UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2005 |
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OR |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No: 0 - 14535
CITIZENS BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Georgia |
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58 1631302 |
(State or other
jurisdiction of |
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(IRS Employer Identification No.) |
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175 John Wesley Dobbs Avenue, N.E., Atlanta, Georgia |
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30303 |
(Address of principal executive offices) |
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(Zip Code) |
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Registrants 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 issuers 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, $1.00 par value outstanding on March 31, 2005.
PART 1. |
FINANCIAL INFORMATION |
ITEM 1. |
Financial statements |
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(In thousands, except share data)
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2005 |
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2004 |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
11,992 |
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$ |
10,875 |
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Interest-bearing deposits with banks |
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3,706 |
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734 |
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Certificates of deposit |
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700 |
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800 |
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Investment securities available for sale, at fair value |
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67,347 |
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74,687 |
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Investment securities held to maturity, at cost |
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9,892 |
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9,980 |
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Other investments |
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1,820 |
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2,469 |
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Loans receivable, net |
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207,745 |
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207,354 |
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Premises and equipment, net |
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8,151 |
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8,379 |
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Cash surrender value of life insurance |
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8,811 |
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8,740 |
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Foreclosed real estate, net |
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401 |
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1,430 |
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Other assets |
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6,172 |
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5,936 |
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Total assets |
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$ |
326,737 |
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$ |
331,384 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES: |
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Noninterest-bearing deposits |
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$ |
66,070 |
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$ |
57,539 |
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Interest-bearing deposits |
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211,401 |
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208,963 |
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Total deposits |
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277,471 |
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266,502 |
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Accrued expenses and other liabilities |
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2,744 |
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3,056 |
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Notes payable |
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540 |
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540 |
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Junior subordinated debentures |
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5,155 |
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5,155 |
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Advances from Federal Home Loan Bank |
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15,000 |
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30,250 |
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Total liabilities |
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300,910 |
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305,503 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY: |
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Common stock - $1 par value; 15,000,000 shares authorized; 2,230,065 shares issued |
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2,230 |
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2,230 |
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Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding |
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90 |
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90 |
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Additional paid-in capital |
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7,441 |
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7,442 |
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Retained earnings |
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18,568 |
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18,108 |
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Treasury stock at cost, 234,434 and 240,643 shares at March 31, 2005 and December 31, 2004, respectively |
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(1,906 |
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(1,955 |
) |
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Accumulated other comprehensive loss, net of income taxes |
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(596 |
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(34 |
) |
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Total stockholders equity |
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25,827 |
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25,881 |
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$ |
326,737 |
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$ |
331,384 |
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See notes to consolidated financial statements.
2
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - In thousands, except per share data)
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Three Months |
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2005 |
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2004 |
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Interest income: |
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Loans, including fees |
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$ |
3,932 |
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$ |
3,941 |
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Investment securities: |
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Taxable |
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618 |
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819 |
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Tax-exempt |
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199 |
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207 |
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Interest-bearing deposits |
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11 |
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13 |
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Total interest income |
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4,760 |
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4,980 |
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Interest expense: |
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Deposits |
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845 |
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700 |
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Other borrowings |
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319 |
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281 |
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Total interest expense |
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1,164 |
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981 |
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Net interest income |
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3,596 |
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3,999 |
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Provision for loan losses |
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105 |
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300 |
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Net interest income after provision for loan losses |
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3,491 |
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3,699 |
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Noninterest income: |
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Service charges on deposits |
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827 |
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843 |
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Gain on sales of securities |
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46 |
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58 |
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Gain (loss) on sales of assets |
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(25 |
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7 |
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Other operating income |
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408 |
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290 |
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Total noninterest income |
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1,256 |
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1,198 |
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Noninterest expense: |
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Salaries and employee benefits |
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2,120 |
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1,954 |
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Net occupancy and equipment |
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664 |
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651 |
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Other operating expenses |
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1,385 |
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1,432 |
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Total noninterest expense |
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4,169 |
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4,037 |
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Income before income taxes |
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578 |
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860 |
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Income tax expense |
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118 |
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198 |
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Net income |
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$ |
460 |
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$ |
662 |
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Net income per share - basic and diluted |
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$ |
0.22 |
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$ |
0.32 |
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Weighted average outstanding shares - basic |
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2,081 |
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2,072 |
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Weighted average outstanding shares - diluted |
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2,093 |
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2,082 |
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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)
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Nonvoting |
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Additional |
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Retained |
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Treasury Stock |
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Accumulated |
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Total |
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Shares |
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Amount |
Shares |
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Amount |
Shares |
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Amount |
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BalanceDecember 31, 2003 |
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2,230 |
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$ |
2,230 |
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90 |
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$ |
90 |
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$ |
7,445 |
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$ |
16,114 |
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(250 |
) |
$ |
(2,025 |
) |
$ |
90 |
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$ |
23,944 |
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Net income |
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662 |
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662 |
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Unrealized holding gains on investment securities available for salenet of taxes of $43,882 |
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633 |
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633 |
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Less reclassification adjustment for holding loss included in net incomenet of taxes of $19,878 |
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(39 |
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(39 |
) |
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Comprehensive income |
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1,256 |
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Sale of treasury stock |
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3 |
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27 |
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27 |
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BalanceMarch 31, 2004 |
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2,230 |
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$ |
2,230 |
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90 |
|
$ |
90 |
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$ |
7,445 |
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$ |
16,776 |
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(247 |
) |
$ |
(1,998 |
) |
$ |
684 |
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$ |
25,227 |
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BalanceDecember 31, 2004 |
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2,230 |
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$ |
2,230 |
|
90 |
|
$ |
90 |
|
$ |
7,442 |
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$ |
18,108 |
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(241 |
) |
$ |
(1,955 |
) |
$ |
(34 |
) |
$ |
25,881 |
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Net income |
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460 |
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460 |
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Unrealized holding losses on investment securities available for salenet of taxes of $273,934 |
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(532 |
) |
(532 |
) |
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Less reclassification adjustment for holding loss included in net incomenet of taxes of $15,541 |
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(30 |
) |
(30 |
) |
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Comprehensive loss |
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(102 |
) |
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Sale of treasury stock |
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(1 |
) |
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6 |
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49 |
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48 |
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BalanceMarch 31, 2005 |
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2,230 |
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$ |
2,230 |
|
90 |
|
$ |
90 |
|
$ |
7,441 |
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$ |
18,568 |
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(235 |
) |
$ |
(1,906 |
) |
$ |
(596 |
) |
$ |
25,827 |
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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)
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March 31, |
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2005 |
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2004 |
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(Unaudited) |
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OPERATING ACTIVITIES: |
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Net income |
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$ |
460 |
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$ |
662 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
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105 |
|
300 |
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Depreciation |
|
248 |
|
261 |
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Amortization and accretion, net |
|
178 |
|
111 |
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Provision for deferred income taxes (benefit) |
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(15 |
) |
114 |
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Gain on sale of assets and investments |
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(71 |
) |
(65 |
) |
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Change in other assets |
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(24 |
) |
(426 |
) |
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Change in accrued expenses and other liabilities |
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(312 |
) |
(171 |
) |
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Net cash provided by operating activities |
|
569 |
|
786 |
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INVESTING ACTIVITIES: |
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Proceeds from calls and maturities of investment securities held to maturity |
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84 |
|
217 |
|
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Proceeds from sales and maturities of investment securities available for sale |
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6,426 |
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17,397 |
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Purchases of investment securities available for sale |
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|
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(1,016 |
) |
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Net change in other investments |
|
649 |
|
887 |
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Net change in loans receivable |
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(539 |
) |
(2,576 |
) |
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Net proceeds from the sale of foreclosed properties |
|
1,053 |
|
18 |
|
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Purchases of premises and equipment, net |
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(20 |
) |
(95 |
) |
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Net change in interest bearing deposits with banks |
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(2,972 |
) |
(1,511 |
) |
||
Net change in certificates of deposit |
|
100 |
|
1,300 |
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||
|
|
|
|
|
|
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Net cash provided by investing activities |
|
4,781 |
|
14,621 |
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||
|
|
|
|
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FINANCING ACTIVITIES: |
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|
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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 |
) |
||
|
|
|
|
|
|
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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 Companys 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 Companys 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 Companys 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.
6
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 Commissions 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 staffs 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 entitys activities or entitled to receive a majority of the entitys 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 Companys 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 Companys 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 Companys 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 Companys 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 |
|
||||
|
|
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 Companys intangible assets at (in thousands):
|
|
March 31, 2005 |
|
December 31, 2004 |
|
||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Gross Carrying |
|
Accumulated |
|
||||
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 |
|
For the 3 |
|
||
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 |
|
10
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):
|
|
Net Income |
|
Shares |
|
Per Share |
|
||
|
|
|
|
|
|
|
|
||
Three Months ended March 31, 2005 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
460 |
|
2,081 |
|
$ |
0.22 |
|
Effect of dilutive securities: options to purchase common shares |
|
|
|
12 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
460 |
|
2,093 |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
||
Three Months 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 |
|
RECLASSIFICATIONS
Certain 2004 amounts have been reclassified to conform to the 2005 presentation.
11
ITEM 2. |
MANAGEMENTS 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 Companys 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 Commissions (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 Companys most critical accounting policies relate to:
Investment Securities - The Company classifies investments in one of three categories based
12
on managements 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 Companys 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 Corporations 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.
13
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 Companys 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 Companys 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 |
|
Gross |
|
Gross |
|
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 |
|
14
At December 31, 2004 |
|
Amortized |
|
Gross |
|
Gross |
|
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 |
|
Gross |
|
Gross |
|
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 |
|
Gross |
|
Gross |
|
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 |
|
15
LOANS
Loans outstanding, by classification, are summarized as follows (in thousands):
|
|
March 31, |
|
December 31, |
|
||
|
|
|
|
|
|
||
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.
16
The table below presents a summary of the Companys nonperforming assets at March 31, 2005 and December 31, 2004.
|
|
March 31, |
|
December 31, |
|
||
|
|
(in thousands, except |
|
||||
|
|
|
|
|
|
||
Nonperforming assets: |
|
|
|
|
|
||
Nonperforming loans: |
|
|
|
|
|
||
Nonaccrual loans |
|
$ |
2,872 |
|
$ |
2,652 |
|
Past-due loans of 90 days or more |
|
|
|
|
|
||
Nonperforming loans |
|
2,872 |
|
2,652 |
|
||
|
|
|
|
|
|
||
Real estate acquired through foreclosure |
|
401 |
|
1,431 |
|
||
Total nonperforming assets |
|
$ |
3,273 |
|
$ |
4,083 |
|
|
|
|
|
|
|
||
Ratios: |
|
|
|
|
|
||
Nonperforming loans to loans, net of unearned income and discount on loans |
|
1.36 |
% |
1.26 |
% |
||
|
|
|
|
|
|
||
Nonperforming assets to loans, net of unearned income, discounts, and real estate acquired through foreclosure |
|
1.55 |
% |
1.93 |
% |
||
|
|
|
|
|
|
||
Nonperforming assets to total assets |
|
1.00 |
% |
1.23 |
% |
||
|
|
|
|
|
|
||
Allowance for loan losses to nonperforming loans |
|
116.99 |
% |
120.02 |
% |
||
|
|
|
|
|
|
||
Allowance for loan losses to nonperforming assets |
|
102.66 |
% |
77.95 |
% |
17
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 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 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. For the three month period ended March 31, 2005 provisions for loan losses totaled $105,000 compared to $300,000 for the same period in 2004.
The allowance for loan losses at March 31, 2005 was approximately $3,360,000, representing 1.59% of total loans, net of unearned income and discounts compared to approximately $3,183,000 at December 31, 2004, which also represented 1.51% 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 Companys 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 Companys loan portfolio is secured by real estate in the metropolitan Atlanta market, including a concentration of loans to churches and convenience stores. The Companys outstanding church loans were approximately $44.7 million at March 31, 2005 and $46.1 million at December 31, 2004. The Companys loans to area convenience stores were approximately $23.4 million at March 31, 2005 and $23.6 million at December 31, 2004. Accordingly, the ultimate collectability of the substantial portion of the Companys loan portfolio is susceptible to changes in market conditions in the metropolitan Atlanta area.
18
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 periods ended March 31, 2005 and 2004 (amount in thousands, except financial ratios):
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Loans, net of unearned income and discounts |
|
$ |
211,105 |
|
$ |
214,333 |
|
|
|
|
|
|
|
||
Average loans, net of unearned income, discounts and the allowance for loan losses |
|
$ |
212,062 |
|
$ |
210,542 |
|
|
|
|
|
|
|
||
Allowance for loan losses at the beginning of period |
|
$ |
3,183 |
|
$ |
3,240 |
|
|
|
|
|
|
|
||
Loans charged off: |
|
|
|
|
|
||
Commercial, financial, and agricultural |
|
36 |
|
|
|
||
Real estate - loans |
|
3 |
|
114 |
|
||
Installment loans to individuals |
|
27 |
|
72 |
|
||
Total loans charged off |
|
66 |
|
186 |
|
||
|
|
|
|
|
|
||
Recoveries of loans previously charged off: |
|
|
|
|
|
||
Commercial, financial, and agricultural |
|
76 |
|
69 |
|
||
Real estate - loans |
|
43 |
|
21 |
|
||
Installment loans to individuals |
|
19 |
|
27 |
|
||
Total loans recovered |
|
138 |
|
117 |
|
||
|
|
|
|
|
|
||
Net loans recovered (charged off) |
|
(72 |
) |
69 |
|
||
|
|
|
|
|
|
||
Additions to allowance for loan losses charged to operating expense |
|
105 |
|
300 |
|
||
|
|
|
|
|
|
||
Allowance for loan losses at period end |
|
$ |
3,360 |
|
$ |
3,471 |
|
|
|
|
|
|
|
||
Ratio of net loans charged off to average loans, net of unearned income, discounts, and the allowance for loan losses |
|
(0.03 |
)% |
0.03 |
% |
||
|
|
|
|
|
|
||
Ratio of allowance for loan losses to loans, net of unearned income and discounts |
|
1.59 |
% |
1.62 |
% |
19
DEPOSITS
Deposits are the Companys primary source of funding loan growth. Total deposits at March 31, 2005 increased by 4.12% or $10,969,000 to $277,471,000 from December 31, 2004. Noninterest-bearing deposits increased by $8,531,000 or 14.83%, while interest-bearing deposits increased by $2,438,000 or 1.17%. 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. In addition, the Company implemented a new sales program in 2005 which places specific emphasis on deposit growth.
The following is a summary of interest-bearing deposits (in thousands):
|
|
March 31, |
|
December 31, |
|
||
|
|
|
|
|
|
||
NOW and money market accounts |
|
$ |
56,754 |
|
$ |
55,748 |
|
Savings accounts |
|
45,921 |
|
43,620 |
|
||
Time deposits of $100,000 or more |
|
64,487 |
|
65,039 |
|
||
Other time deposits |
|
44,239 |
|
44,556 |
|
||
|
|
$ |
211,401 |
|
$ |
208,963 |
|
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 $15,000,000 at March 31, 2005 and $30,250,000 at December 31, 2004. The following advances are collateralized by a blanket lien on the Companys 1-4 family mortgage loans.
Maturity |
|
Callable |
|
Type |
|
March 31, 2005 |
|
December 31, 2004 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
April 2010 |
|
Quarterly |
|
Fixed |
|
5.82 |
% |
$ |
10,000,000 |
|
5.82 |
% |
$ |
10,000,000 |
|
July 2005 |
|
Daily |
|
Variable |
|
|
|
|
|
2.44 |
% |
15,250,000 |
|
||
September 2006 |
|
Monthly |
|
Variable |
|
2.85 |
% |
5,000,000 |
|
2.45 |
% |
5,000,000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total Principal Outstanding |
|
|
|
|
|
|
|
$ |
15,000,000 |
|
|
|
$ |
30,250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Weighted Average Rate at Period End |
|
|
|
|
|
4.83 |
% |
|
|
3.56 |
% |
|
|
The Company had an unsecured note payable of approximately $540,000 at March 31, 2005 and December 31, 2004. The note bears interest at the lenders prime rate minus 50 basis points.
During 2002, the Company issued $5 million of pooled trust preferred securities through one issuance by a wholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the Trust). The trust preferred securities accrue and pay distributions periodically at an annual rate as provided in the indentures of the London Interbank Offered Rate plus 3.45%. The Trust used the net proceeds from the
20
offering to purchase a like amount of Junior Subordinated Debentures (the Debentures) of the Company. These securities are reported in our consolidated balance sheet as Junior Subordinated Debentures. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures on June 26, 2032, or upon earlier redemption as provided in the indentures beginning June 26, 2007. The Company has the right to redeem the Debentures in whole or in part or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. At March 31, 2005, the interest rate on the junior subordinated debenture was 6.00%.
RESULTS OF OPERATIONS
Net Interest Income:
Net interest income is the principal component of a financial institutions 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.
Net interest income decreased $403,000 or 10% for the three month period ended March 31, 2005 as compared with the same period of the previous year. The decrease in net interest income resulted primarily from the decrease in investment interest income as average investments declined coupled with increases in total interest expense resulting from increased interest rates. For the three month period ending March 31, 2005, the average investment in available for sale securities decreased $22,571,000 to $71,668,000 compared to $94,240,000 for the comparative three month period ending March 31, 2004. During 2004, the Company sold securities from its investment portfolio in order reposition its portfolio, reduce investment duration risk, benefit from increased interest rates and fund withdrawals of public funds that it elected not to renew. Interest expense on earning liabilities increased $183,000 due to increases in the average interest rate as the economy moved into a rising rate environment.
Provision for loan losses
The allowance for loan losses and the resulting provision for loan losses are based on changes in the size and character of the Companys loan portfolio, changes in nonperforming and past due loans, the existing risk of individual loans, concentrations of loans to specific borrowers or industries, and economic conditions. For the first quarter of 2005, the provision for loan losses was $105,000 compared to $300,000 for the same period in 2004, representing a decline of 65 percent. The allowance for loan losses was $3,360,000 in the first quarter of 2005, compared to $3,183,000 at December 31, 2004. At March 31, 2005, the allowance for loan losses was 103 percent of the nonperforming assets compared to 78 percent at December 31, 2004. At March 31, 2005, the Company considered its allowance for loan losses to be adequate.
Noninterest income:
Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services, and profits and commissions earned through securities and insurance sales. In addition, gains and losses realized from the sale of investment portfolio securities
21
and sales of assets are included in noninterest income.
Noninterest income totaled $1,256,000 for the three month period ended March 31, 2005, an increase of $58,000 or 5% compared with the same period ended March 31, 2004. This increase is attributed to a $118,000 rise in other noninterest income, partially offset by a $16,000 decrease in deposit and service fee income, a $12,000 decrease in gains on the sale of securities and a $32,000 decrease in gains from the sale of assets.
Noninterest expense:
Noninterest expense totaled $4,169,000 for the three month period ended March 31, 2005, an increase of $132,000 or 3.27% compared to the same period last year. The increase, in large part, is due to salaries and employees benefits, and is partially reduced by other operating expenses.
Salaries and employee benefits increased $166,000 or 8.50% for the three month period ended March 31, 2005 compared to the same period in 2004. In January 2005, the Company adopted a common review and salary adjustment date for all employees. Consequently, all salary adjustments became effective in January on a prorated basis. The Company anticipates this change will improve staff morale and retention. In addition, the Company started accruing for anticipated bonuses in 2005 in anticipation of expected performance levels.
22
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 institutions interest rate risk. The Companys 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 Companys 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, 2005. 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.
23
The following table sets forth the distribution of the repricing of the Companys interest rate sensitive assets and interest rate sensitive liabilities as of March 31, 2005.
|
|
Cumulative amounts as of March 31, 2005 |
|
|||||||||||||
|
|
3 Months |
|
3 to 12 Months |
|
1 to 5 Years |
|
Over 5 Years |
|
Total |
|
|||||
|
|
(amounts in thousands, except ratios) |
|
|||||||||||||
Interest-sensitive assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Investments |
|
$ |
511 |
|
$ |
1,673 |
|
$ |
25,059 |
|
$ |
49,996 |
|
$ |
77,239 |
|
Certificates of deposit |
|
500 |
|
200 |
|
|
|
|
|
700 |
|
|||||
Loans |
|
86,769 |
|
6,771 |
|
67,326 |
|
51,031 |
|
211,897 |
|
|||||
Interest-bearing deposits with other banks |
|
3,706 |
|
|
|
|
|
|
|
3,706 |
|
|||||
Total interest-sensitive assets |
|
$ |
91,486 |
|
$ |
8,644 |
|
$ |
92,385 |
|
$ |
101,027 |
|
$ |
293,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest-sensitive liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Deposits (a) |
|
$ |
139,762 |
|
$ |
52,442 |
|
$ |
19,194 |
|
$ |
3 |
|
$ |
211,401 |
|
Notes payable |
|
540 |
|
|
|
|
|
|
|
540 |
|
|||||
Junior subordinated debentures |
|
|
|
|
|
5,155 |
|
|
|
5,155 |
|
|||||
Other borrowings |
|
|
|
|
|
5,000 |
|
10,000 |
|
15,000 |
|
|||||
Total interest-sensitive liabilities |
|
$ |
140,302 |
|
$ |
52,442 |
|
$ |
29,349 |
|
$ |
10,003 |
|
$ |
232,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest-sensitivity gap |
|
$ |
(48,816 |
) |
$ |
(43,798 |
) |
$ |
63,036 |
|
$ |
91,024 |
|
$ |
61,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cumulative interest-sensitivity gap to total interest-sensitive assets |
|
(16.63 |
)% |
(31.55 |
)% |
(10.08 |
)% |
20.93 |
% |
20.93 |
% |
(a) Savings, Now, and money market deposits totaling $102,675 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 Companys 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 Company requires cash for various operating needs including: dividends to shareholders; business combinations; capital injections to its subsidiaries; the servicing of debt; and the payment of general corporate expenses. The Company has access to various capital markets. However, the primary source of liquidity for the Company is dividends from its bank subsidiary. The Georgia Department of Banking and Finance regulates the dividend payments and must approve dividend payments that exceed 50 percent of the Banks prior year net income. As of March 31, 2005, this amount was approximately $1,357,000. The payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. Currently, the payment of dividends by the Bank requires the prior approval of the Georgia Department of Banking and Finance. 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 Companys 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
24
necessary to maintain an acceptable cash position that meets both requirements.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and, to a lesser extent, sales or paydowns of investment securities available for sale and held to maturity. 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 Companys 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 decreased $54,000 for the three months ended March 31, 2005, primarily due to the changes in other comprehensive loss. Accumulated other comprehensive loss, net of taxes increased by $562,000 to $596,000 during the three month period reduced. These losses are due to the impact of changing economic conditions and changes in market interest rates on the Companys available for sale securities. Retained earnings increased by $460,000 to $18,568,000 due to the first quarters net earnings, partially offsetting the decreases in stockholders equity
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, 2005, the Banks total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 14.76%, 13.50% and 9.03% respectively, compared with 14.47%, 13.22% and 8.80% respectively, at December 31, 2004. As of March 31, 2005, the Company met all capital adequacy requirements to which it is subject.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our market risk arises principally from interest rate risk inherent in our lending, deposit, and borrowing activities. Although we manage certain other risks, such as credit quality and liquidity risk, in the normal course of business we consider interest rate risk to be our most significant market risk and the risk that could potentially have the largest material effect on our financial condition and results of operations. We do not maintain a trading portfolio or deal in international instruments, and therefore, other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities.
Quantitative information about the Companys market risk at March 31, 2005 is as follows (in thousands):
|
|
2005 |
|
||||||||
|
|
Carrying |
|
Estimated |
|
Down |
|
Up |
|
||
|
|
|
|
|
|
|
|
|
|
||
Financial assets: |
|
|
|
|
|
|
|
|
|
||
Interest-bearing deposits with banks |
|
$ |
3,706 |
|
$ |
3,706 |
|
|
% |
|
% |
Certificates of deposit |
|
700 |
|
700 |
|
|
|
|
|
||
Investment securities |
|
77,239 |
|
77,279 |
|
2.55 |
|
(3.41 |
) |
||
Loans receivable |
|
211,897 |
|
208,689 |
|
0.98 |
|
(1.39 |
) |
||
|
|
|
|
|
|
|
|
|
|
||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
||
Interest-bearing deposits |
|
211,401 |
|
200,580 |
|
1.42 |
|
(1.30 |
) |
||
Notes payable |
|
540 |
|
540 |
|
|
|
|
|
||
Junior subordinated debentures |
|
5,155 |
|
5,200 |
|
|
|
|
|
||
Advances from Federal Home Loan Bank |
|
15,000 |
|
15,484 |
|
3.10 |
|
(2.95 |
) |
||
The Company has adopted an asset/liability management program to monitor the Companys 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
As of the end of the period covered by this report, we conducted, under the supervision of and with the participation of our management, including the Companys Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13g-15(e). Based on this evaluation, the Companys Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2005 in timely alerting them to material information required to be included in our reports filed with or furnished to the Securities and
26
Exchange Commission. There have been no changes in the Companys internal controls over financial reporting that occurred during the quarter ended March 31, 2005 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. |
|
|
ITEM 2. |
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS |
|
|
|
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 |
|
|
|
Exhibit 31 |
|
|
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. |
|
|
|
Exhibit 32 |
|
|
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. |
27
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 13, 2005 |
By: |
/s/ James E. Young |
|
||
|
James E. Young |
||||
|
President and Chief Executive Officer |
||||
|
|
||||
Date: May 13, 2005 |
By: |
/s/ Willard C. Lewis |
|
||
|
Willard C. Lewis |
||||
|
Senior Executive Vice President and |
||||
|
Chief Operating Officer |
||||
|
|
||||
Date: May 13, 2005 |
By: |
/s/ Samuel J. Cox |
|
||
|
Samuel J. Cox |
||||
|
Senior Vice President and Chief Financial Officer |
||||
28