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 |
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.
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 | 7,925,908 | 7,102,641 | 5,597,105 | |||||||||
Occupancy expense | 1,177,346 | 1,014,510 | 741,912 | |||||||||
Equipment expense | 1,567,289 | 1,297,232 | 888,648 | |||||||||
Earnings applicable to minority interest | 167,730 | 172,196 | 166,196 | |||||||||
Other expense | 4,203,714 | 4,278,599 | 2,914,602 | |||||||||
Total non-interest expense | 15,041,987 | 13,865,178 | 10,308,463 | |||||||||
Income before income taxes | 9,815,628 | 9,262,655 | 8,268,824 | |||||||||
Income tax expense | 2,844,699 | 2,965,155 | 2,557,926 | |||||||||
Net income | $ | 6,970,929 | $ | 6,297,500 | $ | 5,710,898 | ||||||
Net income per share – basic | $ | 1.40 | $ | 1.27 | $ | 1.15 | ||||||
Net income per share – diluted | $ | 1.39 | $ | 1.26 | $ | 1.15 | ||||||
Average shares outstanding | ||||||||||||
Basic | 4,974,910 | 4,963,448 | 4,963,028 | |||||||||
Diluted | 5,019,759 | 4,999,168 | 4,980,568 | |||||||||
The accompanying notes are an integral part of these financial statements.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2003, 2002 and 2001
2003 | 2002 | 2001 | ||||||||||
Net income | $ | 6,970,929 | $ | 6,297,500 | $ | 5,710,898 | ||||||
Other comprehensive income (loss) | ||||||||||||
Unrealized holding (losses) gains during year | (1,808,269 | ) | 4,453,456 | 10,770 | ||||||||
Reclassification adjustment for gains included in net income | (467,210 | ) | (158,718 | ) | — | |||||||
Income tax effect | 785,458 | (1,460,213 | ) | (3,660 | ) | |||||||
Change in minority interest in net unrealized gains | 28,385 | (59,925 | ) | (10,870 | ) | |||||||
Total other comprehensive income (loss) | (1,461,636 | ) | 2,774,600 | (3,760 | ) | |||||||
Comprehensive income | $ | 5,509,293 | $ | 9,072,100 | $ | 5,707,138 | ||||||
The accompanying notes are an integral part of these financial statements.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2003 and 2002
Number of Shares | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||
Balance, December 31, 2000 | 3,353,750 | $ | 670,750 | $ | 3,113,727 | $ | 160,834 | $ | 39,431,650 | $ | 43,376,961 | ||||||||||
Net income | — | — | — | — | 5,710,898 | 5,710,898 | |||||||||||||||
3 for 2 stock split | 1,609,278 | 321,856 | (321,856 | ) | — | — | — | ||||||||||||||
Dividends paid ($0.383 per share) | — | — | — | — | (1,902,531 | ) | (1,902,531 | ) | |||||||||||||
Other comprehensive loss, net | — | — | — | (3,760 | ) | — | (3,760 | ) | |||||||||||||
Balance, December 31, 2001 | 4,963,028 | 992,606 | 2,791,871 | 157,074 | 43,240,017 | 47,181,568 | |||||||||||||||
Net income | — | — | — | — | 6,297,500 | 6,297,500 | |||||||||||||||
Dividends paid ($0.52 per share) | — | — | — | — | (2,580,879 | ) | (2,580,879 | ) | |||||||||||||
Options exercised | 11,550 | 2,310 | 107,460 | — | — | 109,770 | |||||||||||||||
Other comprehensive income, net | — | — | — | 2,774,600 | — | 2,774,600 | |||||||||||||||
Balance, December 31, 2002 | 4,974,578 | 994,916 | 2,899,331 | 2,931,674 | 46,956,638 | 53,782,559 | |||||||||||||||
Net income | — | — | — | — | 6,970,929 | 6,970,929 | |||||||||||||||
Dividends paid ($0.57 per share) | — | — | — | — | (2,835,769 | ) | (2,835,769 | ) | |||||||||||||
Options exercised | 5,050 | 1,010 | 44,983 | — | — | 45,993 | |||||||||||||||
Other comprehensive income, net | — | — | — | (1,461,636 | ) | — | (1,461,636 | ) | |||||||||||||
Balance, December 31, 2003 | 4,979,628 | $ | 995,926 | $ | 2,944,314 | $ | 1,470,038 | $ | 51,091,798 | $ | 56,502,076 | ||||||||||
The accompanying notes are an integral part of these financial statements.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2003 and 2002
2003 | 2002 | 2001 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 6,970,929 | $ | 6,297,500 | $ | 5,710,898 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Depreciation | 1,020,645 | 851,977 | 546,479 | |||||||||
Amortization of intangibles | 537,503 | 460,548 | 193,109 | |||||||||
Amortization of premiums and accretion of discounts on investment securities | (55,128 | ) | (119,776 | ) | (131,470 | ) | ||||||
Provision for loan losses | 2,002,570 | 1,757,516 | 1,123,166 | |||||||||
Realized investment securities gains | (467,210 | ) | (158,718 | ) | — | |||||||
Deferred income tax (benefit) expense | (472,691 | ) | 99,596 | (23,188 | ) | |||||||
Net earnings applicable to minority interest | 167,730 | 172,196 | 166,196 | |||||||||
Write down of real estate acquired by foreclosure | 149,605 | 143,365 | 27,517 | |||||||||
(Increase) decrease in accrued interest receivable | (94,905 | ) | 505,876 | 604,191 | ||||||||
(Increase) decrease in cash value of life insurance | (313,618 | ) | (353,438 | ) | 210,044 | |||||||
Decrease in accrued interest payable | (287,182 | ) | (582,954 | ) | (181,932 | ) | ||||||
Increase in deferred compensation liability | 649,805 | 103,215 | 162,935 | |||||||||
Change in other assets and liabilities | (240,155 | ) | (204,886 | ) | (1,219,124 | ) | ||||||
Net cash provided by operating activities | 9,567,898 | 8,972,017 | 7,188,821 | |||||||||
Cash flows from investing activities | ||||||||||||
Proceeds from maturities of securities available-for-sale | 62,778,307 | 75,936,011 | 56,903,832 | |||||||||
Proceeds from sales of securities available-for-sale | 58,103,673 | 38,131,901 | — | |||||||||
Purchases of investment securities available-for-sale | (103,672,153 | ) | (100,225,119 | ) | (75,852,844 | ) | ||||||
Purchases of bank premises, furniture, fixtures and equipment | (1,619,676 | ) | (3,458,384 | ) | (1,327,808 | ) | ||||||
Sale of real estate acquired by foreclosure | 733,274 | 5,991 | 133,323 | |||||||||
Net decrease (increase) in interest bearing deposits with other banks | 1,267,613 | 4,055,592 | (4,557,870 | ) | ||||||||
Net (increase) decrease in federal funds sold | 2,300,000 | 5,900,000 | (3,000,000 | ) | ||||||||
Net increase in federal funds purchased | 1,500,000 | — | — | |||||||||
Net increase in loans | (50,278,536 | ) | (30,882,658 | ) | (13,697,674 | ) | ||||||
Cash acquired in CB&T acquisition | — | 2,879,581 | — | |||||||||
Cash paid for acquisitions | — | (12,284,319 | ) | (2,918,960 | ) | |||||||
Increase in intangible assets | (114,209 | ) | — | — | ||||||||
Purchase of company owned life insurance | (11,404,152 | ) | — | — | ||||||||
Proceeds from exercise of stock options | 45,993 | 109,770 | — | |||||||||
Net cash used by investing activities | (40,359,866 | ) | (19,831,634 | ) | (44,318,001 | ) | ||||||
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2003 and 2002
Page 2 of 2
2003 | 2002 | 2001 | ||||||||||
Cash flows from financing activities | ||||||||||||
Net increase in deposits | $ | 5,929,123 | $ | 15,519,379 | $ | 69,401,250 | ||||||
Net decrease in Treasury tax and loan advances | — | — | (700,000 | ) | ||||||||
Dividends paid to stockholders | (2,835,769 | ) | (2,580,879 | ) | (1,902,531 | ) | ||||||
Net increase (decrease) in Federal Home Loan Bank advances | 23,030,712 | 4,977,347 | (27,371,212 | ) | ||||||||
Net cash provided by financing activities | 26,124,066 | 17,915,847 | 39,427,507 | |||||||||
Net (decrease) increase in cash And due from banks | (4,667,902 | ) | 7,056,230 | 2,298,327 | ||||||||
Cash and due from banks, beginning of year | 19,769,712 | 12,713,482 | 10,415,155 | |||||||||
Cash and due from banks, end of year | $ | 15,101,810 | $ | 19,769,712 | $ | 12,713,482 | ||||||
Supplemental disclosures of cash flow information | ||||||||||||
Cash paid for | ||||||||||||
Interest | $ | 8,475,630 | $ | 10,206,139 | $ | 13,580,534 | ||||||
Income taxes | $ | 2,478,332 | $ | 3,390,278 | $ | 2,805,550 | ||||||
Real estate acquired by foreclosure | $ | 291,488 | $ | 1,095,108 | $ | 368,172 | ||||||
The accompanying notes are an integral part of these financial statements.
CITIZENS HOLDING COMPANY AND SUBSIDIARY
Years Ended December 31, 2003, 2002 and 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accounting policies of Citizens Holding Company and Subsidiary conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The consolidated financial statements of Citizens Holding Company include the accounts of its 97.53 percent-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (collectively referred to as “the Company”). All significant intercompany transactions have been eliminated in consolidation.
Nature of Business
The Citizens Bank of Philadelphia, Mississippi (“Citizens Bank”) operates under a state bank charter and provides general banking services. As a state bank, the bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Corporation. Citizens Holding Company is subject to the regulations of the Federal Reserve. The area served by the Citizens Bank is Neshoba County, Mississippi, and the immediately surrounding areas. Services are provided at several branch offices.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for losses on loans and valuation of foreclosed real estate, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans and valuation of foreclosed real estate may change materially in the near term.
Note 1. Continued
Cash and Due from Banks
For the purpose of reporting cash flows, cash and due from banks include cash on hand, demand deposits and interest bearing deposits with banks. Cash flows from loans originated by the Company, deposits, and federal funds purchased and sold are reported at net in the statement of cash flows. The Company is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The total of those reserves for the years ended December 31, 2003 and 2002 was $587,000 and $616,000, respectively.
Interest-bearing deposits in banks mature within one year and are carried at cost.
At December 31, 2003, the Company had deposits in financial institutions in excess of federally insured limits. Management monitors the soundness of the financial institutions and believes there is minimal risk.
Investment Securities
In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” securities are classified as “available-for-sale,” “held-to-maturity” or trading. Fair values for securities are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Gains or losses on the sale of securities are determined using the specific identification method.
Securities Available-for-Sale
Securities available-for-sale are reported at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity. Securities that are held for indefinite periods of time or used as part of the Company’s asset/liability management strategy and that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company classifies its portfolio of U.S. Treasury notes, U.S. Government and Agency securities, taxable state and municipal obligations, and mortgage-backed securities as securities available-for-sale.
Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. The amortization of premiums and accretion of discounts are recognized in interest income.
Securities Held-to-Maturity
The Company has no held-to-maturity securities.
Note 1. Continued
Trading Securities
The Company has no trading securities.
Loans Held-for-Sale
Loans held-for-sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or market value. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans. All sales are made without recourse.
Effective for reporting periods beginning with the quarter ending September 30, 2002, commitments to originate or acquire mortgage loans that will be held-for-sale must be accounted for as derivative financial instruments under FAS No. 133. Therefore, the fair value of the commitments must be determined and recorded in the Company’s financial statements at the end of each reporting period. As of December 31, 2003, the Company had no loans held-for-sale and no material commitments to originate or acquire mortgage loans.
Loans and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of unearned discounts and unearned finance charges.
Loan origination and commitment fees and direct loan origination costs attributable to loans held with a maturity of more than one year are not significant and are, therefore, recognized as income or expense, as applicable in the period received or incurred.
Unearned discounts on installment loans are recognized as income over the terms of the loans by a method that approximates the interest method. Unearned finance charges and interest on commercial loans are recognized based on the principal amount outstanding. For all other loans, interest is accrued daily on the outstanding balances. For impaired loans, interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower’s financial condition is such that collection of interest is doubtful. Cash collections on impaired loans are credited to the loan receivable balance, and no interest income is recognized on those loans until the principal balance has been collected. The Company generally discontinues the accrual of interest income when a loan becomes 90 days past due as to principal or interest; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Interest income on other nonaccrual loans is recognized only to the extent of interest payments. Upon discontinuance of the accrual of interest on a loan, any previously accrued but unpaid interest is reversed against interest income.
Note 1. Continued
A loan is impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses charged against net income. Loans determined 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 loans and prior loss experience. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, review of specific problem loans, the Company’s past loan loss experience, adverse situations that may affect the borrowers’ ability to pay, the estimated value of any underlying collateral, current economic conditions, and other relevant factors. While management uses the best information available to make its evaluation, this evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change. As a result, future adjustments may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require additions to the allowance based on their judgment about information available to them at the time of their examinations.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative and other factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Large groups of small balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
Note 1. Continued
Premises and Equipment
The Company’s premises and equipment are stated at cost less accumulated depreciation computed primarily by straight-line methods over the estimated useful lives of the assets. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure consists of properties repossessed by the Company on foreclosed loans. These assets are stated at the lower of the outstanding loan amount (including accrued interest, if any) or fair value at the date acquired less estimated costs to sell. Losses arising from the acquisition of such property are charged against the allowance for loan losses. Declines in value resulting from subsequent revaluation of the property or losses resulting from disposition of such property are expensed. Revenue and expenses from operations of other real estate owned are reflected as other income (expense). At December 31, 2003 and 2002, real estate acquired by foreclosure totaled $695,018 and $1,286,409, respectively.
Cash Value of Life Insurance
The Company has purchased life insurance contracts on certain employees and directors. Certain of such policies were acquired pursuant to “split-dollar” arrangements with employees whereby the Company is entitled to recover the total amount of premiums paid by the Company under the policy. The cash surrender value of such “split-dollar” policies as well as other Company owned policies is carried at the lower of the actual cash value of the policy or the amount recoverable by the Company at the balance sheet date.
Intangibles
Intangibles include core deposits purchased and goodwill. Core deposits intangibles are amortized on a straight-line basis over their estimated economic lives ranging from 5 to 10 years. Prior to 2002, goodwill was amortized over 40 years. Effective in 2002, pursuant to Statement of Financial Accounting Standards (SFAS) No. 142, goodwill and other intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. If impairment has occurred, the goodwill or other intangible asset is reduced to its estimated fair value through a charge to expense. Amortization of goodwill for the year ended December 31, 2001 was not material to the Company’s financial statements. Therefore, the effect of adopting SFAS No. 142 on previously reported net income for those periods was not material.
Note 1. Continued
Investment – Insurance Company
The Company accounts for its investment in New South Life Insurance Company (“New South”), a 20 percent owned affiliate, by the equity method of accounting. The Company’s share of the net income of New South is recognized as income in the Company’s income statement and added to the investment account, and dividends received from New South would be treated as a reduction of the investment account. New South has not paid dividends.
The fiscal year of New South ends on November 30 and the Company follows the practice of recognizing the net income of New South on that basis.
The investment in New South, which is included in other assets, totaled $1,578,068 and $1,499,679 at December 31, 2003 and 2002, respectively. Income from the investment for the years ended December 31, 2003, 2002, and 2001 included in other income totaled $78,389, $109,884 and $151,590, respectively.
Trust Assets
Assets held by the Trust Department of the Company in fiduciary or agency capacities are not assets of the Company and are not included in the consolidated financial statements.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as described in SFAS No. 109, “Accounting for Income Taxes.” As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock Split
In October 2001, the Board of Directors of the Company declared a three-for-two stock split for all shareholders of record as of December 14, 2001, and increased the number of authorized shares of common stock to 22,500,000. Accordingly, all share and per share information in these financial statements and related footnotes has been restated to give effect to the three-for-two split.
Note 1. Continued
Comprehensive Income
Comprehensive income includes net earnings reported in the statements of income and changes in unrealized gain (loss) on securities available-for-sale reported as a component of stockholders’ equity. Unrealized gain on securities available-for-sale, net of related deferred income taxes, is the only component of accumulated other comprehensive income for the Company.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. The weighted average number of shares outstanding was 4,974,910 for the year ended December 31, 2003 and 4,963,448 for the year ended December 31, 2002 and 4,963,028 for the year ended December 31, 2001. Diluted net income per share is based on the weighted average number of shares of common stock outstanding for the periods, including the dilutive effect of the Company’s outstanding stock options. Dilutive common equivalent shares for the years ended December 31, 2003, 2002 and 2001 were 44,849, 35,720 and 17,540, respectively, all attributable to stock options.
Stock Based Compensation
Stock option grants are accounted for in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense is recognized for stock options granted if the option price is not less than the fair market value of the underlying stock at the grant date. For each of the years ended December 31, 2003, 2002 and 2001, no stock based compensation expense was included in the determination of net income as all options granted during the years had an exercise price equal to the market value of the stock on the date of grant.
Had compensation expense been determined on the basis of fair value pursuant to FASB Statement No. 123 using publicly traded share prices as a basis of determining fair values, net income and earnings per share would have been reduced as follows:
2003 | 2002 | 2001 | ||||||||||
Net income | ||||||||||||
As reported | $ | 6,970,930 | $ | 6,297,500 | $ | 5,710,898 | ||||||
Stock based employee compensation expense included in reported net income | — | — | — | |||||||||
Less stock based compensation expense determined under fair value method for all stock options, net of related income tax benefit | (143,654 | ) | (109,826 | ) | (43,653 | ) | ||||||
Pro forma net income | $ | 6,827,276 | $ | 6,187,674 | $ | 5,667,245 | ||||||
Note 1. Continued
2003 | 2002 | 2001 | |||||||
Basic earnings per share | |||||||||
As reported | $ | 1.40 | $ | 1.27 | $ | 1.15 | |||
Pro forma | $ | 1.37 | $ | 1.25 | $ | 1.14 | |||
Diluted earnings per share | |||||||||
As reported | $ | 1.39 | $ | 1.26 | $ | 1.15 | |||
Pro forma | $ | 1.36 | $ | 1.24 | $ | 1.14 |
The fair value of each option is estimated on the grant date using the Black-Scholes option pricing model. The following assumptions were made in estimating fair values in 2003, 2002 and 2001:
2003 | 2002 | 2001 | |||||||
Assumption | |||||||||
Dividend yield | 1.5 | % | 1.5 | % | 1.5 | % | |||
Risk-free interest rate | 4 | % | 4 | % | 6.25 | % | |||
Expected life | 7 years | 7 years | 10 years | ||||||
Expected volatility | 20.40 | % | 15.00 | % | 16.05 | % |
Advertising Costs
Advertising costs are charged to expense when incurred. Advertising expense was $379,319, $331,239 and $228,078 for the years ended December 31, 2003, 2002 and 2001, respectively.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. These requirements have been incorporated in Note 15. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company and may not be indicative of amounts that might ultimately be realized upon disposition or settlement of those assets and liabilities.
Note 1. Continued
Recent Accounting 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 have not been finalized, adoption of SFAS No. 150 is not expected to have a significant impact on the Company’s financial statements.
Note 2. Acquisition
In May 2002, the Company acquired CB&T Capital Corporation, a one-bank holding company, whose wholly-owned subsidiary was Citizens Bank & Trust Company in Louisville, MS. The acquisition was undertaken by the Company in order to gain entry into a geographic section of the State of Mississippi that is contiguous to the Company’s current markets and in which the Company had very little market presence. The purchase price of the net assets totaled approximately $12.3 million in cash and was based on a multiple of approximately 1.505 times the book value, subject to certain adjustments, of the acquired company. The Company based its purchase price on several factors, including comparable transactions and management’s estimate of the value of entry into a strategically targeted geographic area.
The following is a summary of the assets acquired and liabilities assumed:
In Thousands | ||||
Cash | $ | 2,880 | ||
Investments | 50,620 | |||
Loans | 15,019 | |||
Bank premises and other assets | 3,137 | |||
Deposits | (57,939 | ) | ||
Other liabilities | (5,814 | ) | ||
Net assets acquired | 7,903 | |||
Goodwill and other intangible assets | 4,381 | |||
Purchase price | $ | 12,284 | ||
The Company allocated $1,846,909 of the $4,380,869 total intangible assets to core deposit intangibles and the remaining $2,533,960 to goodwill. The core deposit intangible is amortized on a straight-line method over its estimated economic life of 10 years. The operations of CB&T Capital Corporation are included in the consolidated financial statements since the acquisition date. The pro forma effect, had the acquisition occurred on January 1, 2002, is not significant to the operation of the Company.
Total amortization expense related to all intangible assets for the years ended December 31, 2003, 2002 and 2001 was $537,503, $460,548 and $193,109, respectively.
Amortization expense attributable to core deposit intangible assets is estimated to be approximately $537,000 for each of the next five years.
Note 3. Investment Securities
The amortized cost and estimated fair value of investment securities at December 31, 2003 is as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
Securities available-for-sale | ||||||||||||
Obligations of U.S. Government agencies | $ | 5,400,582 | $ | 278,530 | $ | — | $ | 5,679,112 | ||||
U.S. Treasuries | 15,130,106 | 397,434 | — | 15,527,540 | ||||||||
Mortgage-backed securities | 58,804,116 | 748,853 | 184,771 | 59,368,198 | ||||||||
Other investments | 61,564,682 | 1,675,912 | 634,061 | 62,606,533 | ||||||||
Total | $ | 140,899,486 | $ | 3,100,729 | $ | 818,832 | $ | 143,181,383 | ||||
The aggregate fair value of securities with unrealized losses at December 31, 2003 was $36,994,916. Of that amount, securities with a fair value of $1,068,392 have been in an unrealized loss position for more than twelve months. The aggregate unrealized loss on such securities at December 31, 2003 was $819,102.
The amortized cost and estimated fair value of investment securities at December 31, 2002 is as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
Securities available-for-sale | ||||||||||||
Obligations of U.S. Government agencies | $ | 11,261,352 | $ | 660,005 | $ | — | $ | 11,921,357 | ||||
U.S. Treasuries | 18,280,614 | 812,656 | — | 19,093,270 | ||||||||
Mortgage-backed securities | 85,828,126 | 1,871,959 | 13,223 | 87,686,862 | ||||||||
Other investments | 42,348,837 | 1,299,090 | 73,111 | 43,574,816 | ||||||||
Total | $ | 157,718,929 | $ | 4,643,710 | $ | 86,334 | $ | 162,276,305 | ||||
The Company, as a member of the Federal Home Loan Bank of Dallas (“FHLB”) system, owns stock in such organization. No ready market exists for the stock, and it has no quoted market value. The Company’s investment in the FHLB is carried at cost of $3,338,900 and $2,008,700 at December 31, 2003 and 2002, respectively, and is included in other investments.
Note 3. Continued
The amortized cost and estimated fair value of securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Cost | Estimated Fair Value | |||||
Securities available-for-sale | ||||||
Due in one year or less | $ | 16,578,097 | $ | 16,798,716 | ||
Due after one year through five years | 10,948,627 | 11,529,615 | ||||
Due after five years through ten years | 15,549,754 | 16,312,592 | ||||
Due after ten years | 97,823,008 | 98,540,460 | ||||
Total | $ | 140,899,486 | $ | 143,181,383 | ||
Investment securities with carrying values of $86,599,561 and $95,774,053 at December 31, 2003 and 2002, respectively, were pledged as collateral for public deposits.
Gross realized gains and losses are included in other income. Total gross realized gains and gross realized losses from the sale of investment securities for each of the years ended December 31 were:
2003 | 2002 | 2001 | |||||||||
Gross realized gains | $ | 780,705 | $ | 164,364 | $ | — | |||||
Gross realized losses | (313,495 | ) | (5,646 | ) | — | ||||||
$ | 467,210 | $ | 158,718 | $ | — | ||||||
Note 4. Loans
The composition of net loans at December 31, 2003 and 2002 is as follows:
2003 | 2002 | |||||||
(In Thousands) | ||||||||
Commercial, financial and agricultural loans | $ | 186,950 | $ | 149,762 | ||||
Real estate – construction loans | 15,409 | 11,708 | ||||||
Real estate – mortgage loans | 92,412 | 89,452 | ||||||
Consumer loans | 64,309 | 59,660 | ||||||
359,080 | 310,582 | |||||||
Unearned discount | (2,016 | ) | (2,407 | ) | ||||
Allowance for loan losses | (5,127 | ) | (4,222 | ) | ||||
Loans, net | $ | 351,937 | $ | 303,953 | ||||
Note 4. Continued
Loans are made principally to customers in the Bank’s trade area. The Bank’s lending policy provides that loans collateralized by real estate are normally made with loan-to-loan value ratios of 80 percent or less. Commercial loans are typically collateralized by property, equipment, inventories and/or receivables with loan-to-value ratios from 50 percent to 80 percent. Real estate mortgage loans are collateralized by personal residences with loan-to-value ratios of 80 percent or less. Personal loans are typically collateralized by real estate, vehicles and other consumer durable goods. Approximately $67,608,000 and $31,068,000 of the loans outstanding at December 31, 2003 and 2002, respectively, were variable rate loans.
Changes in the allowance for loan losses at December 31, 2003, 2002 and 2001 is as follows:
2003 | 2002 | 2001 | ||||||||||
Balance, beginning | $ | 4,222,341 | $ | 3,375,000 | $ | 3,325,000 | ||||||
Provision for loan losses | 2,002,570 | 1,757,516 | 1,123,166 | |||||||||
Loans charged off | (1,399,947 | ) | (2,036,933 | ) | (1,322,714 | ) | ||||||
Recoveries of loans previously charged off | 301,771 | 279,417 | 249,548 | |||||||||
Other increases attributed to Bank acquisition | — | 847,341 | — | |||||||||
Balance, end of year | $ | 5,126,735 | $ | 4,222,341 | $ | 3,375,000 | ||||||
Loans on nonaccrual status were $1,502,971, $357,640 and $418,413 at December 31, 2003, 2002 and 2001, respectively. Interest income forgone on loans classified as non-accrued during the years ended December 31, 2003, 2002 and 2001 was $169,135, $69,888 and $123,804, respectively.
Note 5. Premises and Equipment
Premises and equipment consists of the following at December 31, 2003 and 2002:
2003 | 2002 | |||||
Land and buildings | $ | 10,413,679 | $ | 9,643,349 | ||
Furniture, fixtures and equipment | 7,956,845 | 7,107,499 | ||||
18,370,524 | 16,750,848 | |||||
Less accumulated depreciation | 8,371,551 | 7,350,906 | ||||
Total | $ | 9,998,973 | $ | 9,399,942 | ||
Note 5. Continued
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was $1,020,645, $851,977 and $546,479, respectively.
Note 6. Deposits
The composition of deposits is as follows:
2003 | 2002 | |||||
Non-interest bearing | $ | 63,070,459 | $ | 59,761,550 | ||
NOW and money market accounts | 117,431,141 | 122,717,966 | ||||
Savings deposits | 36,436,696 | 33,216,006 | ||||
Time certificates, $100,000 or more | 88,184,262 | 77,399,749 | ||||
Other time certificates | 133,574,740 | 139,672,904 | ||||
Total | $ | 438,697,298 | $ | 432,768,175 | ||
The scheduled maturities of certificates of deposit at December 31, 2003 are as follows:
Year Ending December 31, | Amount | ||
2004 | $ | 179,771,733 | |
2005 | 34,146,595 | ||
2006 | 6,403,650 | ||
2007 | 1,264,332 | ||
2008 | 172,692 | ||
$ | 221,759,002 | ||
Interest expense for certificates of deposit over $100,000 was approximately $1,997,000, $2,346,000 and $4,094,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Note 7. Federal Home Loan Bank Borrowings
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB), advances are collateralized by all the Company’s stock, FHLB Securities ($3,338,900 included in securities available-for-sale at December 31, 2003) and qualifying first mortgage loans. As of December 31, 2003 the balance in qualifying first mortgage loans was $289,048,000. At December 31, 2003, advances from the FHLB, along with their rate and maturity date, consist of the following:
Advance Amount at December 31, | Interest Rate | Final Maturity | ||||||
2003 | 2002 | |||||||
$14,000,000 | $ | — | 1.11 | % | January 19, 2004 | |||
2,736,847 | 3,706,135 | 4.94 | July 3, 2006 | |||||
5,000,000 | 5,000,000 | 5.46 | February 26, 2008 | |||||
5,000,000 | 5,000,000 | 5.66 | April 28, 2008 | |||||
3,000,000 | 3,000,000 | 5.24 | April 20, 2009 | |||||
2,000,000 | 2,000,000 | 5.29 | April 20, 2009 | |||||
2,000,000 | 2,000,000 | 4.47 | September 7, 2010 | |||||
2,000,000 | 2,000,000 | 4.88 | August 22, 2011 | |||||
1,000,000 | 1,000,000 | 4.76 | August 29, 2011 | |||||
900,000 | 900,000 | 4.43 | September 19, 2011 | |||||
10,000,000 | — | 3.66 | June 17, 2013 | |||||
$47,636,847 | $ | 24,606,135 | ||||||
The scheduled payments for the next five years are as follows:
Year Due | Payment | ||
2004 | $ | 15,018,280 | |
2005 | 1,069,749 | ||
2006 | 648,818 | ||
2007 | — | ||
2008 | 10,000,000 | ||
Thereafter | 20,900,000 | ||
$ | 47,636,847 | ||
Note 8. Income Taxes
The consolidated provision for income taxes consists of the following:
2003 | 2002 | 2001 | |||||||||
Currently payable | |||||||||||
Federal | $ | 2,939,498 | $ | 2,556,030 | $ | 2,356,645 | |||||
State | 377,892 | 309,529 | 224,469 | ||||||||
3,317,390 | 2,865,559 | 2,581,114 | |||||||||
Deferred tax expense (benefit) | (472,691 | ) | 99,596 | (23,188 | ) | ||||||
Income tax expense | $ | 2,844,699 | $ | 2,965,155 | $ | 2,557,926 | |||||
The differences between income taxes calculated at the federal statutory rate and income tax expense were as follows:
2003 | 2002 | 2001 | ||||||||||
Federal taxes based on statutory rate | $ | 3,337,314 | $ | 3,149,303 | $ | 2,811,400 | ||||||
State income taxes, net of Federal benefit | 249,409 | 204,690 | 157,142 | |||||||||
Tax-exempt investment interest | (714,510 | ) | (495,872 | ) | (321,389 | ) | ||||||
Other, net | (27,514 | ) | 107,034 | (89,227 | ) | |||||||
Income tax expense | $ | 2,844,699 | $ | 2,965,155 | $ | 2,557,926 | ||||||
At December 31, 2003 and 2002, net deferred tax assets (liability) consist of the following:
2003 | 2002 | ||||||
Deferred tax assets | |||||||
Allowance for loan losses | $ | 1,477,660 | $ | 992,501 | |||
Deferred compensation liability | 683,415 | 402,018 | |||||
Other | — | 195,976 | |||||
Total | 2,161,075 | 1,590,495 | |||||
Deferred tax liabilities | |||||||
Unrealized gain on available-for-sale securities | 764,050 | 1,549,508 | |||||
Premises and equipment | 528,276 | 396,988 | |||||
Intangible assets | 427,711 | 591,319 | |||||
Other | 130,209 | — | |||||
Total | 1,850,246 | 2,537,815 | |||||
Net deferred tax asset (liability) | $ | 310,829 | $ | (947,320 | ) | ||
Note 8. Continued
The net deferred tax asset at December 31, 2003 of $310,829 is included in other assets. At December 31, 2002, the net deferred tax liability of $947,320 is included in other liabilities. The Company has evaluated the need for a valuation allowance related to the above deferred tax assets and, based on the weight of the available evidence, has determined that it is more likely than not that all deferred tax assets will be realized.
Note 9. Summarized Financial Information of Citizens Holding Company
Summarized financial information of Citizens Holding Company, parent company only, at December 31, 2003 and 2002, and for the years ended December 31, 2003, 2002 and 2001, is as follows:
Balance Sheets
December 31, 2003 and 2002
2003 | 2002 | |||||
Assets | ||||||
Cash | $ | 906,547 | $ | 906,403 | ||
Securities available-for-sale, at fair value | 534,690 | 548,750 | ||||
Investment in bank subsidiary | 55,094,596 | 52,360,312 | ||||
Other assets | 10,417 | 10,417 | ||||
Total assets | $ | 56,546,250 | $ | 53,825,882 | ||
Liabilities | $ | 44,174 | $ | 43,323 | ||
Stockholders’ equity | 56,502,076 | 53,782,559 | ||||
Total liabilities and stockholders’ equity | $ | 56,546,250 | $ | 53,825,882 | ||
Note 9. Continued
Income Statements
Years Ended December 31, 2003, 2002 and 2001
2003 | 2002 | 2001 | |||||||||
Interest income | $ | 38,706 | $ | 42,465 | $ | 74,085 | |||||
Other income | |||||||||||
Other | 14,426 | 35,843 | 34,815 | ||||||||
Dividends from bank subsidiary | 2,918,280 | 2,592,317 | 1,986,540 | ||||||||
Equity in undistributed earnings of bank subsidiary | 4,066,482 | 3,693,570 | 3,721,802 | ||||||||
Total other income | 6,999,188 | 6,321,730 | 5,743,157 | ||||||||
Other expense | 76,771 | 61,030 | 107,824 | ||||||||
Income before income taxes | 6,961,123 | 6,303,165 | 5,709,418 | ||||||||
Income tax expense (benefit) | (9,806 | ) | 5,665 | (1,480 | ) | ||||||
Net income | $ | 6,970,929 | $ | 6,297,500 | $ | 5,710,898 | |||||
Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
2003 | 2002 | 2001 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 6,970,929 | $ | 6,297,500 | $ | 5,710,898 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Equity in undistributed earnings of Bank | (4,066,482 | ) | (3,693,570 | ) | (3,721,802 | ) | ||||||
Decrease in other assets | — | 1,480 | 7,004 | |||||||||
Increase (decrease) in other liabilities | 851 | 24,983 | (76,249 | ) | ||||||||
Net cash provided by operating activities | 2,905,298 | 2,630,393 | 1,919,851 | |||||||||
Cash flows from investing activities | ||||||||||||
Proceeds from sale of investments | — | — | 800,000 | |||||||||
Other | (115,378 | ) | (9,040 | ) | (422,352 | ) | ||||||
Net cash (used) provided by investing activities | (115,378 | ) | (9,040 | ) | 377,648 | |||||||
Note 9. Continued
2003 | 2002 | 2001 | ||||||||||
Cash flows from financing activities | ||||||||||||
Dividends paid to stockholders | $ | (2,835,769 | ) | $ | (2,580,879 | ) | $ | (1,902,531 | ) | |||
Exercise of stock options | 45,993 | 109,770 | — | |||||||||
Net cash used by financing activities | (2,789,776 | ) | (2,471,109 | ) | (1,902,531 | ) | ||||||
Net increase in cash | 144 | 150,244 | 394,968 | |||||||||
Cash, beginning of year | 906,403 | 756,159 | 361,191 | |||||||||
Cash, end of year | $ | 906,547 | $ | 906,403 | $ | 756,159 | ||||||
The Bank is required to obtain approval from state regulators before paying dividends. The Citizens Bank paid dividends of $2,835,769, $2,592,317 and $1,986,540 to the Company during the years ended December 31, 2003, 2002 and 2001, respectively.
Note 10. Related Party Transactions
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, significant stockholders, principal officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly referred to as related parties). In management’s opinion, such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties, and does not involve more than the normal risk of collectibility at the time of the transaction.
The balance of loans made to related parties at December 31, 2003 and 2002 was $2,758,253 and $1,740,496, respectively. Advances to related parties during the year ended December 31, 2003 totaled $3,615,969. Payments received from related parties during the year ended December 31, 2003 totaled $2,598,212.
Deposits from related parties at December 31, 2003 and 2002 approximated $3,326,000 and $2,865,000, respectively.
Note 11. Off-Balance Sheet Financial Instruments, Commitments and Contingencies and Concentrations of Risks
Commitments to Extend Credit
In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of its customers. These commitments and contingent liabilities include commitments to extend credit and issue standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 2003 and 2002, commitments related to unused lines of credit were $20,445,500 and $29,079,857 and standby letters of credit were $1,199,800 and $479,850, respectively. As some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed credit worthiness of the borrower. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties.
Interest Rate Risk
The Company is principally engaged in providing short-term and medium-term installment, commercial and agricultural loans with interest rates that are fixed or fluctuate with the prime lending rate. These assets are primarily funded through short-term demand deposits and long-term certificates of deposit with variable and fixed rates. Accordingly, the Company is exposed to interest rate risk because, in changing interest rate environments, interest rate adjustments on assets and liabilities may not occur at the same time or in the same amount. The Company manages the overall rate sensitivity and mix of its asset and liability portfolio and attempts to minimize the effects that interest rate fluctuations will have on its net interest margin.
Legal Proceedings
The Company is party to lawsuits and other claims that arise in the ordinary course of business. The lawsuits assert claims related to the general business activities of the Company. The cases are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provision is made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. While management believes that the final resolution of pending legal proceedings will not have a material impact on the Company’s financial position or results of operations, the final resolution of such proceedings could have a material adverse effect on the Company’s financial position or results of operations.
Note 11. Continued
Concentration of Risk
The Company makes agricultural, agribusiness, commercial, residential and consumer loans primarily in the eastern region of Mississippi. A substantial portion of the Company’s customers’ abilities to honor their contracts is dependent on the business and agricultural economy in that area.
Although the Company’s loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company’s lending policies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans includes equipment, crops, livestock, and land. Credit losses from loans related to the agricultural economy are consistent with credit losses experienced in the portfolio as a whole. The concentration of credit in the regional agricultural economy is taken into consideration by management in determining the allowance for loan losses.
See Note 4 for a summary of loans by type.
The nature of the Company’s business requires that it maintain amounts due from banks, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Note 12. Lease Commitment and Total Rental Expense
The Company has operating leases under noncancellable operating lease agreements for banking facilities and equipment. Future minimum rental payments due under the leases are as follows:
Years Ending December 31, | Amounts | ||
2004 | $ | 65,318 | |
2005 | 54,669 | ||
2006 | 9,744 | ||
2007 | 7,773 | ||
2008 | 617 | ||
$ | 138,121 | ||
The total rental expense included in the income statements for the years ended December 31, 2003, 2002 and 2001 is $59,330, and $64,281 and $66,962, respectively.
Note 13. Benefit Plans
The Company provides its employees with a profit sharing and savings plan, which allows employees to direct a percentage of their compensation into a tax deferred retirement account, subject to statutory limitations. To encourage participation, the Company provides a 100 percent matching contribution for up to 6 percent of each participant’s compensation, plus discretionary non-matching contributions. Employees are eligible after one year of service. For 2003, 2002 and 2001, the Company’s contributions were $407,577, $358,520 and $288,283, respectively.
Deferred Compensation Plans
The Company provides a deferred compensation plan covering its directors. Participants in the deferred compensation plan can defer a portion of their compensation for payment after retirement. Life insurance contracts have been purchased which may be used to fund payments under the plan. Net expenses related to this plan were $137,364, $103,570 and $81,456 for the plan years ended December 31, 2003, 2002 and 2001, respectively.
The Company has also entered into deferred compensation arrangements with certain officers that provide for payments to such officers or their survivors after retirement. Life insurance policies have been purchased which may be used to fund payments under these arrangements. The obligations of the Company under both the directors and officers deferred compensation arrangements are on a systematic basis over the remaining expected service period of the individual directors and officers.
During 2003, the Company surrendered certain life insurance policies that were acquired pursuant to “split-dollar” arrangements with employees and settled the Company’s obligations to such employees under such arrangements. The impact of such transactions on the Company’s financial statements was not significant.
Also during 2003, one of the Company’s directors died and the Company received life insurance proceeds of approximately $600,000 in excess of the carrying amount of the related policy. In addition, as a result of the untimely death, the Company’s liability for amounts due under the deferred compensation agreement increased by approximately the same amount. Accordingly, the Company did not realize a significant gain or loss. The Company did, however, realize an income tax benefit as the proceeds received from the life insurance policy are not subject to income taxes.
Note 14. Regulatory Matters
The Company is subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators that, if undertaken, could have a direct material affect on the
Note 14. Continued
Company. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines involving quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital and Tier I capital to risk-weighted assets (as defined in the regulations) and Tier I capital to average assets (as defined in the regulations).
As of December 31, 2003 and 2002, the most recent regulatory notification categorized the Bank as well capitalized. To continue to be categorized as well capitalized under the regulatory framework for prompt corrective action, the Company would have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed below, in comparison with actual capital amounts and ratios:
Actual | For Capital Adequacy Purposes | To Be Well Capitalized under Prompt Corrective Action Provisions | ||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
As of December 31, 2003 | ||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | ||||||||||||||||||
Citizens Holding Company | $ | 54,602,000 | 14.94 | % | $ | 29,247,000 | 8 | % | $ | N/A | — | |||||||
Citizens Bank | 53,180,000 | 14.55 | % | 29,238,080 | 8 | % | 36,547,600 | 10 | % | |||||||||
Tier I Capital (to Risk-Weighted Assets) | ||||||||||||||||||
Citizens Holding Company | 50,025,000 | 13.68 | % | 14,624,000 | 4 | % | N/A | — | ||||||||||
Citizens Bank | 48,605,000 | 13.30 | % | 14,619,040 | 4 | % | 21,928,560 | 6 | % | |||||||||
Tier I Capital (to Average Assets) | ||||||||||||||||||
Citizens Holding Company | 50,025,000 | 9.11 | % | 21,973,000 | 4 | % | N/A | — | ||||||||||
Citizens Bank | 48,605,000 | 8.86 | % | 21,943,160 | 4 | % | 27,428,950 | 5 | % |
Note 14. Continued
Actual | For Capital Adequacy Purposes | To Be Well Capitalized under Prompt Corrective Action Provisions | ||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
As of December 31, 2002 | ||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | ||||||||||||||||||
Citizens Holding Company | $ | 49,262,962 | 16.02 | % | $ | 24,605,856 | 8.00 | % | $ | N/A | — | % | ||||||
Citizens Bank | 47,794,683 | 15.55 | 24,596,462 | 8.00 | 30,745,577 | 10.00 | ||||||||||||
Tier I Capital (to Risk-Weighted Assets) | ||||||||||||||||||
Citizens Holding Company | 45,413,634 | 14.77 | 12,302,928 | 4.00 | N/A | — | ||||||||||||
Citizens Bank | 43,946,805 | 14.29 | 12,298,231 | 4.00 | 18,447,346 | 6.00 | ||||||||||||
Tier I Capital (to Average Assets) | ||||||||||||||||||
Citizens Holding Company | 45,413,634 | 8.83 | 20,569,960 | 4.00 | N/A | — | ||||||||||||
Citizens Bank | 43,946,805 | 8.59 | 20,474,027 | 4.00 | 25,592,534 | 5.00 |
Note 15. Fair Values of Financial Instruments
The following represents the carrying value and estimated fair market value of the Company’s financial instruments at December 31, 2003 and 2002:
2003 | 2002 | |||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
Financial assets | ||||||||||||
Cash and due from banks | $ | 15,101,810 | $ | 15,101,810 | $ | 19,769,712 | $ | 19,769,712 | ||||
Interest bearing deposits with banks | 98,036 | 98,036 | 1,365,649 | 1,365,649 | ||||||||
Securities available-for-sale | 143,181,383 | 143,181,383 | 162,276,305 | 162,276,305 | ||||||||
Net loans | 351,937,005 | 352,350,667 | 303,952,527 | 305,656,861 | ||||||||
Accrued interest receivable | 4,206,104 | 4,206,104 | 4,111,119 | 4,111,110 | ||||||||
Federal funds sold | — | — | 2,300,000 | 2,300,000 | ||||||||
Financial liabilities | ||||||||||||
Deposits | $ | 438,697,298 | $ | 438,767,465 | $ | 432,768,175 | $ | 433,735,968 | ||||
Federal Home Loan Bank borrowings | 47,636,847 | 47,456,140 | 24,606,135 | 24,606,135 | ||||||||
Accrued interest payable | 668,538 | 668,538 | 995,720 | 995,720 | ||||||||
Federal funds purchased | 1,500,000 | 1,500,000 | — | — |
The fair value estimates, methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments were:
Note 15. Continued
Cash and Due from Banks and Interest Bearing Deposits with Banks
The carrying amounts reported in the balance sheet for these instruments approximate those assets’ fair values because of their immediate and shorter-term maturities.
Securities Available-for-Sale
Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Net Loans
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (i.e., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans, and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest receivable approximates its fair value.
Federal Funds Sold and Purchased
Due to the short term nature of these instruments, the carrying amount is equal to the fair value.
Deposits
The fair values for demand deposits, NOW and money market accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and time deposits approximate their fair values at the reporting date. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying amount of accrued interest payable approximates its fair value.
Federal Home Loan Bank Borrowings
The fair value of the portion of Federal Home Loan Bank advances that matures within 90 days approximates its fair value. For longer term maturities, the fair value is based on discounted cash flow analysis.
Off-Balance Sheet Instruments
The fair value of commitments to extend credit and letters of credit are estimated using fees currently charged to enter into similar agreements. The fees associated with these financial instruments are not material.
Note 16. Stock Options
The Company has a directors’ stock compensation plan and employees’ long-term incentive plan. Under the directors’ plan the Company may grant options up to 105,000 shares of common stock. The price of each option is equal to the market price determined as of the option grant date. Options granted are exercisable after 6 months and expire after 10 years. Under the employees’ incentive plan the Company may grant options up to 7 percent of the total number of shares of common stock, which may be issued and outstanding. Incentive options must be granted within 10 years of the adoption of the plan and expire no later than 10 years from the grant date. The exercise price is equal to the market price of the Company’s stock on the date of grant.
Following is a summary of the status of the plans for the years ending December 31, 2003, 2002 and 2001:
Directors’ Plan | Employees’ Plan | |||||||||||
Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||
Outstanding at January 1, 2001 | 40,800 | $ | 8.49 | 22,950 | $ | 9.51 | ||||||
Granted | 15,000 | 10.83 | 6,000 | 11.25 | ||||||||
Exercised | — | — | — | — | ||||||||
Forfeited | — | — | (1,500 | ) | 10.33 | |||||||
Outstanding at December 31, 2001 | 55,800 | $ | 9.12 | 27,450 | $ | 9.85 | ||||||
Granted | 15,000 | 15.00 | 38,000 | 14.68 | ||||||||
Exercised | — | — | (11,550 | ) | 9.51 | |||||||
Forfeited | — | — | — | — | ||||||||
Outstanding at December 31, 2002 | 70,800 | $ | 10.37 | 53,900 | $ | 13.33 | ||||||
Granted | 16,500 | 16.40 | 41,500 | 14.57 | ||||||||
Exercised | (3,300 | ) | 7.15 | (1,750 | ) | 12.80 | ||||||
Forfeited | — | — | — | — | ||||||||
Outstanding at December 31, 2003 | 84,000 | $ | 11.68 | 93,650 | $ | 13.89 | ||||||
Options exercisable at: | ||||||||||||
December 31, 2002 | 70,800 | $ | 10.37 | 53,900 | $ | 13.33 | ||||||
December 31, 2003 | 84,000 | $ | 11.68 | 93,650 | $ | 13.89 | ||||||
Weighted average fair value of options granted during years ended | ||||||||||||
December 31, 2002 | $ | 3.85 | $ | 3.76 | ||||||||
December 31, 2003 | $ | 4.21 | $ | 3.74 | ||||||||