Washington, D.C. 20549

FORM 10–Q

(Mark One)

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2004
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                to
	Commission File No:  0 - 14535

 

CITIZENS BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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: 1,985,276 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on September 30, 2004.

 

 

PART 1.  FINANCIAL INFORMATION

ITEM 1.  Financial statements

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(In thousands, except share data)

 

		2004			2003
		(Unaudited)
ASSETS
Cash and due from banks		$	9,576		$	11,694
Interest-bearing deposits with banks		314			108
Certificates of deposit		800			2,983
Investment securities available for sale, at fair value		77,572			97,301
Investment securities held to maturity, at cost		10,081			10,553
Other investments		1,848			2,734
Loans receivable, net		200,042			208,814
Premises and equipment, net		8,635			9,161
Cash surrender value of life insurance		8,480			8,150
Foreclosed real estate, net		1,418			2,053
Other assets		6,851			6,892
Total assets		$	325,617		$	360,443
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits		$	57,165		$	55,832
Interest-bearing deposits		210,204			220,947
Total deposits		267,369			276,779
Accrued expenses and other liabilities		2,877			3,219
Federal funds purchased		—			4,000
Notes payable		540			540
Trust preferred securities		5,000			5,000
Advances from Federal Home Loan Bank		24,500			46,961
Total liabilities		300,286			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		7,443			7,445
Retained earnings		17,461			16,114
Treasury stock at cost, 244,789 and 249,518 shares at September 30, 2004 and December 31, 2003, respectively		(1,987		)	(2,025		)
Accumulated other comprehensive income, net of income taxes		94			90
Total stockholders’ equity		25,331			23,944
		$	325,617		$	360,443

 

See notes to consolidated financial statements.

 

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - In thousands, except per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Interest income:
Loans, including fees		$	3,691		$	3,681		$	11,576		$	11,104
Investment securities:
Taxable		668			592			2,115			2,020
Tax-exempt		204			244			613			725
Federal funds sold		—			1			—			10
Interest-bearing deposits		3			36			22			114
Total interest income		4,566			4,554			14,326			13,973
Interest expense:
Deposits		692			747			2,051			2,491
Other borrowings		319			304			882			902
Total interest expense		1,011			1,051			2,933			3,393
Net interest income		3,555			3,503			11,393			10,580
Provision for loan losses		225			100			775			380
Net interest income after provision for loan losses		3,330			3,403			10,618			10,200
Noninterest income:
Service charges on deposits		1,017			965			2,794			2,702
Gain on sales of securities		—			489			58			707
Gain on sales of assets		75			10			149			10
Other operating income		352			253			1,329			839
Total noninterest income		1,444			1,717			4,330			4,258
Noninterest expense:
Salaries and employee benefits		2,026			1,847			6,109			5,478
Net occupancy and equipment		689			662			2,005			1,964
Other operating expenses		1,612			1,907			4,728			4,612
Total noninterest expense		4,327			4,416			12,842			12,054
Income before income taxes		447			704			2,106			2,404
Income tax expense		66			135			448			512
Net income		$	381		$	569		$	1,658		$	1,892
Net income per share - basic		$	0.18		$	0.27		$	0.80		$	0.91
Net income per share - diluted		$	0.18		$	0.27		$	0.80		$	0.91
Weighted average outstanding shares - basic		2,075			2,073			2,074			2,077
Weighted average outstanding shares - diluted		2,080			2,073			2,080			2,077
Dividends per common share		$	—		$	—		$	0.15		$	0.15

 

See notes to consolidated financial statements.

 

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(In thousands)

 

		September 30,
		2004			2003
		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	1,658		$	1,892
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		775			380
Depreciation		807			836
Amortization and accretion, net		860			1,126
Provision for deferred income taxes		55			(166		)
Gain on sale of assets and investments		(207		)	(717		)
Change in other assets		(350		)	672
Change in accrued expenses and other liabilities		(341		)	(1,562		)
Net cash provided by operating activities		3,257			2,461
INVESTING ACTIVITIES:
Proceeds from calls and maturities of investment securities held to maturity		453			530
Proceeds from sales and maturities of investment securities available for sale		28,679			45,247
Purchases of investment securities held to maturity		—			(7,229		)
Purchases of investment securities available for sale		(9,423		)	(38,236		)
Net change in other investments		886			92
Net change in loans receivable		7,027			5,195
Increase in cash surrender value of life insurance		(98		)	(1,006		)
Net cash and cash equivalents acquired from CFS Bancshares		—			2,612
Net proceeds from the sale of foreclosed properties		1,543			—
Purchases of premises and equipment, net		(272		)	(457		)
Net change in interest bearing deposits with banks		(206		)	10,852
Net change in certificates of deposit		2,183			46
Net cash provided by investing activities		30,772			17,646
FINANCING ACTIVITIES:
Net change in deposits		(9,410		)	(14,681		)
Sale of treasury stock		38			20
Principal payments on debt		—			(200		)
Net change in advances from Federal Home Loan Bank		(22,461		)	(2,739		)
Decrease in federal funds sold		(4,000		)	—
Net change in additional paid-in-capital		(2		)	—
Dividends paid		(311		)	(312		)
Net cash used in financing activities		(36,146		)	(17,912		)
Net change in cash and cash equivalents		(2,117		)	2,195
Cash and and cash equivalents, beginning of period		11,694			11,117
Cash and and cash equivalents at end of period		$	9,577		$	13,312
Supplemental disclosures of cash paid during the period for:
Interest		$	3,039		$	3,384
Income taxes		$	638		$	628
Supplemental disclosures of noncash transactions:
Change in unrealized gain (loss) on investment securities available for sale, net of taxes		$	4		$	(571	)

 

See notes to consolidated financial statements.

 

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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 and nine month periods ended September 30, 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 nine 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

 

No recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by us have occurred during the quarter ending September 30, 2004, other than the items described below.

 

In March 2004, the FASB issued an exposure draft on “Share-Based Payment”.  The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the

 

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fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  This proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally would require instead that such transactions be accounted for using a fair-value-based method.  This Statement, if approved, was scheduled to be effective for awards that are granted, modified, or settled in fiscal years beginning after a) December 15, 2004 for public entities and nonpublic entities that used the fair-value-based method of accounting under the original provisions of Statement 123 for recognition or pro forma disclosure purposes and b) December 15, 2005 for all other nonpublic entities. On October 16, 2004, the FASB delayed the effective date of this proposal by six months and anticipates it will be effective for by the third quarter of 2005. Retrospective application of this Statement is not permitted.  The adoption of this Statement, if approved, could have an impact on the Company’s financial position or results of operations.

 

In March 2004, the Securities and Exchange Commission staff released Staff Accounting Bulletin (SAB) No. 105, “Application of Accounting Principles to Loan Commitments.” This SAB disallows the inclusion of expected future cash flows related to the servicing of a loan in the determination of the fair value of a loan commitment. Further, no other internally developed intangible asset should be recorded as part of the loan commitment derivative. Recognition of intangible assets would only be appropriate in a third-party transaction, such as a purchase of a loan commitment or in a business combination. The SAB is effective for all loan commitments entered into after March 31, 2004, but does not require retroactive adoption for loan commitments entered into on or before March 31, 2004. Adoption of this SAB did not have a material effect on the Company’s Condensed Consolidated Financial Statements.

 

In March 2004, the FASB approved certain additional provisions of the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, including measurement guidance for evaluating whether an “other than temporary impairment” has occurred for marketable securities and cost method investments.  Additional disclosures are also required for cost method investments, effective at the end of the current fiscal year. The guidance for determining the amount of impairment was scheduled to be effective for periods ending after June 15, 2004, but has been delayed indefinitely pending implementation guidance by the FASB. The adoption of this EITF is not expected to have a material effect on the Company’s Consolidated Financial Statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

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2.  STOCK BASED COMPENSATION

 

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 September 30,						For the nine months ended September 30,
		2004			2003			2004			2003
As reported net income available to common stockholders		$	381		$	569		$	1,658		$	1,892
Less: stock-based compensation expense determined under fair value method, net of tax		(8		)	(4		)	(22		)	(12		)
Pro forma net income		$	373		$	565		$	1,636		$	1,880
As reported earnings per share		$	0.18		$	0.27		$	0.80		$	0.91
Pro forma earnings per share		$	0.18		$	0.27		$	0.79		$	0.91
As reported earnings per diluted share		$	0.18		$	0.27		$	0.80		$	0.91
Pro forma earnings per diluted share		$	0.18		$	0.27		$	0.79		$	0.91

 

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.

 

3.  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.

 

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The following table presents information about the Company’s intangible assets at (in thousands):

 

		September 30, 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		$	1,688		$	2,836		$	1,385

 

The following table presents information about aggregate amortization expense (in thousands):

 

		For the 3 months ended September 30, 2004			For the 9 months ended September 30, 2004			For the 3 months ended September 30, 2003			For the 9 months ended September 30, 2003
Aggregate amortization expense of core deposit intangibles:		$	101		$	303		$	101		$	286
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2004		$	405
2005		$	405
2006		$	405
2007		$	112
2008 and thereafter		$	124

 

4.  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 and nine month periods ended September 30, 2004 and 2003 (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net Income		$	381		$	569		$	1,658		$	1,892
Other comprehensive income (loss)		1,102			(1,325		)	4			(571		)
Comprehensive income		$	1,483		$	(756	)	$	1,662		$	1,321

 

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5.  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 nine months ended September 30, 2004 and 2003 (in thousands, except per share data):

 

		Net Income			Shares		Per Share
		(Numerator)			(Denominator)		Amount
Three Months ended September 30, 2004
Basic earnings per share		$	381		2,075		$	0.18
Effect of dilutive securities: options to purchase common shares		—			5		$	—
Diluted earnings per share		$	381		2,080		$	0.18
Three Months ended September 30, 2003
Basic earnings per share		$	569		2,073		$	0.27
Effect of dilutive securities: options to purchase common shares		—			—		—
Diluted earnings per share		$	569		2,073		$	0.27
Nine Months ended September 30, 2004
Basic earnings per share		$	1,658		2,074		$	0.80
Effect of dilutive securities: options to purchase common shares		—			6		$	—
Diluted earnings per share		$	1,658		2,080		$	0.80
Nine Months ended September 30, 2003
Basic earnings per share		$	1,892		2,077		$	0.91
Effect of dilutive securities: options to purchase common shares		—			—		—
Diluted earnings per share		$	1,892		2,077		$	0.91

 

RECLASSIFICATIONS

 

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

 

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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 September 30, 2004 and the changes in the financial condition and results of operations for the three and nine month periods ended September 30, 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

 

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comprehensive income.  The Company had no investment securities classified as trading 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, not only on individual assets and their related cash flow forecasts, sales values, and independent appraisals, but also on 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 the 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, 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 September 30, 2004 were $325,617,000, a decrease of $34,826,000 or 10% compared to $360,443,000 at December 31, 2003. This decrease is due to the planned effort of the Company’s management to reposition the Company’s balance sheet, reduce its exposure to interest rate risk and benefit from continuing interest rate increases.  The Company may take advantage of additional opportunities as they arise to further improve asset yields and/or reduce long-term funding costs during the fiscal year.

 

At September 30, 2004, the Company maintained a balance of cash and due from banks of $9,576,000 representing a decrease of $2,118,000 from December 31, 2003.  Interest bearing deposits with banks increased to $314,000 from $108,000 at December 31, 2003.  Certificates of Deposit decreased $2,183,000 as the Company’s commitment in the Community Development Financial Institution Program (the CDFI) expires.  The CDFI program required the Company to place

 

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certificates of deposit in other CDFI institutions to fund economic development in local communities.  The Company is not renewing these certificates of deposit as they mature.

 

Investment securities classified as available for sale and held to maturity also decreased $19,729,000 and $472,000, respectively, since December 31, 2003.  In March 2004, the Company sold approximately $11,400,000 of investments available for sale for a gain of $58,000 to restructure and reduce the interest rate risk of its investment portfolio.  The remaining decrease in investments available for sale is attributed to called securities and pay-downs of mortgage-backed securities in the investment portfolio.

 

Loans receivable, net decreased $8,772,000 to $200,042,000 for the period ended September 30, 2004 compared to $208,814,000 at December 31, 2003.  In June 2004, the Company sold approximately $2,400,000 of its mortgage loan portfolio in its effort to reduce the interest rate risk and improve asset quality.  The Company broke even on the sale of those mortgage loans.

 

Total liabilities decreased $36,213,000 to $300,286,000 at September 30, 2004 compared to $336,499,000 at December 31, 2003. Total deposits, a component of total liabilities, decreased $9,410,000 from $276,779,000 at December 31, 2003 to $267,369,000 at September 30, 2004.  The decrease in deposits is partially attributed to a planned decline in interest-bearing deposits with governmental customers.  The Company elected not to renew several certificates of deposit due to the required collateralization of the deposits in the form of pledged investment securities.  By not renewing some of its governmental deposits, the Company mitigated its exposure to rising interest rates by reducing its investment portfolio and effectively, its cost of funds by relying more on deposits acquired through the open market.  Another significant component of total liabilities, advances from Federal Home Loan Bank decreased $22,461,000 to $24,500,000 at September 30, 2004 compared to $46,961,000 at December 31, 2003.

 

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 September 30, 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 September 30, 2004		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Treasury and
U.S. Government agencies		$	9,902		$	42		$	4		$	9,940
State, county, and municipal securities		13,093			518			3			$	13,608
Mortgage-backed securities		53,035			145			286			$	52,894
Equity securities (1)		1,400			—			270			1,130
Totals		$	77,430		$	705		$	563		$	77,572

 

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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)		1,400			—			231			1,169
Totals		$	97,165		$	786		$	650		$	97,301

 

(1) The equity securities represent agency dividends received deduction (DRD) preferred stock issued by FNMA and FHLMC.  These securities are callable at par, the interest rates reprice periodically and the interest earned is 70 percent tax free.

 

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

 

At September 30, 2004		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Treasury and
U.S. Government agencies		$	3,000		$	2		$	16		$	2,986
State, county, and municipal securities		5,390			229			—			5,619
Mortgage-backed securities		1,691			5			31			1,665
Totals		$	10,081		$	236		$	47		$	10,270

 

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

 

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