31,
2003 2002
-------------- --------------
Interest Income, including fees $ 7,339,500 $ 7,030,469
Interest Expense 2,174,325 2,465,595
-------------- --------------
Net Interest Income 5,165,175 4,564,874
Provision for Loan Losses 375,000 234,496
Net Interest Income after
Provision for Loan Losses 4,790,175 4,330,378
Other Income 1,104,950 1,006,133
Other Expense 3,702,819 3,042,234
-------------- --------------
Income before Provision For
Income Taxes 2,192,306 2,294,277
Provision for Income Taxes 672,717 748,919
-------------- --------------
Net Income $ 1,519,589 $ 1,545,358
============== ==============
Net Income Per share - Basic $ 0.31 $ 0.31
============== ==============
Net Income Per Share-Diluted $ 0.30 $ 0.31
============== ==============
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 11.03% for the three months ended
March 31, 2003, and 12.79% for the three months ended March 31, 2002.
The book value per share increased to $10.94 at March 31, 2003 compared to
$10.81 at December 31, 2002. This increase is due to earnings exceeding
dividends paid during this period. Average assets for the three months ended
March 31, 2003, were $530,178,666 compared to $491,832,644 for the year ended
December 31, 2002, and average equity increased to $55,106,821 for the three
months ended March 31, 2003, from $51,303,506 for the year ended December 31,
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 4.48% for the three months ended March
31, 2003, compared to an annualized net interest margin of 4.61% for the three
months ended March 31, 2002. Earnings assets averaged $477,462,172 for the three
months ended March 31, 2003. This represented an increase of $70,558,706, or
17.3%, over average earning assets of $406,903,466 for the three months ended
March 31, 2002. The increase in average earning assets results from the May 2002
CB&T Capital Corporation acquisition and normal bank growth.
Net interest income was $5,165,175 for the three month period in 2003, an
increase of $600,301 over the same period in 2002. An increase in loan volume
and investments in this period contributed to this increase. A lower cost of
deposits and other borrowed
funds during 2003 over the same period in 2002 also contributed to the increase
in Net Interest Income. Income from investment securities increased in the three
month period in 2003 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.
Other interest income decreased in the three month period ended March 31, 2003
compared to the same period in 2002 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 Ended March 31,
2003 2002
-----------------------------------------------------
Interest and Fees $ 5,826,158 $ 5,322,589
Average Loans 321,257,260 265,479,157
Annualized Yield 7.25% 8.02%
The decrease in rates in the three month period ended March 31, 2003 reflects
the decrease in all loan rates for both new and refinanced loans in the period.
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:
Quarter Ended Year to Date Amount of Percent of
March 31, December 31, Increase Increase
2003 2002 (Decrease) (Decrease)
-----------------------------------------------------------------
BALANCES:
Gross Loans $ 330,770,346 $ 310,581,493 $ 20,188,853 6.50%
Allowance for Loan Losses 4,401,715 4,222,342 179,373 4.25%
Nonaccrual Loans 414,317 357,640 56,677 15.85%
Ratios:
Allowance for loan losses to
gross loans 1.33% 1.36%
Net loans charged off to
allowance for loan losses 4.44% 41.62%
The provision for loan losses for the three months ended March 31, 2003 was
$375,000, an increase of $140,504 or 59.9% over the $234,496 for the same period
in 2002. The increase in the provision was made to bring the allowance back to
the desired level after the net charge-offs for these periods and to cover the
increases in the loan portfolio. The allowance for loan losses was increased
$847,341 as a result of the acquisition of Citizens Bank & Trust Company in the
second quarter of 2002. This addition to the allowance for loan losses was made
to reflect estimated loan losses as of the acquisition date.
For the three months ended March 31, 2003, net loan losses charged to allowance
for loan losses totaled $195,626, a decrease of $38,870 over the same period in
2002.
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 three 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
March 31, 2003 increased $98,817 or 9.8% over the same period in 2002. The
increase 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 ended March 31, 2003
were $3,702,819 compared to the $3,042,234 for the three months ended March 31,
2002 for an increase of $660,585. Salaries and benefits increased to $1,931,828
for the three months in 2003 from $1,673,033 for the same period in 2002, an
increase of $258,795 or 15.5%. 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 acquisition of Citizens Bank & Trust Company in May
2002 and internal growth of the deposit base. The Corporation's efficiency ratio
for the period ended March 31, 2003 was 57.57% compared to 53.54% for the same
period in 2002.
BALANCE SHEET ANALYSIS
Amount of Percent of
March 31, December 31, Increase Increase
2003 2002 (Decrease) (Decrease)
-----------------------------------------------------------------
Cash and Cash Equivalents $ 21,073,402 $ 21,135,361 $ -61,959 -0.29%
Investment Securities 161,686,609 162,276,305 -589,696 -0.36%
Loans, net 324,069,956 303,952,527 20,117,429 6.62%
Total Assets 549,417,202 518,450,118 30,967,084 5.97%
Total Deposits 463,771,065 432,768,175 31,002,890 7.16%
Total Stockholders' Equity 54,434,280 53,782,559 651,721 1.21%
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are made up of cash, balances at correspondent banks
and items in process of collection. The balance for the first quarter of 2003
remained virtually the same as 2002 with only a slight decrease of $61,959.
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 decreased
$589,696 or .4% due to 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 $20,117,429 or 6.6% during the three month period ended March 31,
2003. 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:
Quarter Ended Year to Date Amount of Percent of
March 31, December 31, Increase Increase
2003 2002 (Decrease) (Decrease)
-----------------------------------------------------------------
Noninterest-bearing Deposits $ 70,606,029 $ 59,761,550 $ 10,844,479 18.15%
Interest-bearing Deposits 135,745,512 122,717,966 13,027,546 10.62%
Savings 33,911,932 33,216,006 695,926 2.10%
Certificates of Deposit 223,507,592 217,072,653 6,434,939 2.96%
-------------- -------------- -------------- --------------
Total Deposits $ 463,771,065 $ 432,768,175 $ 31,002,890 7.16%
============== ============== ============== ==============
The increase is the result of normal deposit growth. 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 operates; (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. Interest rates
remained stable during the quarter ended March 31, 2003. 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, 2002.
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
99(a) Section 906 Certification of Chief Executive Officer
99(b) Section 906 Certification of Chief Financial Officer
* Filed as an exhibit to the Form 10-Q of the Corporation filed on
August 14, 2002 and incorporated herein by reference.
** Filed as an exhibit to the Form 10-K of the Corporation filed on
March 31, 2003 and incorporated herein by reference.
*** 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 the 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 January 28, 2003, 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 December 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/ Greg L. McKee BY: /s/ Robert T. Smith
------------------------ ------------------------
Greg L. McKee Robert T. Smith
President and Chief Treasurer and Chief
Executive Officer Financial Officer
DATE: May 12, 2003 DATE: May 12, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Greg L. McKee, President 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: May 12, 2003
/s/ Greg L. McKee
---------------------------
Greg L. McKee
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert T. Smith, Treasurer and Chief Financial 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: May 12, 2003
/s/ Robert T. Smith
-----------------------
Robert T. Smith
Treasurer and Chief Financial Officer