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EX-31 - EX-31 - CITIZENS BANCSHARES CORP /GA/a11-9353_1ex31.htm
EX-32 - EX-32 - CITIZENS BANCSHARES CORP /GA/a11-9353_1ex32.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10 – Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

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

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

75 Piedmont 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.  x  Yes  o  No.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  o  Yes  o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  o  Yes  x  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: 2,018,284 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value were outstanding on May 10, 2011.

 

 

 



 

PART 1.                FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2011 AND DECEMBER 31, 2010

(In thousands, except share data)

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

6,021

 

$

4,764

 

Interest-bearing deposits with banks

 

29,390

 

19,033

 

Certificates of deposit

 

100

 

150

 

Investment securities available for sale, at fair value

 

122,560

 

127,355

 

Investment securities held to maturity, at cost

 

3,309

 

3,311

 

Other investments

 

2,058

 

2,058

 

Loans receivable, net

 

188,289

 

191,994

 

Premises and equipment, net

 

7,371

 

7,520

 

Cash surrender value of life insurance

 

10,925

 

10,848

 

Foreclosed real estate

 

12,180

 

9,110

 

Other assets

 

10,991

 

11,663

 

 

 

 

 

 

 

Total assets

 

$

393,194

 

$

387,806

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Noninterest-bearing deposits

 

$

68,207

 

$

58,543

 

Interest-bearing deposits

 

274,046

 

279,061

 

 

 

 

 

 

 

Total deposits

 

342,253

 

337,604

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

4,012

 

4,057

 

Advances from Federal Home Loan Bank

 

323

 

328

 

 

 

 

 

 

 

Total liabilities

 

346,588

 

341,989

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock - No par value; 10,000,000 shares authorized; Series B, 7,462 shares issued and outstanding

 

7,462

 

7,462

 

Preferred stock - No par value; 10,000,000 shares authorized; Series C, 4,379 shares issued and outstanding

 

4,379

 

4,379

 

Common stock - $1 par value; 20,000,000 shares authorized; 2,237,356 shares issued and outstanding

 

2,237

 

2,233

 

Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding

 

90

 

90

 

Nonvested restricted common stock

 

(96

)

(107

)

Additional paid-in capital

 

7,793

 

7,813

 

Retained earnings

 

26,123

 

25,965

 

Treasury stock at cost, 219,072 and 217,531 shares at March 31, 2011 and December 31, 2010, respectively

 

(1,810

)

(1,805

)

Accumulated other comprehensive income (loss), net of income taxes

 

428

 

(213

)

 

 

 

 

 

 

Total stockholders’ equity

 

46,606

 

45,817

 

 

 

 

 

 

 

 

 

$

393,194

 

$

387,806

 

 

See notes to consolidated financial statements.

 

1



 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited  — In thousands, except per share data)

 

 

 

Three Months
 Ended March 31,

 

 

 

2011

 

2010

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

2,928

 

$

3,348

 

Investment securities:

 

 

 

 

 

Taxable

 

615

 

681

 

Tax-exempt

 

454

 

455

 

Interest-bearing deposits

 

14

 

21

 

Total interest income

 

4,011

 

4,505

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

438

 

688

 

Other borrowings

 

 

14

 

Total interest expense

 

438

 

702

 

 

 

 

 

 

 

Net interest income

 

3,573

 

3,803

 

 

 

 

 

 

 

Provision for loan losses

 

475

 

630

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

3,098

 

3,173

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Service charges on deposits

 

863

 

906

 

Gain on sales of securities

 

63

 

333

 

Gain on sales of assets

 

6

 

 

Other operating income

 

309

 

513

 

 

 

 

 

 

 

Total noninterest income

 

1,241

 

1,752

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

1,825

 

1,962

 

Net occupancy and equipment

 

584

 

624

 

Amortization of core deposit intangible

 

118

 

131

 

FDIC insurance

 

198

 

182

 

Other real estate owned, net

 

330

 

127

 

Other operating expenses

 

1,197

 

1,215

 

 

 

 

 

 

 

Total noninterest expense

 

4,252

 

4,241

 

 

 

 

 

 

 

Income before income taxes

 

87

 

684

 

 

 

 

 

 

 

Income tax expense (benefit)

 

(130

)

59

 

 

 

 

 

 

 

Net income

 

$

217

 

$

625

 

Preferred dividends accrued

 

59

 

93

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

158

 

$

532

 

 

 

 

 

 

 

Net income per common share - basic

 

$

0.08

 

$

0.25

 

 

 

 

 

 

 

Net income per common share - diluted

 

$

0.07

 

$

0.25

 

 

 

 

 

 

 

Weighted average common outstanding shares - basic

 

2,105

 

2,103

 

 

 

 

 

 

 

Weighted average common outstanding shares - diluted

 

2,120

 

2,113

 

 

 

 

 

 

 

Dividends per common share

 

$

 

$

 

 

See notes to consolidated financial statements.

 

2



 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Unaudited  — In thousands, except parenthetical footnotes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonvoting

 

Nonvested

 

Additional

 

 

 

 

 

 

 

Other

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Common Stock

 

Restricted

 

Paid-in

 

Retained

 

Treasury Stock

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Stock

 

Capital

 

Earnings

 

Shares

 

Amount

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2009

 

7

 

$

7,462

 

2,230

 

$

2,230

 

90

 

$

90

 

$

(52

)

$

7,707

 

$

25,834

 

(218

)

$

(1,805

)

$

772

 

$

42,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

625

 

 

 

 

625

 

Unrealized holding gains on investment securities available for sale—net of taxes of $52,765

 

 

 

 

 

 

 

 

 

 

 

 

102

 

102

 

Less reclassification adjustment for holding gains included in net income—net of taxes of $113,323

 

 

 

 

 

 

 

 

 

 

 

 

(220

)

(220

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

 

 

 

15

 

 

 

 

 

15

 

Nonvested restricted stock

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Dividends declared - preferred

 

 

 

 

 

 

 

 

 

(93

)

 

 

 

(93

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—March 31, 2010

 

7

 

$

7,462

 

2,230

 

$

2,230

 

90

 

$

90

 

$

(51

)

$

7,722

 

$

26,366

 

(218

)

$

(1,805

)

$

654

 

$

42,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—December 31, 2010

 

12

 

$

11,841

 

2,233

 

$

2,233

 

90

 

$

90

 

$

(107

)

$

7,813

 

$

25,965

 

(218

)

$

(1,805

)

$

(213

)

$

45,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

217

 

 

 

 

217

 

Unrealized holding gains on investment securities available for sale—net of taxes of $351,649

 

 

 

 

 

 

 

 

 

 

 

 

683

 

683

 

Less reclassification adjustment for holding gains included in net income—net of taxes of $21,434

 

 

 

 

 

 

 

 

 

 

 

 

(42

)

(42

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

 

4

 

4

 

 

 

 

12

 

 

 

 

 

16

 

Nonvested restricted stock

 

 

 

 

 

 

 

11

 

(32

)

 

 

 

 

(21

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

(1

)

(5

)

 

(5

)

Dividends declared - preferred

 

 

 

 

 

 

 

 

 

(59

)

 

 

 

(59

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance—March 31, 2011

 

12

 

$

11,841

 

2,237

 

$

2,237

 

90

 

$

90

 

$

(96

)

$

7,793

 

$

26,123

 

(219

)

$

(1,810

)

$

428

 

$

46,606

 

 

See notes to consolidated financial statements.

 

3



 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands)

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

217

 

$

625

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

475

 

630

 

Depreciation

 

170

 

176

 

Amortization and accretion, net

 

288

 

271

 

Provision for deferred income tax benefit

 

(99

)

35

 

Gains on sale of assets and investments, net

 

(49

)

(337

)

Stock based compensation expense

 

 

15

 

Restricted stock based compensation plan

 

11

 

1

 

Decrease in carrying value of other real estate owned

 

284

 

 

Change in other assets

 

212

 

182

 

Change in accrued expenses and other liabilities

 

(45

)

(425

)

 

 

 

 

 

 

Net cash provided by operating activities

 

1,464

 

1,173

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Net change in certificates of deposit

 

50

 

 

Proceeds from calls and maturities of investment securities held to maturity

 

2

 

39

 

Proceeds from sales and maturities of investment securities available for sale

 

7,661

 

16,637

 

Purchases of investment securities available for sale

 

(2,000

)

(19,761

)

Net change in loans receivable

 

(256

)

456

 

Proceeds from the sale of premises and equipment

 

6

 

 

Proceeds from the sale of other real estate owned

 

117

 

83

 

Purchases of premises and equipment, net

 

(27

)

(147

)

 

 

 

 

 

 

Net cash provided by investing activities

 

5,553

 

(2,693

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Net change in deposits

 

4,649

 

26,222

 

Net change in advances from Federal Home Loan Bank

 

(4

)

(4

)

Proceeds from issuance of common stock

 

16

 

 

Purchase of treasury stock

 

(5

)

 

Dividends paid - preferred

 

(59

)

(93

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

4,597

 

26,125

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

11,614

 

24,605

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

23,797

 

27,070

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

35,411

 

$

51,675

 

 

 

 

 

 

 

Supplemental disclosures of cash paid during the period for:

 

 

 

 

 

Interest

 

$

502

 

$

700

 

 

 

 

 

 

 

Income taxes

 

$

8

 

$

15

 

 

 

 

 

 

 

Supplemental disclosures of noncash transactions:

 

 

 

 

 

Real estate acquired through foreclosure

 

$

3,471

 

929

 

 

 

 

 

 

 

Change in unrealized gain on investment securities available for sale, net of taxes

 

$

641

 

$

(118

)

 

See notes to consolidated financial statements.

 

4



 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

Notes to the Condensed 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 and personal banking 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 financial centers in metropolitan Atlanta, Georgia, one full-service financial center in Columbus, Georgia, one full-service financial center in Birmingham, Alabama, and one full-service financial center in Eutaw, Alabama.

 

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required by generally accepted accounting principles are not included herein. These interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2010.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2011 fiscal year.

 

The consolidated financial statements of the Company for the three month ended March 31, 2011 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, 2010.  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.

 

Troubled Asset Relief Program

 

On August 13, 2010, as part of the U.S. Department of the Treasury (the “Treasury”) Troubled Asset Relief Program (“TARP”) Community Development Capital Initiative, the Company entered into a Letter Agreement, and an Exchange Agreement—Standard Terms (“Exchange Agreement”), with the Treasury, pursuant to which the Company agreed to exchange 7,462 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Shares”), issued on March 6, 2009, pursuant to the Company’s participation in the TARP Capital Purchase Program, for 7,462 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Shares”), both of which have a liquidation preference of $1,000 (the “Exchange Transaction”).  No new monetary consideration was exchanged in connection with the Exchange Transaction.  The Exchange Transaction closed on August 13, 2010 (the “Closing Date”).

 

5



 

On September 17, 2010, the Company issued 4,379 shares of its Series C Preferred Shares to the Treasury as part of its TARP Community Development Capital Initiative for a total of 11,841 shares of Series B and C Preferred Shares issued to Treasury.  The issuance of the Series B and Series C Preferred Shares was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

 

The Series B and Series C Preferred Shares qualify as Tier 1 capital and will pay cumulative dividends at a rate of 2% per annum for the first eight years after the Closing Date and 9% per annum thereafter.  The Company may, subject to consultation with the Federal Reserve Bank of Atlanta, redeem the Series B and Series C Preferred Shares at any time for its aggregate liquidation amount plus any accrued and unpaid dividends.

 

Acquisition

 

On March 27, 2009, the Company’s subsidiary, Citizens Trust Bank (“Citizens”), acquired the Lithonia branch (the “Branch”) of The Peoples Bank, a Georgia state bank (“Peoples”).  Citizens acquired the in-market deposits of the Branch which totaled approximately $50 million. Under the Agreement, Citizens also acquired the branch office and related real estate and certain personal property at the Branch.  The Company recorded a finite lived intangible asset related to the value of deposit accounts acquired of approximately $3,303,000 and is amortizing the amount over 7 years.

 

Recently Issued Accounting Standards

 

The following is a summary of recent authoritative pronouncements that could affect the accounting, reporting, and disclosure of financial information by the Company:

 

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis.  The Company is required to include these disclosures in their interim and annual financial statements.

 

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR.   The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

 

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

 

In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption.  Impairments occurring subsequent to adoption should be included in earnings.  The amendment was effective for the Company beginning January 1, 2011.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

6



 

2. INVESTMENTS

 

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

 

At March 31, 2011

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

State, county, and municipal securities

 

$

46,345

 

$

664

 

$

848

 

$

46,161

 

Mortgage-backed securities

 

65,020

 

1,081

 

354

 

65,747

 

Corporate securities

 

10,547

 

171

 

66

 

10,652

 

Totals

 

$

121,912

 

$

1,916

 

$

1,268

 

$

122,560

 

 

At December 31, 2010

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

State, county, and municipal securities

 

$

46,807

 

$

439

 

$

1,342

 

$

45,904

 

Mortgage-backed securities

 

72,343

 

1,257

 

631

 

72,969

 

Corporate securities

 

8,528

 

30

 

76

 

8,482

 

Totals

 

$

127,678

 

$

1,726

 

$

2,049

 

$

127,355

 

 

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

 

At March 31, 2011

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

State, county, and municipal securities

 

$

3,294

 

$

73

 

$

7

 

$

3,360

 

Mortgage-backed securities

 

15

 

 

 

15

 

Totals

 

$

3,309

 

$

73

 

$

7

 

$

3,375

 

 

At December 31, 2010

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

State, county, and municipal securities

 

$

3,294

 

$

86

 

$

5

 

$

3,375

 

Mortgage-backed securities

 

17

 

1

 

 

18

 

Totals

 

$

3,311

 

$

87

 

$

5

 

$

3,393

 

 

7



 

The amortized costs and fair values of investment securities at March 31, 2011, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with and without call or prepayment penalties (in thousands).

 

 

 

Available for Sale

 

Held to Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

545

 

$

549

 

$

 

$

 

Due after one year through five years

 

4,985

 

4,937

 

906

 

919

 

Due after five years through ten years

 

31,506

 

31,988

 

2,403

 

2,456

 

Due after ten years

 

84,876

 

85,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

121,912

 

$

122,560

 

$

3,309

 

$

3,375

 

 

Securities with carrying values of $70,741,000 and $70,239,000 at March 31, 2011 and December 31, 2010 were pledged to secure public deposits, FHLB advances and an $18 million line of credit at the Federal Reserve Bank discount window and for other purposes as required by law.

 

Gross realized gains on securities were $68,000 and $333,000 at March 31, 2011 and 2010, respectively.  Gross realized losses on securities were $5,000 at March 31, 2011.  There were no gross realized losses on securities at March 31, 2010.

 

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations, general obligation and revenue municipals and corporate securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio.  The company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions.  Management believes credit risk associated with correspondent accounts is not significant.

 

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010. Except as explicitly identified below, all unrealized losses on investment securities are considered by management to be temporarily impaired given the credit ratings on these investment securities and the short duration of the unrealized loss (in thousands).

 

8



 

At March 31, 2011

 

Securities Available for Sale

 

 

 

Securities in a loss position for

 

Securities in a loss position for

 

 

 

 

 

 

 

less than twelve months

 

twelve months or more

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Fair value

 

losses

 

Fair value

 

losses

 

Fair value

 

losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

18,145

 

$

(186

)

$

3,122

 

$

(168

)

$

21,267

 

$

(354

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

22,967

 

(833

)

175

 

(15

)

23,142

 

(848

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

5,934

 

(66

)

 

 

5,934

 

(66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

47,046

 

$

(1,085

)

$

3,297

 

$

(183

)

$

50,343

 

$

(1,268

)

 

Securities Held to Maturity

 

 

 

Securities in a loss position for

 

Securities in a loss position for

 

 

 

 

 

 

 

less than twelve months

 

twelve months or more

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Fair value

 

losses

 

Fair value

 

losses

 

Fair value

 

losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

$

273

 

$

(7

)

$

 

$

 

$

273

 

$

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

273

 

$

(7

)

$

 

$

 

$

273

 

$

(7

)

 

At December 31, 2010

 

Securities Available for Sale

 

 

 

Securities in a loss position for

 

Securities in a loss position for

 

 

 

 

 

 

 

less than twelve months

 

twelve months or more

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Fair value

 

losses

 

Fair value

 

losses

 

Fair value

 

losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

23,830

 

$

(437

)

$

3,287

 

$

(193

)

$

27,117

 

$

(630

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

29,021

 

(1,310

)

424

 

(32

)

29,445

 

(1,342

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

6,184

 

(77

)

 

 

6,184

 

(77

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

59,035

 

$

(1,824

)

$

3,711

 

$

(225

)

$

62,746

 

$

(2,049

)

 

Securities Held to Maturity

 

 

 

Securities in a loss position for

 

Securities in a loss position for

 

 

 

 

 

 

 

less than twelve months

 

twelve months or more

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Fair value

 

losses

 

Fair value

 

losses

 

Fair value

 

losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

$

275

 

$

(5

)

$

 

$

 

$

275

 

$

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

275

 

$

(5

)

$

 

$

 

$

275

 

$

(5

)

 

The Company’s available for sale portfolio had 5 investment securities at March 31, 2011 and 7 investment securities at December 31, 2010 that were in an unrealized loss position for longer than 12 months.  The investment securities in an unrealized loss position for more than 12 months at March 31, 2011 and December 31, 2010 consisted of 4 private label collateralized mortgage obligation (CMO) securities.  The Company reviews these securities for other-than-temporary impairment on a quarterly basis by monitoring their credit support and coverage, constant payment of the contractual principal and interest, loan to value and delinquencies ratios.

 

We use prices from third party pricing services and, to a lesser extent, indicative (non-binding) quotes from third party brokers, to measure fair value of our investment securities. Fair values of the investment securities portfolio could decline in the future if the underlying performance of the collateral for collateralized mortgage obligations or other securities deteriorates and the levels do not provide sufficient protection for contractual principal and interest. As a result, there is risk that an other-than-temporary impairment may occur in the future particularly in light of the current economic environment.

 

The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell those securities before recovery of its amortized cost. The Company

 

9



 

believes, based on industry analyst reports and credit ratings, that it will continue to receive scheduled interest payments as well as the entire principal balance, and the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

 

3. LOANS

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Commercial, financial, and agricultural

 

$

20,009

 

$

16,986

 

Installment

 

7,202

 

7,538

 

Real estate - mortgage

 

153,532

 

158,402

 

Real estate - construction

 

10,397

 

12,404

 

Other

 

1,154

 

1,036

 

 

Loans receivable

 

192,294

 

196,366

 

Less:

Net deferred loan fees

 

164

 

184

 

 

Allowance for loan losses

 

3,841

 

4,188

 

 

 

 

 

 

 

 

Loans receivable, net

 

$

188,289

 

$

191,994

 

 

The classification Real estate — mortgage consists of home equity loans, mortgages on 1—4 family residential, multifamily residential, and nonfarm nonresidential properties such as churches, hotels, and convenience stores.

 

Activity in the allowance for loan losses is summarized as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Balance at beginning of year

 

$

4,188

 

$

4,094

 

Provision for loan losses

 

475

 

2,465

 

Loans charged off

 

(858

)

(2,522

)

Recoveries on loans previously charged off

 

36

 

151

 

 

 

 

 

 

 

Balance—end of year

 

$

3,841

 

$

4,188

 

 

10



 

The allocation of the allowance for loan losses by portfolio segment was as follows (amounts in thousands):

 

 

 

At March 31, 2011

 

 

 

Commercial

 

Commercial 
Real Estate

 

Single-
family 
Residential

 

Construction 
& Development

 

Consumer

 

Other

 

Unallocated

 

Total

 

Specific Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

127

 

$

2,218

 

$

 

$

302

 

$

 

$

 

$

 

$

2,647

 

Total specific reserves

 

127

 

2,218

 

 

302

 

 

 

 

2,647

 

General reserves

 

 

373

 

254

 

18

 

245

 

 

304

 

1,194

 

Total

 

$

127

 

$

2,591

 

$

254

 

$

320

 

$

245

 

$

 

$

304

 

$

3,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

736

 

$

17,009

 

$

 

$

2,376

 

$

 

$

 

$

 

$

20,121

 

Loans collectively evaluated for impairment

 

19,273

 

98,316

 

38,043

 

8,021

 

7,202

 

1,154

 

 

172,009

 

Total

 

$

20,009

 

$

115,325

 

$

38,043

 

$

10,397

 

$

7,202

 

$

1,154

 

$

 

$

192,130

 

 

 

 

At December 31, 2010

 

 

 

Commercial

 

Commercial 
Real Estate

 

Single-
family 
Residential

 

Construction 
& Development

 

Consumer

 

Other

 

Unallocated

 

Total

 

Specific Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

257

 

$

2,129

 

$

 

$

301

 

$

 

$

 

$

 

$

2,687

 

Total specific reserves

 

257

 

2,129

 

 

301

 

 

 

 

2,687

 

General reserves

 

 

489

 

518

 

115

 

140

 

 

239

 

1,501

 

Total

 

$

257

 

$

2,618

 

$

518

 

$

416

 

$

140

 

$

 

$

239

 

$

4,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

257

 

$

28,645

 

$

 

$

1,649

 

$

 

$

 

$

 

$

30,551

 

Loans collectively evaluated for impairment

 

16,729

 

89,740

 

39,833

 

10,755

 

7,538

 

1,036

 

 

165,631

 

Total

 

$

16,986

 

$

118,385

 

$

39,833

 

$

12,404

 

$

7,538

 

$

1,036

 

$

 

$

196,182

 

 

11



 

The following table presents loans individually evaluated for impairment by class of loan (amounts in thousands):

 

 

 

At March 31, 2011

 

 

 

 

 

 

 

 

 

Impaired Loans - With

 

 

 

 

 

 

 

Impaired Loans - With Allowance

 

no Allowance

 

 

 

 

 

 

 

Unpaid 
Principal

 

Recorded 
Investment

 

Allowance 
for Loan 
Losses 
Allocated

 

Unpaid 
Principal

 

Recorded 
Investment

 

Average 
Recorded 
Investment

 

Interest 
Income 
Recognized

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgages

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

HELOC’s and equity

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

 

 

484

 

484

 

509

 

6

 

Unsecured

 

252

 

252

 

127

 

 

 

338

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

2,413

 

2,413

 

898

 

4,498

 

4,180

 

7,425

 

1

 

Non-owner occupied

 

9,699

 

9,699

 

1,320

 

157

 

51

 

9,772

 

252

 

Multi-family

 

 

 

 

808

 

667

 

732

 

10

 

Construction and Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

1,565

 

1,565

 

223

 

493

 

386

 

1,879

 

16

 

Improved Land

 

146

 

146

 

79

 

559

 

278

 

564

 

12

 

Unimproved Land

 

 

 

 

 

 

 

 

Consumer and Other

 

 

 

 

 

 

 

 

 

Total

 

$

14,075

 

$

14,075

 

$

2,647

 

$

6,999

 

$

6,046

 

$

21,219

 

$

297

 

 

 

 

At December 31, 2010

 

 

 

 

 

 

 

 

 

Impaired Loans - With

 

 

 

 

 

 

 

Impaired Loans - With Allowance

 

no Allowance

 

 

 

 

 

 

 

Unpaid 
Principal

 

Recorded 
Investment

 

Allowance 
for Loan 
Losses 
Allocated

 

Unpaid 
Principal

 

Recorded 
Investment

 

Average 
Recorded 
Investment

 

Interest 
Income 
Recognized

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgages

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

HELOC’s and equity

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

 

 

 

 

 

 

Unsecured

 

257

 

257

 

257

 

 

 

301

 

18

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

4,097

 

4,097

 

509

 

11,781

 

11,657

 

14,456

 

1,419

 

Non-owner occupied

 

10,484

 

10,484

 

1,620

 

1,872

 

1,111

 

11,726

 

110

 

Multi-family

 

 

 

 

412

 

412

 

311

 

181

 

Construction and Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

1,649

 

1,649

 

301

 

 

 

1,564

 

95

 

Improved Land

 

 

 

 

 

 

 

 

Unimproved Land

 

 

 

 

 

 

 

 

Consumer and Other

 

 

 

 

 

 

 

 

 

Total

 

$

16,487

 

$

16,487

 

$

2,687

 

$

14,065

 

$

13,180

 

$

28,358

 

$

1,823

 

 

In addition, there were 32 and 37 loans restructured or otherwise impaired totaling $7,290,000 and $9,799,000 with a valuation allowance of $468,000 and $271,000 at March 31, 2011 and December 31, 2010, respectively.

 

12



 

The following table is an aging analysis of our loan portfolio (amounts in thousands):

 

 

 

At March 31, 2011

 

 

 

30- 59 Days 
Past Due

 

60- 89 
Days Past 
Due

 

Over 90 
Days Past 
Due

 

Total Past 
Due

 

Current

 

Total Loans 
Receivable

 

Recorded 
Investment 
> 90 Days 
and 
Accruing

 

Nonaccrual

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgages

 

$

4,455

 

$

262

 

$

2,849

 

$

7,566

 

$

21,679

 

$

29,245

 

$

 

$

5,209

 

HELOC’s and equity

 

198

 

100

 

275

 

573

 

8,224

 

8,797

 

 

381

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

175

 

 

358

 

533

 

19,225

 

19,758

 

 

357

 

Unsecured

 

 

 

 

 

252

 

252

 

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

444

 

 

1,701

 

2,145

 

81,164

 

83,309

 

 

6,299

 

Non-owner occupied

 

1,500

 

 

3,413

 

4,913

 

20,903

 

25,816

 

 

 

Multi-family

 

 

 

259

 

259

 

6,105

 

6,364

 

 

259

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

215

 

 

136

 

351

 

9,598

 

9,949

 

 

136

 

Improved Land

 

 

 

 

 

448

 

448

 

 

 

Unimproved Land

 

 

 

 

 

 

 

 

 

Consumer and Other

 

119

 

37

 

246

 

402

 

7,790

 

8,192

 

 

217

 

Total

 

$

7,106

 

$

399

 

$

9,237

 

$

16,742

 

$

175,388

 

$

192,130

 

$

 

$

12,858

 

 

13



 

 

 

At December 31, 2010

 

 

 

30- 59 Days 
Past Due

 

60- 89 Days 
Past Due

 

Over 90 Days 
Past Due

 

Total Past 
Due

 

Current

 

Total Loans 
Receivable

 

Recorded 
Investment 
> 90 Days 
and 
Accruing

 

Nonaccrual

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgages

 

$

4,243

 

$

1,325

 

$

2,234

 

$

7,802

 

$

22,123

 

$

29,925

 

$

 

$

3,185

 

HELOC’s and equity

 

227

 

26

 

88

 

341

 

9,567

 

9,908

 

 

648

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

 

 

 

16,664

 

16,664

 

 

142

 

Unsecured

 

 

 

15

 

15

 

308

 

323

 

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,119

 

2,661

 

5,753

 

9,533

 

92,861

 

102,394

 

 

8,503

 

Non-owner occupied

 

4,503

 

326

 

2,268

 

7,097

 

2,741

 

9,838

 

 

 

Multi-family

 

 

 

 

 

6,152

 

6,152

 

 

397

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

10,761

 

10,761

 

 

136

 

Improved Land

 

 

146

 

136

 

282

 

1,361

 

1,643

 

 

 

Unimproved Land

 

 

 

 

 

 

 

 

 

Consumer and Other

 

117

 

48

 

455

 

620

 

7,954

 

8,574

 

 

229

 

Total

 

$

10,209

 

$

4,532

 

$

10,949

 

$

25,690

 

$

170,492

 

$

196,182

 

$

 

$

13,240

 

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if appropriately classified and impairment, if any. All other loan relationships greater than $750,000 are reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will evaluate the loan grade.

 

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

 

Special Mention Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

14



 

The following table presents our loan portfolio by risk rating (amounts in thousands):

 

 

 

At March 31, 2011

 

 

 

Total

 

Pass Credits

 

Special 
Mention

 

Substandard

 

Doubtful

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

First mortgages

 

$

29,245

 

$

25,158

 

$

818

 

$

3,269

 

$

 

HELOC’s and equity

 

8,797

 

7,576

 

153

 

1,068

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Secured

 

19,758

 

19,176

 

96

 

486

 

 

Unsecured

 

252

 

 

 

252

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

83,309

 

72,258

 

1,254

 

9,797

 

 

Non-owner occupied

 

25,816

 

17,462

 

181

 

6,883

 

1,290

 

Multi-family

 

6,364

 

5,689

 

409

 

266

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

9,949

 

8,120

 

 

1,829

 

 

Improved Land

 

448

 

170

 

 

278

 

 

Unimproved Land

 

 

 

 

 

 

Consumer and Other

 

8,192

 

6,765

 

7

 

1,401

 

19

 

Total

 

$

192,130

 

$

162,374

 

$

2,918

 

$

25,529

 

$

1,309

 

 

 

 

At December 31, 2010

 

 

 

Total

 

Pass Credits

 

Special 
Mention

 

Substandard

 

Doubtful

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

First mortgages

 

$

29,925

 

$

26,066

 

$

234

 

$

3,625

 

$

 

HELOC’s and equity

 

9,908

 

8,305

 

41

 

1,562

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Secured

 

16,664

 

15,902

 

336

 

426

 

 

Unsecured

 

322

 

 

 

322

 

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

102,394

 

88,923

 

4,861

 

8,610

 

 

Non-owner occupied

 

9,839

 

 

184

 

9,655

 

 

Multi-family

 

6,152

 

5,741

 

411

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

10,761

 

5,724

 

 

5,037

 

 

Improved Land

 

1,643

 

1,480

 

 

163

 

 

Unimproved Land

 

 

 

 

 

 

Consumer and Other

 

8,574

 

8,174

 

27

 

373

 

 

Total

 

$

196,182

 

$

160,315

 

$

6,094

 

$

29,773

 

$

 

 

15



 

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company measures or monitors certain of its assets and liabilities on a fair value basis.  Fair value is used on a recurring basis for assets and liabilities that are elected to be accounted for under ASC guidance as well as certain assets and liabilities in which fair value is the primary basis of accounting.  Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value, which are in accordance with the guidance for determining the fair value of a financial asset when the market for that asset is not active.

 

In accordance with ASC guidance, the Company applied the following fair value hierarchy:

 

Level 1—Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury and other highly liquid investments that are actively traded in over-the-counter markets.

 

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities, certain derivative contracts and impaired loans.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

 

Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Other Real Estate Owned—Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company recorded the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

 

16



 

Loans—The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2011 and December 31, 2010, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

 

Goodwill and Other Intangible Assets—Goodwill and other intangible assets are measured for impairment on an annual basis or more frequently if there is a change in circumstances. If the goodwill or other intangibles exceed the fair value, an impairment charge is recorded in an amount equal to the excess. Impairment is tested utilizing accepted valuation techniques utilizing discounted cash flows of the business unit, and implied fair value based on a multiple of earnings and tangible book value for merger transactions. The measurement of these fair values is considered a Level 3 measurement.

 

17



 

The following tables present financial assets measured at fair value on a recurring and nonrecurring basis and the change in fair value for those specific financial instruments in which fair value has been elected.  There were no financial liabilities measured at fair value for the periods being reported (in thousands).

 

 

 

Fair Value Measurements at March 31, 2011

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for

 

Significant

 

 

 

 

 

 

 

Identical

 

Other

 

Significant

 

 

 

Assets/Liabilities

 

Assets/

 

Observable

 

Unobservable

 

 

 

Measured at

 

Liabilities

 

Inputs

 

Inputs

 

 

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Recurring Basis:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

State, county, and municipal securities

 

$

46,161

 

$

 

$

46,161

 

$

 

Mortgage-backed securities

 

65,747

 

 

65,747

 

 

Corporate securities

 

10,652

 

 

10,652

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring Basis:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

17,475

 

$

 

$

17,475

 

$

 

Other real estate owned

 

12,180

 

 

12,180

 

 

 

 

 

Fair Value Measurements at December 31, 2010

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for

 

Significant

 

 

 

 

 

 

 

Identical

 

Other

 

Significant

 

 

 

Assets/Liabilities

 

Assets/

 

Observable

 

Unobservable

 

 

 

Measured at

 

Liabilities

 

Inputs

 

Inputs

 

 

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Recurring Basis:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

State, county, and municipal securities

 

$

45,904

 

$

 

$

45,904

 

$

 

Mortgage-backed securities

 

72,969

 

 

72,969

 

 

Corporate securities

 

8,482

 

 

8,482

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring Basis:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

27,864

 

$

 

$

27,864

 

$

 

Other real estate owned

 

9,110

 

 

9,110

 

 

 

18



 

Following are disclosures of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination, or issuance.

 

Cash, Due From Banks, Federal Funds Sold, Interest-Bearing Deposits With Banks, and Certificates of Deposits—Carrying amount is a reasonable estimate of fair value due to the short-term nature of such items.

 

Investment Securities—Fair value of investment securities are based on quoted market prices.

 

Other Investments—The carrying amount of other investments approximates its fair value.

 

Loans—The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value.

 

Cash Surrender Value of Life Insurance—Cash values of life insurance policies are carried at the value for which such policies may be redeemed for cash.

 

Deposits—The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed rate certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

 

Advances from Federal Home Loan Bank—The fair values of advances from the Federal Home Loan Bank are estimated by discounting the future cash flows using the rates currently available to the Bank for debt with similar remaining maturities and terms.

 

Commitments to Extend Credit and Commercial Letters of Credit—Because commitments to extend credit and commercial letters of credit are made using variable rates, or are recently executed, the contract value is a reasonable estimate of fair value.

 

LimitationsFair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments; for example, premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

19



 

The carrying values and estimated fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010 are as follows:

 

 

 

2011

 

2010

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

 

 

(in thousands)

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

6,021

 

$

6,021

 

$

4,764

 

$

4,764

 

Interest-bearing deposits with banks

 

29,390

 

29,390

 

19,033

 

19,033

 

Cetificates of deposit

 

100

 

100

 

150

 

150

 

Investment securities

 

125,869

 

126,886

 

130,666

 

130,748

 

Other investments

 

2,058

 

2,058

 

2,058

 

2,058

 

Loans—net

 

188,289

 

189,544

 

191,994

 

192,893

 

Cash surrender value of life insurance

 

10,925

 

10,925

 

10,848

 

10,848

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

342,253

 

329,007

 

337,604

 

325,744

 

Advances from Federal Home Loan Bank

 

323

 

323

 

328

 

328

 

 

 

 

Notional

 

Estimated

 

Notional

 

Estimated

 

 

 

amount

 

fair value

 

amount

 

fair value

 

Off-balance-sheet financial instruments:

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

19,759

 

 

$

20,072

 

 

Commercial letters of credit

 

2,388

 

 

2,499

 

 

 

5.  OTHER REAL ESTATE OWNED

 

Other real estate owned is reported at the lower of cost or fair value less estimated disposal costs, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. Any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is treated as a charge-off against the allowance for loan losses. Any subsequent declines in value are charged to earnings. Transactions in other real estate owned are summarized below (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Balance—beginning of period

 

$

9,110

 

$

10,837

 

Additions

 

3,471

 

3,340

 

Sales

 

(117

)

(3,089

)

Write downs

 

(284

)

(1,978

)

 

 

 

 

 

 

Balance—end of period

 

$

12,180

 

$

9,110

 

 

20



 

6.  INTANGIBLE ASSETS

 

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

 

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

 

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

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible asset:

 

 

 

 

 

 

 

 

 

Goodwill

 

$

362

 

$

 

$

362

 

$

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

Core deposit intangibles

 

$

3,676

 

$

1,317

 

$

3,676

 

$

1,199

 

 

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

 

 

 

Three months ended
March 31, 2011

 

 

 

2011

 

2010

 

Aggregate amortization expense of core deposit intangibles:

 

$

118

 

$

131

 

 

Estimated aggregate amortization expense of core deposit intangibles for the years ending March 31:

 

2011

 

$

472

 

2012

 

$

472

 

2013

 

$

472

 

2014

 

$

472

 

2015 and thereafter

 

$

471

 

 

21



 

7.  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 (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net Income

 

$

217

 

$

625

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

641

 

(118

)

 

 

 

 

 

 

Comprehensive income

 

$

858

 

$

507

 

 

8.  NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

 

Basic and diluted net income per share available to common and potential common stockholders 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 share available to common and potential common stockholders for the three month period ended March 31, 2011 and 2010 (in thousands, except per share data):

 

 

 

Net Income

 

Shares

 

Per Share

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

 

 

 

 

 

 

 

 

Three Months ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share available to common stockholders

 

$

158

 

2,105

 

$

0.08

 

Nonvested restricted stock grant

 

 

15

 

(0.01

)

Effect of dilutive securities: options to purchase common shares

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

158

 

2,120

 

$

0.07

 

 

 

 

 

 

 

 

 

Three Months ended March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share available to common stockholders

 

$

532

 

2,103

 

$

0.25

 

Nonvested restricted stock grant

 

 

10

 

 

Effect of dilutive securities: options to purchase common shares

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

532

 

2,113

 

$

0.25

 

 

9.  SUBSEQUENT EVENTS

 

The Company evaluated subsequent events through the date its financial statements were issued.

 

10.  RECLASSIFICATIONS

 

Certain 2010 amounts have been reclassified to conform to the 2011 presentation. The reclassifications did not impact net income or stockholder’s equity.

 

22



 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS

 

INTRODUCTION

 

Citizens Bancshares Corporation (the “Company”) is a holding company that provides a full range of commercial and personal banking 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 11 full-service financial centers in Georgia and Alabama.

 

Forward Looking Statements

 

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

 

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

 

The following discussion is of the Company’s financial condition as of March 31, 2011 and December 31, 2010, and the changes in the financial condition and results of operations for the three month periods ended March 31, 2011 and 2010.

 

Critical Accounting Policies

 

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

 

Investment Securities - The Company classifies investments in one of three categories based on management’s intent upon purchase: held to maturity securities which are reported at amortized cost, trading securities which are reported at fair value with unrealized holding gains and losses included in earnings, and available for sale securities which are recorded at fair value with unrealized holding gains and losses included as a component of accumulated other comprehensive income.  The Company had no investment securities classified as trading securities during 2011 or 2010.

 

23



 

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 or OCI 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 semi-annual basis an independent comprehensive review of the methodology and allocation 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.

 

Other Real Estate Owned - Other real estate owned is reported at the lower of cost or fair value less estimated disposal costs, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. Any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is treated as a charge-off against the allowance for loan losses. Any subsequent declines in value are charged to earnings.

 

Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

 

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for the portion of a deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

 

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial

 

24



 

condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.

 

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, 2010.  The Company has followed those policies in preparing this report.

 

FINANCIAL CONDITION

 

At March 31, 2011, the Company had total assets of $393,194,000 compared to $387,806,000 at December 31, 2010.  Total assets primarily consisted principally of $125,869,000 in investments securities and $188,289,000 in net loans representing 33% and 48% of total assets, respectively.  Investment securities and net loans represented 34% and 50% of total assets at December 31, 2010.

 

Interest-bearing deposits with banks increased by $10,357,000 to $29,390,000 for the three month period ended March 31, 2011 compared to December 31, 2010.  Interest-bearing deposits with banks primarily represent funds maintained on deposit at the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB).  These funds fluctuate daily and are used to manage the Company’s liquidity position.  The Company monitors its short-term liquidity position daily and closely manages its overnight cash positions in light of the current economic environment.

 

Loans typically provide higher interest yields than other types of interest-earning assets and, therefore, continue to be the largest component of the Company’s assets.  Net loan receivables declined by $3,705,000 for the three month period due to weak loan demand due to the ongoing challenging economic conditions and high unemployment.  However, the Company continues to focus on extending credit to qualified borrowers as businesses and consumers work through the current economic downturn.

 

At March 31, 2011, other real estate owned increased by $3,070,000 to $12,180,000 compared to the year-end of 2010. The increase is primarily due to the addition of two commercial properties totaling $3,116,000 to OREO during the three month period, partially offset by other OREO activities.

 

Cash value of life insurance, a comprehensive compensation program for directors and certain senior managers of the Company, increased $77,000 to $10,925,000 at March 31, 2011.  The increase primarily represents the earnings on the premiums paid over the life of the insurance contract.

 

The Company’s liabilities at March 31, 2011 totaled $346,588,000 and consisted primarily of $342,253,000 in deposits, representing an increase of $4,649,000 compared to total deposits of $337,604,000 at December 31, 2010.  The remaining liabilities were FHLB advances totaling $323,000 at March 31, 2011 compared to $328,000 at December 31, 2010.

 

The Company’s asset/liability management program, which monitors the Company’s interest rate sensitivity as well as volume and mix changes in earning assets and interest bearing liabilities, may impact the growth of the Company’s balance sheet as it seeks to maximize net interest income.

 

INVESTMENT SECURITIES

 

The composition of the Company’s investment securities portfolio reflects the Company’s investment strategy of maximizing portfolio yields commensurate with risk and liquidity considerations. The primary objective of the Company’s investment strategy is to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company’s interest rate sensitivity position, while at the same time producing adequate levels of interest income.

 

25



 

At March 31, 2011 and December 31, 2010, the investment securities portfolio represented approximately 33% and 34% of the Company’s total assets.

 

Other investments consist of Federal Home Loan Bank and Federal Reserve Bank stock which are restricted and have no readily determined market value.  The Company is required to maintain an investment in the FHLB and the FRB as part of its membership conditions. The level of investments at the FHLB is primarily determined by the amount of outstanding advances. The FRB investment level is 6 percent of the par value of the bank’s common stock outstanding and paid-in-capital.  These investments are carried at cost.

 

LOANS

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Commercial, financial, and agricultural

 

$

20,009

 

$

16,986

 

Installment

 

7,202

 

7,538

 

Real estate - mortgage

 

153,532

 

158,402

 

Real estate - construction

 

10,397

 

12,404

 

Other

 

1,154

 

1,036

 

Loans receivable

 

192,294

 

196,366

 

Less: Net deferred loan fees

 

164

 

184

 

Allowance for loan losses

 

3,841

 

4,188

 

 

 

 

 

 

 

Loans receivable, net

 

$

188,289

 

$

191,994

 

 

The Company does not have any concentrations of loans exceeding 10% of total loans of which management is aware and which are not otherwise disclosed as a category of loans in the table above or in other sections of this Annual Report on Form 10-K.  A substantial portion of the Company’s loan portfolio is secured by real estate in metropolitan Atlanta and Birmingham.

 

The largest component of loans in the Company’s loan portfolio is real estate mortgage loans.  At March 31, 2011 and December 31, 2010, real estate mortgage loans, which consist of first and second mortgages on single or multi-family residential dwellings, loans secured by commercial and industrial real estate and other loans secured by multi-family properties, totaled $154 million and $158 million, respectively, and represented 80% and 81% of loans, net of unearned income for the periods reported.

 

A substantial portion of the Company’s loan portfolio is collateralized by real estate in metropolitan Atlanta and Birmingham markets. Accordingly, the ultimate collectibility of a substantial portion of the Company’s loan portfolio is susceptible to changes in market conditions in the metropolitan Atlanta and Birmingham areas.

 

·                  The Company’s loans to area churches were approximately $43 million and $44 million at March 31, 2011 and December 31, 2010, respectively, which are generally secured by real estate.

 

·                  The Company’s loans to area convenience stores were approximately $11 million and $12 million at March 31, 2011 and December 31, 2010, respectively.  Loans to convenience stores are generally secured by real estate.

 

26



 

·                  The Company’s loans to area hotels were approximately $22 Million and $21 million at March 31, 2011 and December 31, 2010, respectively, which are generally secured by real estate.

 

In addition, 1—4 family residential mortgage loans secured by first liens were approximately $33 million and $36 million at March 31, 2011 and December 31, 2010, respectively.

 

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 and 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 of 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.

 

The financial and credit markets continued to experience difficulty during the first three months of 2011.  Although there appears to be some positive signs of recovery and the economic outlook appears to be stabilizing, our local markets continue to be impacted by recessionary conditions which continue to influence the levels of our nonperforming assets.  For the first quarter of 2011, nonperforming assets increased by $2,688,000 to $25,038,000.  During the first three months of 2011, the Company charged-off $858,000 in nonperforming loans, an improvement over the $1,207,000 charged-off in the fourth quarter of 2010; however, it represents an increase of $421,000 over the $437,000 charged-off for the same period last year. OREO increased by $3,070,000 to $12,180,000 primarily due to the foreclosures of a convenience store and a hotel totaling $1,409,000 and $1,707,000, respectively, partially offset by other OREO activities.  At March 31, 2011, nonperforming assets represent 6.37% of total assets compared to 5.76% at December 31, 2010.  There were no loans greater than 90 days past due and still accruing interest at the end of the first quarter of 2011 or at December 31, 2010.  In addition, there were 32 and 37 loans restructured or otherwise impaired totaling $7,290,000 and $9,799,000 at March 31, 2011 and December 31, 2010, respectively.  At March 31, 2011, 16 restructured loans totaling $2,083,000 and at December 31, 2010, 11 restructured loans totaling $2,757,000 are included in nonaccrual loans in the table below.

 

27



 

The table below presents a summary of the Company’s nonperforming assets at March 31, 2011 and December 31, 2010.

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands, except

 

 

 

financial ratios)

 

Nonperforming assets:

 

 

 

 

 

Nonperforming loans:

 

 

 

 

 

Nonaccrual loans

 

$

12,858

 

$

13,240

 

Past-due loans of 90 days or more and still accruing

 

 

 

Nonperforming loans

 

12,858

 

13,240

 

 

 

 

 

 

 

Real estate acquired through foreclosure

 

12,180

 

9,110

 

Total nonperforming assets

 

$

25,038

 

$

22,350

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

Nonperforming loans to loans, net of unearned income

 

6.69

%

6.75

%

 

 

 

 

 

 

Nonperforming assets to loans, net of unearned income, and real estate acquired through foreclosure

 

12.25

%

10.89

%

 

 

 

 

 

 

Nonperforming assets to total assets

 

6.37

%

5.76

%

 

 

 

 

 

 

Allowance for loan losses to nonperforming loans

 

29.87

%

31.63

%

 

 

 

 

 

 

Allowance for loan losses to nonperforming assets

 

15.34

%

18.74

%

 

ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses is primarily available to absorb losses inherent in the loan portfolio. Credit exposures deemed uncollectible are charged against 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 semi-annual basis an independent 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 first three months of 2011, a provision for loan losses of $475,000 was charged against operating earnings compared to $630,000 for the same period last year, representing a decrease of $155,000. The decrease in the provision for loan losses in 2011 relates to asset quality improvement experienced in the first quarter of 2011.

 

The allowance for loan losses at March 31, 2011 was approximately $3,841,000, representing 2.00% of

 

28



 

total loans, net of unearned income compared to approximately $4,327,000 for the same period last year, which represented 2.14% of total loans, net of unearned income.  Approximately $2,647,000 of the allowance for loan losses was allocated to loans management considered impaired at March 31, 2011.

 

At March 31, 2011, management believes the allowance for loan losses is adequate. Management uses available information to recognize losses on loans; however, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the metropolitan Atlanta, Georgia and Birmingham, Alabama areas. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

 

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, 2011 and 2010 (amount in thousands, except financial ratios):

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Loans, net of unearned income

 

$

192,129

 

$

202,522

 

 

 

 

 

 

 

Average loans, net of unearned income and the allowance for loan losses

 

$

190,828

 

$

199,072

 

 

 

 

 

 

 

Allowance for loan losses at the beginning of period

 

$

4,188

 

$

4,094

 

 

 

 

 

 

 

Loans charged-off:

 

 

 

 

 

Commercial, financial, and agricultural

 

 

50

 

Real estate - loans

 

809

 

309

 

Installment loans to individuals

 

49

 

78

 

Total loans charged-off

 

858

 

437

 

 

 

 

 

 

 

Recoveries of loans previously charged off:

 

 

 

 

 

Commercial, financial, and agricultural

 

1

 

1

 

Real estate - loans

 

3

 

10

 

Installment loans to individuals

 

32

 

29

 

Total loans recovered

 

36

 

40

 

 

 

 

 

 

 

Net loans charged-off

 

822

 

397

 

 

 

 

 

 

 

Additions to allowance for loan losses charged to operating expense

 

475

 

630

 

 

 

 

 

 

 

Allowance for loan losses at period end

 

$

3,841

 

$

4,327

 

 

 

 

 

 

 

Ratio of net loans charged-off to average loans, net of unearned income and the allowance for loan losses

 

0.43

%

0.20

%

 

 

 

 

 

 

Ratio of allowance for loan losses to loans, net of unearned income

 

2.00

%

2.14

%

 

29



 

DEPOSITS

 

Deposits are the Company’s primary source of funding loan growth.  Total deposits at March 31, 2011 increased 1% or $4,649,000 to $342,253,000 compared to December 31, 2010.  The bank has a stable core deposit base with a high percentage of non-interest bearing deposits.  Noninterest-bearing deposits increased by $9,664,000 to $68,207,000, or 17%, and interest-bearing deposits declined by $5,015,000, or 2%, to $274,046,000 for the three month period ending March 31, 2010.  On an average basis, noninterest-bearing deposits were $64,204,000 for the first quarter of 2011 compared to $62,799,000 at December 31, 2010.  Average interest-bearing deposits decreased by $7,865,000 to $275,257,000 in the first quarter of 2011 compared to $283,122,000 at December 31, 2010.  As a result of the high level of core deposits, the Company maintained a net interest margin of 4.17% at March 31, 2011 compared to 4.12% reported for the same period last year, which is above its internal and FDIC peer group.

 

The Company is participating in the Temporary Liquidity Guarantee Program’s full coverage of noninterest-bearing deposit transaction accounts.  In addition, the Company participates in Certificate of Deposit Account Registry Services (“CDARS”), a program that allows its customers the ability to benefit from full FDIC insurance on CD investments.  At March 31, 2011 and December 31, 2010, the Company had $15,074,000 and $14,813,000 in CDARS deposits.

 

Participation in these programs has enhanced the Company’s ability to retain Corporate and Governmental customers’ deposits that make sizeable deposits and withdrawals based on their budgetary needs.

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

NOW and money market accounts

 

$

94,604

 

$

96,412

 

Savings accounts

 

32,091

 

31,841

 

Time deposits of $100,000 or more

 

92,166

 

94,572

 

Other time deposits

 

55,185

 

56,236

 

 

 

$

274,046

 

$

279,061

 

 

OTHER BORROWED FUNDS

 

The Company continues to emphasize funding earning asset growth through core deposits; however, the Company has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal funds purchased, short-term borrowings and FHLB advances.

 

The Bank had outstanding advances from the FHLB of $323,000 at March 31, 2011 and $328,000 at December 31, 2010. These advances are collateralized by FHLB stock, a blanket lien on 1-4 family and multifamily mortgage loans, certain commercial real estate loans and investment securities.  As of March 31, 2011 and December 31, 2010, total loans pledged as collateral was $38,276,000 and $43,477,000, respectively.

 

30



 

Maturity 

 

Callable

 

Type

 

March 31, 2011

 

December 31, 2010

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 2026

 

 

 

 

(1)

 

323

 

 

328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Principal Outstanding

 

 

 

 

 

$

323

 

 

 

$

328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Rate at Period End

 

 

 

%

 

 

%

 

 

 


(1)          Represents an Affordable Housing Program (AHP) award used to subsidize loans for homeownership or rental initiatives.  The AHP is a principal reducing credit, scheduled to mature on August 17, 2026 with an interest rate of zero.

 

At March 31, 2011, the Company had a $78 million line of credit facility at the FHLB of which $20.3 million was committed consisting of an advance of $323,000 and a letter of credit to secure public deposits in the amount of $20 million.  The Company also had $18 million of borrowing capacity at the Federal Reserve Bank discount window.

 

RESULTS OF OPERATIONS

 

Net Interest Income:

 

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

 

For the three month period ended March 31, 2011, net interest income decreased by $230,000 or 6% to $3,573,000 compared to $3,803,000 reported for the same period last year.  Total interest income declined by $494,000 to $4,011,000 compared to the same three month period in 2010 primarily due to a $420,000 decrease in interest income on loans.  The decline in interest income on loans is caused by continued weakness in loan demand and lower loan yields. Similarly, interest income on investment securities declined by $67,000 due to lower yields earned on investment securities compared to the first quarter of 2010.  Total interest expense for the period decreased by $264,000 or 38% compared to the same three month period in 2010.  Interest expense on interest-bearing deposits decreased by $250,000 or 36%, as the Company lowered its funding cost and improved its deposit mix.  Also, interest expense on other borrowings decreased by $14,000 or 100% as the Company had no outstanding interest bearing advances from the FHLB during the first quarter of 2011.  At March 31, 2011, the Company had a net interest margin of 4.17% compared to 4.12% for the same period last year.

 

The Company has an asset/liability management program which monitors the Company’s interest rate sensitivity and ensures the Company is competitive in the loan and deposit market.  The Company continues to monitor its asset/liability mix and will make changes as appropriate to ensure it is properly positioned to react to changing interest rates and inflationary trends.

 

Provision for loan losses

 

For the first three months of 2011, the Company recognized a provision for loan losses of $475,000, a $155,000 or 25% decrease, compared to $630,000 for the same period in 2010.  The allowance for loan losses was $3,841,000 at March 31, 2011 compared to $4,188,000 at December 31, 2010.  At

 

31



 

March 31, 2011, the allowance for loan losses was 30% of nonperforming loans compared to 32% at December 31, 2010.  The provision for loan losses and the resulting allowance for loan losses are based on changes in the size and character of the Company’s 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.  At March 31, 2011, 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 commissions earned through insurance sales.  In addition, gains and losses realized from the sale of investment portfolio securities and sales of assets are included in noninterest income.

 

Noninterest income totaled $1,241,000 for the three month period ended March 31, 2011, a decrease of $511,000 or 29% compared with the same period last year.  The decline in the first quarter of 2011 is primarily attributed to gains on the sale of securities decreasing by $270,000 to $63,000 compared to $333,000 for the same period last year.  In addition, in the first quarter of 2010, the Company received a $259,000 award for its participation in the U.S. Department of Treasury Bank Enterprise Award (BEA) which provides financial incentives for lending and investment activities within economically distressed communities. The Company did not receive a BEA award in the first quarter of 2011.

 

Noninterest expense:

 

Noninterest expense includes compensation and benefits, occupancy expenses, advertising and marketing, professional fees, office supplies, data processing, telephone expenses, miscellaneous items and other losses.

 

Non-interest expense in the first quarter of 2011 was relatively flat compared to the same quarter last year, increasing by a nominal $11,000.  However, the Company is benefiting from several savings initiatives it has implemented. For the three month period ended March 31, 2011, salaries and employee benefits decreased by $137,000.  This decrease is due to a reduction of 14 full time employees compared to March 31, 2010.  Net occupancy cost, amortization of core deposits intangible and other operating expenses decreased by $40,000, $16,000 and $18,000, respectively, compared to the same period last year.  Offsetting these declines were FDIC insurance which increased by $16,000 and other real estate owned which increased by $203,000 due to write downs and related expenses compared to the same period last year.

 

INTEREST RATE SENSITIVITY MANAGEMENT

 

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

 

One method of measuring the impact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest rate sensitive assets and interest rate sensitive liabilities at various time intervals is referred to as the gap.  The Company is liability sensitive on a short-term basis as reflected in the following table.  Generally, a net liability sensitive position indicates that there would be a negative impact on net interest income in an increasing rate environment.  However, interest rate

 

32



 

sensitivity gap does not necessarily indicate the impact of general interest rate movements on the net interest margin, since all interest rates and yields do not adjust at the same velocity and the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company’s customers.  In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. The following table shows the contractual maturities of all interest rate sensitive assets and liabilities at March 31, 2011.  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.  Taking a conservative approach, the Company has included demand deposits such as NOW, money market, and savings accounts in the three month category.  However, the actual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only a general indicator of potential effects of interest rate changes on net interest income.

 

The following table sets forth the distribution of the repricing of the Company’s interest rate sensitive assets and interest rate sensitive liabilities as of March 31, 2011.

 

 

 

Cumulative amounts as of March 31, 2011

 

 

 

Maturing and repricing within

 

 

 

3

 

3 to 12

 

1 to 5

 

Over

 

 

 

 

 

Months

 

Months

 

Years

 

5 Years

 

Total

 

 

 

(amounts in thousands, except ratios)

 

Interest-sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits with other banks

 

$

29,390

 

$

 

$

 

$

 

$

29,390

 

Certificates of deposit

 

 

100

 

 

 

100

 

Investments

 

 

550

 

5,842

 

119,863

 

126,255

 

Loans

 

41,986

 

22,538

 

92,762

 

34,843

 

192,129

 

Total interest-sensitive assets

 

$

71,376

 

$

23,188

 

$

98,604

 

$

154,706

 

$

347,874

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-sensitive liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits (a)

 

$

166,896

 

$

87,235

 

$

19,915

 

$

 

$

274,046

 

Other borrowings

 

 

 

 

323

 

323

 

Total interest-sensitive liabilities

 

$

166,896

 

$

87,235

 

$

19,915

 

$

323

 

$

274,369

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-sensitivity gap

 

$

(95,520

)

$

(64,047

)

$

78,689

 

$

154,383

 

$

73,505

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative interest-sensitivity gap to total interest-sensitive assets

 

(27.46

)%

(45.87

)%

(23.25

)%

21.13

%

21.13

%

 


(a) Savings, Now, and money market deposits totaling $126,694 are included in the maturing in 3 months classification.

 

LIQUIDITY

 

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.  Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. Additionally, the Company requires cash for various operating needs including: dividends to shareholders; business combinations; capital injections to its subsidiary; the servicing of debt; and the payment of general corporate expenses. The Company has access to various capital markets and on March 6, 2009, the Company issued 7,462 shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Department of the Treasury (“Treasury”) under the TARP Program for an

 

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investment of $7,462,000.  On August 13, 2010, the Company exchanged the outstanding 7,462 shares of Series A Preferred Stock for 7,462 shares of Series B Preferred Stock.  No monetary consideration was given in connection with this exchange.  The Company also issued 4,379 shares of Series C Preferred Stock for $4,379,000 to the Treasury on September 17, 2010.  However, the primary source of liquidity for the Company is dividends from its bank subsidiary.  Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company as well as the Company’s payment of dividends to its stockholders.  The Georgia Department of Banking and Finance regulates the Bank’s dividend payments and must approve dividend payments that exceed 50 percent of the Bank’s prior year net income. The payment of dividends may also be affected or limited by other factors, such as the requirement by federal agencies to maintain adequate capital above regulatory guidelines and that bank holding companies and insured banks pay dividends out of current earnings. Currently, the Bank must receive approval from the Georgia Department of Banking and Finance and the Company must receive approval from the Federal Reserve Bank of Atlanta prior to the payment of dividends.

 

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

 

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 Company’s incremental borrowing capacity.  These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. The Company does not anticipate any liquidity requirements in the near future that it will not be able to meet.

 

CAPITAL RESOURCES

 

Stockholders’ equity increased by $789,000 for the three month period ended March 31, 2011. This increase is primarily due to accumulated other comprehensive income, net of taxes positively impacting the Company’s capital, increasing by $641,000 to an unrealized gain of $428,000 from an unrealized loss of $213,000 at December 31, 2010.  This increase is attributed to the rapid movements in the Treasury markets and swings in volatility and credit spreads, and their impact on the Company’s available for sale securities portfolio.  Retained earnings increased by $158,000 due to net income for the quarter of $217,000 offset by $59,000 preferred dividend paid to the Treasury.

 

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.  The Company’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 18%, 17% and 11% at March 31, 2011 and at December 31, 2010, respectively.  At March 31, 2011, the Company met all capital adequacy requirements to which it is subject and is considered to be ‘well capitalized” under regulatory standards.

 

34



 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This information is not required since the Company qualifies as a smaller reporting company.

 

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 Company’s 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 13a-15(e). Based on this evaluation, the Company’s Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2011 in accumulating and communicating information to management, including the Chief Executive Officer, the Chief Operating Officer, and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports filed or submitted by the Company under the Securities Exchange Act is recorded, processed, summarized and reported within the specified time periods.  During the quarter ended March 31, 2011, there have been no changes in the Company’s internal controls over financial reporting or, to the Company’s knowledge, in other factors that could significantly change those internal controls subsequent to the date the Company carried out its evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  However, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

PART II.  OTHER INFORMATION

 

ITEM 1.    LEGAL PROCEEDINGS

 

The Company and the Bank are involved in various claims and legal actions arising in the ordinary course of business.  In the opinion of management, based in part on the advice of counsel, the ultimate disposition of these matters will not have a material adverse impact on the Company’s consolidated financial position.

 

On May 20, 2010, Citizens Trust Bank filed suit against its former insurance brokers and the third party administrator of the Bank’s medical insurance plan.  The lawsuit alleges negligent misrepresentation, breach of fiduciary duty, fraud, and civil conspiracy against the defendants based on allegations that the defendants misrepresented the coverage provided under the Bank’s 2009 and 2010 medical insurance plan and concealed the actual coverage to induce the Bank to continue with the same plan.  Citizens Trust Bank seeks compensatory damages in the amount of at least $268,013.15, punitive damages, and reimbursement of its attorney’s fees.  One of the defendants has filed a counterclaim alleging indemnification and abusive litigation and is seeking its attorney’s fees.  The case is set for trial on the court’s August 2011 jury trial calendar.

 

ITEM 1A.   RISK FACTORS

 

We believe there have been no material changes from the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.  You should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The

 

35



 

risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

 

ITEM 2.     UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.     REMOVED AND RESERVED

 

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 2002.

 

Exhibit 32

 

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

36



 

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 16, 2011

By:

/s/ James E. Young

 

James E. Young

 

President and Chief Executive Officer

 

 

 

 

Date:  May 16, 2011

By:

/s/ Cynthia N. Day

 

Cynthia N. Day

 

Senior Executive Vice President and

 

Chief Operating Officer

 

 

 

 

Date:  May 16, 2011

By:

/s/ Samuel J. Cox

 

Samuel J. Cox

 

Executive Vice President and

 

Chief Financial Officer

 

37