UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

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 March 31, 2005
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)

 

Georgia		58 – 1631302
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
175 John Wesley Dobbs Avenue, N.E., Atlanta, Georgia		30303
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code:     (404) 659 - 5959

 

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: 1,995,631 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on March 31, 2005.

 

 

PART 1.	FINANCIAL INFORMATION
ITEM 1.	Financial statements

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2005 AND DECEMBER 31, 2004

(In thousands, except share data)

 

		2005			2004
		(Unaudited)
ASSETS
Cash and due from banks		$	11,992		$	10,875
Interest-bearing deposits with banks		3,706			734
Certificates of deposit		700			800
Investment securities available for sale, at fair value		67,347			74,687
Investment securities held to maturity, at cost		9,892			9,980
Other investments		1,820			2,469
Loans receivable, net		207,745			207,354
Premises and equipment, net		8,151			8,379
Cash surrender value of life insurance		8,811			8,740
Foreclosed real estate, net		401			1,430
Other assets		6,172			5,936
Total assets		$	326,737		$	331,384
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits		$	66,070		$	57,539
Interest-bearing deposits		211,401			208,963
Total deposits		277,471			266,502
Accrued expenses and other liabilities		2,744			3,056
Notes payable		540			540
Junior subordinated debentures		5,155			5,155
Advances from Federal Home Loan Bank		15,000			30,250
Total liabilities		300,910			305,503
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		7,441			7,442
Retained earnings		18,568			18,108
Treasury stock at cost, 234,434 and 240,643 shares at March 31, 2005 and December 31, 2004, respectively		(1,906		)	(1,955		)
Accumulated other comprehensive loss, net of income taxes		(596		)	(34		)
Total stockholders’ equity		25,827			25,881
		$	326,737		$	331,384

 

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,
		2005			2004
Interest income:
Loans, including fees		$	3,932		$	3,941
Investment securities:
Taxable		618			819
Tax-exempt		199			207
Interest-bearing deposits		11			13
Total interest income		4,760			4,980
Interest expense:
Deposits		845			700
Other borrowings		319			281
Total interest expense		1,164			981
Net interest income		3,596			3,999
Provision for loan losses		105			300
Net interest income after provision for loan losses		3,491			3,699
Noninterest income:
Service charges on deposits		827			843
Gain on sales of securities		46			58
Gain (loss) on sales of assets		(25		)	7
Other operating income		408			290
Total noninterest income		1,256			1,198
Noninterest expense:
Salaries and employee benefits		2,120			1,954
Net occupancy and equipment		664			651
Other operating expenses		1,385			1,432
Total noninterest expense		4,169			4,037
Income before income taxes		578			860
Income tax expense		118			198
Net income		$	460		$	662
Net income per share - basic and diluted		$	0.22		$	0.32
Weighted average outstanding shares - basic		2,081			2,072
Weighted average outstanding shares - diluted		2,093			2,082

 

See notes to consolidated financial statements.

 

3

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Unaudited  - In thousands)

 

		Common Stock					Nonvoting Common Stock					Additional Paid-in Capital			Retained Earnings			Treasury Stock					Accumulated Other Comprehensive Income (Loss)			Total
		Shares		Amount			Shares		Amount									Shares		Amount
Balance—December 31, 2003		2,230		$	2,230		90		$	90		$	7,445		$	16,114		(250	)	$	(2,025	)	$	90		$	23,944
Net income		—		—			—		—			—			662			—		—			—			662
Unrealized holding gains on investment securities available for sale—net of taxes of $43,882		—		—			—		—			—			—			—		—			633			633
Less reclassification adjustment for holding loss included in net income—net of taxes of $19,878		—		—			—		—			—			—			—		—			(39		)	(39		)
Comprehensive income		—		—			—		—			—			—			—		—			—			1,256
Sale of treasury stock		—		—			—		—			—			—			3		27			—			27
Balance—March 31, 2004		2,230		$	2,230		90		$	90		$	7,445		$	16,776		(247	)	$	(1,998	)	$	684		$	25,227
Balance—December 31, 2004		2,230		$	2,230		90		$	90		$	7,442		$	18,108		(241	)	$	(1,955	)	$	(34	)	$	25,881
Net income		—		—			—		—			—			460			—		—			—			460
Unrealized holding losses on investment securities available for sale—net of taxes of $273,934		—		—			—		—			—			—			—		—			(532		)	(532		)
Less reclassification adjustment for holding loss included in net income—net of taxes of $15,541		—		—			—		—			—			—			—		—			(30		)	(30		)
Comprehensive loss		—		—			—		—			—			—			—		—			—			(102		)
Sale of treasury stock		—		—			—		—			(1		)	—			6		49			—			48
Balance—March 31, 2005		2,230		$	2,230		90		$	90		$	7,441		$	18,568		(235	)	$	(1,906	)	$	(596	)	$	25,827

 

See notes to consolidated financial statements.

 

4

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(In thousands)

 

		March 31,
		2005			2004
		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	460		$	662
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		105			300
Depreciation		248			261
Amortization and accretion, net		178			111
Provision for deferred income taxes (benefit)		(15		)	114
Gain on sale of assets and investments		(71		)	(65		)
Change in other assets		(24		)	(426		)
Change in accrued expenses and other liabilities		(312		)	(171		)
Net cash provided by operating activities		569			786
INVESTING ACTIVITIES:
Proceeds from calls and maturities of investment securities held to maturity		84			217
Proceeds from sales and maturities of investment securities available for sale		6,426			17,397
Purchases of investment securities available for sale		—			(1,016		)
Net change in other investments		649			887
Net change in loans receivable		(539		)	(2,576		)
Net proceeds from the sale of foreclosed properties		1,053			18
Purchases of premises and equipment, net		(20		)	(95		)
Net change in interest bearing deposits with banks		(2,972		)	(1,511		)
Net change in certificates of deposit		100			1,300
Net cash provided by investing activities		4,781			14,621
FINANCING ACTIVITIES:
Net change in deposits		10,969			17,663
Sale of treasury stock		48			26
Net change in advances from Federal Home Loan Bank		(15,250		)	(30,000		)
Decrease in federal funds sold		—			(4,000		)
Net cash used in financing activities		(4,233		)	(16,311		)
Net change in cash and cash equivalents		1,117			(904		)
Cash and and cash equivalents, beginning of period		10,875			11,694
Cash and and cash equivalents at end of period		$	11,992		$	10,790
Supplemental disclosures of cash paid during the period for:
Interest		$	1,101		$	1,017
Income taxes		$	—		$	150
Supplemental disclosures of noncash transactions:
Change in unrealized gain (loss) on investment securities available for sale, net of taxes		$	(562	)	$	594

 

See notes to consolidated financial statements.

 

5

 

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 Company also owns and operates a wholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the “Trust”) through the issuance of pooled trust preferred securities.  However, in accordance with current accounting guidance, the Trust has not been consolidated in the financial statements.

 

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, 2004.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2005 fiscal year.

 

The consolidated financial statements of the Company for the three month period ended March 31, 2005 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 period 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, 2004.  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 March 31, 2005, other than the items described below.

 

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In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”).  SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements.  In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements.  SFAS No. 123(R) is effective beginning as of the first annual reporting period beginning after June 15, 2005.  The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial position, results of operations and cash flows.

 

In April 2005, the Securities and Exchange Commission’s Office of the Chief Accountant and its Division of Corporation Finance has released Staff Accounting Bulletin (SAB) No.107 to provide guidance regarding the application of FASB Statement No.123 (revised 2004), Share-Based Payment.  Statement No.123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  SAB 107 provides interpretive guidance related to the interaction between Statement No.123R and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to Statement No.123R.

 

In December 2003, the FASB issued FIN No. 46 (revised), “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), which addresses consolidation by business enterprises of variable interest entities.  FIN No. 46(R) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both.  FIN No. 46(R) also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest.  FIN No. 46(R) provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the entity lacks sufficient equity or its equity holders lack adequate decision-making ability.  The consolidation requirements of FIN No. 46(R) applied immediately to variable interest entities created after January 31, 2003.  The consolidation requirements applied to the Company’s existing variable interest entities in the first reporting period ending after March 15, 2004.  Certain of the disclosure requirements applied to all financial statements issued after December 31, 2003, regardless of when the variable interest entity was established.  The adoption of FIN No. 46(R) did not have a material impact on the Company’s financial position or results of operations.

 

In November 2003, the Emerging Issues Task Force (“EITF”) reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which other-than-temporary impairment has not been recognized.  Accordingly the EITF issued EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”  This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures.  The disclosure requirements of EITF No. 03-1 are effective for annual financial statements for fiscal years ending after June 15, 2004.  The effective date for the measurement and recognition guidance of EITF No. 03-1 has been delayed.  The FASB staff has issued a proposed Board-directed FASB Staff Position (“FSP”), FSP EITF 03-1-a, “Implementation Guidance for the

 

7

 

Application of Paragraph 16 of Issue No. 03-1.” The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under the measurement and recognition requirements of EITF No. 03-1.  The delay of the effective date for the measurement and recognition requirements of EITF No. 03-1 will be superseded concurrent with the final issuance of FSP EITF 03-1-a.  Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the Company’s financial position or results of operations.

 

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.

 

8

 

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, except per share data):

 

		For the three months ended March 31,
		2005			2004
As reported net income available to common stockholders		$	460		$	662
Less: stock-based compensation expense determined under fair value method, net of tax		(4		)	(7		)
Pro forma net income		$	456		$	655
As reported earnings per share		$	0.22		$	0.32
Pro forma earnings per share		$	0.22		$	0.32
As reported earnings per diluted share		$	0.22		$	0.32
Pro forma earnings per diluted share		$	0.22		$	0.31

 

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.

 

9

 

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

 

		March 31, 2005						December 31, 2004
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Unamortized intangible asset:
Goodwill		$	362		$	—		$	362		$	—
Amortized intangible assets:
Core deposit intangibles		$	2,836		$	1,891		$	2,836		$	1,790

 

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

 

		For the 3 months ended March 31, 2005			For the 3 months ended March 31, 2004
Aggregate amortization expense of core deposit intangibles:		$	101		$	101
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2005		$	405
2006		$	405
2007		$	112
2008		$	53
2009		$	53

 

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 month periods ended March 31, 2005 and 2004 (in thousands):

 

		Three Months Ended March 31,
		2005			2004
Net Income		$	460		$	662
Other comprehensive income (loss)		(562		)	594
Comprehensive income		$	(102	)	$	1,256

 

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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 three months ended March 31, 2005 and 2004 (in thousands, except per share data):

 

 

RECLASSIFICATIONS

 

Certain 2004 amounts have been reclassified to conform to the 2005 presentation.

 

11

 

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.  The Company also owns and operates a wholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the “Trust”) through the issuance of pooled trust preferred securities. However, in accordance with current accounting guidance, the Trust has not been consolidated in the financial statements.

 

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, 2005 and the changes in the financial condition and results of operations for the three month periods ended March 31, 2005 and 2004.

 

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

 

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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 securities during 2005 or 2004.

 

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, 2004.  The Company has followed those policies in preparing this report.

 

FINANCIAL CONDITION

 

Citizens Bancshares Corporation’s total assets at March 31, 2005 were $326,737,000, a decrease of $4,647,000 or 1% compared to $331,384,000 at December 31, 2004.

 

At March 31, 2005, the Company maintained a balance of cash and due from banks of $11,992,000 representing an increase of $1,117,000 from December 31, 2004.  Interest bearing deposits with banks increased $2,972,000 to $3,706,000 at March 31, 2005 from $734,000 at December 31, 2004.

 

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Investment securities classified as available for sale and held to maturity decreased $7,340,000 and $88,000, respectively, since December 31, 2004.  In February 2005, the Company took advantage of an opportunity to increase its average yield on earning assets through the sale of $1.8 million in available for securities to fund loan growth. 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 increased $391,000 to $207,745,000 for the period ended March 31, 2005 compared to $207,354,000 at December 31, 2004.  Loan growth evened out for the first quarter of 2005 as a significant outstanding loan in the amount of $2.5 million paid-off in March 2005.

 

Total liabilities decreased $4,593,000 to $300,910,000 at March 31, 2005 compared to $305,503,000 at December 31, 2004. Total deposits, a component of total liabilities, increased $10,969,000 to $277,471,000 at March 31, 2005.  The increase in deposits is partially attributable to the Company’s implementation of a new sales culture which places specific emphasis on deposit growth.  Another significant component of total liabilities, advances from Federal Home Loan Bank (FHLB) decreased $15,250,000 to $15,000,000 at March 31, 2005 compared to $30,250,000 at December 31, 2004.  The Company used the liquidity generated from its deposit growth, and loan and investment pay-downs to reduce its outstanding debt with the FHLB, while improving its yield.

 

INVESTMENT SECURITIES

 

The Company invests a portion of its assets in U.S. government sponsored agency securities, state, county and municipal securities, mortgage backed bonds, as well as certain equity securities.  At March 31, 2005 and December 31, 2004, the Company’s investment securities portfolio represented approximately 24% and 26% of total assets, respectively.

 

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

 

At March 31, 2005		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Government agencies		$	8,358		$	—		$	119		$	8,239
State, county, and municipal securities		12,333			285			35			$	12,583
Mortgage-backed securities		46,158			48			781			$	45,425
Equity securities(1)		1,400			—			300			1,100
Totals		$	68,249		$	333		$	1,235		$	67,347

 

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At December 31, 2004		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Government agencies		$	9,880		$	12		$	26		$	9,866
State, county, and municipal securities		14,074			424			7			14,491
Mortgage-backed securities		49,384			145			249			49,280
Equity securities(1)		1,400			—			350			1,050
Totals		$	74,738		$	581		$	632		$	74,687

 

⁽¹⁾ The equity securities represent agency dividends received deduction (DRD) preferred stock issued by Fannie Mae Corporation (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).  These securities are callable at par and reprice every two years.  The interest earned on these equity securities is 70 percent tax free.

 

Management evaluates its investment portfolio periodically to identify any impairment that is other than temporary.  At March 31, 2005, the Company had several debt securities that have been in an unrealized loss position for more than twelve months.  Management believes these losses are temporary and a result of the current interest rate environment.

 

The fair values of equity securities are highly correlated to the level of short term interest rates and the shape of the yield curve.  Management believes these securities are not impaired and the Company has the intent and ability to hold the securities for a reasonable period of time for a forecasted recovery of the fair values up to and beyond the cost of the investments or until the securities are called at par.

 

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

 

At March 31, 2005		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Government agencies		$	3,000		$	—		$	60		$	2,940
State, county, and municipal securities		5,390			136			1			5,525
Mortgage-backed securities		1,502			4			39			1,467
Total		$	9,892		$	140		$	100		$	9,932

 

At December 31, 2004		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Government agencies		$	3,000		$	—		$	21		$	2,979
State, county, and municipal securities		5,390			190			—			5,580
Mortgage-backed securities		1,590			4			27			1,567
Total		$	9,980		$	194		$	48		$	10,126

 

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LOANS

 

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

 

		March 31, 2005			December 31, 2004
Commercial, financial, and agricultural		$	20,621		$	22,327
Installment		8,780			7,666
Real estate - mortgage		169,159			174,335
Real estate - construction		10,826			4,510
Other		2,511			2,609
Loans receivable		211,897			211,447
Less:    Net deferred loan fees		489			554
Allowance for loan losses		3,360			3,183
Discount on loans acquired		303			356
Loans receivable, net		$	207,745		$	207,354

 

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 $810,000 to $3,273,000 at March 31, 2005 from $4,083,000 at December 31, 2004.  Nonperforming assets represents 1.55% of loans, net of unearned income, discounts, and real estate acquired through foreclosure at March 31, 2005 as compared to 1.93% at December 31, 2004.

 

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