UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10 - Q

 

 

Commission File No:  0 - - 14535

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý  Yes  o  No.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)     o  Yes  ý  No.

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     o  Yes  o  No.

 

SEC 1296 (08-03)           Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding for each of the issuer’s classes of common stock as of the latest practicable date: 1,983,876 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on April 30, 2004.

 

 

PART 1.                FINANCIAL INFORMATION

ITEM 1.  Financial statements

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 AND DECEMBER 31, 2003

(In thousands, except share data)

 

		2004			2003
		(Unaudited)
ASSETS
Cash and due from banks		$	10,790		$	11,694
Interest-bearing deposits with banks		1,619			108
Certificates of deposit		1,683			2,983
Investment securities available for sale, at fair value		81,707			97,301
Investment securities held to maturity, at cost		10,329			10,553
Other investments		1,847			2,734
Loans receivable, net		210,862			208,814
Premises and equipment, net		9,003			9,161
Cash surrender value of life insurance		8,226			8,150
Foreclosed real estate, net		2,431			2,053
Other assets		6,721			6,892
Total assets		$	345,218		$	360,443
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits		$	74,470		$	55,832
Interest-bearing deposits		219,972			220,947
Total deposits		294,442			276,779
Accrued expenses and other liabilities		3,048			3,219
Federal funds purchased		—			4,000
Notes payable		540			540
Trust preferred securities		5,000			5,000
Advances from Federal Home Loan Bank		16,961			46,961
Total liabilities		319,991			336,499
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock - $1 par value; 15,000,000 shares authorized; 2,230,065 shares issued		2,230			2,230
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding		90			90
Additional paid-in capital		7,445			7,445
Retained earnings		16,777			16,114
Treasury stock at cost, 246,189 and 249,518 shares at March 31, 2004 and December 31, 2003, respectively		(1,999		)	(2,025		)
Accumulated other comprehensive income, net of income taxes		684			90
Total stockholders’ equity		25,227			23,944
		$	345,218		$	360,443

 

See notes to consolidated financial statements.

 

2

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - In thousands, except per share data)

 

		Three Months Ended March 31,
		2004			2003
Interest income:
Loans, including fees		$	3,941		$	3,465
Investment securities:
Taxable		819			653
Tax-exempt		207			235
Federal funds sold		—			2
Interest-bearing deposits		13			40
Total interest income		4,980			4,395
Interest expense:
Deposits		700			918
Other borrowings		281			263
Total interest expense		981			1,181
Net interest income		3,999			3,214
Provision for loan losses		300			215
Net interest income after provision for loan losses		3,699			2,999
Noninterest income:
Service charges on deposits		843			841
Gain on sales of securities		58			—
Gain on sales of assets		7			—
Other operating income		290			308
Total noninterest income		1,198			1,149
Noninterest expense:
Salaries and employee benefits		1,954			1,756
Net occupancy and equipment		651			562
Other operating expenses		1,432			1,068
Total noninterest expense		4,037			3,386
Income before income taxes		860			762
Income tax expense		198			158
Net income		$	662		$	604
Net income per share - basic and diluted		$	0.32		$	0.29
Weighted average outstanding shares - basic		2,072			2,079
Weighted average outstanding shares - diluted		2,082			2,079
Dividends per common share		$	—		$	0.15

 

See notes to consolidated financial statements.

 

3

 

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

(In thousands)

 

		March 31,
		2004			2003
		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	662		$	604
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		300			215
Depreciation		261			257
Amortization and accretion, net		111			36
Provision for deferred income taxes		114			—
Gain on sale of assets and investments		(65		)	—
Change in other assets		(426		)	1,402
Change in accrued expenses and other liabilities		(171		)	1,434
Net cash provided by operating activities		786			3,948
INVESTING ACTIVITIES:
Proceeds from calls and maturities of investment securities held to maturity		217			335
Proceeds from sales and maturities of investment securities available for sale		17,397			5,029
Purchases of investment securities held to maturity		—			(3,651		)
Purchases of investment securities available for sale		(1,016		)	(8,462		)
Net change in other investments		887			(395		)
Net change in loans receivable		(2,576		)	3,618
Net expenditures on foreclosed real estate		18			—
Increase in cash surrender value of life insurance		—			(323		)
Net cash and cash equivalents acquired from CFS Bancshares		—			2,802
Purchases of premises and equipment, net		(95		)	(113		)
Net change in interest bearing deposits with banks		(1,511		)	14,314
Net change in certificates of deposit		1,300			—
Net cash provided by investing activities		14,621			13,154
FINANCING ACTIVITIES:
Net change in deposits		17,663			(23,515		)
Sale of treasury stock		26			—
Net change in advances from Federal Home Loan Bank		(30,000		)	15,300
Decrease in federal funds sold		(4,000		)	—
Dividends paid		—			(312		)
Net cash used in financing activities		(16,311		)	(8,527		)
Net change in cash and cash equivalents		(904		)	8,575
Cash and and cash equivalents, beginning of period		11,694			11,117
Cash and and cash equivalents at end of period		$	10,790		$	19,692
Supplemental disclosures of cash paid during the period for:
Interest		$	1,017		$	1,066
Income taxes		$	150		$	181
Supplemental disclosures of noncash transactions:
Change in unrealized gain (loss) on investment securities available for sale, net of taxes		$	594		$	294

 

See notes to consolidated financial statements.

 

4

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

 

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Citizens Bancshares Corporation (the “Company”) is a holding company that provides a full range of commercial banking and mortgage brokerage services to individual and corporate customers in metropolitan Atlanta and Columbus, Georgia, and in Birmingham and Eutaw, Alabama, through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank operates under a state charter and serves its customers through eight full-service branches in metropolitan Atlanta, Georgia, one full-service branch in Columbus, Georgia, two full-service branches in Birmingham, Alabama, and one full-service branch in Eutaw, Alabama.

 

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required by generally accepted accounting principles are not included herein. These interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2003.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2004 fiscal year.

 

The consolidated financial statements of the Company for the three month periods ended March 31, 2004 and 2003 are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the three month periods have been included.  All adjustments are of a normal recurring nature.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Accounting Policies

 

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which often require the judgment of management in the selection and application of certain accounting principles and methods.  Reference is made to the accounting policies of the Company described in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.  The Company has followed those policies in preparing this report.  Management believes that the quality and reasonableness of its most critical policies enable the fair presentation of its financial position and of its results of operations.

 

Recently Issued Accounting Standards

 

In December 2002, the Financial Accounting Standards Board (FASB) issued Statements of Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure—an Amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures about the method of accounting for stock-based employee compensation and

 

5

 

the effect of the method used on reported results in both annual and interim financial statements. This Statement was effective for financial statements for fiscal years ending after December 15, 2002. As permitted by SFAS No. 148, during 2004 the Company continued to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.

 

The Company’s as reported and pro forma information, including stock-based compensation expense as if the fair-value based method had been applied, is illustrated in the following table (in thousands):

 

		For the three months ended March 31,
		2004			2003
As reported net income available to common stockholders		$	662		$	604
Less: stock-based compensation expense determined under fair value method, net of tax		(7		)	(4		)
Pro forma net income		$	655.00		$	600.00
As reported earnings per share		$	0.32		$	0.29
Pro forma earnings per share		$	0.32		$	0.29
As reported earnings per diluted share		$	0.32		$	0.29
Pro forma earnings per diluted share		$	0.31		$	0.29

 

Compensation expense in the pro forma disclosures is not indicative of future amounts, as options vest over several years and additional grants could be made each year.

 

2.  INTANGIBLE ASSETS

 

Finite lived intangible assets of the Company represent deposit assumption premiums recorded upon the purchase of certain assets and liabilities from other financial institutions.  Deposit assumption premiums are amortized over seven years, the estimated average lives of the deposit bases acquired, using the straight-line method and are included within other assets on the Consolidated Balance Sheets.

 

The Company applies a fair value-based impairment test to the carrying value of goodwill on an annual basis and on an interim basis if certain events or circumstances indicate that an impairment loss may have been incurred.

 

The following table presents information about our intangible assets at March 31, 2004 and December 31, 2003 (in thousands):

 

6

 

		March 31, 2004						December 31, 2003
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Unamortized intangible asset:
Goodwill		$	362		$	—		$	362		$	—
Amortized intangible assets:
Core deposit intangibles		$	2,836		$	1,486		$	2,836		$	1,385

 

The following table presents information about aggregate amortization expense:

 

		For the 3 months ended March 31, 2004			For the 3 months ended March 31, 2003
Aggregate amortization expense of core deposit intangibles:		$	101		$	88
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2004		$	405
2005		$	405
2006		$	405
2007		$	112
2008		$	53

 

3.  COMPREHENSIVE INCOME

 

Comprehensive income includes: (1) reported net income and (2) unrealized gains and losses on marketable securities.  The following table shows our comprehensive income for the three months ended March 31, 2004 and 2003 (in thousands):

 

		Three Months Ended March 31,
		2004			2003
Net Income		$	662		$	604
Other comprehensive income		594			294
Comprehensive income		$	1,256		$	898

 

7

 

4.  NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

 

Basic and diluted net income per common and potential common share has been calculated based on the weighted average number of shares outstanding.  The following schedule reconciles the numerator and denominator of the basic and diluted net income per common and potential common share for the three months ended March 31, 2004 and 2003 (in thousands, except per share data):

 

		Net Income (Numerator)			Shares (Denominator)		Per Share Amount
Three month ended March 31, 2004
Basic earnings per share		$	662		2,072		$	0.32
Effect of dilutive securities: options to purchase common shares		—			10		—
Diluted earnings per share		$	662		2,082		$	0.32
Three month ended March 31, 2003
Basic earnings per share		$	604		2,079		$	0.29
Effect of dilutive securities: options to purchase common shares		—			—		—
Diluted earnings per share		$	604		2,079		$	0.29

 

8

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

INTRODUCTION

 

Citizens Bancshares Corporation (the “Company”) is a holding company that provides a full range of commercial banking and mortgage brokerage services to individuals and corporate customers in its primary market areas, metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabama through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal Reserve System and operates under a state charter.  The Company serves its customers through 12 full-service branches in Georgia and Alabama.

 

Forward Looking Statements

 

In addition to historical information, this report on Form 10-Q may contain forward-looking statements. For this purpose, any statements contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties. Without limiting the foregoing, the words “believe,” “anticipates,” “plan,” expects,” and similar expressions are intended to identify forward-looking statements.

 

Forward-looking statements are based on current management expectations and, by their nature, are subject to risk and uncertainties because of the possibility of changes in underlying factors and assumptions. Actual conditions, events or results could differ materially from those contained in or implied by such forward-looking statements for a variety of reasons, including: sharp and/or rapid changes in interest rates; significant changes in the economic scenario from the current anticipated scenario which could materially change anticipated credit quality trends and the ability to generate loans and gather deposits; significant delay in or inability to execute strategic initiatives designed to grow revenues and/or control expenses; unanticipated issues during the integration of acquisitions; and significant changes in accounting, tax or regulatory practices or requirements. The Company undertakes no obligation to, nor does it intend to, update forward-looking statements to reflect circumstances or events that occur after the date hereof or to reflect the occurrence of unanticipated events.

 

The following discussion is of the Company’s financial condition as of March 31, 2004 and the changes in the financial condition and results of operations for the three month periods ended March 31, 2004 and 2003.

 

Critical Accounting Policies

 

In response to the Securities and Exchange Commission’s (“SEC”) Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has identified the following as the most critical accounting policies upon which its financial status depends.  The critical policies were determined by considering accounting policies that involve the most complex or subjective decisions or assessments.  The Company’s most critical accounting policies relate to:

 

Investment Securities – The Company classifies investments in one of three categories based on management’s intent upon purchase: held to maturity securities which are reported at amortized cost, trading securities which are reported at fair value with unrealized holding gains and losses included in earnings, and available for sale securities which are recorded at fair value with unrealized holding gains and losses included as a component of accumulated other comprehensive income.  The Company had no investment securities classified as trading

 

9

 

securities during 2004 or 2003.

 

Premiums and discounts on available for sale and held to maturity securities are amortized or accreted using a method which approximates a level yield.

 

Gains and losses on sales of investment securities are recognized upon disposition, based on the adjusted cost of the specific security.  A decline in market value of any security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.

 

Loans – Loans are reported at principal amounts outstanding less unearned income and the allowance for loan losses.  Interest income on loans is recognized on a level-yield basis. Loan fees and certain direct origination costs are deferred and amortized over the estimated terms of the loans using the level-yield method.  Discounts on loans purchased are accreted using the level-yield method over the estimated remaining life of the loan purchased.

 

Allowance for Loan Losses - The Company provides for estimated losses on loans receivable when any significant and permanent decline in value occurs.  These estimates for losses are based on not only on individual assets and their related cash flow forecasts, sales values, independent appraisals, but also the volatility of certain real estate markets, and the concern for disposing of real estate in distressed markets.  For loans that are pooled for purposes of determining necessary provisions, estimates are based on loan types, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine the provision for losses is subject to the reasonableness of these estimates.  The adequacy of the allowance for loan losses is reviewed on a monthly basis by management and the Board of Directors.  On a quarterly basis a comprehensive review of the adequacy of the allowance for loan losses is performed.  This assessment is made in the context of historical losses as well as existing economic conditions, performance trends within specific portfolio segments, and individual concentrations of credit.  Loans are charged against the allowance when, in the opinion of management, such loans are deemed uncollectible and subsequent recoveries are added to the allowance.

 

A description of other accounting policies are summarized in Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.  The Company has followed those policies in preparing this report.

 

FINANCIAL CONDITION

 

Citizens Bancshares Corporation’s total assets at March 31, 2004  were $345,218,000, a decrease of $15,225,000 or 4% compared to $360,443,000 at December 31, 2003. This decrease is due to the planned effort of the Company’s management to reduce the size of the Company in order to improve its earnings and capital to assets ratios.

 

At March 31, 2004, the Company maintained a balance of cash and due from banks of $10,790,000 representing a decrease of $904,000 from December 31, 2003.  Investment securities classified as available for sale and held to maturity also decreased $15,594,000 and $224,000, respectively, since December 31, 2003.  The decrease in investments available for sale are attributable to security sales made in a planned decision to restructure the investment portfolio in order to reduce the portfolio duration risk and to fund the withdrawal of public funds that the Company elected not to renew.  This decision was premised on the fact that public deposits require a significant amount of collateralization in the form of pledged securities.  By opting not to renew some of its public deposits, the Company effectively reduced its cost of funds and relied more on deposits acquired through the open market.

 

10

 

Loans receivable, net increased $2,048,000 to $210,862,000 for the period ended March 31, 2004 compared to $208,814,000 at December 31, 2003.

 

Total liabilities decreased $16,508,000 to $319,991,000 at March 31, 2004 compared to $336,499,000 at December 31, 2003. Total deposits, a component of total liabilities, increased $17,663,000 from $276,779,000 at December 31, 2003 to $294,442,000 at March 31, 2004.  Another significant component of total liabilities, advances from Federal Home Loan Bank decreased $30,000,000 to $16,961,000.  This decrease in borrowings was funded by the increase in total deposits and the sale and maturity of investment securities.

 

INVESTMENT SECURITIES

 

The Company invests a portion of its assets in U.S. treasury bills and notes, U.S. government sponsored agency securities, mortgage backed bonds, as well as certain equity securities.  At March 31, 2004 and December 31, 2003, the Company’s investment securities portfolio represented approximately 27% and 31% of total assets, respectively.

 

Investment securities available for sale are summarized as follows (in thousands):

 

At March 31, 2004		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Treasury and U.S. Government agencies		$	9,947		$	185		$	—		$	10,132
State, county, and municipal securities		13,596			861						14,457
Mortgage-backed securities		55,727			353			105			55,975
Equity securities		1,400			—			257			1,143
Totals		$	80,670		$	1,399		$	362		$	81,707

 

At December 31, 2003		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Treasury and U.S. Government agencies		$	14,820		$	95		$	8		$	14,907
State, county, and municipal securities		13,602			450			14			14,038
Mortgage-backed securities		67,343			241			397			67,187
Equity securities		1,400			—			231			1,169
Totals		$	97,165		$	786		$	650		$	97,301

 

11

 

Investment securities held to maturity are summarized as follows (in thousands):

 

At March 31, 2004		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Treasury and U.S. Government agencies		$	3,000		$	16		$	1		$	3,015
Mortgage-backed securities		1,938			8			13			1,933
State, county, and municipal securities		5,391			329			—			5,720
Totals		$	10,329		$	353		$	14		$	10,668

 

At December 31, 2003		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Treasury and U.S. Government agencies		$	3,000		$	9		$	23		$	2,986
State, county, and municipal securities		5,549			213			—			5,762
Mortgage-backed securities		2,004			10			35			1,979
Totals		$	10,553		$	232		$	58		$	10,727

 

LOANS

 

Loans outstanding, by classification, are summarized as follows (in thousands):

 

			March 31, 2004			December 31, 2003
Commercial, financial, and agricultural			$	17,111		$	16,919
Installment			5,804			13,342
Real estate - mortgage			144,465			135,194
Real estate - construction			15,633			15,381
Other			32,437			32,379
			215,450			213,215
Less:	Net deferred loan fees		598			589
	Allowance for loan losses		3,471			3,240
	Discount on loans acquired		519			572
Loans receivable, net			$	210,862		$	208,814

 

12

 

NONPERFORMING ASSETS

 

Nonperforming assets include nonperforming loans, real estate acquired through foreclosure, and repossessed assets.  Nonperforming loans consist of loans that are past due with respect to principal or interest more than 90 days or have been placed on nonaccrual status.

 

With the exception of the loans included within nonperforming assets in the table below, management is not aware of any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed which (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (2) represent any information on material credits which management is aware that causes management to have serious doubts as to the abilities of such borrowers to comply with the loan repayment terms.

 

Nonperforming assets decreased by $1,730,000 to $6,800,000 at March 31, 2004 from $8,530,000 at December 31, 2003.  Improved monitoring and oversight of loans have contributed to this decline.  Nonperforming assets represents 3.14% of loans, net of unearned income, discounts, and real estate acquired through foreclosure at March 31, 2004 as compared to 4.06% at December 31, 2003.

 

The table below presents a summary of the Company’s nonperforming assets at March 31, 2004 and December 31, 2003.

 

		March 31, 2004			December 31, 2003
		(in thousands, except financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans		$	4,363		$	6,477
Past-due loans		6			—
Nonperforming loans		4,369			6,477
Real estate acquired through foreclosure		2,431			2,053
Total nonperforming assets		$	6,800		$	8,530
Ratios:
Nonperforming loans to loans, net of unearned income and discount on loans		2.04		%	3.05		%
Nonperforming assets to loans, net of unearned income, discounts, and real estate acquired through foreclosure		3.14		%	3.98		%
Nonperforming assets to total assets		1.97		%	2.37		%
Allowance for loan losses to nonperforming loans		79.45		%	50.02		%
Allowance for loan losses to nonperforming assets		51.04		%	37.98		%

 

13

 

ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses is primarily available to absorb losses inherent in the loan portfolio. Credit exposures deemed uncorrectable are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

 

The Company provides for estimated losses on loans receivable when any significant and permanent decline in value occurs.  These estimates for losses are based on individual assets and their cash flow forecasts, sales values, independent appraisals, the volatility of certain real estate markets, and concern for disposing of real estate in distressed markets.  For loans that are pooled for purposes of determining necessary provisions, estimates are based on loan types, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine the provision for losses is subject to the reasonableness of these estimates. The adequacy of the allowance for loan losses is reviewed on a monthly basis by management and the Board of Directors.  On a quarterly basis a comprehensive review of the adequacy of allowance for loan losses is performed.  This assessment is made in the context of historical losses as well as existing economic conditions, performance trends within specific portfolio segments, and individual concentrations of credit.

 

Loans are charged against the allowance when, in the opinion of management, such loans are deemed uncollectible and subsequent recoveries are added to the allowance.  For the three months ended March 31, 2004 provisions for loan losses totaled $300,000 compared to $215,000 for the same period in 2003.

 

The allowance for loan losses at March 31, 2004 was approximately $3,471,000, representing 1.62% of total loans, net of unearned income and discounts compared to approximately $3,240,000 at December 31, 2003, which represented 1.53% of total loans, net of unearned income and discounts.

 

Management believes the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the metropolitan Atlanta area. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

 

A substantial portion of the Company’s loan portfolio is secured by real estate in the metropolitan Atlanta market, including a concentration of loans to churches and convenience stores.  The Company’s outstanding church loans were approximately $53.2 million at March 31, 2004 and $36.6 million at December 31, 2003.  The Company’s loans to area convenience stores were approximately $27.1 million at March 31, 2004 and $27.3 million at December 31, 2003.  Accordingly, the ultimate collectability of the substantial portion of the Company’s loan portfolio is susceptible to changes in market conditions in the metropolitan Atlanta area.

 

14

 

The following table summarizes loans, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expense as of and for the three month period ended March 31, 2004 (amount in thousands, except financial ratios):

 

 

		2004
Loans, net of unearned income and discounts		$	214,333
Average loans, net of unearned income, discounts and the allowance for loan losses		$	210,542
Allowance for loans losses at the beginning of period		$	3,240
Loans charged off:
Commercial, financial, and agricultural		—
Real estate - loans		114
Installment loans to individuals		72
Total loans charged off		186
Recoveries of loans previously charged off:
Commercial, financial, and agricultural		69
Real estate - loans		21
Installment loans to individuals		27
Total loans recovered		117
Net loans charged off		69
Allowance for loan losses transferred from acquired institution		—
Additions to allowance for loan losses charged to operating expense		300
Allowance for loan losses at period end		$	3,471
Ratio of net loans charged off to average loans, net of unearned income, discounts, and the allowance for loan losses		0.03		%
Ratio of allowance for loan losses to loans, net of unearned income and discounts		1.62		%

 

15

 

DEPOSITS

 

Deposits are the Company’s primary source of funding loan growth.  Total deposits for the three month period ended March 31, 2004 increased by 6% or $17,662,000 to $294,442,000.  Noninterest-bearing deposits increased by $18,638,000 or 33%, while interest-bearing deposits decreased by $975,000 or 0.44%.  The increase in total deposits is primarily attributed to Corporate and Governmental customers who make significant monthly deposits and withdrawals based on their budgetary needs and the Company’s decision to not renew several governmental customer deposits.  Approximately $14,000,000 of the increase in noninterest bearing deposits was attributable to a single governmental customer, which withdrew the amount in April 2004.

 

The following is a summary of interest-bearing deposits (in thousands):

 

		March 31, 2004			December 31, 2003
NOW and money market accounts		$	57,592		$	54,840
Savings accounts		44,641			43,524
Time deposits of $100,000 or more		71,468			77,187
Other time deposits		46,271			45,396
		$	219,972		$	220,947

 

OTHER BORROWED FUNDS

 

While the Company continues to emphasize funding earning asset growth through deposits, the Company has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal Home Loan Bank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from the FHLB of $16,961,000 at March 31, 2004 and $46,961,000 at December 31, 2003.   The following advances are collateralized by a blanket lien on the Company’s 1-4 family mortgage loans.

 

Maturity		Callable		Type		March 31, 2004					December 31, 2003
April 2010		Quarterly		Fixed		5.82	%	$	10,000,000		5.82	%	$	10,000,000
July 2004		Daily		Variable		1.25	%	6,961,000			1.30	%	36,961,000
Total Principal Outstanding								$	16,961,000				$	46,961,000
Weighted Average Rate						3.94	%				3.76	%

 

The Company had an unsecured note payable of approximately $540,000 at March 31, 2004 and December 31, 2003.  The note bears interest at the lender’s prime rate minus 50 basis points.

 

16

 

RESULTS OF OPERATIONS

 

Net Interest Income:

 

Net interest income is the principal component of a financial institution’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds.  Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.

 

For the three month period ending March 31, 2004, net interest income increased $785,000 to $3,999,000 compared to $3,214,000 in the same period ended March 31, 2003.  This increase in net interest income is largely due to the increase in average earning assets.  Notably, for the three month period ending March 31, 2004, average loans, net of unearned income, discounts and the allowance for loan losses increased $5,837,000 to $213,890,000 compared to $208,053,000 at March 31, 2003.  In addition, interest income on investment securities increased $139,000 for the period ending March 31, 2004 when compared to the same period ending March 31, 2003.  Two factors contributed to the increase in interest income on investment securities: 1) the yield on investments improved in 2004, and 2) in 2004, the Company recorded three months of interest income on securities acquired from CFS Bancshares Corporation on February 28, 2003, as compared to one month of interest income in 2003.  In addition, total interest expense decreased $200,000 as the Company strategically eliminated a number of large public deposits from its portfolio.

 

Noninterest income:

 

Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services and origination fees from the Company’s mortgage lending division.  In addition, gains and losses realized from the sale of investment portfolio securities and sales of assets are included in noninterest income.  Non-interest income totaled $1,198,000 for the three month period ended March 31, 2004, an increase of $49,000 or 4% compared with the same period ended March 31, 2003.  This increase is primarily due to $65,000 net gains on the sale of securities and fixed assets.  The gains were partially offset by a decrease of $18,000 attributed to various immaterial components of other non-interest income.

 

Noninterest expense:

 

Non-interest expense totaled $4,037,000 for the three month period ended March 31, 2004, an increase of $651,000 or 19% compared to the same period in 2003.  The increase, in large part, is due to the acquisition of CFS Bancshares, Inc. on February 28, 2003, whereby the bank recorded only one month of operating expenses related to the acquired institution in 2003, compared to three months of expenses in 2004.   Much of the increases related to noninterest expenses are attributable to the additional two months of expenses recorded as a result of the acquisition.

 

Salaries and employee benefits increased by $198,000 or 11% for the three month period ended March 31, 2004 compared to the same period in 2003.  The addition of the CFS employee payroll for a full three months in first quarter ended March 31, 2004 as opposed to only one month in the comparable 2003 period, accounted for this change.

 

Net occupancy and equipment expense increased by $89,000 or 16% to $651,000 for the three month

 

17

 

period ended March 31, 2004 compared to the same period in 2003.  The increase is primarily the result of the acquisition of the Alabama Division on February 28, 2003, which has three full service branches.   Two additional months of depreciation expense on premises and equipment acquired from CFS Bancshares Corporation was recorded in the three month period ended March 31, 2004 as opposed to one month in the comparable 2003 period.

 

Other operating expenses increased $364,000 or 34% to $1,432,000 for the three month period ended March 31, 2004 compared to $1,068,000 for the same period in 2003.   This increase is due in large part to the acquisition of CFS Bancshares on February 28, 2003 and the recognition of operating expenses for three months in the first quarter of 2004 compared to only one month in the first quarter of 2003.

 

INTEREST RATE SENSITIVITY MANAGEMENT

 

Interest rate sensitivity management involves managing the potential impact of interest rate movements on net interest income within acceptable levels of risk.  The Company seeks to accomplish this by structuring the balance sheet so that repricing opportunities exist for both assets and liabilities in equivalent amounts and time intervals.  Imbalances in these repricing opportunities at any point in time constitute a financial institution’s interest rate risk.  The Company’s ability to reprice assets and liabilities in the same dollar amounts and at the same time minimizes interest rate risk.

 

One method of measuring the impact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest rate sensitive assets and interest rate sensitive liabilities at various time intervals is referred to as the gap.  The Company is liability sensitive on a short-term basis as reflected in the following table.  Generally, a net liability sensitive position indicates that there would be a negative impact on net interest income in an increasing rate environment.  However, interest rate sensitivity gap does not necessarily indicate the impact of general interest rate movements on the net interest margin, since all interest rates and yields do not adjust at the same velocity and the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company’s customers.  In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. The following table shows the contractual maturities of all investment securities at March 31, 2004.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  For conservative purposes, the Company has included demand deposits such as NOW, money market, and savings accounts in the three month category.  However, the actual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only a general indicator of potential effects of interest rate changes on net interest income.

 

The following table sets forth the distribution of the repricing of the Company’s interest rate sensitive assets and interest rate sensitive liabilities as of March 31,2004.

 

18

 

		Cumulative amounts as of March 31, 2004 Maturing and repricing within
		3 Months			3 to 12 Months			1 to 5 Years			Over 5 Years			Total
		(amounts in thousands, except ratios)
Interest-sensitive assets:
Investments		$	988		$	1,613		$	19,949		$	71,333		$	93,883
Certificates of deposit		688			95			900			—			1,683
Loans		69,656			8,130			75,079			62,585			215,450
Interest-bearing deposits with other banks		1,619			—			—			—			1,619
Total interest-sensitive assets		$	72,951		$	9,838		$	95,928		$	133,918		$	312,635
Interest-sensitive liabilities:
Deposits  (a)		$	142,959		$	54,517		$	21,918		578			$	219,972
Notes payable		540			—			—			—			540
Trust preferred securities		—			—			5,000			—			5,000
Other borrowings		6,961			—			—			10,000			16,961
Total interest-sensitive liabilities		$	150,460		$	54,517		$	26,918		$	10,578		$	242,473
Interest-sensitivity gap		$	(77,509	)	$	(44,679	)	$	69,010		$	123,340		$	70,162
Cumulative interest-sensitivity gap to total interest-sensitive assets		(24.79		)%	(39.08		)%	(17.01		)%	22.44		%	22.44		%

 

(a) Savings, Now, and money market deposits totaling  $104,058 are included in the maturing in 3 months classification.

 

LIQUIDITY

 

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves.  Additionally, the Bank holding company requires cash for various operating needs including: dividends paid to shareholders; business combinations; capital injections to its subsidiaries; the servicing of debt; and the payment of general corporate expenses.

 

The primary source of liquidity for the Bank holding company is dividends from the Bank. The amount of dividends paid by the Bank to the Company is limited by various banking regulatory agencies.  The Georgia Department of Banking and Finance regulates dividend payments and must approve payments that exceed 50% of the Bank’s net income for the prior year. The total dividends that could be paid by the Bank to the Company in 2004 without prior regulatory approval is approximately $970,000.  Also, the Company has access to various capital markets. The Company does not anticipate any liquidity requirements in the near future that it will not be able to meet.

 

Asset and liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Company’s customers, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can earn a return that meets the investment requirements of its shareholders.  Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable cash position that meets both requirements.

 

19

 

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and, to a lesser extent, sales of investment securities available for sale.  Other short-term investments such as federal funds sold and maturing interest bearing deposits with other banks are additional sources of liquidity funding.

 

The liability portion of the balance sheet provides liquidity through various customers’ interest bearing and noninterest bearing deposit accounts. Federal funds purchased and other short-term borrowings are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs.

 

CAPITAL RESOURCES

 

Stockholders’ equity increased $1,283,000 for the three months ended March 31, 2004, primarily due to the increase in retained earnings and unrealized gains on investment securities.  Retained earnings increased by $662,000 to $16,777,000 due to net earnings for the three month period.  Also, for the three month period ended March 31, 2004, accumulated other comprehensive income increased $594,000 to $684,000, compared with $90,000 at December 31, 2003.  The increase is due to the impact of changing economic conditions and changes in market interest rates on the Company’s available for sale investment portfolio.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets.  As of March 31, 2004, the Bank’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 15%, 13%, and 8% respectively, compared with 14%, 13% and 8% respectively, at December 31, 2003.  As of March 31, 2004, the Company met all capital adequacy requirements to which it is subject.

 

20

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Quantitative information about the Company’s market risk at March 31, 2004 is as follows (in thousands):

 

		2004
		Carrying Value			Estimated Fair Value			Down 100 bp		Up 100 bp
Financial assets:
Interest-bearing deposits with banks		$	1,619		$	1,619		—	%	—	%
Certificates of deposit		1,683			1,683			—		—
Investment securities		92,036			92,375			1.76		(3.67	)
Loans receivable, net		215,450			212,525			1.63		(1.64	)
Financial liabilities:
Interest-bearing deposits		219,972			216,854			1.38		(1.29	)
Notes payable		540			540			—		—
Advances from Federal Home Loan Bank		16,961			18,212
Trust preferred securities		5,000			5,036			3.71		(3.51	)

 

The Company has adopted an asset/liability management program to monitor the Company’s interest rate sensitivity and to ensure that the Company is competitive in the loan and deposit markets.  Management seeks to manage the relationship between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.  The Company has not entered into any derivative financial instruments such as futures, forwards, swaps or options.  Additionally, refer to our interest rate sensitivity management and liquidity disclosures within Part 1, Item 2, of this Form 10-Q.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Based on the evaluation of our disclosure controls and procedures, the Company’s Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2004 in timely alerting them to material information required to be included in our reports filed with or furnished to the Securities and Exchange Commission.  There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

ITEM 1.		LEGAL PROCEEDINGS
		The Company is not aware of any material pending legal proceedings to which the Company or its subsidiary is a party or to which any of their property is subject.

 

21

 

ITEM 2.		CHANGES IN SECURITIES
		None
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES
		None
ITEM 4.		SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
		None.
ITEM 5.		OTHER INFORMATION
		None
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K
(a)	Exhibits:
		Exhibit 31
		Section 302 Certification by the Company’s executive officers with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
		Exhibit 32
		Section 906 Certification pursuant to Section 1350 of Chapter 63 of Title 18 U.S.C. by the Company’s executive officers with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
(b)	Reports on Form 8-K:
		Press Release of Registrant, dated May 14, 2004, announcing 2004 first quarter results.

 

22

 

SIGNATURES

 

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CITIZENS BANCSHARES CORPORATION

 

 

Date:  May 14, 2004	By:	/s/ James E. Young
	James E. Young
	President and Chief Executive Officer
Date:  May 14, 2004	By:	/s/ Willard C. Lewis
	Willard C. Lewis
	Senior Executive Vice President and Chief Operating Officer
Date:  May 14, 2004	By:	/s/ Samuel J. Cox
	Samuel J. Cox
	Senior Vice President and Chief Financial Officer

 

23