Annual Report Pursuant to Section 13 or 15(d)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

 

or

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


 

Name of Each Exchange on Which Registered


Common Stock, $.20 par value   American Stock Exchange

 

Securities registered pursuant to section 12(g) of the Act:

 

None

 

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. YES x NO ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 


Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ¨ NO x

 

As of June 30, 2003, the aggregate market value of the registrant’s common stock, $.20 par value, held by non-affiliates of the registrant was $65,028,341.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class


 

Outstanding at March 14, 2004


Common stock, $.20 par value   4,980,628 Shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following documents are incorporated by reference to Part II and III of the Form 10-K: 2003 Annual Report to Shareholders (Part II) and the Definitive Proxy Statement dated March 23, 2004 for the registrant’s Annual Meeting of Stockholders to be held April 27, 2004 (Part III).

 


 


CITIZENS HOLDING COMPANY

FORM 10-K

INDEX

 

          PAGE

     PART I     

ITEM 1.

   BUSINESS    1

ITEM 2.

   PROPERTIES    9

ITEM 3.

   LEGAL PROCEEDINGS    11

ITEM 4.

   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    11
     PART II     

ITEM 5.

   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS    11

ITEM 6.

   SELECTED FINANCIAL DATA    13

ITEM 7.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    14

ITEM 7A.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    14

ITEM 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA    14

ITEM 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE    14

ITEM 9A.

   CONTROLS AND PROCEDURES    14
     PART III     

ITEM 10.

   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT    15

ITEM 11.

   EXECUTIVE COMPENSATION    15

ITEM 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS    15

ITEM 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS    15

ITEM 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES    15
     PART IV     

ITEM 15.

   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K    16

SIGNATURES

   18

 


CITIZENS HOLDING COMPANY

FORM 10-K

 

PART I

 

In addition to historical information, this report contains statements which constitute forward-looking statements and information 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 “Business” and in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Citizens Holding Company (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 business of the Corporation and The Citizens Bank of Philadelphia, Mississippi (the “Bank”) 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 and the Bank 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 economy 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.

 

ITEM 1. BUSINESS

 

BACKGROUND

 

The Corporation is a one-bank holding company that holds 97.53% of the outstanding shares of the Bank. The Corporation was incorporated under Mississippi law on February 16, 1982, at the direction of the Board of Directors of the Bank in order to facilitate the Bank’s adoption of a one-bank holding company structure.

 

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At December 31, 2003, the Bank was the largest bank headquartered in Neshoba County with total assets of $550,222,207 and total deposits of $439,603,847.

 

The principal executive offices of both the Corporation and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350 and its telephone number is (601) 656-4692. All

 


references hereinafter to the activities or operations of the Corporation reflect the Corporation’s activities or operations through the Bank.

 

The Corporation acquired by merger CB&T Capital Corporation and Citizens Bank & Trust Company in Louisville, Mississippi in the second quarter of 2002. This acquisition added approximately $70 million in assets to the Corporation. 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.

 

In July 2001, the Corporation purchased two branches of Union Planters National Bank located in Forest and Decatur, Mississippi. This acquisition had the effect of adding $30,506,745 in assets, including $11,703,517 in loans, and $30,284,185 in deposits.

 

OPERATIONS

 

The Corporation, through the Bank, engages in a wide range of commercial and personal banking activities, including accepting demand deposits, savings and time deposit accounts, making secured and unsecured loans, issuing letters of credit, originating mortgage loans, and providing personal and corporate trust services; the Corporation, through the Bank, also provides certain services that are closely related to commercial banking such as credit life insurance and title insurance for its loan customers.

 

Revenues from the Corporation’s lending activities constitute the largest component of the Corporation’s operating revenues. Revenue from loan interest and fees made up 67.6% of gross revenues in 2003, 65.3% in 2002 and 68.8% in 2001. Such lending activities include commercial, real estate, installment (direct and indirect) and credit card loans. The Corporation’s primary lending area is East Central Mississippi, specifically Neshoba, Newton, Leake, Scott, Attala, Lauderdale, Winston and Kemper counties and contiguous counties. The Corporation extends out-of-area credit only to borrowers who are considered to be low risk, and only on a very limited basis.

 

This eight county lending area is mainly rural with Meridian, at 41,036 in population, being the largest city. Agriculture and some light industry are a big part of the economy of this area. The largest employer in the Corporation’s service area is the Mississippi Band of Choctaw Indians; their schools, manufacturing plants and their main source of income, The Pearl River Resort (the “Resort”), generate a significant number of jobs in the area. The Resort and its related services employ approximately 5,000 people from the Corporation’s service area.

 

The Corporation has in the past and intends to continue to make most types of real estate loans, including, but not limited to, single and multi-family housing, farm, residential and commercial construction and commercial real estate loans. Historically, approximately 67.15 % of the Corporation’s loan portfolio has been attributed to this category of lending. Another 14.14% of the Corporation’s loan portfolio is comprised of commercial, industrial and agricultural production loans, with consumer loans making up the remaining 18.71% of the total loan portfolio.

 

The Corporation’s loan personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit that exceeds the authority of the loan officer is forwarded to the loan committee for approval. The loan committee is composed of various Bank directors, including the Chairman. All aggregate credits that exceed the loan committee’s lending authority are presented to the full Board of Directors for ultimate approval

 


or denial. The loan committee not only acts as an approval body to ensure consistent application of the Corporation’s loan policy, but also provides valuable insight through the communication and pooling of knowledge, judgment and experience of its members.

 

Of course, all loans in the Corporation’s portfolio are subject to risk based on the economy in the Corporation’s area and also that of the nation. However, because the Corporation’s local economy has been strong and unemployment has remained at historic lows, management continues to believe that general risk levels are low.

 

In addition to lending services, the Corporation provides a wide range of personal and corporate trusts and trust-related services, which include its serving as executor of estates, as trustee under testamentary and inter vivos trusts and various pension and other employee benefit plans, as the guardian of the estates of minors and incompetents, and as escrow agent under various agreements. The Corporation also offers discount brokerage services through First Tennessee Bank.

 

Through such innovations as its VISA Checkcard program, the 24 Hour Phone Teller and its Internet site (http://www.thecitizensbankphila.com), the Corporation’s customers have easy and convenient access to their funds and account balances 24 hours a day, 7 days a week. Additionally, the Internet site enables the Corporation’s customers to review their accounts in detail, make transfers between their accounts and pay bills from anywhere in the world.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Greg L. McKee, who is 42 years old, was named President and Chief Executive Officer of the Corporation and Chief Executive Officer of the Bank in January 2003. He has served as President of the Bank since January 2002 and served as Chief Operating Office of the Bank from January 2002 until December 31, 2002. He has also been a member of the Board of Directors of both the Corporation and the Bank since 2001. Previous to this, he served as Executive Vice-President of the Bank from 2001 to 2002, Senior Vice-President of the Bank from 2000 to 2001, Vice-President of the Bank from 1992 to 2000, Assistant Vice-President of the Bank from 1989 to 1992, and Assistant Cashier of the Bank from 1984 to 1989.

 

Robert T. Smith, who is 52 years old, has been employed by the Bank since 1986 and has been in his current position of Senior Vice-President and Chief Financial Officer since January 2001. Prior to January 2001, Mr. Smith held the title of Vice-President and Controller from 1987 until 2001 and Assistant Vice-President from 1986 to 1987. In addition to his position with the Bank, Mr. Smith has served as Treasurer of the Corporation since February 1996.

 

EMPLOYEES

 

The Corporation has no employees other than three officers of the Bank, who also provide services to the Corporation. These officers receive no compensation from the Corporation for their services to it; their entire salary is paid by the Bank. At December 31, 2003, the Bank employed 201 full-time employees and 31 part-time employees. The Bank is not a party to any collective bargaining agreements, and employee relations are considered to be good.

 


SUPERVISION AND REGULATION

 

The Bank is chartered under the banking laws of the State of Mississippi and is subject to the supervision of, and is regularly examined by, the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Corporation (“FDIC”). The Corporation is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to the supervision of the Federal Reserve Board (“FRB”). Certain legislation and regulations affecting the businesses of the Corporation and the Bank are discussed below.

 

General.

 

The FRB requires the Corporation to maintain certain levels of capital and to file an annual report with the FRB. The FRB also has the authority to conduct examinations of the Corporation and the Bank and to take enforcement action against any bank holding company that engages in any unsafe or unsound practice or that violates certain laws, regulations, or conditions imposed in writing by the FRB.

 

Capital Standards.

 

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

 

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

 

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

 

Prompt Corrective Action and Other Enforcement Mechanisms.

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more of the prescribed minimum capital ratios. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized,

 


undercapitalized, significantly undercapitalized, and critically undercapitalized. The Corporation and Bank are classified as well capitalized under these guidelines.

 

Safety and Soundness Standards.

 

FDICIA also implemented certain specific restrictions on transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extension of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts.

 

Restrictions on Dividends and Other Distributions.

 

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

 

The Corporation’s ability to pay dividends depends in large part on the ability of the Bank to pay dividends to the Corporation. 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.

 

FRB regulations limit the amount the Bank may loan to the Corporation unless those loans are collateralized by specific obligations. At December 31, 2003, the maximum amount available for transfer from the Bank in the form of cash dividends and loans was 19% of the Bank’s consolidated net assets.

 

FDIC Insurance Assessments.

 

The FDIC has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”), both of which are administered by the FDIC. The Bank’s deposits are insured through BIF except for those deposits the Bank acquired from the Resolution Trust Corporation in April, 1994. This acquisition consisted of one branch of the former Security Federal Savings and Loan in Kosciusko, Mississippi, and these deposits remain insured through SAIF.

 

Deposit insurance premiums for banks and savings associations were increased as a result of The Financial Institutions Reform, Recovery and Enforcement Act of 1989, and losses incurred by the FDIC in connection with the default or assistance of troubled federally insured financial institutions are required to be reimbursed by other federally insured financial institutions.

 


Other BHC Act Provisions

 

The BHC Act requires a bank holding company to obtain prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by such bank holding company.

 

The BHC Act provides that the FRB shall not approve any acquisition, merger or consolidation which would result in a monopoly or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking. Neither will the FRB approve any other transactions in which the effect might substantially lessen competition, or in any manner be a restraint on trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.

 

The BHC Act also prohibits a bank holding company, with certain exceptions, from itself engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities. The principal exception is for engaging in or acquiring shares of a company whose activities are found by the FRB to be so closely related to banking or managing banks as to be a proper incident thereto. In making such determinations, the FRB is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition, or gains in efficiency of resources versus the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest, or unsound banking practices.

 

The BHC Act prohibits the acquisition by a bank holding company of more than 5% of the outstanding voting shares of a bank located outside the state in which the operations of its banking subsidiaries are principally conducted, unless such an acquisition is specifically authorized by statute of the state in which the bank to be acquired is located. We and our Bank are subject to certain restrictions imposed by the Federal Reserve Act and the Federal Deposit Insurance Act on any extensions of credit to the Company or the Bank, or investments in the stock or other securities of the Company or the Bank, and on taking such stock or other securities as collateral for loans of any borrower.

 

The BHC Act was recently amended to permit “financial holding companies” to engage in a broader range of nonbanking financial activities, such as underwriting and selling insurance, providing financial or investment advice, and dealing and making markets in securities and merchant banking. The Gramm-Leach-Bliley Act was enacted on November 12, 1992, and became effective on March 11, 2000. In order to qualify as a financial holding company, we must declare to the Federal Reserve our intention to become a financial holding company and certify that our depository subsidiary meets the capitalization management requirements and that it has at least a satisfactory rating under the Community Reinvestment Act of 1997. As of December 31, 2003, we had not elected to become a financial holding company.

 


Interstate Banking and Branching.

 

On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) was signed into law. The Interstate Act effectively permits nationwide banking by removing territorial restrictions on interstate bank mergers.

 

Interstate branching by merger with, or acquisition or consolidation of, banks located in different states was permitted beginning June 1, 1997, except in states that have passed legislation prior to that date “opting-out” of interstate branching. If a state opted-out prior to June 1, 1997, then banks located in that state may not participate in interstate branching. Effective May 1, 1997, Mississippi “opted in” to the interstate branching provision of the Interstate Act.

 

Community Reinvestment Act.

 

The Community Reinvestment Act of 1997, as amended (“CRA”), requires the assessment by the appropriate regulatory authority of a financial institution’s record in meeting the credit needs of the local community, including low and moderate-income neighborhoods. The regulations promulgated under CRA emphasize an assessment of actual performance rather than of the procedures followed by a bank, to evaluate compliance with the CRA. CRA compliance is also a factor in evaluations of proposed mergers, acquisitions and applications to open new branches or facilities. Overall CRA compliance continues to be rated across a four-point scale from “outstanding” to “substantial noncompliance,” and continues to be a factor in review of applications to merge, to establish new branches or for the formation of bank holding companies. Different evaluation methods are used depending on the asset size of the bank.

 

The FDIC examined the Bank on June 1, 1999 and again most recently on August 21, 2001, for its performance under the CRA. The Bank was rated Satisfactory during both of these examinations. No discriminatory practices or illegal discouragement of applications were found.

 

Anti-Money Laundering Efforts.

 

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) requires financial institutions to establish anti-money laundering programs and due diligence policies, procedures and controls with respect to bank accounts involving foreign individuals and certain foreign banks, and to avoid establishing and maintaining accounts in the United States for, or on the behalf of, foreign banks that do not have a physical presence in any country.

 

Corporate Governance.

 

The Sarbanes-Oxley Act of 2002 (“Sarbanes Act”) requires publicly traded companies to adhere to several directives designed to prevent corporate misconduct. Additional duties have been placed on officers, directors, auditors and attorneys of public companies. The Sarbanes Act requires certifications regarding financial statement accuracy and internal control adequacy by the chief executive officer and the chief financial officer to accompany periodic reports filed with the Securities and Exchange Commission (“SEC”). The Sarbanes Act also accelerates Section 16 insider reporting obligations, restricts certain executive officer and director transactions, imposes new obligations on corporate audit committees and provides for enhanced review by the SEC.

 


Impact of Monetary Policies.

 

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-earning assets comprises the major source of banks’ earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies. The nature and timing of any future changes in such policies and their impact on the Corporation cannot be predicted.

 

COMPETITION

 

The banking business is a highly competitive business. The Corporation’s market area consists principally of Neshoba, Newton, Leake, Scott, Attala, Lauderdale, Winston and Kemper Counties in Mississippi, although the Corporation also competes with other financial institutions in those counties and in surrounding counties in Mississippi in obtaining deposits and providing many types of financial services. The Corporation competes with larger regional banks for the business of companies located in the Corporation’s market area. A healthy economy, such as the Corporation’s market area is experiencing, invites certain challenges, especially that of competition.

 

All financial institutions today are faced with the challenge of competing for customers’ deposits, and the Corporation is no exception. The Corporation competes with savings and loan associations, credit unions, production credit associations, federal land banks, finance companies, personal loan companies, money market funds and other non-depository financial intermediaries. Many of these financial institutions have resources many times greater than those of the Corporation. In addition, new financial intermediaries such as money-market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions. The Corporation believes it benefits from a good reputation in the community and from the significant length of time it has provided needed banking services to its customers. Also, as a locally owned financial institution, the Corporation believes it is able to respond to the needs of the community with services tailored to the particular demands of its customers. Also, as a local institution, the Corporation believes it can provide these services faster than a larger institution.

 

Recent changes in federal and state law have resulted in, and are expected to continue to result in, increased competition. The reductions in legal barriers to the acquisition of banks by out-of-state bank holding companies resulting from implementation of the Interstate Act and other recent and proposed changes are expected to continue to further stimulate competition in the markets in which the Corporation operates, although it is not possible to predict the extent or timing of such increased competition.

 

Currently, there are approximately fourteen different financial institutions in the Corporation’s market area competing for the same customer base. Despite these challenges, the Corporation has not only been able to maintain its market share, but has actually increased its share in recent years. The Corporation competes in its market for loan and deposit products along with many of the other services required by today’s banking customer. The Corporation believes it is able to compete favorably in its markets, in terms of both the rates we offer and the level of service that we provide to our customers.

 


ITEM 2. PROPERTIES

 

The Corporation, through the Bank, currently operates from its main office in downtown Philadelphia, and from 18 additional branches in Neshoba, Newton, Leake, Scott, Attala, Lauderdale, Winston and Kemper counties, all located in Mississippi. Information about these branches is set forth in the table below:

 

NAME OF OFFICE


  

LOCATION/ TELEPHONE NUMBER


  

BANKING FUNCTIONS OFFERED


Main Office    521 Main Street    Full Service;
     Philadelphia, Mississippi    Trust
     (601) 656-4692     
Eastside Branch    585 East Main Street    Drive-up
     Philadelphia, Mississippi     
     (601) 656-4976     
Westside Branch    912 West Beacon Street    Full Service;
     Philadelphia, Mississippi    24 Hour Teller
     (601) 656-4978     
Northside Branch    720 Pecan Avenue    Deposits;
     Philadelphia, Mississippi    24 Hour Teller
     (601) 656-4977     
Pearl River Branch    110 Choctaw Town Center    Full Service;
     Philadelphia, Mississippi    24 Hour Teller
     (601) 656-4971     
Union Branch    Corner of Horne & Bank    Full Service
     Union, Mississippi     
     (601) 774-9231     
Carthage Main Office    219 West Main Street    Full Service
     Carthage, Mississippi     
     (601) 267-4525     
Crossroads Branch    Highways 35 & 16    Drive-up
     Carthage, Mississippi     
     (601) 267-4525     
Madden Branch    Highway 488    Deposits
     Madden, Mississippi     
     (601) 267-7366     

 


Sebastopol Branch    24 Pine Street    Full Service;
     Sebastopol, Mississippi    24-Hour Teller
     (601) 625-7447     
DeKalb Branch    Corner of Main & Bell    Full Service
     DeKalb, Mississippi     
     (601) 743-2115     
Kosciusko Branch    775 North Jackson Avenue    Full Service;
     Kosciusko, Mississippi    24-hour Teller
     (662) 289-4356     
Scooba Branch    1048 Johnston Street    Full Service
     Scooba, Mississippi     
     (662) 476-8431     
Meridian Branch    1825 Highway 39 North    Full Service;
     Meridian, Mississippi    24-Hour Teller
     (601) 693-8367     
Decatur Branch    15520 Highway 15 South    Full Service;
     Decatur, Mississippi    24-Hour Teller
     (601) 635-2321     
Forest Branch    247 Woodland Drive North    Full Service;
     Forest, Mississippi    24-Hour Teller
     (601) 469-3424     
Louisville Main Branch    100 East Main Street    Full Service
     Louisville, MS     
     (662) 773-6261     
Industrial Branch    803 South Church Street    Drive-Up
     Louisville, MS     
     (662) 773-6261     
Noxapater Branch    45 Main Street    Deposits
     Noxapater, MS     
     (662) 724-4261     

 

The Bank owns its main office and its branch offices, except for the Pearl River Branch Office, which is leased. The main office facility, originally occupied in 1966, is used solely by the Corporation and the Bank. This facility contains approximately 20,000 square feet and houses the executive offices and all operations related departments of the Corporation. The other branches range in size from nearly 4,000 square feet to 1,000 square feet.

 


ITEM 3. LEGAL PROCEEDINGS

 

There are no material pending legal proceedings, other than routine litigation incidental to their business, to which either the Corporation or the Bank is a party or to which any of their property is subject.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matters submitted to the Company’s shareholders during the fourth quarter of 2003.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Price.

 

The Corporation’s Common Stock is traded on the American Stock Exchange (“AMEX”) under the symbol “CIZ.” The stock began trading on the AMEX on October 19, 1999 and prior to that date was sold by private transactions between parties. On December 31, 2003, the Common Stock’s closing price was $22.85.

 

2002


   High

   Low

   Dividends Declared
(per common share)


January - March

   $ 16.26    $ 14.25    $ 0.12

April - June

     16.00      14.65      0.12

July - September

     16.85      15.75      0.14

October - December

     17.35      15.70      0.14

2003


   High

   Low

   Dividends Declared
(per common share)


January - March

   $ 16.10    $ 14.35    $ 0.14

April - June

     17.00      14.75      0.14

July - September

     19.00      16.00      0.14

October - December

     24.75      18.25      0.15

 

Per share information included in the above table has been adjusted to reflect the three-for-two (3:2) common stock split effective January 2, 2002.

 


On March 15, 2004, the shares of Common Stock were held of record by approximately 462 shareholders.

 

Dividends

 

Dividends, retroactively adjusted to give effect to the three-for-two stock split, totaled $0.57 per share in 2003 compared to $0.52 per share for 2002. These dividends reflect a 10 % increase in 2003 over 2002.

 

The Corporation declares dividends on a quarterly basis in March, June, September and December with payment following at the end of the month in which the dividend was declared.

 

Funds for the payment by the Corporation of cash dividends are obtained from dividends received by the Corporation from the Bank. Accordingly, the declaration and payment of dividends by the Corporation depend upon the Bank’s earnings and financial condition, general economic conditions, compliance with regulatory requirements, and other factors.

 

The information appearing under the caption “Equity Compensation Plan Information” in Item 12 of this Form 10-K is incorporated herein by reference.

 


ITEM 6. SELECTED FINANCIAL DATA

 

FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED STATISTICS

(amounts in Thousands, Except Percent and Per Share Data)

(Per Share Data adjusted for 3:2 split of January 2, 2002)

 

     2003

    2002

    2001

    2000

    1999

 

Summary of Earnings

                                        

Total Interest Income

   $ 29,725     $ 30,197     $ 29,119     $ 28,638     $ 25,476  

Total Interest Expense

     8,188       9,746       13,399       14,064       10,974  

Provision for loan losses

     2,003       1,758       1,123       918       849  

Non-interest income

     5,324       4,435       3,980       3,285       3,122  

Non-interest expense

     15,042       13,865       10,308       8,772       8,361  

Income tax expense

     2,845       2,965       2,558       2,635       2,793  

Net Income

     6,971       6,298       5,711       5,534       5,621  

Per Share Data

                                        

Earnings-basic

   $ 1.40     $ 1.27     $ 1.15     $ 1.12     $ 1.13  

Earnings-diluted

     1.39       1.26       1.15       1.11       1.13  

Cash dividends

     0.570       0.520       0.383       0.283       0.213  

Book value at year end

     11.35       10.81       9.51       8.74       7.57  

Selected Year End Actual Balances

                                        

Loans, net of unearned income

   $ 357,064     $ 308,175     $ 264,278     $ 252,022     $ 234,349  

Allowance for possible loan losses

     5,127       4,222       3,375       3,325       3,100  

Investment securities

     143,181       162,276       122,567       103,533       102,451  

Total assets

     550,761       518,450       427,213       382,800       362,790  

Deposits

     438,697       432,768       359,309       289,908       284,462  

Long term borrowings

     47,637       24,606       14,629       10,000       10,000  

Shareholders’ equity

     56,502       53,783       47,182       43,377       37,546  

Selected Year End Average Balances

                                        

Loans, net of unearned income

   $ 337,763     $ 289,407     $ 255,185     $ 244,307     $ 221,165  

Allowance for possible loan losses

     4,495       3,905       3,335       3,198       2,974  

Investment securities

     164,371       153,726       106,632       102,325       97,219  

Total assets

     549,520       491,833       403,881       374,439       347,613  

Deposits

     447,188       414,135       327,536       290,704       288,176  

Long term borrowings

     35,314       19,301       14,815       10,000       10,000  

Shareholders’ equity

     56,121       51,304       47,664       40,701       37,603  

Selected Ratios

                                        

Return on average assets

     1.27 %     1.28 %     1.41 %     1.48 %     1.62 %

Return on average equity

     12.42 %     12.28 %     11.98 %     13.60 %     14.95 %

Dividend payout ratio

     40.71 %     40.98 %     33.31 %     25.41 %     18.84 %

Equity to year end assets

     10.26 %     10.37 %     11.04 %     11.33 %     10.35 %

Total risk-based capital to risk-adjusted assets

     14.94 %     15.57 %     18.40 %     18.88 %     18.52 %

Leverage capital ratio

     9.11 %     8.83 %     10.51 %     11.61 %     11.06 %

Efficiency ratio

     54.45 %     54.51 %     51.32 %     47.20 %     45.48 %

 

The year end and average balances for the year 2002 reflect the increase in loans, assets and deposits that resulted from the May 2002 acquisition of CB&T Capital Corporation and Citizens Bank and Trust Company of Louisville.

 

Similarly, the balances in 2001 were increased in part by the acquisition of two Union Planters branches located in Forest and Decatur Mississippi in July 2001.

 


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Information on the Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2003, 2002, and 2001 required by this Item 7 can be found under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2003, 2002 and 2001” and “Consolidated Financial Statements” in the 2003 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Information on the Quantitative and Qualitative Disclosures about Market Risk, required by this Item 7A can be found under the headings “Quantitative and Qualitative Disclosures about Market Risk” in the 2003 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Information on Financial Statements and Supplementary Data required by this Item 8 can be found under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2003, 2002 and 2001”, “Consolidated Financial Statements” and “Quarterly Financial Trends” in the 2003 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Within the 90 days prior to the date of this Annual Report on Form 10-K, the Corporation’s principal executive officer and principal financial officer carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Corporation’s principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Corporation’s 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 III

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Information regarding the Directors and Executive Officers of the Corporation required by this Item 10 can be found under the headings “Executive Officers of the Registrant” in Item 1 of this Annual Report on Form 10-K and “Section 16(a) Beneficial Ownership Reporting Compliance” and “Board of Directors” in the Corporation’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 23, 2004, relating to its 2004 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information regarding the Executive Compensation paid by the Corporation required by this Item 11 can be found under the headings “Executive Compensation”, “Compensation of the Board of Directors”, “Stock Performance Graph” and “Compensation Committee Interlocks and Insider Participation” in the Corporation’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 23, 2004, relating to its 2004 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters required by this Item 12 can be found under the headings “Security Ownership of Directors, Nominees and Executive Officers”, “Security Ownership of Certain Beneficial Owners” and “Equity Compensation Plan Information” in the Corporation’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 23, 2004, relating to its 2004 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Information regarding Certain Relationships and Related Transactions can be found under the headings “Indebtedness of Related Parties” and “Interests of the Board of Directors” in the Corporation’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 23, 2004, relating to its 2004 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Information regarding Principal Accountant Fees and Services can be found under the heading “Proposal IV: Appointment of Independent Accountants” in the Corporation’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 23, 2004, relating to its 2004 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

 


PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

  (a) Financial Statements

 

  1. Consolidated Financial Statements and Supplementary Information for years ended December 31, 2001, 2002 and 2003, which include the following:

 

  (i) Independent Auditor’s Report

 

  (ii) Consolidated Balance Sheets

 

  (iii) Consolidated Statements of Income

 

  (iv) Consolidated Statements of Comprehensive Income

 

  (v) Consolidated Statements of Changes in Shareholders’ Equity

 

  (vi) Consolidated Statements of Cash Flows

 

  (vii) Notes to Consolidated Financial Statements

 

  2. Financial Statement Schedules

 

None.

 

  3. Exhibits required by Item 601 of Regulation S-K

 

3(i)   Amended Articles of Incorporation of the Corporation    *
3(ii)   Amended and Restated Bylaws of the Corporation    *
4   Rights Agreement between Citizens Holding Company and The Citizens Bank of Philadelphia, Mississippi    *
10(a)   Directors’ Deferred Compensation Plan - Form of Agreement    *
10(b)   Citizens Holding Company 1999 Directors’ Stock Compensation Plan    *
10(c)   Citizens Holding Company 1999 Employees’ Long-Term Incentive Plan    *
10(d)   Change in Control Agreement dated December 10, 2002 between the Company and Greg L. McKee    **
10(e)   Summary of Consulting Agreement between the Company and Steve Webb    **
13   2003 Annual Report to Shareholders     
14   Code of Ethics     
21   Subsidiaries of Registrant     
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer     
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer     
32.1   Section 1350 Certification of Chief Executive Officer     
32.2   Section 1350 Certification of Chief Financial Officer     

 

*

Filed as an exhibit to the Form 10 Registration Statement of the Corporation (File No. 000-25221) filed on December 30, 1998 and incorporated herein by reference, and also filed as

 


 

an exhibit to Amendment No. 1 to Form 10 Registration Statement of the Corporation (File No. 000-25221) filed on June 21, 1999 and incorporated herein by reference.

 

** Filed as an exhibit to the 2002 Form 10-K Annual Report of the Corporation (File No. 000-25221) filed on March 31, 2003 and incorporated herein by reference.

 

  (b) Reports on Form 8-K

 

The following report on form 8-K was filed by the Corporation during the last quarter of the period covered by this Form 10-K:

 

On October 27, 2003, the Corporation furnished on Form 8-K under Item 5, Item 7 and Item 12 a press release announcing the financial results of the Corporation for the quarter ended September 30, 2003.

 

On December 2, 2003, the Corporation furnished on Form 8-K under Item 7(c) and Item 9 a press release announcing the payment of a $.15 per share dividend of the Corporation for the fourth quarter of 2003.

 


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

Date: March 23, 2004

      By:   /s/    GREG L. MCKEE        
             
               

Greg L. McKee

President and Chief Executive Officer

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

SIGNATURES


  

CAPACITIES


 

DATE


/s/    WILLIAM M. MARS        


  

Director

  March 23, 2004

/s/    DAVID A. KING        


  

Director

  March 23, 2004

/s/    KARL BRANTLEY        


  

Director

  March 23, 2004

/s/    DON FULTON        


  

Director

  March 23, 2004

/s/    DONALD L. KILGORE        


  

Director

  March 23, 2004

/s/    M. G. BOND        


  

Director

  March 23, 2004

/s/    DAVID P. WEBB        


  

Director

  March 23, 2004

/s/    HERBERT A. KING         


  

Director

  March 23, 2004

/s/    W. W. DUNGAN        


  

Director

  March 23, 2004

/s/    GREG L. MCKEE        


  

Director, President and

Chief Executive Officer

  March 23, 2004

/s/    ROBERT T. SMITH        


  

Treasurer and Chief Financial Officer

  March 23, 2004

/s/    STEVE WEBB        


  

Chairman of the Board

  March 23, 2004

 

2003 Annual Report to Shareholders

EXHIBIT 13

 

Dear Stockholder:

 

I am very pleased to report your Company’s accomplishments for 2003. We can point to many positive factors that include earnings, asset growth and infrastructure improvements. These factors all work together to enhance the value of your investment.

 

In summary, we were able to increase earnings 10.7% over 2002, while maintaining adequate reserves for an increase in net loans of 15%. This equates to basic per share earnings of 1.40, compared to 1.27 for 2002. The assets of the bank increased approximately 6%. We have made adjustments in processes, procedures, technology and employee training that significantly strengthens our infrastructure. While growth is a positive factor in the health of the Company, we continually strive to be sure that the growth is fueled by quality assets being managed by quality employees. To that end, we have instituted a new training program that gives all employees the knowledge and tools necessary to do their jobs and give top quality customer service.

 

It is obvious that we are no longer a small bank in asset size, but we continually strive to maintain the culture of a small bank by giving our employees the flexibility necessary to profitably meet the customers’ needs.

 

Because of the continuing growth and expansion of the Company, we have started an intense campaign throughout the entire organization that clarifies our vision for the future. This vision includes the goals and priorities necessary to further grow the size and earnings of an already great Company.

 

Overall, we are obviously pleased with the Company’s accomplishments this year. With the continued support of great stockholders, great customers and great employees, we embrace an exciting future for our Company.

 

As always, thank you for your support and the opportunity to serve in this capacity.

 

/s/ Greg L. McKee

 

Greg L. McKee

President and Chief Executive Officer


Management’s Discussion and Analysis of Financial Condition and Results of Operations as of

December 31, 2003, 2002 and 2001

 

BACKGROUND

 

Citizens Holding Company (the “Company”) is a one-bank holding company that holds 97.53% of the outstanding shares of The Citizens Bank of Philadelphia, Mississippi (the “Bank”). The Company was incorporated under Mississippi law on February 16, 1982.

 

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At December 31, 2003, the Bank was the largest bank headquartered in Neshoba County with total assets of $550,222,207 and total deposits of $439,603,847. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350 and its telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s acting or operating through the Bank.

 

OVERVIEW

 

Over the past three years, the Bank has experienced growth in asset size and earnings as management has capitalized on opportunities for strategic acquisitions and on natural economic growth within our market area. In 2001, branches in Forest and Decatur, Mississippi were acquired from Union Planters Bank that added approximately $30.5 million in assets; in 2002, the acquisition of CB&T Capital Corporation and its subsidiary, Citizens Bank and Trust Company (“CB&T”) in Louisville, Mississippi added $71.7 million in assets. Growth in 2003 is attributable to steady loan demand fueled by continued low interest rates. Much of the loan growth in 2003 was funded by low interest rate borrowings from the Federal Home Loan Bank. Earnings have increased steadily over the three-year period as management utilized low costs of funds to increase net interest income. At the same time, management made appropriate provisions for potential loan losses caused primarily by general economic conditions in our market area.

 

The Company in 2003 experienced normal growth in assets without any acquisitions, relying on the continued growth of the market area served by the Company. Total assets for the year increased 6.2% from 2002 to $550,761,143, and loans increased 15.8% from 2002 to $351,937,005. Deposit growth for the year was 1.4% to $438,697,298.

 

In 2002, the Company had significant growth in assets, loans and deposits, in large part due to the acquisition of CB&T for a net purchase price of $4,300,300. Assets increased $91,237,244, or 21.4%, over 2001, net loans increased $43,049,436, or 16.5%, over 2001, and deposits increased $73,459,168, or 20.4%, over 2001, with $71.7 million of the increase in assets, including $15.0 million in net loans and $57.9 million of the increase in deposits attributable to the Louisville purchase.

 

The Company also experienced positive growth in assets and loans for 2001. Total assets at the end of 2001 were $427,212,874, an increase of 11.6% over 2000; net loans were $260,903,091, an increase of 4.9% over 2000; and deposits increased to $359,309,007, an increase of 24.9% over 2000. These increases were aided by the acquisition in July 2001 of the two Union Planters branches in Forest and Decatur for a net purchase price of $2,453,390; this acquisition added $30,506,745 in assets, including $11,703,517 in loans and $30,284,185 in deposits.


Net income after taxes of the Company for 2003 increased 10.7% over 2002 to $6,970,929. Net income after taxes of the Company for 2002 increased by 10.3% over 2001 to $6,297,500. Net income was positively affected in both 2003 and 2002 by a decrease in interest paid on deposits and other borrowed money. Net income after taxes for 2001 was up 3.2%, also due to the falling interest rate environment, as well to asset and loan growth. Net income for 2003 produced, on a fully diluted basis, earnings per share of $1.39 compared to $1.26 in 2002 and $1.15 for 2001.

 

The Company’s Return on Average Assets (ROA) was 1.27% in 2003, compared to 1.28% in 2002 and 1.41% in 2001, and its Return on Average Equity (ROE) was 12.42% in 2003, 12.28% in 2002 and 11.98% in 2001. During these periods, leverage capital ratios decreased from 10.51% in 2001 to 8.83% in 2002 but increased to 9.11% in 2003. While ROA has declined somewhat over the past three years, ROE has increased. This indicates that the Company has better utilized its capital to support growth in both assets and earnings, which has allowed the Company to increase the dividend payout rate from approximately 33% to 41%. These changes caused a slight decline in the leverage capital ratio; however, the 2003 ratio of 9.11% is still well above the regulatory requirement of 5% to be considered “well capitalized” under applicable Federal Deposit Insurance Corporation (FDIC) guidelines.

 

CRITICAL ACCOUNTING POLICIES

 

The allowance for loan losses is established through a provision for loan losses charged against net income. Loans declared to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance represents an amount, which, in management’s judgment, will be adequate to absorb estimated probable losses on existing loans that may become uncollectible. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of specific loans and prior loss experience. Other factors considered by management include specific economic events, general economic conditions and trends, and loan portfolio mix and growth. The allowance for loan losses is subject to close regulatory review from the FDIC and is also a factor in the determination of the bank’s capital adequacy. The estimation of potential losses in the bank’s loan portfolio is susceptible to changes resulting from changes in the financial condition of individual borrowers, economic conditions in the Bank’s market area and general economic conditions in the area.

 

RECENT PRONOUNCEMENTS

 

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 Company effective January 1, 2003. The adoption of FIN No. 45 did not have any material impact on the financial statements of the Company.


In January 2003, FIN No. 46, “Consolidation of Variable Interest Entities,” was issued. FIN No. 46 sets forth the criteria used in determining whether an investment in a variable interest entity (“VIE”) should be consolidated. FIN No. 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 Company is not expected to have a material impact on the financial position or results of operations of the Company.

 

In April 2003, SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 was adopted by the Company effective June 30, 2003 and had no material impact on the financial position or results of operations of the Company.

 

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Since its issuance, the effective date of certain provisions of SFAS No. 150 has been extended. SFAS No. 150 establishes standards for an issuer’s classification and measurement of certain financial instruments with characteristics of both liabilities and equity. While the impact of the provisions of SFAS No. 150 has not been finalized, adoption of SFAS No. 150 is not expected to have a significant impact on the Company’s financial statements.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this report contains statements which constitute forward-looking statements and information which are based on management’s beliefs, plans, expectations, and 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. The Company 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 Company’s and the Bank’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 Company operates; (b) changes in the legislative and regulatory environment that negatively impact the Company and Bank 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 economy in the Company’s market area; and (h) other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. The Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date on which they are made.

 

SELECTED DATA

 

The following selected data has been taken from the Company’s consolidated financial statements and should be read in conjunction with such consolidated financial statements and related notes included elsewhere. The major components of the Company’s operating results for the past five years are summarized in Table 1 - Five Year Financial Summary of Consolidated Statements and Related Statistics. All dollar references in the following tables are in thousands except for per share data. All per share data has been adjusted to give effect to the three-for-two stock split effective January 2, 2002.

 

TABLE 1 - FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED STATISTICS

(amounts in thousands, except percent and per share data)

 

     2003

   2002

   2001

   2000

   1999

Summary of Earnings

                                  

Total Interest Income

   $ 29,725    $ 30,197    $ 29,119    $ 28,638    $ 25,476

Total Interest Expense

     8,188      9,746      13,399      14,064      10,974

Provision for loan losses

     2,003      1,758      1,123      918      849

Non-interest income

     5,324      4,435      3,980      3,285      3,122

Non-interest expense

     15,042      13,865      10,308      8,772      8,361

Income tax expense

     2,845      2,965      2,558      2,635      2,793

Net Income

     6,971      6,298      5,711      5,534      5,621

Per Share Data

                                  

Earnings-basic

   $ 1.40    $ 1.27    $ 1.15    $ 1.12    $ 1.13

Earnings-diluted

     1.39      1.26      1.15      1.11      1.13

Cash dividends

     0.570      0.520      0.383      0.283      0.213

Book value at year end

     11.35      10.81      9.51      8.74      7.57

Selected Year End Actual Balances

                                  

Loans, net of unearned income

   $ 357,064    $ 308,175    $ 264,278    $ 252,022    $ 234,349

Allowance for possible loan losses

     5,127      4,222      3,375      3,325      3,100

Investment securities

     143,181      162,276      122,567      103,533      102,451

Total assets

     550,761      518,450      427,213      382,800      362,790

Deposits

     438,697      432,768      359,309      289,908      284,462

Long term borrowings

     47,637       24,606       14,629       10,000       10,000  

Shareholders’ equity

     56,502       53,783       47,182       43,377       37,546  

Selected Year End Average Balances

                                        

Loans, net of unearned income

   $ 337,763     $ 289,407     $ 255,185     $ 244,307     $ 221,165  

Allowance for possible loan losses

     4,495       3,905       3,335       3,198       2,974  

Investment securities

     164,371       153,726       106,632       102,325       97,219  

Total assets

     549,520       491,833       403,881       374,439       347,613  

Deposits

     447,188       414,135       327,536       290,704       288,176  

Long term borrowings

     35,314       19,301       14,815       10,000       10,000  

Shareholders’ equity

     56,121       51,304       47,664       40,701       37,603  

Selected Ratios

                                        

Return on average assets

     1.27 %     1.28 %     1.41 %     1.48 %     1.62 %

Return on average equity

     12.42 %     12.28 %     11.98 %     13.60 %     14.95 %

Dividend payout ratio

     40.71 %     40.98 %     33.31 %     25.41 %     18.84 %

Equity to year end assets

     10.26 %     10.37 %     11.04 %     11.33 %     10.35 %

Total risk-based capital to risk-adjusted assets

     14.94 %     15.57 %     18.40 %     18.88 %     18.52 %

Leverage capital ratio

     9.11 %     8.83 %     10.51 %     11.61 %     11.06 %

Efficiency ratio

     54.45 %     54.51 %     51.32 %     47.20 %     45.48 %

 

NET INTEREST INCOME

 

Net interest income is the most significant component of the Company’s earnings. Net interest income is the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest margin is this difference expressed as a percentage of average earning assets. Net interest income is affected by several factors, including the volume of earning assets and liabilities, the mix of earning assets and liabilities, and interest rates.

 

Net interest income on a tax equivalent basis was $22,317,000, $21,014,000 and $16,047,000 and the net interest margin was 4.49%, 4.67% and 4.32% for the years 2003, 2002, and 2001, respectively. In 2003, the average yield on earnings assets decreased to 6.13% from 6.83% in 2002 while the average rate on interest-bearing liabilities decreased to 1.94% from 2.59% in 2002. Earning assets volume increased 10.6% while interest-bearing liabilities volume increased 12.0% in 2003. The increase in the volume of interest-bearing assets, combined with a smaller interest rate reduction on loans than deposits, caused the rise in net interest income in 2003.

 

For 2002, the average yield on earning assets decreased to 6.83% from 7.91% in 2001 while the earning asset volume increased 21.0% over 2001. The average rate on interest bearing liabilities decreased to 2.59% in 2002 from 4.35% in 2001 and the interest bearing volume increased 21.8% in 2002.


During this three-year period, loan demand has remained strong and has allowed the Company to continue to invest its available funds in loans that provide the Company with yields that are greater than the yields on typical investment securities. The volume increases in both interest bearing assets and liabilities was aided by the acquisition of CB&T in May 2002 and the Union Planters branch acquisitions in July 2001.

 

Also, during 2003, the Company purchased $12 million additional Bank owned life insurance, resulting in a total investment of approximately $14.9 million at December 31, 2003. The additional purchases were made to providing a future funding source for certain of the Company’s deferred compensation arrangements. Such insurance also offers more attractive yield than other investment securities.


TABLE 2 - AVERAGE BALANCE SHEETS AND INTEREST RATES

 

     Average Balance

   Income/Expense

   Average Yield/Rate

 
     2003

   2002

   2001

   2003

   2002

   2001

   2003

    2002

    2001

 

Loans:

                                                            

Commercial Loans

   $ 313,599    $ 265,178    $ 232,424    $ 21,347    $ 20,130    $ 20,275    6.81 %   7.59 %   8.72 %

Installment Loans (Net)

     22,676      22,747      21,521      2,350      2,506      2,503    10.36 %   11.02 %   11.63 %
    

  

  

  

  

  

  

 

 

Total Loans

     336,275      287,925      253,945      23,697      22,636      22,778    7.05 %   7.86 %   8.97 %

Investment Securities

                                                            

Taxable

     108,695      115,510      78,423      3,761      5,772      4,671    3.39 %   5.00 %   5.96 %

Tax-exempt

     49,183      34,166      23,952      2,998      2,143      1,498    6.10 %   6.27 %   6.25 %
    

  

  

  

  

  

  

 

 

Total Investment Securities

     157,878      149,676      102,375      6,759      7,915      6,169    4.28 %   5.29 %   6.03 %

Federal Funds Sold and Other

     3,575      12,428      15,681      34      198      487    0.95 %   1.59 %   3.11 %
    

  

  

  

  

  

  

 

 

Total Interest Earning Assets

     497,728      450,029      372,001      30,490      30,749      29,434    6.13 %   6.83 %   7.91 %
    

  

  

  

  

  

  

 

 

Non-Earning Assets

     51,792      41,804      31,880                                        
    

  

  

                                       

Total Assets

   $ 549,520    $ 491,833    $ 403,881                                        
    

  

  

                                       

Deposits:

                                                            

Interest-bearing Demand Deposits

   $ 123,338    $ 117,989    $ 82,127    $ 1,212    $ 1,499    $ 1,930    0.98 %   1.27 %   2.35 %

Savings

     34,696      27,653      19,828      354      483      521    1.02 %   1.75 %   2.63 %

Time

     222,695      209,610      183,883      5,024      6,702      9,727    2.26 %   3.20 %   5.29 %
    

  

  

  

  

  

  

 

 

Total Deposits

     380,729      355,252      285,838      6,590      8,684      12,178    1.73 %   2.44 %   4.26 %

Borrowed Funds

                                                            

Short-term Borrowings

     4,065      659      9,721      56      12      544    1.37 %   1.82 %   5.60 %

Long-term Borrowings

     35,314      19,301      12,407      1,527      1,039      665    4.32 %   5.38 %   5.36 %
    

  

  

  

  

  

  

 

 

Total Borrowed Funds

     39,379      19,960      22,128      1,583      1,051      1,209    4.02 %   5.27 %   5.46 %
    

  

  

  

  

  

  

 

 

Total Interest-Bearing Liabilities

     420,108      375,212      307,966      8,173      9,735      13,387    1.94 %   2.59 %   4.35 %

Non-Interest Bearing Liabilities

                                                            

Demand Deposits

     65,985      58,883      41,368                                        

Other Liabilities

     7,306      6,434      6,883                                        

Shareholders’ Equity

     56,121      51,304      47,664                                        
    

  

  

                                       

Total Liabilities and Shareholders’ Equity

   $ 549,520    $ 491,833    $ 403,881                                        
    

  

  

                                       

Interest Rate Spread

                                             4.19 %   4.24 %   3.56 %
                                              

 

 

Net Interest Income

                        $ 22,317    $ 21,014    $ 16,047                   
                         

  

  

                  

Net Interest Margin

                                             4.49 %   4.67 %   4.32 %
                                              

 

 


Table 3 - Net Average Interest Earning Assets illustrates net interest earning assets and liabilities for 2003, 2002, and 2001.

 

TABLE 3 - NET AVERAGE INTEREST EARNING ASSETS

 

     2003

   2002

   2001

Average interest earning assets

   $ 497,728    $ 450,029    $ 372,001

Average interest bearing liabilities

     420,108      375,212      307,966
    

  

  

Net average interest earning assets

   $ 77,620    $ 74,817    $ 64,035
    

  

  

 

Table 4 – Volume/Rate Analysis depicts the dollar effect of volume and rate changes from 2001 through 2003. Variances which were not specifically attributable to volume or rate were allocated proportionately between rate and volume using the absolute values of each for a basis for the allocation. Non-accruing loans were included in the average loan balances used in determining the yields. Interest income on tax-exempt securities and loans has been adjusted to a tax equivalent basis using a marginal federal income tax rate of 34%.

 

TABLE 4 - VOLUME/RATE ANALYSIS

 

     2003 Change from 2002

   2002 Change from 2001

     Volume

   Rate

   Total

   Volume

   Rate

   Total

INTEREST INCOME

                                         

Loans

   $ 3,407    -$ 2,346    $ 1,061    $ 2,671    -$ 2,813    -$ 142

Taxable Securities

     -236      -1,775      -2,011      1,854      -753      1,101

Non-Taxable Securities

     916      -61      855      640      5      645

Federal Funds Sold and Other

     -84      -80      -164      -51      -238      -289
    

  

  

  

  

  

TOTAL INTEREST INCOME

   $ 4,003    -$ 4,262    -$ 259    $ 5,114    -$ 3,799    $ 1,315
    

  

  

  

  

  

INTEREST EXPENSE

                                         

Interest-bearing demand deposits

   $ 52    -$ 339    -$ 287    $ 456    -$ 887    -$ 431

Savings Deposits

     71      -200      -129      137      -175      -38

Time Deposits

     295      -1,973      -1,678      823      -3,848      -3,025

Short-term borrowings

     47      -3      44      -165      -367      -532

Long-term borrowings

     692      -204      488      371      3      374
    

  

  

  

  

  

TOTAL INTEREST EXPENSE

   $ 1,157    -$ 2,719    -$ 1,562    $ 1,622    -$ 5,274    -$ 3,652
    

  

  

  

  

  

NET INTEREST INCOME

   $ 2,846    -$ 1,543    $ 1,303    $ 3,492    $ 1,475    $ 4,967
    

  

  

  

  

  


PROVISION FOR LOAN LOSSES AND ASSET QUALITY

 

The provision for loan losses represents charges against operations to establish reserves for probable loan losses inherent in the Company’s loan portfolio. This expense is determined by a number of factors including historical loan losses, assessment of specific credit weaknesses within the portfolio, assessment of the prevailing economic climate, and other factors that may affect the overall condition of the loan portfolio. These factors were employed by management to determine the provision for loan losses for each of 2001, 2002 and 2003. The ratio of net loans charged off to average loans was .33% in 2003, .61% in 2002 and .42% in 2001. These percentages are representative of normal loan charge-offs and are not the result of an economic downturn in any particular segment of our economy. Management evaluates the adequacy of the allowance for loan loss on a quarterly basis and makes provisions to the allowance based on this analysis.

 

The provision for loan losses was $2,002,570 in 2003, $1,757,516 in 2002 and $1,123,166 in 2001. At the end of 2003, the total allowance for loan losses was $5,126,735, an amount that management believes to be sufficient to protect against future loan losses.

 

Activity in the allowance for loan losses is reflected in Table 5 - Analysis of Allowance for Loan Losses. The Company’s policy is to charge-off loans, when, in management’s opinion, the loan is deemed uncollectable, although the Company makes concerted efforts to maximize recovery of the loan after it is charged off.


TABLE 5 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

 

     2003

    2002

    2001

    2000

    1999

 

BALANCE AT BEGINNING OF YEAR

   $ 4,222     $ 3,375     $ 3,325     $ 3,100     $ 2,900  

LOANS CHARGED-OFF

                                        

Commercial, financial and agricultural

     700       935       612       186       320  

Real estate - construction

     0       23       0       0       0  

Real estate - mortgage

     145       122       36       26       74  

Consumer

     555       957       675       801       522  
    


 


 


 


 


TOTAL CHARGE-OFFS

     1,400       2,037       1,323       1,013       916  
    


 


 


 


 


CHARGE-OFFS RECOVERED

                                        

Commercial, financial and agricultural

     65       54       22       121       122  

Real estate - construction

     0       0       0       0       0  

Real estate - mortgage

     2       4       26       24       0  

Consumer

     235       221       202       175       145  
    


 


 


 


 


TOTAL RECOVERIES

     302       279       250       320       267  
    


 


 


 


 


Net loans charged-off

     1,098       1,758       1,073       693       649  

Additions charged to operating expense

     2,003       1,758       1,123       918       849  

Other increases attributed to acquisition

     0       847       0       0       0  
    


 


 


 


 


BALANCE AT END OF YEAR

   $ 5,127     $ 4,222     $ 3,375     $ 3,325     $ 3,100  
    


 


 


 


 


Loans at year end

   $ 357,064     $ 308,175     $ 264,278     $ 252,022     $ 234,349  

Ratio of allowance to loans at year end

     1.44 %     1.37 %     1.28 %     1.32 %     1.32 %

Average loans - net of unearned

   $ 337,763     $ 289,407     $ 255,185     $ 244,307     $ 221,165  

Ratio of net loans charged-off to average loans

     0.33 %     0.61 %     0.42 %     0.28 %     0.29 %

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,

 

     2003

   2002

   2001

   2000

   1999

Commercial, financial and agricultural

   $ 2,300    $ 1,700    $ 1,200    $ 1,000    $ 900

Real estate - construction

     300      200      250      250      225

Real estate - mortgage

     900      800      700      650      600

Consumer

     1,550      1,475      1,175      1,075      1,050

Unallocated

     77      47      50      350      325
    

  

  

  

  

Total

   $ 5,127    $ 4,222    $ 3,375    $ 3,325    $ 3,100
    

  

  

  

  

 

COMPOSITION OF LOAN PORTFOLIO BY TYPE AT DECEMBER 31,

 

     2003

    2002

    2001

    2000

    1999

 

Commercial, financial and agricultural

   52.06 %   48.22 %   47.25 %   48.02 %   47.52 %

Real estate - construction

   4.29 %   3.77 %   2.26 %   2.08 %   3.02 %

Real estate - mortgage

   25.74 %   28.80 %   30.18 %   29.35 %   28.43 %

Consumer

   17.91 %   19.21 %   20.31 %   20.55 %   21.03 %
    

 

 

 

 

     100.00 %   100.00 %   100.00 %   100.00 %   100.00 %
    

 

 

 

 

 

While the loan portfolio has increased steadily in the past three years, the mix of loan types within the portfolio has not changed significantly. The portion of the allowance for loan losses allocated to commercial, financial and agricultural loans has increased at a faster rate than the other portions of the allowance. This increase reflects the significant growth in the commercial loan portfolio and the higher risks associated with commercial lending as compared to real estate and consumer loans.

 

Non-performing assets and relative percentages to loan balances are presented in Table 6 - Non-performing Assets. Non-performing loans include non-accrual loans, restructured loans, and loans delinquent 90 days or more. Loans are classified as non-accrual when management believes that collection of interest is doubtful, typically because payments are past due over 90 days, unless the loans are well secured and in the process of collection. Another measurement of asset quality is other real estate owned (OREO), which represents properties acquired by the Company through loan defaults by customers; the percentage of OREO to loans is .19% in 2003.

 

Loans on non-accrual status amounted to $1,502,971 in 2003 as compared to $357,640 in 2002 and $418,813 in 2001. Interest income forgone on loans classified as non-accrual in 2003 was $169,135 as compared to $69,888 in 2002 and $123,804 in 2001. All interest accrued on these loans at the time they are classified as non-accrual is reversed and interest accruals are suspended until such time that the loan is in compliance with its terms.


TABLE 6 - NON-PERFORMING ASSETS

 

     As of December 31,

 
     2003

    2002

    2001

    2000

    1999

 

PRINCIPAL BALANCE - DOMESTIC

                                        

Non-accrual

   $ 1,503     $ 358     $ 419     $ 590     $ 390  

90 days or more past due

     4,396       5,117       2,918       1,746       1,643  

Troubled debt restructuring

     0       0       0       0       0  
    


 


 


 


 


TOTAL DOMESTIC LOANS

   $ 5,899     $ 5,475     $ 3,337     $ 2,336     $ 2,033  
    


 


 


 


 


TOTAL NON-PERFORMING LOANS

   $ 5,899     $ 5,475     $ 3,337     $ 2,336     $ 2,033  
    


 


 


 


 


Income on non-accrual loans not recorded

   $ 169     $ 69     $ 31     $ 147     $ 110  

Non-performing as a percent of loans

     1.65 %     1.78 %     1.27 %     0.93 %     0.87 %

Other real estate owned

   $ 695     $ 1,286     $ 340     $ 133     $ 292  

OREO as a percent of loans

     0.19 %     0.42 %     0.13 %     0.05 %     0.15 %

Allowance as a percent of non-performing loans

     86.91 %     77.11 %     101.14 %     142.34 %     152.48 %

 

Statements of Financial Accounting Standard No. 114 and 118, “Accounting by Creditors for Impairment of a Loan,” became effective January 1, 1995. These statements changed the way loan loss allowance estimates were to be made for problem loans. In general, when it is determined that principal and interest due under the contractual terms of a loan are not fully collectible, management must value the loan using discounted future expected cash flows. Management has not recognized any loans as being impaired in conformity with FASB 114 and 118 for the years 2003, 2002, 2001, 2000 and 1999.

 

Management believes loans classified under FDIC regulations as loss, doubtful or substandard, but which are not included in non-performing or impaired loans, do not represent or result from trends or uncertainties which will have a material impact on future operating results, liquidity, or capital resources. In addition to loans classified for regulatory purposes, management also designates certain loans for internal monitoring purposes in a “watch” category. Loans may be placed on management’s watch list as a result of delinquent status, management’s concern about the borrower’s financial condition or the value of the collateral securing the loan, a substandard classification during regulatory examinations, or simply as a result of management’s desire to monitor more closely a borrower’s financial condition and performance. Watch category loans may include loans with loss potential that are still performing and accruing interest and may be current under the terms of the loan agreement; however, management may have a significant degree of concern about the borrowers’ ability to


continue to perform according to the terms of the loan. Loss exposure on these loans is typically evaluated based primarily upon the estimated liquidation value of the collateral securing the loan. Also, watch category loans may include credits which, although adequately secured and performing, reflect a past delinquency problem or unfavorable financial trends exhibited by the borrower. At December 31, 2003, loans totaling $15,927,063 were included on the watch list of the Company. The majority of these loans were real estate loans that are adequately collateralized but the customer is frequently delinquent in making scheduled payments. The inclusion of loans on this list does not indicate a greater risk of loss; rather it indicates that the loan possesses one of the several characteristics described above warranting increased oversight by management.

 

NON-INTEREST INCOME AND EXPENSE

 

A listing of non-interest income and expense from 2001 through 2003 and percentage changes between years is included in Table 7 - Non-interest Income and Expense.

 

TABLE 7 - NON-INTEREST INCOME & EXPENSE

 

     2003

   %
CHANGE
FROM ‘02


    2002

   %
CHANGE
FROM ‘01


    2001

NON-INTEREST INCOME

                                

Income from fiduciary activities

   $ 2    -33.33 %   $ 3    50.00 %   $ 2

Service charges on deposit accounts

     3,235    6.87 %     3,027    7.72 %     2,810

Other operating income

     2,087    48.54 %     1,405    20.29 %     1,168
    

  

 

  

 

TOTAL NON-INTEREST INCOME

   $ 5,324    20.05 %   $ 4,435    11.43 %   $ 3,980
    

  

 

  

 

NON-INTEREST EXPENSE

                                

Salaries and employee benefits

   $ 7,926    11.59 %   $ 7,103    26.91 %   $ 5,597

Occupancy expense, including equipment

     2,745    18.73 %     2,312    41.75 %     1,631

Other operating expense

     4,371    -1.78 %     4,450    44.48 %     3,080
    

  

 

  

 

TOTAL NON-INTEREST EXPENSE

   $ 15,042    8.49 %   $ 13,865    34.51 %   $ 10,308
    

  

 

  

 

 

Non-interest income typically consists of service charges on checking accounts and other financial services. With continued pressure on interest rates, the Company has sought to increase its non-interest income through the expansion of fee income and the development of new services. Currently, the Company’s main sources of non-interest income are service charges on checking, safe deposit box rentals, credit life insurance premiums, title insurance service fees and income contributions from the Company’s credit life insurance subsidiary.

 

During 2003 non-interest income increased to $5,323,698, an increase of $888,536, or 20.05%, over 2002. The mortgage re-financing boom during 2003 contributed to the increased non-interest income, as did the receipt of insurance proceeds from the untimely death of one of our longtime directors.


Non-interest income for 2002 increased to $4,435,162, an increase of $454,550, or 11.43% over 2001. The increase in the customer base and the resulting fee income associated with the acquisition of CB&T in May 2002 and the effect of a full year’s income from the Decatur and Forest branches acquired in July 2001 are responsible for this increase.

 

Non-interest income for 2001 was $3,980,612, an increase of $695,792, or 21.2%, over 2000. This increase was attributable to increases in checking account service charges related to volume increases, an increase in the number of safe deposit boxes rented, and another year of increased income from the Company’s credit life and title insurance subsidiaries and increased fees from its mortgage origination department.

 

Non-interest expenses consist of salaries and benefits, occupancy expense and other overhead expenses incurred by the Company in the transaction of its business. Non-interest expense for 2003 increased $1,177,370, or 8.49%, to $15,041,985 from 2002. This increase is due mainly to normal growth of the Company.

 

Non-interest expense increased $3,556,715, or 34.51%, to $13,865,178 in 2002 and $1,536,558, or 17.5%, in 2001 over 2000. The increases in both years were mainly from normal growth activity in the Company, although the purchase of the Decatur and Forest branches acquired in July 2001 contributed significantly to the increase in 2001 and the acquisition of CB&T in May 2002 contributed to the increase in 2002.

 

In 2003, the Company’s efficiency ratio was 54.45% compared to 54.51% in 2002 and 51.32% in 2001. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income, on a fully tax equivalent basis, and non-interest income. The increase in the efficiency ratio over the past three years reflects the increases in non-interest expense required to manage the growth in assets during the period and the additional personnel costs associated with the CB&T and Union Planters branch acquisitions.

 

INCOME TAXES

 

The Company records a provision for income taxes currently payable, along with a provision for deferred taxes to be realized in the future. Such deferred taxes arise from differences in timing of certain items for financial statement reporting rather than income tax reporting. The major difference between the effective tax rate applied to the Company’s financial statement income and the federal statutory rate of 34% is interest on tax-exempt securities and loans.

 

The Company’s effective tax rate was 28.98%, 32.01% and 30.93% in 2003, 2002, and 2001, respectively. Further tax information is disclosed in Note 8 to the consolidated financial statements.

 

SECURITIES

 

At December 31, 2003, the Company classified all of its securities as available-for-sale. Securities available-for-sale are reported at fair value, with unrealized gains and losses included as a separate component of equity, net of tax. The Company does not classify any securities as held to maturity or held for trading purposes.


Table 8 - Securities and Securities Maturity Schedule summarizes the carrying value of securities from 2001 through 2003 and the maturity distribution at December 31, 2003, by classification.

 

TABLE 8 - SECURITIES

 

     2003

   2002

   2001

SECURITIES AVAILABLE FOR SALE

                    

U. S. Treasury

   $ 15,528    $ 19,093    $ 31,014

U. S. Agencies

     5,679      11,921      10,676

Mortgage Backed

     59,368      87,687      52,362

State, Municipal and Other

     62,606      43,575      28,515
    

  

  

TOTAL SECURITIES AVAILABLE FOR SALE

   $ 143,181    $ 162,276    $ 122,567
    

  

  

SECURITIES HELD TO MATURITY

                    

TOTAL SECURITIES HELD TO MATURITY

   $ 0    $ 0    $ 0
    

  

  

TOTAL SECURITIES

   $ 143,181    $ 162,276    $ 122,567
    

  

  


SECURITIES MATURITY SCHEDULE

 

     1 year or less

    1 to 5 years

    5 to 10 years

    over 10 years

 
     Actual
Balance


   Average
Yield


    Actual
Balance


   Average
Yield


    Actual
Balance


   Average
Yield


    Actual
Balance


   Average
Yield


 

AVAILABLE-FOR-SALE

                                                    

U. S. Treasury

   $ 11,253    4.33 %   $ 4,274    4.36 %   $ 0    0.00 %   $ 0    0.00 %

U. S. Agencies

     517    6.00 %     1,070    6.00 %     3,554    6.10 %     540    5.37 %

Mortgage Backed

     0    0.00 %     31    7.00 %     731    5.68 %     58,605    5.14 %

State, Municipal and Other (1)

     5,028    5.22 %     6,154    5.94 %     12,028    6.56 %     39,396    6.41 %
    

  

 

  

 

  

 

  

TOTAL AVAILABLE-FOR-SALE

   $ 16,798    4.50 %   $ 11,529    5.35 %   $ 16,313    6.42 %   $ 98,541    5.66 %
    

  

 

  

 

  

 

  

TOTAL HELD-TO-MATURITY

   $ 0    0.00 %   $ 0    0.00 %   $ 0    0.00 %   $ 0    0.00 %
    

  

 

  

 

  

 

  


(1) Average rates were calculated on tax equivalent basis using a marginal federal income tax rate of 34% and a state tax rate of 5%.

 

Although the change in equity due to market value fluctuations in the available-for-sale portfolio is not used in the Tier 1 capital calculation, the change which occurred in the unrealized gain/loss on securities between 2003 and 2002 was a result of the changing in the interest rate environment during that period, in conjunction with the change in the portfolio mix.

 

LOANS

 

The loan portfolio constitutes the major earning asset of the Company and, in the opinion of management, offers the best alternative for maximizing interest spread above the cost of funds. The Company’s loan personnel has the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit that exceeds the authority of the loan officer is forwarded to the loan committee for approval. The loan committee is composed of various directors, including the Chairman. All aggregate credits which exceed the loan committee’s lending authority are presented to the full Board of Directors for ultimate approval or denial. The loan committee not only acts as an approval body to ensure consistent application of the Company’s loan policy but also provides valuable insight through communication and pooling of knowledge, judgment, and experience of its members.

 

The Company has stated in its Loan Policy the following objectives for its loan portfolio: (a) to make loans on sound and thorough credit analysis, (b) to properly document all loans, (c) to eliminate loans from the portfolio that are under-priced, high risk or difficult and costly to administer, (d) to seek good relationships with the customer, (e) to avoid undue concentrations of loans, and (f) to keep non-accrual loans to a minimum by aggressive collection policies.


Loan demand has remained strong in the Company’s market area over the past three years. In general, the loan growth experienced in 2003, 2002 and 2001 was due to a continuation of the overall growth in the area that is served by the Company. However, the acquisitions of CB&T in 2002 and the Decatur and Forest branches in 2001 added approximately $15.0 million and $11.7 million in loans, respectively. The continued success of the casino on the nearby Choctaw Indian Reservation caused an increase in the number of businesses and jobs in the area. Consequently, the housing market in the area tightened, causing a large number of new houses to be built. Real estate mortgage loans originated by the Company grew by $2,959,217, or 3.3%, in 2003, $8,904,468, or 11.1%, in 2002 and $5,724,725, or 7.7%, in 2001.

 

Commercial and agricultural loans also showed large growth during this period. These loans grew $37,188,745, or 24.8%, in 2003, $23,630,697, or 18.7%, in 2002 and $3,718,912, or 3.0%, in 2001. This increase was caused by the influence of the casino in the area and by an increase in the number of loans to poultry producers originated during these years.

 

Consumer loans have shown moderate growth during the period. This category increased $4,649,580, or 7.8%, $5,441,264, or 10.0%, in 2002 and $1,824,679, or 3.5%, in 2001. The Company believes that changes in consumer purchasing habits and the increase in loan sources have affected the growth of this segment of loans. Sustained low unemployment may also have lessened the dependence on consumer loans for some purchases.

 

Commercial and agricultural loans are the largest segment of the loan portfolio and, by nature, bear a higher degree of risk. Management believes the lending practices, policies, and procedures surrounding this loan category are adequate to manage any risk represented by the growth of the loans in this category.

 

Table 9 - Loans Outstanding reflects outstanding balances by loan type for the past five years. Additional loan information is presented in Note 4 to the consolidated financial statements.

 

TABLE 9 - LOANS OUTSTANDING

AT DECEMBER 31,

 

     2003

   2002

   2001

   2000

   1999

Commercial, financial and agricultural

   $ 186,950    $ 149,762    $ 126,131    $ 122,412    $ 112,634

Real estate - construction

     15,409      11,708      6,036      5,310      7,157

Real estate - mortgage

     92,412      89,452      80,548      74,824      67,376

Consumer

     64,309      59,660      54,218      52,394      49,840
    

  

  

  

  

TOTAL LOANS

   $ 359,080    $ 310,582    $ 266,933    $ 254,940    $ 237,007
    

  

  

  

  


Table 10 - Loan Liquidity and Sensitivity to Changes in Interest Rates reflects the maturity schedule or repricing frequency of all loans. Also indicated are fixed and variable rate loans maturing after one year for all loans.

 

TABLE 10 - LOAN LIQUIDITY

LOAN MATURITIES AT DECEMBER 31, 2003

 

     1 YEAR
OR LESS


   1 - 5
YEARS


   OVER 5
YEARS


   Total

Commercial, financial and agricultural

   $ 49,922    $ 107,697    $ 29,331    $ 186,950

Real estate - construction

     14,909      465      35    $ 15,409

Real estate - mortgage

     12,345      56,087      23,980    $ 92,412

Consumer

     26,971      34,382      2,956    $ 64,309
    

  

  

  

Total loans

   $ 104,147    $ 198,631    $ 56,302    $ 359,080
    

  

  

  

 

SENSITIVITY TO CHANGES IN INTEREST RATES

 

     1 - 5
YEARS


   OVER 5
YEARS


Fixed rates

   $ 171,864    $ 36,823

Variable rates

     26,767      19,479
    

  

Total loans

   $ 198,631    $ 56,302
    

  

 

Each loan either has a stated maturity as to when the loan is to be repaid or is subject to an agreement between the Bank and the customer governing its progressive reduction. The Company’s policy is that every loan is to be repaid by its stated maturity and not carried as a continuing debt. All loans must have principal reductions starting prior to the second renewal date.

 

DEPOSITS

 

The Company offers a wide variety of deposit services to individual and commercial customers, such as non-interest-bearing and interest-bearing checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. The deposit base is the Company’s major funding source for earning assets. Time deposits continue to be the largest single source of the Company’s deposit base.

 

A three-year schedule of deposits by type and maturities of time deposits greater than $100,000 is presented in Table 11 - Deposit Information.


TABLE 11 - DEPOSIT INFORMATION

 

     2003

    2002

    2001

 
     Average
Balance


   Average
Rate


    Average
Balance


   Average
Rate


    Average
Balance


   Average
Rate


 

Noninterest-bearing

   $ 65,985          $ 58,883          $ 41,698       

Interest-bearing demand

     123,338    0.98 %     117,989    1.27 %     82,127    2.35 %

Savings

     34,696    1.02 %     27,653    1.75 %     19,828    2.63 %

Certificates of deposit

     222,695    2.26 %     209,610    3.20 %     183,883    5.29 %
    

  

 

  

 

  

     $ 446,714    1.48 %   $ 414,135    2.10 %   $ 327,536    3.72 %
    

  

 

  

 

  

 

MATURITY RANGES OF TIME CERTIFICATES OF DEPOSIT

OF $100,000 OR MORE AT DECEMBER 31,

 

     2003

3 months or less

   $ 39,505

3 through 6 months

     15,844

6 through 12 months

     20,621

over 12 months

     12,003
    

     $ 87,973
    

 

The Company in its normal course of business will acquire large certificates of deposit, generally from public entities, with a variety of maturities. These funds are acquired on a bid basis and are considered to be part of the deposit base of the Company.

 

BORROWINGS

 

Aside from the core deposit base and large denomination certificates of deposit mentioned above, the remaining funding sources utilized by the Company include short-term and long-term borrowings. Short-term borrowings consist of federal funds purchased from other financial institutions on an overnight basis, short-term and long-term borrowings from the Federal Home Loan Bank of Dallas (FHLB), and U.S. Treasury demand notes for treasury, tax and loan (TT&L).


TABLE 12 - SHORT-TERM BORROWINGS

 

     As of December 31,

 
     2003

    2002

    2001

 

Federal Home Loan Bank borrowings

                        

Year-end balance

   $ 14,000     $ 0     $ 0  

Weighted average rate

     1.11 %     0.00 %     0.00 %

Maximum month-end balance

   $ 15,000     $ 0     $ 34,300  

Year to date average balance

   $ 1,229     $ 0     $ 7,862  

Weighted average rate

     1.15 %     0.00 %     5.38 %

 

The Company has borrowed funds from the Federal Home Loan Bank as an alternative to Federal Funds Purchased for short periods of time. The $14,000,000 in short-term borrowings at December 31, 2003 was for a period of 14 days and had a maturity date of January 9, 2004. At its maturity on January 9, 2004, this advance was renewed for another 14 days at an interest rate of 1.01%. The Company continues to renew this advance for successive 14 days periods and as of March 8, 2004 had reduced the amount of this advance to $10,000,000.

 

The Company foresees short-term borrowings to be a continued source of liquidity and will continue to use these borrowings as a method to fund short-term needs. The Company has the capacity to borrow up to $179,959,475 from the FHLB and other financial institutions in the form of federal funds purchased and will use these borrowings if circumstances warrant such action.

 

The Company, at the end of 2003, had long-term debt in the amount of $33,636,847 to the Federal Home Loan Bank for advances and $1,998,174 payable to the State of Mississippi for advances under the Agribusiness Enterprise Loan Program. This program provides monies to banks to be extended to qualifying farmers at no interest. Farmers that qualify for the program receive 20% of their loan at zero interest. When the loan is repaid, the State receives its pro-rata share of 20% of the principal payment. The remaining maturity schedule of the long-term debt at December 31, 2003 is listed below.

 

     2003

Less than one year

   $ 1,035

One year to three years

     1,761

Over three years

     32,839
    

Total Long-term borrowings

   $ 35,635
    


LIQUIDITY AND RATE SENSITIVITY

 

Liquidity management is the process by which the Company ensures that adequate liquid funds are available to meet financial commitments on a timely basis. These commitments include honoring withdrawals by depositors, funding credit obligations to borrowers, servicing long-term obligations, making shareholder dividend payments, paying operating expenses, funding capital expenditures, and maintaining reserve requirements.

 

Interest rate risk is the exposure of Company earnings and capital to changes in interest rates. All financial institutions assume interest rate risk as an integral part of normal operations. Managing and measuring the interest rate risk is the process that ranges from reducing the exposure of the Company’s interest margin to swings in interest rates to assuring that there is sufficient capital and liquidity to support future balance sheet growth.

 

The Bank’s predominant sources of funding are core deposits consisting of both commercial and individual deposits, proceeds from maturities of securities, repayments of loan principal and interest, federal funds purchased, and short-term and long-term borrowing from the FHLB. In 2003, the growth of core deposits has been at a lower growth rate than that of loans. As a result, the Company is increasingly dependent upon non-core sources of funding such as federal funds purchased and short and long term borrowings from the FHLB. While the strategy of using wholesale funding is adequate to cover liquidity deficiencies in the short term, the Company strives to increase core deposits as a source of long term funding.

 

The deposit base is diversified between individual and commercial accounts; this helps avoid dependence on large concentrations of funds. The Company does not solicit certificates of deposit from brokers. The primary sources of liquidity on the asset side of the balance sheet are federal funds sold and securities classified as available-for-sale. All of the investment securities portfolio are classified in the available-for-sale category, and are available to be sold, should liquidity needs arise. Management, through its Asset Liability Committee (ALCO), and the Board reviews the Company’s liquidity position on a monthly basis. At December 31, 2003, both the ALCO and the Board determined that the Company’s liquidity position was adequate.

 

Table 13 - Funding Uses and Sources details the main components of cash flows for 2003 and 2002.


TABLE 13 - FUNDING USES AND SOURCES

 

     2003
Average
Balance


   Percent
Change


    2002
Average
Balance


   Percent
Change


    2001
Average
Balance


FUNDING USES

                                

Loans, net of unearned income

   $ 337,763    16.71 %   $ 289,407    13.41 %   $ 255,185

Taxable securities

     108,695    -5.90 %     115,510    47.29 %     78,423

Tax-exempt securities

     49,183    43.95 %     34,166    42.64 %     23,952

Federal funds sold and other

     3,575    -71.23 %     12,428    -20.74 %     15,681
    

  

 

  

 

TOTAL USES

   $ 499,216    10.57 %   $ 451,511    20.97 %   $ 373,241
    

  

 

  

 

FUNDING SOURCES

                                

Noninterest-bearing deposits

   $ 65,985    12.89 %   $ 58,452    40.18 %   $ 41,698

Interest-bearing demand and savings deposits

     158,034    8.51 %     145,642    42.85 %     101,955

Time Deposits

     222,695    6.24 %     209,610    13.99 %     183,883

Short-term borrowings

     4,065    516.84 %     659    -93.22 %     9,721

Long-term debt

     35,314    82.96 %     19,301    13.83 %     16,956
    

  

 

  

 

TOTAL SOURCES

   $ 486,093    12.09 %   $ 433,664    22.43 %   $ 354,213
    

  

 

  

 

 

Rate sensitivity gap is defined as the difference between the repricing of interest earning assets and the repricing of interest bearing liabilities within certain defined time frames. The Company’s interest rate sensitivity position is influenced by the distribution of interest earning assets and interest-bearing liabilities among the maturity categories. Table 14 - Liquidity and Interest Rate Sensitivity reflects interest earning assets and interest-bearing liabilities by maturity distribution as of December 31, 2003. Product lines repricing in time periods predetermined by contractual agreements are included in the respective maturity categories.


TABLE 14 - LIQUIDITY AND INTEREST RATE SENSITIVITY

 

     AT DECEMBER 31, 2003

    

1 - 90

Days


    91 - 365
Days


   

1 - 5

Years


   

Over

5 years


    Total

INTEREST EARNING ASSETS

                                      

Loans

   $ 113,008     $ 71,783     $ 150,799     $ 10,948     $ 346,538

Investment securities

     946       13,536       91,179       33,932       139,593

Federal Home Loan Bank Account

     98       0       0       0       98

Federal Funds Sold

     0       0       0       0       0
    


 


 


 


 

TOTAL INTEREST BEARING ASSETS

   $ 114,052     $ 85,319     $ 241,978     $ 44,880     $ 486,229
    


 


 


 


 

INTEREST BEARING LIABILITIES

                                      

Interest bearing demand deposits

   $ 100,245     $ 0     $ 0     $ 0     $ 100,245

Savings and Money Market deposits

     53,471       0       0       0       53,471

Time deposits

     92,452       102,680       26,627       0       221,759

Federal Funds Purchased

     1,500       0       0       0       1,500

Short term borrowings

     14,000       0       0       0       14,000

Long term borrowings

     267       768       1,761       32,839       35,635
    


 


 


 


 

TOTAL INTEREST BEARING LIABILITIES

   $ 261,935     $ 103,448     $ 28,388     $ 32,839     $ 426,610
    


 


 


 


 

Rate sensitive gap

   -$ 147,883     -$ 18,129     $ 213,590     $ 12,041     $ 59,619

Rate sensitive cumulative gap

     -147,883       -166,012       47,578       59,619        

Cumulative gap as a percentage of total earning assets

     -30.41 %     -34.14 %     9.79 %     12.26 %      

 

The purpose of the above table is to measure interest rate risk utilizing the repricing intervals of interest sensitive assets and liabilities. Rate sensitive gaps constantly change as funds are acquired and invested and as rates change. Rising interest rates are likely to increase net interest income in a positive gap position while falling interest rates are beneficial in a negative gap position.

 

The above rate sensitivity analysis places interest-bearing demand and savings deposits in the shortest maturity category because these liabilities do not have defined maturities. If these deposits were placed in a maturity distribution representative of the Company’s deposit base history, the shortfall of the negative rate sensitive gap position would be reduced in the 1-to-90 day time frame.


The Company’s large negative cumulative gap position in the one-year period ending December 31, 2003 was mainly due to: (1) the interest-bearing and savings deposits being classified in the 1-90 day category; (2) approximately 91% of certificates of deposit maturing during the next twelve months; and (3) a significant portion of the Company’s loans maturing after one year. A decline in the interest rate environment would enhance earnings, while an increase in interest rates would have the opposite effect on corporate earnings. The effect of any changes in interest rates on the Company would be mitigated by the fact that interest-bearing demand and savings deposits may not be immediately affected by changes in general interest rates.

 

CAPITAL RESOURCES

 

The Company and Bank are subject to various regulatory capital guidelines as required by federal and state banking agencies. These guidelines define the various components of core capital and assign risk weights to various categories of assets.

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These tiers are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under these regulations, a “well-capitalized” institution must achieve a Tier 1 risk-based capital ratio of at least 6.00%, a total capital ratio of at least 10.00%, a leverage ratio of at least 5.00% and not be under a capital directive order. Failure to meet capital requirements can initiate regulatory action that could have a direct material effect on the Company’s financial statements. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions, asset growth, and expansion are limited, and the institution is required to submit a capital restoration plan.

 

Management believes the Company and the Bank meet all the capital requirements to be well-capitalized under the guidelines established by the banking regulators as of December 31, 2003, as noted below in Table 15 - Capital Ratios. To be classified as well-capitalized, the Company and Bank must maintain the ratios described above.

 

Management has sought in the past to maintain a sufficient level of capital to allow the Company to respond to growth and acquisition opportunities in our service area. This strategy has allowed us to purchase the Decatur and Forest branches from Union Planters in July 2001 and to purchase CB&T in May 2002 without having to raise additional capital. The Company has been able to increase capital through retention of earnings, while still increasing the dividend payout ratio to over 40% for the last two years. The Company does not have any commitments for capital expenditures that would require the Company to raise additional capital at this time by means other than retained earnings. The Company does not plan to change this strategy unless needed to support future acquisition activity.


TABLE 15 - CAPITAL RATIOS

 

     At December 31,

 
     2003

    2002

    2001

 

Tier 1 capital

                        

Shareholders’ equity

   $ 56,502     $ 53,783     $ 47,182  

Less: Intangibles

     -6,390       -6,814       -2,974  

Add/less: Unrealized loss/(gain) on securities

     -1,470       -2,931       -157  

Add: Minority interest in equity accounts of unconsolidated subsidiaries

     1,383       1,376       1,212  
    


 


 


TOTAL TIER 1 CAPITAL

   $ 50,025     $ 45,414     $ 45,263  
    


 


 


Total capital

                        

Tier 1 capital

   $ 50,025     $ 45,414     $ 45,263  

Allowable allowance for loan losses

     4,577       3,849       3,299  
    


 


 


TOTAL CAPITAL

   $ 54,602     $ 49,263     $ 48,562  
    


 


 


RISK WEIGHTED ASSETS

   $ 365,589     $ 307,573     $ 263,901  
    


 


 


AVERAGE ASSETS (FOURTH QUARTER)

   $ 549,314     $ 514,249     $ 430,607  
    


 


 


RISK BASED RATIOS

                        

TIER 1

     13.68 %     14.77 %     17.15 %
    


 


 


TOTAL CAPITAL

     14.94 %     16.02 %     18.40 %
    


 


 


LEVERAGE RATIOS

     9.11 %     8.83 %     10.51 %
    


 


 



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 Company has taken steps to assess the amount of risk that is associated with its asset and liability structure. The Company measures the potential risk on a regular basis and makes changes to its strategies to manage these risks. The Board of Directors reviews important policy limits each month with a more detailed risk analysis completed on a quarterly basis. These measurement tools are important in allowing the Company to manage market risk and to plan effective strategies to respond to any adverse changes in risk. The Company does not participate in some of the financial instruments that are inherently subject to substantial market risk. All of the financial instruments entered into by the Company are for purposes other than trading.

 

Market/Interest Rate Risk Management

 

Interest rate risk is the primary market risk that management must address. The primary purpose in managing interest rate risk is to effectively invest capital and preserve the value created by the core banking business of the Company. The Company 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. This report utilizes an immediate 200 basis point rate movement up and down and measures the effect this change has on earnings and the value of equity.

 

Static gap analysis is also used in measuring interest rate risk. Although management believes that this does not provide a complete picture of the Company’s exposure to interest rate risk, it does highlight significant short-term repricing volume mismatches. The following table presents the Company’s rate sensitivity static gap analysis at December 31, 2003 ($ in thousands):

 

     Interest Sensitive Within

 
     90 days

    One year

 

Total rate sensitive assets

   $ 114,052     $ 85,319  

Total rate sensitive liabilities

     261,935       103,448  
    


 


Net gap

   $ (147,883 )   $ (18,129 )
    


 


 

The analysis shows a negative gap position over the next three- and twelve –month periods which indicates that the Company would benefit somewhat from a decrease in market interest rates. Although rate increases would be detrimental to the interest rate risk of the Company, management believes there is adequate flexibility to alter the overall rate sensitivity structure as necessary to minimize exposure to these changes.


The static gap analysis does not fully capture the impact of interest rate movements on interest sensitive assets and liabilities. The interest rate sensitivity table that follows provides additional information about the financial instruments that are sensitive to changes in interest rates. This tabular disclosure is limited by its failure to depict accurately the effect on assumptions of significant changes in the economy or interest rates or changes in management’s expectations or intentions relating to the Company’s financial statements. The information in the interest rate sensitivity table below reflects contractual interest rate pricing dates and contractual maturity dates. For indeterminate maturity deposit products (money market, NOW and savings accounts), the tables present principal cash flows in the shortest term. Although these deposits may not reprice within this time frame, the depositors of such funds have the ability to reprice. Weighted average floating rates are based on the rate for that product as of December 31, 2003 and 2002.

 

INTEREST RATE SENSITIVITY

 

As of December 31, 2003

 

     2004

    2005

    2006

    2007

    2008

    Thereafter

    Carrying
Value


    Fair Value

Loans

                                                              

Fixed Rate

   $ 118,504     $ 46,225     $ 39,860     $ 40,912     $ 33,480     $ 12,491     $ 291,472     $ 284,743

Average Int Rate

     7.21 %     7.68 %     7.31 %     6.98 %     6.59 %     6.58 %     7.16 %      

Floating Rate

   $ 26,221     $ 7,230     $ 5,973     $ 5,401     $ 15,293     $ 7,490     $ 67,608     $ 67,608

Average Int Rate

     4.74 %     4.70 %     4.69 %     4.70 %     4.40 %     4.90 %     4.67 %      

Investment Securities

                                                              

Fixed Rate

   $ 13,210     $ 4,828     $ 3,739     $ 1,379     $ 1,584     $ 118,441     $ 143,181     $ 143,181

Average Int Rate

     4.50 %     5.21 %     4.85 %     6.14 %     6.40 %     5.76 %     5.61 %      

Floating Rate

                                                              

Average Int Rate

                                                              

Other earning assets

                                                              

Fixed Rate

                                                              

Average Int Rate

                                                              

Floating Rate

                                                              

Average Int Rate

                                                              

Interest-bearing deposits

                                                              

Fixed Rate

   $ 319,614     $ 29,517     $ 3,059     $ 1,361     $ 325     $ 0     $ 353,876     $ 353,946

Average Int Rate

     1.22 %     2.59 %     3.57 %     4.23 %     4.88 %     0.00 %     1.37 %      

Floating Rate

   $ 6,045     $ 11,084     $ 4,434     $ 25     $ 135     $ 28     $ 21,751     $ 21,751

Average Int Rate

     1.85 %     1.85 %     1.85 %     1.85 %     1.85 %     1.85 %     1.85 %      

Other int-bearing liabilities

                                                              

Fixed Rate

   $ 16,519     $ 1,070     $ 648     $ 0     $ 10,000     $ 20,900     $ 49,137     $ 49,137

Average Int Rate

     1.36 %     4.94 %     4.94 %     0.00 %     5.56 %     4.32 %     3.60 %      

Floating Rate

                                                              

Average Int Rate

                                                              

As of December 31, 2002

 

     2003

    2004

    2005

    2006

    2007

    Thereafter

    Carrying
Value


    Fair Value

Loans

                                                              

Fixed Rate

   $ 111,290     $ 48,344     $ 34,487     $ 33,729     $ 31,801     $ 12,297     $ 271,948     $ 273,472

Average Int Rate

     7.46 %     7.97 %     7.82 %     7.49 %     7.02 %     7.31 %     7.54 %      

Floating Rate

   $ 15,325     $ 5,067     $ 3,570     $ 3,149     $ 2,955     $ 8,568     $ 38,634     $ 38,634

Average Int Rate

     5.07 %     5.15 %     5.31 %     5.31 %     5.39 %     5.12 %     5.16 %      

Investment securities

                                                              

Fixed Rate

   $ 6,545     $ 13,734     $ 4,816     $ 4,007     $ 1,801     $ 131,373     $ 162,276     $ 162,276

Average Int Rate

     4.51 %     4.54 %     5.11 %     5.61 %     6.27 %     5.84 %     5.65 %      

Floating Rate

                                                              

Average Int Rate

                                                              

Other earning assets

                                                              

Fixed Rate

   $ 2,300                                             $ 2,300     $ 2,300

Average Int Rate

     1.13 %                                             1.13 %      

Floating Rate

                                                              

Average Int Rate

                                                              

Interest-bearing deposits

                                                              

Fixed Rate

   $ 324,420     $ 18,691     $ 8,092     $ 1,362     $ 1,235     $ 0     $ 353,800     $ 354,591

Average Int Rate

     1.81 %     3.10 %     3.83 %     5.39 %     4.47 %     0.00 %     1.95 %      

Floating Rate

   $ 4,991     $ 6,704     $ 7,475     $ 12     $ 22     $ 3     $ 19,207     $ 19,207

Average Int Rate

     3.00 %     3.00 %     3.00 %     3.00 %     3.00 %     3.00 %     3.00 %      

Other int-bearing liabilities

                                                              

Fixed Rate

   $ 10,969     $ 6,018     $ 1,070     $ 649     $ 0     $ 5,900     $ 24,606     $ 24,606

Average Int Rate

     5.50 %     5.21 %     4.94 %     4.94 %     0.00 %     4.65 %     5.03 %      

Floating Rate

                                                              

Average Int Rate

                                                              

QUARTERLY FINANCIAL TRENDS

 

     2003

     First
Quarter


   Second
Quarter


   Third
Quarter


   Fourth
Quarter


   Year to
Date


Interest Income

   $ 7,339    $ 7,407    $ 7,511    $ 7,468    $ 29,725

Interest Expense

     2,174      2,076      2,028      1,910      8,188
    

  

  

  

  

Net Interest Income

     5,165      5,331      5,483      5,558      21,537

Provision for Loan Losses

     375      375      717      536    $ 2,003

Non-interest Income

     1,105      1,353      1,674      1,192    $ 5,324

Non-interest Expense

     3,703      3,683      3,821      3,835    $ 15,042

Income Taxes

     672      855      706      612    $ 2,845
    

  

  

  

  

Net Income

   $ 1,520    $ 1,771    $ 1,913    $ 1,767    $ 6,971
    

  

  

  

  

Per common share:

                                  

Basic

   $ 0.31    $ 0.36    $ 0.38    $ 0.36    $ 1.40

Diluted

   $ 0.30    $ 0.35    $ 0.38    $ 0.35    $ 1.39
    

  

  

  

  

Cash Dividends

   $ 0.14    $ 0.14    $ 0.14    $ 0.15    $ 0.57

 

     2002

     First
Quarter


   Second
Quarter


   Third
Quarter


   Fourth
Quarter


   Year to
Date


Interest Income

   $ 7,030    $ 7,574    $ 7,891    $ 7,702    $ 30,197

Interest Expense

     2,465      2,380      2,507      2,394      9,746
    

  

  

  

  

Net Interest Income

     4,565      5,194      5,384      5,308      20,451

Provision for Loan Losses

     234      436      337      751    $ 1,758

Non-interest Income

     1,006      1,043      1,154      1,232    $ 4,435

Non-interest Expense

     3,043      3,364      3,721      3,737    $ 13,865

Income Taxes

     749      775      800      641    $ 2,965
    

  

  

  

  

Net Income

   $ 1,545    $ 1,662    $ 1,680    $ 1,411    $ 6,298
    

  

  

  

  

Per common share:

                                  

Basic

   $ 0.31    $ 0.33    $ 0.34    $ 0.28    $ 1.27

Diluted

   $ 0.31    $ 0.33    $ 0.34    $ 0.28    $ 1.26
    

  

  

  

  

Cash Dividends

   $ 0.12    $ 0.12    $ 0.14    $ 0.14    $ 0.52

MARKET PRICE AND DIVIDEND INFORMATION

 

Market Price.

 

The Company’s Common Stock is traded on the American Stock Exchange (“AMEX”) under the symbol “CIZ”. The stock began trading on the AMEX on October 19, 1999 and prior to that date was sold by private transactions between parties. On December 31, 2003, the Common Stock’s closing price was $22.85.

 

2002


   High

   Low

   Dividends Declared
(per common share)


January - March

   $ 16.26    $ 14.25    $ 0.12

April - June

     16.00      14.65      0.12

July - September

     16.85      15.75      0.14

October - December

     17.35      15.70      0.14

 

2003


   High

   Low

   Dividends Declared
(per common share)


January - March

   $ 16.10    $ 14.35    $ 0.14

April - June

     17.00      14.75      0.14

July - September

     19.00      16.00      0.14

October - December

     24.75      18.25      0.15

 

Per share information included in the above table has been adjusted to reflect the three-for-two (3:2) common stock split effective January 2, 2002.

 

On March 14, 2004, the shares of Common Stock were held of record by approximately 462 shareholders.


Dividends

 

Dividends, retroactively adjusted to give effect to the three-for-two stock split, totaled $0.57 per share for 2003 compared to $0.52 per share for 2002. These dividends reflect a 10% increase in 2003 over 2002.

 

The Company declares dividends on a quarterly basis in March, June, September and December with payment following at the end of the month in which the dividend was declared. Funds for the payment by the Company of cash dividends are obtained from dividends received by the Company from the Bank. Accordingly, the declaration and payment of dividends by the Company depend upon the Bank’s earnings and financial condition, general economic conditions, compliance with regulatory requirements, and other factors.

 

Information regarding equity compensation plans can be found under the heading “Executive Compensation” in the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 23, 2004, relating to its 2004 Annual Meeting of Shareholders. Such information is incorporated herein by reference.


THE CITIZENS BANK OFFICERS

 

Greg McKee

President & CEO

 

Danny Hicks

Sr. Vice President

 

Robert T. Smith

Sr. Vice President & CFO

 

Erdis Chaney

Vice President & Cashier

 

Tim Lofton

Vice President & CIO

 

Randy Cheatham

Vice President

 

Mike Guthrie

Vice President

 

Joe Foster

Vice President & Trust

 

Murray Johnson

Vice President

 

Jackie Hester

Vice President & Marketing

 

Kaye Johnson

Vice President

 

Stanley Salter

Vice President

 

Darrell Bates

Vice President

 

David Sharp

Vice President & Compliance

 

Jean T. Fulton

Vice President & Auditor

 

Gayle Sharp

Vice President

 

Lucille M. Myatt

Assistant to the President

 

Carolyn K. McKee

Student Loan Officer

 

Mark Majure

Assistant Cashier

 

Beth Branning

Assistant Cashier

 

Pat Stokes

Assistant Cashier

 

Adriana Burt

Assistant Cashier

 

Mitch Peden

Data Processing Officer

 

Brad Copeland

Assistant Cashier

 

Sommer Vick

Accounting Officer

 

Mark Flake

Data Processing Officer

 

Barbara Lewis

Assistant Cashier

 

Greg Jackson

Accounting Officer

 

Carthage Branch

 

Mike Brooks

President

 

J. Michael Ellis

Vice President

 

Billie Nell Dowdle

Vice President

 

Byron Hines

Vice President

 

Margaret Thompson

Assistant Cashier

 

Carol Wright

Assistant Cashier

 

Sebastopol Branch

 

Linda Bennett

President

 

Union Branch

 

Robert C. Palmer , Jr.

President

 

Karen Foster

Assistant Vice President

 

DeKalb Branch

 

Steven Lockley

Vice President

 

Kosciusko Branch

 

Charlie Hudson

President

 

Joanne Sanders

Assistant Cashier

 

Scooba Branch

 

Fran Knight

Vice President

 

Meridian Branch

 

Charles Young

President

 

Mac Hodges

Vice President

 

Forest Branch

 

Richard Latham

Vice President

 

Dymple Winstead

Assistant Vice President

 

Decatur Branch

 

Ken Jones

Vice President

 

Louisville Branch

 

Terry Woods

President

 

Edna Bell

Vice President

 

Stan Acy

Vice President

 

Marion Gardner

Assistant Cashier

 

Danny Parker

Assistant Cashier

 

Bruce Lee

Assistant Cashier

 

Mortgage Loan Department

 

David Blair

Vice President

 

Linda Stribling

Mortgage Loan Officer

 

CITIZENS HOLDING COMPANY

 

Steve Webb

Chairman of the Board

 

Greg L. McKee

President and CEO

 

Carolyn K. McKee

Secretary

 

Robert T. Smith

Treasurer and CFO


BOARD OF DIRECTORS

 

M. G. Bond

Retired Mississippi State Senator

 

Karl Brantley

Plant Manager

U. S. Electrical Motors

 

W. W. Dungan

Partner

McDaniel Timber Company

 

Don Fulton

President & General Manager

Nemanco, Inc.

 

Don L. Kilgore

Attorney

Alford, Thomas & Kilgore, P.A.

 

David A. King

Proprietor

Philadelphia Motor Company

 

Herbert A. King

Civil Engineer

King Engineering Associates, Inc.

 

William M. Mars

Retired Attorney

Mars, Mars, Mars & Chalmers, P.A.

 

Greg McKee

President & CEO

Citizens Holding Company and The Citizens Bank

 

David P. Webb

Attorney

Phelps Dunbar, LLP

 

Steve Webb

Chairman

Citizens Holding Company and The Citizens Bank


BANKING LOCATIONS

 

The Citizens Bank

  Crossroads Branch   Decatur Branch

Main Office

  501 Hwy 35 south   15330 Hwy 15 South

521 Main Street

  Carthage, MS 39051   Decatur, MS 39327

Philadelphia, MS 39350

  601.267.4525   601.635.2321

601.656.4692

       

Westside Branch

  Madden Branch   Forest Branch

912 West Beacon Street

  53 Dr. Brantley Road   247 Woodland Drive North

Philadelphia, MS 39350

  Madden, MS 39109   Forest, MS 39074

601.656.4978

  601.267.7366   601.469.3424

Northside Branch

  Sebastopol Branch   Louisville Branch

802 Pecan Avenue

  24 Pine Street   100 East Main Street

Philadelphia, MS 39350

  Sebastopol, MS 39359   Louisville, MS 39339

601.656.4977

  601.625.7447   662.773.6261

Eastside Branch

  DeKalb Branch   Noxapater Branch

585 East Main Street

  Corner of Main & Bell St.   45 East Main Street

Philadelphia, MS 39350

  DeKalb, MS 39328   Noxapater, MS 39346

601.656.4976

  601.743.2115   662.724.4261

Pearl River Branch

  Kosciusko Branch   Industrial Branch

110 Choctaw Town Center

  775 North Jackson Street   803 South Church Street

Philadelphia, MS 39350

  Kosciusko, MS 39090   Louisville, MS 39339

601.656.4971

  662.289.4356   662.773.6261

Union Branch

  Scooba Branch    

502 Bank Street

  1048 Johnson Street    

Union, MS 39365

  Scooba, MS 39358    

601.656.4879

  662.476-8431    

601.774.9231

       

Carthage Main Office

  Meridian Branch    

219 West Main Street

  1825 Hwy 39 North    

Carthage, MS 39051

  Meridian, MS 39301    

601.257.4525

  601.693.8367    

Phone Teller

  Internet Banking    

1.800.397.0344

  http://www.thecitizensbankphila.com    

FINANCIAL INFORMATION

 

CORPORATE HEADQUARTERS

 

521 Main Street

P.O. Box 209

Philadelphia, MS 39350

 

601.656.4692

 

ANNUAL STOCKHOLDER MEETING

 

The Annual Stockholder meeting of the Citizens Holding Company, Inc. will be held Tuesday, April 27, 2004, at 3:30 P.M. at the main office of The Citizens Bank, 521 Main Street, Philadelphia, Mississippi.

 

STOCK REGISTRAR AND TRANSFER AGENT

 

American Stock Transfer & Trust Company

59 Maiden Lane

New York, NY 10038

 

FORM 10-K

 

The Corporation’s most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission, is available to stockholder’s upon request to the Treasurer of the Citizens Holding Company.

 

FINANCIAL CONTACT

 

Robert T. Smith

Treasurer and Chief Financial Officer

P.O. 209

Philadelphia, Mississippi 39350

 

601.656.4692

 

www.thecitizensbankphila.com


NOTES


CITIZENS HOLDING COMPANY

AND SUBSIDIARY

 

Philadelphia, Mississippi

 

Consolidated Financial Statements

 

Years Ended December 31, 2003, 2002 and 2001


CONTENTS

 

Independent Auditor’s Report

   1

Consolidated Financial Statements

    

  Consolidated Balance Sheets

   2

  Consolidated Statements of Income

   3

  Consolidated Statements of Comprehensive Income

   4

  Consolidated Statements of Changes in Stockholders’ Equity

   5

  Consolidated Statements of Cash Flows

   6 – 7

  Notes to Consolidated Financial Statements

   8 – 33

LOGO   
  

Members of the American Institute of Certified Public Accountants

Mississippi Society of Certified Public Accountants

Tennessee Society of Certified Public Accountants

 

INDEPENDENT AUDITOR’S REPORT

 

Board of Directors

Citizens Holding Company and Subsidiary

Philadelphia, Mississippi

 

We have audited the accompanying consolidated balance sheets of Citizens Holding Company and Subsidiary as of December 31, 2003 and 2002 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens Holding Company and Subsidiary as of December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

 

LOGO

 

Jackson, Mississippi

February 6, 2004


CITIZENS HOLDING COMPANY AND SUBSIDIARY

 

Consolidated Balance Sheets

December 31, 2003 and 2002

 

     2003

   2002

ASSETS

             

Cash and due from banks

   $ 15,101,810    $ 19,769,712

Interest bearing deposits with other banks

     98,036      1,365,649

Federal funds sold

     —        2,300,000

Securities available for sale, at fair value (amortized cost of $140,899,486 in 2003 and $157,718,929 in 2002)

     143,181,383      162,276,305

Loans, net of allowance for loan losses of $5,126,735 in 2003 and $4,222,341 in 2002

     351,937,005      303,952,527

Bank premises, furniture, fixtures and equipment, net

     9,998,973      9,399,942

Real estate acquired by foreclosure

     695,018      1,286,409

Accrued interest receivable

     4,206,104      4,111,199

Cash value of life insurance

     14,880,618      3,162,848

Intangible assets, net of accumulated amortization of $1,618,530 in 2003 and $1,081,027 in 2002

     6,390,480      6,813,774

Other assets

     4,271,716      4,011,753
    

  

Total assets

   $ 550,761,143    $ 518,450,118
    

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Deposits

             

Non-interest bearing demand deposits

   $ 63,070,459    $ 59,761,550

Interest bearing NOW and money market accounts

     117,431,141      122,717,966

Interest bearing savings deposits

     36,436,696      33,216,006

Interest bearing time deposits

     221,759,002      217,072,653
    

  

Total deposits

     438,697,298      432,768,175

Federal Home Loan Bank advances

     47,636,847      24,606,135

Accrued interest payable

     668,538      955,720

Deferred compensation payable

     1,832,211      1,182,406

Federal funds purchased

     1,500,000      —  

Other liabilities

     2,540,822      3,779,163
    

  

Total liabilities

     492,875,716      463,291,599
    

  

Commitments and contingencies

             

Minority interest

     1,383,351      1,375,960
    

  

Stockholders’ equity

             

Common stock, $.20 par value, authorized 22,500,000 shares; 4,979,628 shares issued at 2003 and 4,974,578 at 2002

     995,926      994,916

Additional paid-in capital

     2,944,314      2,899,331

Accumulated other comprehensive income, net of deferred tax liability of $764,050 in 2003 and $1,549,508 in 2002

     1,470,038      2,931,674

Retained earnings

     51,091,798      46,956,638
    

  

Total stockholders’ equity

     56,502,076      53,782,559
    

  

Total liabilities and stockholders’ equity

   $ 550,761,143    $ 518,450,118
    

  

 

The accompanying notes are an integral part of these financial statements.

 


CITIZENS HOLDING COMPANY AND SUBSIDIARY

 

Consolidated Statements of Income

Years Ended December 31, 2003, 2002 and 2001

 

     2003

    2002

    2001

 

Interest income

                        

Interest and fees on loans

   $ 23,693,234     $ 22,628,364     $ 22,770,622  

Interest on securities

                        

Taxable

     3,760,630       5,771,707       4,670,987  

Non-taxable

     2,237,257       1,598,983       1,117,874  

Other interest

     33,814       197,476       558,961  
    


 


 


Total interest income

     29,724,935       30,196,530       29,118,444  
    


 


 


Interest expense

                        

Deposits

     6,605,373       8,696,134       12,189,194  

Other borrowed funds

     1,583,075       1,050,209       1,209,409  
    


 


 


Total interest expense

     8,188,448       9,746,343       13,398,603  
    


 


 


Net Interest Income

     21,536,487       20,450,187       15,719,841  

Provision for loan losses

     (2,002,570 )     (1,757,516 )     (1,123,166 )
    


 


 


Net interest income after provision for loan losses

     19,533,917       18,692,671       14,596,675  
    


 


 


Non-interest income

                        

Service charges on deposit accounts

     3,235,400       3,026,976       2,810,403  

Other service charges and fees

     895,375       749,786       572,187  

Other income

     1,192,923       658,400       598,022  
    


 


 


Total non-interest income

     5,323,698       4,435,162       3,980,612  
    


 


 


Non-interest expense

                        

Salaries and employee benefits