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CITIZENS HOLDING CO /MS/ - Quarter Report: 2004 September (Form 10-Q)

For the Quarterly Period Ended September 30, 2004
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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

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

incorporation or organization)

 

(I. R. S. Employer

Identification Number)

 

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 mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2004.

 

Title


 

Outstanding


Common Stock, $.20 par value   5,000,278

 



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CITIZENS HOLDING COMPANY

THIRD QUARTER 2004 INTERIM FINANCIAL STATEMENTS

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PART I. FINANCIAL INFORMATION

         Item 1.    Consolidated Financial Statements (Unaudited)
          Consolidated Statements of Condition
September 30, 2004 and December 31, 2003
          Consolidated Statements of Income
Three and nine months ended September 30, 2004 and 2003
          Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2004 and 2003
          Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003
          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 2.    Unregistered Sales of Equity Securities and Use of Proceeds
         Item 6.    Exhibits

SIGNATURES


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PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

(Unaudited)

 

     September 30,
2004


   December 31,
2003


ASSETS

             

Cash and due from banks

   $ 19,086,570    $ 15,101,810

Interest bearing deposits with other banks

     189,701      98,036

Federal funds sold

     4,500,000      0

Investment securities available-for-sale, at fair value

     146,254,608      143,181,383

Loans, net of allowance for loan losses of $5,794,980 in 2004 and $5,126,735 in 2003

     363,185,897      351,937,005

Premises and equipment, net

     9,899,659      9,998,973

Real estate acquired by foreclosure

     745,436      695,018

Accrued interest receivable

     4,652,272      4,206,104

Cash value of life insurance

     15,091,841      14,880,618

Intangible assets (net)

     5,987,353      6,390,480

Other assets

     4,964,706      4,271,716
    

  

TOTAL ASSETS

   $ 574,558,043    $ 550,761,143
    

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

LIABILITIES

             

Deposits:

             

Noninterest-bearing demand

   $ 83,018,814    $ 63,070,459

Interest-bearing NOW and money market accounts

     129,087,426      117,431,141

Interest bearing savings deposits

     39,037,209      36,436,696

Interest bearing time deposits

     214,184,225      221,759,002
    

  

Total deposits

     465,327,674      438,697,298

Accrued interest payable

     543,506      668,538

Federal Home Loan Bank advances

     42,877,863      47,636,847

Federal funds purchased

     0      1,500,000

Directors deferred compensation payable

     1,963,048      1,832,211

Other liabilities

     3,015,384      2,540,822
    

  

Total liabilities

     513,727,475      492,875,716

Minority interest

     1,450,639      1,383,351

STOCKHOLDERS’ EQUITY

             

Common stock; $.20 par value, 22,500,000 shares authorized, 5,000,278 shares outstanding at September 30, 2004 and 4,979,628 shares at December 31, 2003

     1,000,056      995,926

Additional paid-in capital

     3,150,246      2,944,314

Retained earnings

     54,258,862      51,091,798

Accumulated other comprehensive income, net of deferred tax liability of $419,216 in 2004 and $764,050 in 2003

     970,765      1,470,038
    

  

Total stockholders’ equity

     59,379,929      56,502,076
    

  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 574,558,043    $ 550,761,143
    

  

 

See notes to consolidated financial statements.


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CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

    

For the Three Months

Ended September 30,


  

For the Nine Months

Ended September 30,


     2004

   2003

   2004

   2003

INTEREST INCOME

                           

Interest and fees on loans

   $ 5,972,998    $ 5,941,778    $ 17,850,801    $ 17,690,267

Interest on securities

     1,505,360      1,564,871      4,196,486      4,537,942

Other interest

     23,582      3,998      53,928      28,360
    

  

  

  

Total interest income

     7,501,940      7,510,647      22,101,215      22,256,569

INTEREST EXPENSE

                           

Deposits

     1,433,549      1,572,462      4,226,224      5,160,080

Other borrowed funds

     475,454      454,840      1,313,420      1,117,450
    

  

  

  

Total interest expense

     1,909,003      2,027,302      5,539,644      6,277,530
    

  

  

  

NET INTEREST INCOME

     5,592,937      5,483,345      16,561,571      15,979,039

PROVISION FOR LOAN LOSSES

     121,691      717,400      1,021,691      1,467,400
    

  

  

  

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     5,471,246      4,765,945      15,539,880      14,511,639

NON-INTEREST INCOME

                           

Service charges on deposit accounts

     880,417      858,633      2,534,623      2,416,354

Other service charges and fees

     116,532      217,221      529,640      530,845

Other income

     368,274      598,545      1,092,503      1,185,339
    

  

  

  

Total non-interest income

     1,365,223      1,674,399      4,156,766      4,132,538

NON-INTEREST EXPENSE

                           

Salaries and employee benefits

     2,275,272      2,016,484      6,628,989      5,907,636

Occupancy expense

     759,316      717,913      2,205,972      2,072,222

Other operating expense

     1,106,545      1,038,874      3,339,741      3,094,964

Earnings applicable to minority interest

     48,949      48,588      137,037      132,350
    

  

  

  

Total non-interest expense

     4,190,082      3,821,859      12,311,739      11,207,172
    

  

  

  

INCOME BEFORE INCOME TAXES

     2,646,387      2,618,485      7,384,907      7,437,005

INCOME TAX EXPENSE

     708,018      705,488      1,971,564      2,232,739
    

  

  

  

NET INCOME

   $ 1,938,369    $ 1,912,997    $ 5,413,343    $ 5,204,266
    

  

  

  

NET INCOME PER SHARE

                           

-Basic

   $ 0.39    $ 0.38    $ 1.08    $ 1.05
    

  

  

  

-Diluted

   $ 0.38    $ 0.38    $ 1.07    $ 1.04
    

  

  

  

 

See notes to consolidated financial statements.


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CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

    

For the Three Months

Ended September 30,


  

For the Nine Months

Ended September 30,


     2004

   2003

   2004

   2003

Net income

   $ 1,938,369    $ 1,912,997    $ 5,413,343    $ 5,204,266

Other comprehensive income (loss), net of tax

                           

Unrealized holding gains (losses)

     2,172,095      -1,514,282      -506,293      -1,322,606

Reclassification adjustment for (gains) losses included in net income

     959      271,018      -7,020      471,167
    

  

  

  

Total other comprehensive income (loss)

     2,171,136      -1,785,300      -499,273      -1,793,773
    

  

  

  

Comprehensive income

   $ 4,109,505    $ 127,697    $ 4,914,070    $ 3,410,493
    

  

  

  

 

See notes to consolidated financial statements.


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CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    

For the Nine Months

Ended September 30,


     2004

   2003

CASH FLOWS FROM OPERATING ACTIVITIES

             

Net Cash Provided by Operating Activities

   $ 8,562,513    $ 8,676,283

CASH FLOWS FROM INVESTING ACTIVITIES

             

Proceeds from maturities of securities available-for-sale

     30,927,404      52,797,166

Proceeds from sale of investment securities available-for-sale

     21,852,802      35,061,984

Purchases of investment securities available-for-sale

     -57,700,736      -101,141,113

Purchases of bank premises and equipment

     -729,686      -1,285,328

Increase in interest bearing deposits with other banks

     -91,665      -2,622,376

Decrease in Federal funds purchased

     -1,500,000      0

Increase in Federal funds sold

     -4,500,000      -7,100,000

Sale of real estate acquired by foreclosure

     1,129,611      0

Net increase in loans

     -13,636,028      -37,452,946
    

  

Net Cash Used by Investing Activities

     -24,248,298      -61,742,613

CASH FLOWS FROM FINANCING ACTIVITIES

             

Net increase in deposits

     26,630,376      27,993,510

Increase (Decrease) in FHLB advances

     -4,758,984      24,277,533

Proceeds from exercise of stock options

     45,993      0

Payment of dividends

     -2,246,840      -2,089,333
    

  

Net Cash Provided by Financing Activities

     19,670,545      50,181,710
    

  

Net Increase (Decrease) in Cash and Due from Banks

     3,984,760      -2,884,620

Cash and Due From Banks, beginning of year

     15,101,810      19,769,712
    

  

Cash and Due from Banks, end of period

   $ 19,086,570    $ 16,885,092
    

  

 

See notes to consolidated financial statements.


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CITIZENS HOLDING COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For the three and nine months ended September 30, 2004

 

1. These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. 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 September 30, 2004 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 97.53% 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 for the year ended December 31, 2003, filed March 31, 2004.

 

3. 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, 2004, the Corporation had entered into commitments with certain customers that had an unused balance of $23,940,717 compared to $19,669,825 unused at December 31, 2003. There were $4,490,978 of letters of credit outstanding at September 30, 2004 and $1,199,800 at December 31, 2003. Because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire, the balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the level of draws under the credit-related commitments into its asset and liability management program.

 

4. 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 using the


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treasury stock method. Stock options have a dilutive effect when the current market price exceeds the option exercise price and have an anti-dilutive effect when the exercise price exceeds the current market price. Net income per share was computed as follows:

 

    

For the Three Months

Ended September 30,


  

For the Nine Months

Ended September 30,


     2004

   2003

   2004

   2003

Basic weighted average shares outstanding

     4,997,099      4,974,578      4,990,279      4,974,578

Dilutive effect of granted options

     58,744      28,776      66,860      38,036
    

  

  

  

Diluted weighted average shares outstanding

     5,055,843      5,003,354      5,057,139      5,012,614

Net income

   $ 1,938,369    $ 1,912,997    $ 5,413,343    $ 5,204,266

Net income per share-basic

   $ 0.39    $ 0.38    $ 1.08    $ 1.05

Net income per share-diluted

   $ 0.38    $ 0.38    $ 1.07    $ 1.04

 

5. The Corporation is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are being vigorously contested. In the regular course of business, Management evaluates estimated losses or costs related to litigation, and 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.

 

6. At September 30, 2004, 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 and nine months ended September 30, 2004 and 2003.


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For the Three Months

Ended September 30,


  

For the Nine Months

Ended September 30,


     2004

   2003

   2004

   2003

Net income, as reported

   $ 1,938,369    $ 1,912,996    $ 5,413,343    $ 5,204,266

Deduct: Stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     0      118,260      201,610      118,260
    

  

  

  

Pro forma net income

   $ 1,938,369    $ 1,794,736    $ 5,211,733    $ 5,086,006
    

  

  

  

Basic earnings per share: As reported

   $ 0.39    $ 0.38    $ 1.08    $ 1.05

Pro forma

     0.39      0.36      1.04      1.02

Diluted earnings per share: As reported

   $ 0.38    $ 0.38    $ 1.07    $ 1.04

Pro forma

     0.38      0.36      1.03      1.01

 

7. In January 2003, FIN No. 46, “Consolidation of Variable Interest Entities,” was issued. FIN 46 sets forth the criteria used in determining whether an investment in a variable interest entity (“VIE”) should be consolidated. FIN 46 (as revised in December 2003) is effective for interest in VIE’s created or obtained by publicly traded entities after January 31, 2003. For variable interests in VIE’s created before February 1, 2003, the provisions of FIN No. 46 must be applied in the first interim or annual period ending after March 15, 2004. The adoption of FIN No. 46 by the Corporation did not have a material impact on the financial position or results of operations of the Corporation.

 

On March 9, 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments”. This bulletin summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The adoption of this bulletin did not impact the Corporation’s consolidated financial statements.


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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 97.53% owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with Citizens Holding Company, 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 is the ratio of net deposits and short-term liabilities divided by net cash, short-term investments and marketable assets. Liquidity of the Corporation was 60.51% at September 30, 2004, 56.99% at December 31, 2003 and 62.28% at September 30, 2003. 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. Deposits are the chief source of the Corporation’s liquidity. In addition, the Corporation has secured and unsecured federal funds lines with correspondent banks in the amount of $35,000,000. In addition, the Corporation has the ability to draw on its line of credit with the Federal Home Loan Bank in excess of $154,250,296 at September 30, 2004. At September 30, 2004, the Corporation had unused and available $35,000,000 of its federal funds line of credit and $111,372,433 of its line of credit with the Federal Home Loan Bank.

 

CAPITAL RESOURCES

 

The Corporation’s equity capital was $59,379,929 at September 30, 2004, as compared to $56,502,076 at December 31, 2003. The main source of capital for the Corporation has been the retention of net income.

 

The Corporation does not anticipate any capital expenditures on expansion, new services, equipment or personnel in the near future other than what that may be necessary to accommodate normal growth of the Corporation.

 

In 2003, certain employees and directors exercised stock options for 5,050 shares. In 2004, officer and directors exercised options for an aggregate of 8,200 shares of stock in the first quarter, 7,950 shares in the second quarter and 4,500 shares in the third quarter.


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These option exercises brought the number of shares outstanding to 5,000,278 at September 30, 2004. Cash dividends in the amount of $2,246,840, or $0.45 per share, have been paid in 2004 as of the end of the third quarter.

 

Quantitative measures established by Federal Deposit Insurance Corporation regulations 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, 2004, the Corporation meets all capital adequacy requirements to which it is subject. The Bank was rated as “well capitalized” under FDIC regulations at September 30, 2004.

 

     Actual

   

For Capital

Adequacy Purposes


   

To Be Well

Capitalized Under
Prompt Corrective
Actions Provisions


 
     Amount

   Ratio

    Amount

   Ratio

    Amount

   Ratio

 

As of September 30, 2004

                                       

Total Capital (to Risk-Weighted Assets)

   $ 58,735,080    15.13 %   $ 31,046,238    >8.00 %   $ 38,807,797    >10.00 %

Tier 1 Capital (to Risk-Weighted Assets)

     53,872,451    13.88 %     15,523,119    >4.00 %     23,284,678    >6.00 %

Tier 1 Capital ( to Average Assets)

     53,872,451    9.51 %     22,656,036    >4.00 %     28,320,045    >5.00 %

 

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 September 30,


  

For the Nine Months

Ended September 30,


     2004

   2003

   2004

   2003

Interest Income, including fees

   $ 7,501,940    $ 7,510,647    $ 22,101,215    $ 22,256,569

Interest Expense

     1,909,003      2,027,302      5,539,644      6,277,530
    

  

  

  

Net Interest Income

     5,592,937      5,483,345      16,561,571      15,979,039

Provision for Loan Losses

     121,691      717,400      1,021,691      1,467,400
    

  

  

  

Net Interest Income after Provision for Loan Losses

     5,471,246      4,765,945      15,539,880      14,511,639

Other Income

     1,365,223      1,674,399      4,156,766      4,132,538

Other Expense

     4,190,082      3,821,859      12,311,739      11,207,172
    

  

  

  

Income before income taxes

     2,646,387      2,618,485      7,384,907      7,437,005

Income Tax expense

     708,018      705,488      1,971,564      2,232,739
    

  

  

  

Net Income

   $ 1,938,369    $ 1,912,997    $ 5,413,343    $ 5,204,266
    

  

  

  

Net Income Per share - Basic

   $ 0.39    $ 0.38    $ 1.08    $ 1.05
    

  

  

  

Net Income Per Share-Diluted

   $ 0.38    $ 0.38    $ 1.07    $ 1.04
    

  

  

  


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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, as described in Note 4 to the financial statements.

 

Annualized return on average equity (ROE) was 13.33% and 12.40% for the three and nine months ended September 30, 2004, compared to 13.37% and 12.37% for the three and nine months ended September 30, 2003.

 

The book value per share increased to $11.88 at September 30, 2004 compared to $11.35 at December 31, 2003 and to $11.08 at September 30, 2003. The increase in book value at September 30, 2004 as compared to December 31, 2003 and September 30, 2003 is due to earnings exceeding dividends paid during these periods, offset in part by the decline in the market value of the security portfolio due to the rise in interest rates. Average assets for the nine months ended September 30, 2004, were $562,440,841 compared to $549,519,773 for the year ended December 31, 2003 and $547,435,590 at September 30, 2003. Average equity increased to $58,186,523 for the nine months ended September 30, 2004, from $56,121,211 for the year ended December 31, 2003 and $56,100,776 at September 30, 2003. Normal growth in both assets and equity were the reason for the increase in average year to date assets and average year to date equity.

 

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.

 

Net interest income was $5,592,937 and $16,561,571 for the three and nine month periods ended September 30, 2004, an increase of $109,592 and $582,532, respectively, over the same periods in 2003. Increases in loan volume accounted for a large part of the net interest income increase while the yield on the loan portfolio declined slightly as did the rates paid on deposits.


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The annualized net interest margin was 4.53% and 4.56% for the three and nine month periods ended September 30, 2004, compared to an annualized net interest margin of 4.42% and 4.44% for the three and nine months ended September 30, 2003. The increase in net interest margin is the result of continuing loan demand and the continued decline in rates paid on deposits. Earning assets averaged $504,058,412 for the nine months ended September 30, 2004. This represented an increase of $4,350,533, or .9%, over average earning assets of $499,707,879 for the nine months ended September 30, 2003. The increase in earning assets is the result of the normal growth pattern of the Corporation and not due to any special investments or acquisitions.

 

The following table shows the interest and fees and corresponding yields for loans only.

 

    

For the Three Months

Ended September 30,


   

For the Nine Months

Ended September 30,


 
     2004

    2003

    2004

    2003

 

Interest and Fees

   $ 5,972,998     $ 5,941,778     $ 17,850,801     $ 17,690,267  

Average Loans

     362,276,421       342,553,750       358,124,868       333,319,170  

Annualized Yield

     6.59 %     6.94 %     6.65 %     7.08 %

 

The decrease in rates in both the three and nine month periods ended September 30, 2004 as compared to the same periods in prior periods reflect the decrease in all loan rates for both new and refinanced loans in the 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


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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
September 30,
2004


    Year to Date
December 31,
2003


    Amount of
Increase
(Decrease)


   Percent of
Increase
(Decrease)


 

BALANCES:

                             

Gross Loans

   $ 370,727,510     $ 359,080,337     $ 11,647,173    3.24 %

Allowance for Loan Losses

     5,794,980       5,126,735       668,245    13.03 %

Nonaccrual Loans

     4,034,955       1,502,971       2,531,984    168.47 %

Ratios:

                             

Allowance for loan losses to gross loans

     1.56 %     1.43 %             

Net loans charged off to allowance for loan losses

     6.10 %     41.62 %             

 

The increase in nonaccrual loans from December 31, 2003 to September 30, 2004 was the result of the deterioration in credit quality for a single borrower and is not an indication of any downward trend in overall credit quality. The balance of this credit at September 30, 2004 totaled $3,612,219, and there is a related specific reserve of $1,163,666. Management believes that adequate allowances have been made to offset the loss, if any, associated with this particular credit.


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The provision for loan losses for the three months ended September 30, 2004 was $121,691, a decrease of $595,709, or 83.0%, over the $717,400 for the same period in 2003. The provision for the nine months ended September 30, 2004, was $1,021,691, a decrease of $445,709 or 30.4% over the $1,467,400 for the nine months ended September 30, 2003. The decrease in the provision was made to bring the allowance back to a level deemed sufficient by Management (based on the factors discussed above in this section) to cover anticipated loan losses after the net charge-offs for these periods and to cover the increases in the loan portfolio. The Corporation used an in-depth analysis of the Corporation’s current loan portfolio, using a loan grading system and the assignment of specific reserves to certain loans, to determine what would represent a reasonable and adequate allowance for loan loss.

 

For the three months ended September 30, 2004, net loan losses charged to the allowance for loan losses totaled $94,027, a decrease of $273,407 over the net loan losses charged to the allowance in the same period in 2003. For the nine months ended September 30, 2003, net loan losses charged to the allowance for loan losses totaled $353,445, a decrease of $467,999 over the same period in 2003.

 

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 based on an analysis of the portfolio on an individual loan basis with the loans of lesser quality receiving a higher allowance for possible loss. 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 OPERATING INCOME

 

Other operating income includes service charges on deposit accounts, wire transfer fees, safe deposit box rental fees and other revenue not derived from interest on earning assets such as income received from the sale of investment securities.

 

Other operating income for the three months ended September 30, 2004 decreased $309,176, or 18.5%, to $1,365,223 over the same period in 2003 and for the nine months ended September 30, 2004, increased $24,228, or .6%, to $4,156,766 over the same period in 2003. The decrease in 2004 for the three month period was due mainly to a reduction in the income received from the sale of investment securities and the recognition of the proceeds of a bank owned life insurance policy on a director in the third quarter of 2003.


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OTHER EXPENSE

 

Other expense includes salaries and employee benefits, occupancy and equipment, and other operating expenses such as legal and accounting, office supplies, postage and other expenses necessary for the operation of a business. Other expense for the three and nine months ended September 30, 2004 were $4,190,082 and $12,311,739 compared to $3,821,859 and $11,207,172 for the three and nine months ended September 30, 2003, an increase of $368,223, or 9.6%, and $1,104,567, or 9.9%, respectively. Salaries and benefits increased to $2,275,272 and $6,628,989 for the three and nine months of 2004 from $2,016,484 and $5,907,636 for the same period in 2003, an increase of $258,788, or 12.8%, and $721,353, or 12.2%, respectively. Normal growth in the Corporation, along with annual increases in salaries and increased cost of employee benefits, were the main reasons for the increase in salaries and benefits. These increases in salaries and employee benefits are primarily responsible for the overall increase in other expense. The remainder of this increase is due to increased expenses related to normal growth and inflation. The Corporation’s efficiency ratio (the ratio of operating expenses to net interest income and other operating income) for the three and nine month periods ended September 30, 2004 was 58.07% and 57.44%, compared to 51.88% and 54.26% for the same periods in 2003.

 

The Corporation anticipates the expenditures it will make in the fourth quarter in order to comply with Section 404 of the Sarbanes-Oxley Act of 2002 will have a material effect on the Company’s earnings, but the Corporation is unable to quantify the amount of these anticipated expenditures.

 

BALANCE SHEET ANALYSIS

 

     September 30,
2004


   December 31,
2003


   Amount of
Increase
(Decrease)


   Percent of
Increase
(Decrease)


 

Cash and Cash Equivalents

   $ 19,276,271    $ 15,199,846    $ 4,076,425    26.82 %

Investment Securities

     146,254,608      143,181,383      3,073,225    2.15 %

Loans, net

     363,185,897      351,937,005      11,248,892    3.20 %

Total Assets

     574,558,043      550,761,143      23,796,900    4.32 %

Total Deposits

     465,327,674      438,697,298      26,630,376    6.07 %

Total Stockholders’ Equity

     59,379,929      56,502,076      2,877,853    5.09 %

 

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 as of the end of the third quarter of 2004 increased $4,076,425 compared to $15,199,846 as of December 31, 2003 due to normal fluctuations in cash letters sent for collection on the last day of the quarter.


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INVESTMENT SECURITIES

 

The Corporation’s investment securities portfolio is 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 $3,073,225, or 2.2%, from the balance at December 31, 2003 due to the investment of excess funds that were not used to fund new loans.

 

LOANS

 

Loan demand in the Corporation’s service area began to strengthen as in the first nine months of 2004. Net loans increased by $11,248,892, or 3.2%, during the nine month period ended September 30, 2004 as compared to $351,937,005 at December 31, 2003. Commercial, financial and agricultural loans increased $14,317,978, or 7.7%, consumer loans increased $1,919,155, or 3.2%, real estate mortgage loans increased $500,699, or .5% while real estate construction loans decreased $5,090,659, or 33.0%. No special loan programs were initiated during this period.

 

DEPOSITS

 

The following shows the balance and percentage change in the various deposits:

 

     September 30,
2004


   December 31,
2003


   Amount of
Increase
(Decrease)


   Percent of
Increase
(Decrease)


 

Noninteresting-bearing Deposits

   $ 83,018,814    $ 63,070,459    $ 19,948,355    31.63 %

Interest-bearing Deposits

     129,087,426      117,431,141      11,656,285    9.93 %

Savings

     39,037,209      36,436,696      2,600,513    7.14 %

Certificates of Deposit

     214,184,225      221,759,002      -7,574,777    -3.42 %
    

  

  

  

Total Deposits

   $ 465,327,674    $ 438,697,298    $ 26,630,376    6.07 %
    

  

  

  

 

The increase in total deposits is the result of normal deposit growth. The Corporation believes that 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. Certificates of deposit declined due to competitive pressure from financial institutions in our market area.


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OFF-BALANCE SHEET ARRANGEMENTS

 

The Corporation has no off-balance sheet arrangements except as set forth in Note 3 in the notes to the consolidated financial statements included in this report, which provides a discussion of the nature and extent of the Corporation’s off-balance sheet arrangements.

 

FORWARD LOOKING STATEMENTS

 

In addition to historical information, this report contains statements which constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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.


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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. This indicates that the Corporation would benefit somewhat from a decrease in market interest rates. Although the Federal Reserve Bank raised key interest rates during the quarter ended September 30, 2004, this rate increase has had little affect on the Corporation’s net interest margin. Market rates on NOW accounts, money market deposit accounts and savings deposits have not responded immediately to the Fed’s interest rate increase and the Corporation believes that when local market pressure causes these rates to increase, they will not increase the full amount of the Fed rate increase. Certificates of deposit will not reprice until their respective maturities and therefore any increase in rates paid will occur over the remaining maturity schedule of the certificate of deposit. If the increase in interest rates is carried out over a period of time, the Corporation believes that the effect on its earnings will be minimized. The Corporation believes that a substantial increase in rates over a short period of time would have a negative effect on the net interest income of the Corporation due to its liability sensitive position. The Corporation will continue to monitor the upward movement in interest rates and will adjust our rates accordingly to compete with our market’s interest rate structure.

 

Although the Fed has begun to increase key interest rates, the Corporation’s market risk has not changed materially since the end of the last fiscal year end of December 31, 2003. Any more Fed interest rate increases in the near future could have the effect of changing the Corporation’s market risk.


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CITIZENS HOLDING COMPANY AND SUBSIDIARY

ITEM 4. CONTROLS AND PROCEDURES

 

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-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the fiscal quarter covered by this report. Based on this evaluation, the Corporation’s 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 changes in the Corporation’s internal controls over financial reporting (as defined in Rule 13(a)-15(f) and Rule 15(d)-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.


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PART II. - OTHER INFORMATION

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Capital Standards

 

The FRB, FDIC and other federal banking agencies have established risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a bank’s operations.

 

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.

 

In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%.

 

Stock Repurchase Plan

 

The Corporation does not have a plan in effect to repurchase its shares of common stock. In the third quarter of 2004, there were no stock repurchases of Corporation stock. There have been no sales of unregistered securities during 2004.

 

Restrictions on Dividends and Other Distributions

 

The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.

 

The Corporation’s ability to pay dividends depends in large part on the ability of the Bank to pay dividends to the Corporation. The approval of the Mississippi Department of Banking and Consumer Finance is required prior to the Bank paying dividends; dividends are limited to earned surplus in excess of three times the Bank’s capital stock. At September 30, 2004 the maximum amount available for transfer from the Bank to the Corporation in the form of cash dividends was $50,942,000.


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FRB regulations limit the amount the Bank may loan to the Corporation unless those loans are collateralized by specific obligations. At September 30, 2004, the maximum amount available for transfer from the Bank in the form of loans was $57,455,804. The maximum amount available for transfer from the Bank in the form of both cash dividends and loans was $108,397,804 (which represents 19% of the Bank’s consolidated net assets).

 

ITEM 6.   EXHIBITS    
    3(i)   Amended Articles of Incorporation of the Corporation   *
    3(ii)   Amended and Restated Bylaws of the Corporation   *
    31(a)   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).    
    31(b)   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).    
    32(a)   Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.    
    32(b)   Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.    

* 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.


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SIGNATURES

 

Pursuant to the requirements 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: November 12, 2004

 

DATE: November 12, 2004


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EXHIBIT INDEX

 

EXHIBITS

 

31(a)   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31(b)   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32(a)   Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.
32(b)   Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.