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, 2015
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ____________ to  _____________

 

Commission File No: 0 - 14535

 

 

 

CITIZENS BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Georgia	58 – 1631302
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
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.

x 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: 2,063,951 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 13, 2015.

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2015 AND DECEMBER 31, 2014

(In thousands, except share data)

 

ASSETS		2015				2014
		(Unaudited)
Cash and due from banks		$	2,995			$	2,758
Interest-bearing deposits with banks			56,427				45,653
Certificates of deposit			350				350
Investment securities available for sale, at fair value			116,111				126,611
Investment securities held to maturity, at cost			240				240
Other investments			799				792
Loans receivable, net			191,525				188,739
Premises and equipment, net			6,337				6,395
Cash surrender value of life insurance			10,135				10,082
Other Real Estate Owned			4,382				4,668
Other assets			9,288				9,351
Total assets		$	398,589			$	395,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits		$	86,052			$	83,818
Interest-bearing deposits			257,211				257,071
Total deposits			343,263				340,889
Accrued expenses and other liabilities			4,710				4,930
Advances from Federal Home Loan Bank			249				254
Total liabilities			348,222				346,073
STOCKHOLDERS’ EQUITY:
Preferred stock - No par value; 10,000,000 shares authorized;
Series B, 7,462 shares issued and outstanding			7,462				7,462
Series C, 4,379 shares issued and outstanding			4,379				4,379
Common stock - $1 par value; 20,000,000 shares authorized; 2,303,228 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively			2,303				2,303
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding			90				90
Nonvested restricted common stock			(77	)			(107	)
Additional paid-in capital			8,119				8,119
Retained earnings			28,901				28,532
Treasury stock at cost, 235,938 shares at March 31, 2015 and December 31, 2014, respectively			(1,882	)			(1,882	)
Accumulated other comprehensive income, net of income taxes			1,072				670
Total stockholders’ equity			50,367				49,566
		$	398,589			$	395,639

 

See notes to condensed consolidated financial statements.

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - In thousands, except per share data)

 

		Three Months  Ended March 31,
		2015				2014
Interest income:
Loans, including fees		$	2,403			$	2,477
Investment securities:
Taxable			507				584
Tax-exempt			235				295
Interest-bearing deposits			29				20
Total interest income			3,174				3,376
Interest expense:
Deposits			184				212
Total interest expense			184				212
Net interest income			2,990				3,164
Provision for loan losses			75				—
Net interest income after provision for loan losses			2,915				3,164
Noninterest income:
Service charges on deposits			668				703
Gain on sales of securities			191				—
Other operating income			305				276
Total noninterest income			1,164				979
Noninterest expense:
Salaries and employee benefits			1,676				1,536
Net occupancy and equipment			501				543
Amortization of core deposit intangible			118				118
FDIC insurance			93				77
Other real estate owned, net			19				231
Other operating expenses			1,151				1,139
Total noninterest expense			3,558				3,644
Income before income taxes			521				499
Income tax expense			93				83
Net income		$	428			$	416
Preferred dividends			59				59
Net income available to common shareholders		$	369			$	357
Net income per common share - basic		$	0.17			$	0.17
Net income per common share - diluted		$	0.17			$	0.16
Weighted average common outstanding shares - basic			2,194				2,161
Weighted average common outstanding shares - diluted			2,210				2,171

 

See notes to condensed consolidated financial statements.

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - In thousands)

 

		Three Months Ended
		March 31,
		2015				2014
Net Income		$	428			$	416
Other Comprehensive Income:
Unrealized holding gain on investment securities available for sale, net of tax of $270 for 2015 and $421 for 2014			528				819
Reclassification adjustment for holding gains included in net income, net of tax of $65 and $ - for 2015 and 2014, respectively			(126	)			—
Other Comprehensive Income		$	402			$	819
Total Comprehensive Income		$	830			$	1,235

 

See notes to condensed consolidated financial statements

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Unaudited - In thousands)

 

																																														Accumulated
		Preferred																Nonvoting								Nonvested				Additional																Other
		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, 2013			12			$	11,841				2,293			$	2,293				90			$	90			$	(16	)		$	7,933			$	27,131				(236	)		$	(1,882	)		$	(1,082	)		$	46,308
Net income			—				—				—				—				—				—				—				—				416				—				—				—				416
Other comprehensive loss			—				—				—				—				—				—				—				—				—				—				—				819				819
Nonvested restricted stock			—				—				—				—				—				—				12				—				—				—				—				—				12
Dividends declared - preferred			—				—				—				—				—				—				—				—				(59	)			—				—				—				(59	)
Balance—March 31, 2014			12			$	11,841				2,293			$	2,293				90			$	90			$	(4	)		$	7,933			$	27,488				(236	)		$	(1,882	)		$	(263	)		$	47,496
Balance—December 31, 2014			12			$	11,841				2,303			$	2,303				90			$	90			$	(107	)		$	8,119			$	28,532				(236	)		$	(1,882	)		$	670			$	49,566
Net income			—				—				—				—				—				—				—				—				428				—				—				—				428
Other comprehensive income			—				—				—				—				—				—				—				—				—				—				—				402				402
Nonvested restricted stock			—				—				—				—				—				—				30				—				—				—				—				—				30
Dividends declared - preferred			—				—				—				—				—				—				—				—				(59	)			—				—				—				(59	)
Balance—March 31, 2015			12			$	11,841				2,303			$	2,303				90			$	90			$	(77	)		$	8,119			$	28,901				(236	)		$	(1,882	)		$	1,072			$	50,367

 

See notes to condensed consolidated financial statements.

 

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(In thousands)

 

		2015				2014
		(Unaudited)
OPERATING ACTIVITIES:
Net income		$	428			$	416
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			75				—
Depreciation			137				137
Amortization and accretion, net			243				216
Provision (benefit) for deferred income tax			(91	)			77
Gains on sale of assets and investments, net			(191	)			—
Restricted stock based compensation plan			30				12
Decrease in carrying value of other real estate owned			3				206
Net gain on sale of other real estate owned			(12	)			(60	)
Decrease (increase) in cash surrender value of life insurance			(53	)			—
Change in other assets			(170	)			(763	)
Change in accrued expenses and other liabilities			(220	)			43
Net cash provided by operating activities			179				284
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and paydowns of investment securities available for sale			11,192				4,109
Purchases of investment securities available for sale			—				(200	)
Net change in other investments			(7	)			—
Net change in loans receivable			(2,968	)			3,802
Proceeds from the sale of other real estate owned			383				917
Purchases of premises and equipment, net			(78	)			(32	)
Net cash provided by investing activities			8,522				8,596
FINANCING ACTIVITIES:
Net change in deposits			2,374				11,228
Net change in advances from Federal Home Loan Bank			(5	)			(5	)
Dividends paid - preferred			(59	)			(59	)
Net cash provided by financing activities			2,310				11,164
Net change in cash and cash equivalents			11,011				20,044
Cash and  cash equivalents, beginning of period			48,411				29,167
Cash and  cash equivalents at end of period		$	59,422			$	49,211
Supplemental disclosures of cash paid during the period for:
Interest		$	197			$	264
Income taxes		$	20			$	—
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure		$	88				410
Change in unrealized gain on investment securities available for sale, net of taxes		$	402			$	819

 

See notes to condensed consolidated financial statements.

 

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 seven 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, 2014. The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2015 fiscal year.

 

The consolidated financial statements of the Company for the three month period ended March 31, 2015 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, 2014. 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”) issued pursuant to the TARP Community Development Capital Initiative, 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”).

 

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.

 

Recently Issued Accounting Standards

In January 2014, the FASB amended Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (OREO). In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual period beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

 

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016 and interim periods within annual reporting periods beginning after December 15, 2018. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

 

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

 

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.

 

2. INVESTMENTS

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

 

At March 31, 2015		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
State, county, and municipal securities		$	26,823			$	1,569			$	—			$	28,392
Mortgage-backed securities			77,782				466				532				77,716
Corporate securities			9,882				121				—				10,003
Totals		$	114,487			$	2,156			$	532			$	116,111

 

At December 31, 2014		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
State, county, and municipal securities		$	28,179			$	1,514			$	—			$	29,693
Mortgage-backed securities			87,548				437				1,070				86,915
Corporate securities			9,867				136				—				10,003
Totals		$	125,594			$	2,087			$	1,070			$	126,611

 

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

 

At March 31, 2015		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
State, county, and municipal securities		$	240			$	4			$	—			$	244

 

At December 31, 2014		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
State, county, and municipal securities		$	240			$	3			$	—			$	243

 

The amortized costs and fair values of investment securities at March 31, 2015, 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).

 

		Held to Maturity								Available for Sale
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Due in one year or less		$	—			$	—			$	4,200			$	4,215
Due after one year through five years			240				244				10,332				10,615
Due after five years through ten years			—				—				26,974				28,454
Due after ten years			—				—				72,981				72,827
		$	240			$	244			$	114,487			$	116,111

 

Securities with carrying values of $92,827,000 and $99,299,000 as of March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, FHLB advances and a $22,953,000 line of credit at the Federal Reserve Bank discount window and for other purposes as required by law.

 

For the three months ended March 31, 2015, proceeds from the sale of securities was $6,040,000. There were no sale of securities during the three months ended March 31, 2014. Gross realized gains on the sale of securities for the three months ended March 31, 2015 was $191,000. There were no gross realized losses on sales of securities for the three month period ended March 31, 2015 and 2014, respectively.

 

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, 2015 and December 31, 2014. 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).

 

At March 31, 2015

 

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				$	13,613			$	(52	)		$	27,627			$	(480	)		$	41,240			$	(532	)
	Total			$	13,613			$	(52	)		$	27,627			$	(480	)		$	41,240			$	(532	)

 

Securities Held to Maturity

 

There were no securities classified as held to maturity in an unrealized loss position at March 31, 2015.

 

At December 31, 2014

 

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				$	15,384			$	(151	)		$	40,643			$	(919	)		$	56,027			$	(1,070	)
	Total			$	15,384			$	(151	)		$	40,643			$	(919	)		$	56,027			$	(1,070	)

 

Securities Held to Maturity

 

There were no securities classified as held to maturity in an unrealized loss position at December 31, 2014.

 

The Company’s available for sale portfolio had sixteen investment securities at March 31, 2015 that were in an unrealized loss position for longer than twelve months. At December 31, 2014, the Company had twenty-one investment securities that were in an unrealized loss position for longer than twelve months. 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.

 

As of the date of its evaluation, the Company did not intend to sell and has the ability to hold 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 or the security matures. The Company 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 RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

 

		March 31,				December 31,
		2015				2014
Commercial, financial, and agricultural		$	37,171			$	33,308
Commercial Real Estate			114,698				116,437
Single-Family Residential			32,581				31,940
Construction and Development			2,902				2,925
Consumer			6,399				6,428
			193,751				191,038
Allowance for loan losses			2,226				2,299
		$	191,525			$	188,739

 

Activity in the allowance for loan losses for the three months ended March 31, 2015 and 2014 and the year ended December 31, 2014 is summarized as follows (in thousands):

 

		March 31,  2015				December 31, 2014				March 31,  2014
Balance at beginning of period		$	2,299			$	3,157			$	3,157
Provision for loan losses			75				75				—
Loans charged-off			(235	)			(1,358	)			(200	)
Recoveries on loans previously charged-off			87				425				112
Balance at end of period		$	2,226			$	2,299			$	3,069

 

Activity in the allowance for loan losses by portfolio segment is summarized as follows (in thousands):

 

		For the Three Month Period Ended March 31, 2015
		Commercial				Commercial Real Estate				Single-family Residential				Construction & Development				Consumer				Total
Beginning balance		$	415			$	1,366			$	254			$	72			$	192			$	2,299
Provision for loan losses			(131	)			(40	)			192				(21	)			75				75
Loans charged-off			—				(83	)			(97	)			—				(55	)			(235	)
Recoveries on loans charged-off			5				65				1				1				15				87
Ending Balance		$	289			$	1,308			$	350			$	52			$	227			$	2,226

 

		For the Three Month Period Ended March 31, 2014
		Commercial				Commercial Real Estate				Single-family Residential				Construction & Development				Consumer				Total
Beginning balance		$	384			$	1,721			$	731			$	126			$	195			$	3,157
Provision for loan losses			—				—				—				—				—				—
Loans charged-off			—				(105	)			(52	)			—				(43	)			(200	)
Recoveries on loans charged-off			10				3				86				—				13				112
Ending Balance		$	394			$	1,619			$	765			$	126			$	165			$	3,069

 

		For the Year Ended December 31, 2014
		Commercial				Commercial Real Estate				Single-family Residential				Construction & Development				Consumer				Total
Beginning balance		$	384			$	1,721			$	731			$	126			$	195			$	3,157
Provision for loan losses			(12	)			27				(129	)			69				120				75
Loans charged-off			(9	)			(562	)			(468	)			(137	)			(182	)			(1,358	)
Recoveries on loans charged-off			52				180				120				14				59				425
Ending Balance		$	415			$	1,366			$	254			$	72			$	192			$	2,299

 

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in the judgment of management, should be charged-off.

 

In determining our allowance for loan losses, we regularly review loans for specific reserves based on the appropriate impairment assessment methodology. Consumer residential loans are evaluated as a homogeneous population and therefore loans are not evaluated individually for impairment. General reserves are determined using historical loss trends measured over a rolling four quarter average for consumer loans, and a three year average loss factor for commercial loans which is applied to risk rated loans grouped by Federal Financial Examination Council (“FFIEC”) call code. For commercial loans, the general reserves are calculated by applying the appropriate historical loss factor to the loan pool. Impaired loans greater than a minimum threshold established by management are excluded from this analysis.   The sum of all such amounts determines our total allowance for loan losses. 

 

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

 

		At March 31, 2015
		Commercial				Commercial Real Estate				Single-family Residential				Construction & Development				Consumer				Total
Specific Reserves:
Impaired loans		$	—			$	218			$	100			$	—			$	—			$	318
Total specific reserves			—				218				100				—				—				318
General reserves			289				1,090				250				52				227				1,908
Total		$	289			$	1,308			$	350			$	52			$	227			$	2,226
Loans individually evaluated for impairment		$	—			$	9,904			$	425			$	—			$	—			$	10,329
Loans collectively evaluated for impairment			37,171				104,794				32,156				2,902				6,399				183,422
Total		$	37,171			$	114,698			$	32,581			$	2,902			$	6,399			$	193,751

 

		At December 31, 2014
		Commercial				Commercial Real Estate				Single-family Residential				Construction & Development				Consumer				Total
Specific Reserves:
Impaired loans		$	—			$	91			$	51			$	—			$	—			$	142
Total specific reserves			—				91				51				—				—				142
General reserves			415				1,275				203				72				192				2,157
Total		$	415			$	1,366			$	254			$	72			$	192			$	2,299
Loans individually evaluated for impairment		$	—			$	9,787			$	280			$	219			$	—			$	10,286
Loans collectively evaluated for impairment			33,308				106,650				31,660				2,706				6,428				180,752
Total		$	33,308			$	116,437			$	31,940			$	2,925			$	6,428			$	191,038

 

The following table presents impaired loans by class of loan (in thousands):

 

		At March 31, 2015
														Impaired Loans - With
		Impaired Loans - With Allowance												no Allowance
		Unpaid Principal				Recorded Investment				Allowance for Loan Losses Allocated				Unpaid Principal				Recorded Investment
Residential:
First mortgages		$	—			$	—			$	—			$	—			$	—
HELOC’s and equity			135				135				100				311				290
Commercial
Secured			—				—				—				—				—
Unsecured			—				—				—				—				—
Commercial Real Estate:
Owner occupied			598				595				32				7,200				6,879
Non-owner occupied			691				691				139				1,757				1,639
Multi-family			100				100				47				—				—
Construction and Development:
Construction			—				—				—				—				—
Improved Land			—				—				—				—				—
Unimproved Land			—				—				—				—				—
Consumer and Other			—				—				—				—				—
Total		$	1,524			$	1,521			$	318			$	9,268			$	8,808

 

The following table presents the average recorded investment and interest income recognized on impaired loans by class of loan (in thousands):

 

		Three Months Ended								Three Months Ended
		March 31, 2015								March 31, 2014
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
Residential:
First mortgages		$	—			$	—			$	231			$	—
HELOC’s and equity			2,916				12				260				9
Commercial:
Secured			—				—				—				—
Unsecured			—				—				—				—
Commercial Real Estate:
Owner occupied			7,409				97				8,523				252
Non-owner occupied			2,407				75				2,104				21
Multi-family			98				15				—				13
Construction and Development:
Construction			—				—				—				—
Improved Land			—				—				—				—
Unimproved Land			—				—				—				—
Consumer and Other			—				—				—				—
Total		$	12,830			$	199			$	11,118			$	295

 

 

		At December 31, 2014
		Impaired Loans - With Allowance												Impaired Loans - With 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			102				102				51				178				178				86				35
Commercial
Secured			—				—				—				—				—				—				—
Unsecured			—				—				—				—				—				—				—
Commercial Real Estate:
Owner occupied			81				81				81				8,014				7,457				7,575				717
Non-owner occupied			—				—				—				2,388				2,154				2,228				165
Multi-family			95				95				10				—				—				97				69
Construction and Development																											.
Construction			—				—				—				356				219				292				30
Improved Land			—				—				—				—				—				—				—
Unimproved Land			—				—				—				—				—				—				—
Consumer and Other			—				—								—				—				—				—
Total		$	278			$	278			$	142			$	10,936			$	10,008			$	10,278			$	1,016

 

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

 

		At March 31, 2015
		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		$	818			$	545			$	816			$	2,179			$	21,927			$	24,106			$	—			$	1,743
HELOC’s and equity			259				487				256				1,002				7,473				8,475				—				256
Commercial:
Secured			—				—				—				—				30,282				30,282				—				—
Unsecured			4				—				—				4				6,885				6,889				—				—
Commercial Real Estate:
Owner occupied			1,270				425				852				2,547				55,141				57,688				—				2,239
Non-owner occupied			788				—				317				1,105				44,126				45,231				—				2,129
Multi-family			—				718				100				818				10,961				11,779				—				100
Construction and  Development:
Construction			—				189				—				189				2,593				2,782				—				—
Improved Land			—				—				—				—				120				120				—				—
Consumer and Other			109				—				14				123				6,276				6,399				—				14
Total		$	3,248			$	2,364			$	2,355			$	7,967			$	185,784			$	193,751			$	—			$	6,481

 

 

		At December 31, 2014
		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		$	2,273			$	1,190			$	1,036			$	4,499			$	19,960			$	24,459			$	35			$	1,513
HELOC’s and equity			60				550				184				794				6,687				7,481				—				286
Commercial:
Secured			—				187				—				187				28,232				28,419				—				—
Unsecured			—				—				—				—				4,889				4,889				—				—
Commercial Real Estate:
Owner occupied			767				—				228				995				59,065				60,060				—				1,222
Non-owner occupied			1,429				588				84				2,101				42,425				44,526				—				1,026
Multi-family			35				327				95				457				11,394				11,851				—				95
Construction and  Development:
Construction			—				—				—				—				2,759				2,759				—				—
Improved Land			103				—				—				103				63				166				—				—
Consumer and Other			6				22				18				46				6,382				6,428				—				18
Total		$	4,673			$	2,864			$	1,645			$	9,182			$	181,856			$	191,038			$	35			$	4,160

 

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan and lease portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant.

 

Commercial, financial and agricultural loans—We centrally underwrite each of our commercial loans based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We endeavor to gain a complete understanding of our borrower’s businesses including the experience and background of the principals. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, we gain an understanding of the likely value of the collateral and what level of strength the collateral brings to the loan transaction. To the extent that the principals or other parties provide personal guarantees, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of our collateral. Due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

 

Consumer—The installment loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

 

Commercial Real Estate—Real estate commercial loans consist of loans secured by multifamily housing, commercial non-owner and owner occupied and other commercial real estate loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates. Commercial owner-occupied and other commercial real estate loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. These loans are primarily secured by real property and can include other collateral such as personal guarantees, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Also, due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

 

Single-family Residential— Real estate residential loans are to individuals and are secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Such a decline in values has led to unprecedented levels of foreclosures and losses during 2008-2012 within the banking industry.

 

Construction and Development—Real estate construction loans are highly dependent on the supply and demand for residential and commercial real estate in the markets we serve as well as the demand for newly constructed commercial space and residential homes and lots that our customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers. Real estate construction loans can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.

 

Risk categories—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.

 

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

 

		At March 31, 2015
		Total				Pass Credits				Special Mention				Substandard				Doubtful
Single-Family Residential:
First mortgages		$	24,106			$	22,594			$	151			$	1,361			$	—
HELOC’s and equity			8,475				7,310				548				536				81
Commercial, financial, and agricultural:
Secured			30,282				30,282				—				—				—
Unsecured			6,889				6,889				—				—				—
Commercial Real Estate:
Owner occupied			57,688				48,313				4,686				4,689				—
Non-owner occupied			45,231				38,450				4,486				2,249				46
Multi-family			11,779				10,286				1,362				131				—
Construction and Development:
Construction			2,782				2,782				—				—				—
Improved Land			120				120				—				—				—
Consumer			6,399				6,300				—				88				11
Total		$	193,751			$	173,326			$	11,233			$	9,054			$	138

 

		At December 31, 2014
		Total				Pass Credits				Special Mention				Substandard				Doubtful
Single-Family Residential:
First mortgages		$	24,459			$	22,168			$	—			$	2,291			$	—
HELOC’s and equity			7,481				6,346				557				476				102
Commercial, financial, and agricultural:
Secured			28,419				28,419				—				—				—
Unsecured			4,889				4,889				—				—				—
Commercial Real Estate:
Owner occupied			60,060				50,603				4,673				4,702				82
Non-owner occupied			44,526				37,750				4,805				1,971				—
Multi-family			11,851				10,353				1,368				130				—
Construction and Development:
Construction			2,759				2,540				—				219				—
Improved Land			166				127				39				—				—
Unimproved Land			—				—				—				—				—
Consumer			6,428				6,392				5				13				18
Total		$	191,038			$	169,587			$	11,447			$	9,802			$	202

 

During the three months ended March 31, 2015, the bank modified two loans that were considered to be troubled debt restructurings. During the three months ended March 31, 2014, the Bank modified no loans that were considered to be troubled debt restructurings. We extended the terms and decreased the interest rate on both loans (dollars in thousands).

 

		Three Months Ended March 31, 2015
		Number of Loans				Pre-Modification Recorded Investment				Post-Modification Recorded Investment
Troubled Debt Restructurings
Residential:
Residential mortgages			2			$	34			$	34
Total			2			$	34			$	34

 

There were no loans restructured during the last twelve months that have experienced payment default subsequent to restructuring during the three months ended March 31, 2015 and 2014, respectively.

 

The Company considers a default as failure to comply with the restructured loan agreement. This would include the restructured loan being past due greater than 90 days, failure to comply with financial covenants, or failure to maintain current insurance coverage or real estate taxes after the loan restructure date.

 

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— Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. The fair value of other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company may further adjust an appraised amount given its knowledge of a specific property or market.

 

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, 2015 and December 31, 2014, 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. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company may further adjust an appraised amount given its knowledge of a specific property or market. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

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, 2015
						Quoted Prices
						In Active				Significant
		Assets				Markets for				Other				Significant
		Measured				Identical				Observable				Unobservable
		at				Assets				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
Recurring Basis:
Assets
Securities available for sale:
State, county, and municipal securities		$	28,392			$	—			$	28,392			$	—
Mortgage-backed securities			77,716				—				77,716				—
Corporate securities			10,003				—				10,003				—
			116,111				—				116,111				—
Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate		$	9,686			$	—			$	—			$	9,686
Single-family Residential			325				—				—				325
Other real estate owned			4,382				—				—				4,382
			14,393				—				—				14,393

 

		Fair Value Measurements at December 31, 2014
						Quoted Prices
						In Active				Significant
		Assets				Markets for				Other				Significant
		Measured				Identical				Observable				Unobservable
		at				Assets				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
Recurring Basis:
Assets
Securities available for sale:
State, county, and municipal securities		$	29,693			$	—			$	29,693			$	—
Mortgage-backed securities			86,915				—				86,915				—
Corporate securities			10,003				—				10,003				—
			126,611				—				126,611				—
Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate		$	9,696			$	—			$	—			$	9,696
Single-family Residential			229				—				—				229
Construction and Development			219				—				—				219
Other real estate owned			4,668				—				—				4,668
			14,812				—				—				14,812

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows (dollars in thousands):

 

		Fair Value at		Valuation		Unobservable
(Dollars in thousands)		March 31, 2015		Technique		Inputs		Range
Impaired Loans:
	Commercial Real Estate	$     9,686		Appraised Value		Negative adjustment for selling costs and changes in market conditions since appraisal		5% - 20%
	Single-family Residential	$        325		Appraised Value		Negative adjustment for selling costs and changes in market conditions since appraisal		5% - 20%
OREO		$    4,382		Appraised Value		Negative adjustment for selling costs and changes in market conditions since appraisal		5% - 20%

 

As of December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows (dollars in thousands):

 

		Fair Value at		Valuation		Unobservable
(Dollars in thousands)		December 31, 2014		Technique		Inputs		Range
Impaired Loans:
	Commercial Real Estate	$     9,696		Appraised Value		Negative adjustment for selling costs and changes in market conditions since appraisal		5% - 20%
	Single-family Residential	$        229		Appraised Value		Negative adjustment for selling costs and changes in market conditions since appraisal		5% - 20%
	Construction & Development	$        219		Appraised Value		Negative adjustment for selling costs and changes in market conditions since appraisal		5% - 20%
OREO		$     4,668		Appraised Value		Negative adjustment for selling costs and changes in market conditions since appraisal		5% - 20%

 

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 an estimate 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—Fair value equals the carrying value of such assets due to their nature and is classified as Level 1.

 

Investment Securities—Fair value of investment securities is based on quoted market prices and is classified as Level 2.

 

Other Investments—The carrying amount of other investments approximates its fair value and is classified as Level 1.

 

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 resulting in a Level 3 classification. For variable rate loans, the carrying amount is a reasonable estimate of fair value. The methods utilized to estimate the fair values of loans do not necessarily represent an exit price. The carrying amount of related accrued interest receivable, due to its short-term nature, approximates its fair value, is not significant and is not disclosed.

 

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 and are classified as Level 1.

 

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 and is classified as Level 2.

 

Fed Funds Purchased—Fair value equals the carrying value due to the nature of this liability and is classified as Level 1.

 

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 and are classified as Level 2.

 

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.

 

Limitations—Fair 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.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2015 (in thousands):

 

		March 31, 2015
		Fair Value Measurements
		Carrying
		Amount				Total				Level 1				Level 2				Level 3
Financial assets:
Cash and due from banks		$	2,995			$	2,995			$	2,995			$	—			$	—
Interest-bearing deposits with banks			56,427				56,427				56,427				—				—
Certificates of deposit			350				350				350				—				—
Investment securities			116,351				116,355				—				116,355				—
Other investments			799				799				799				—				—
Loans-net			191,525				190,889				—				—				190,889
Cash surrender value of life insurance			10,135				10,135				10,135				—				—
Financial liabilities:
Deposits			343,262				343,881				217,998				125,883				—
Advances from Federal Home Loan Bank			249				249				—				249				—
		Notional				Estimated
		Amount				Fair Value
Off-balance-sheet financial instruments:
Commitments to extend credit		$	20,502			$	—
Commercial letters of credit			2,027				—

 

The carrying values and estimated fair values of the Company’s financial instruments at December 31, 2014 are as follows:

 

		December 31, 2014
		Fair Value Measurements
		Carrying
		Amount				Total				Level 1				Level 2				Level 3
Financial assets:
Cash and due from banks		$	2,758			$	2,758			$	2,758			$	—			$	—
Interest-bearing deposits with banks			45,653				45,653				45,653				—				—
Certificates of deposit			350				350				350				—				—
Investment securities			126,851				126,854				—				126,854				—
Other investments			792				792				792				—				—
Loans-net			188,739				188,195				—				—				188,195
Cash surrender value of life insurance			10,082				10,082				10,082				—				—
Financial liabilities:
Deposits			340,889				341,719				201,994				139,725				—
Advances from Federal Home Loan Bank			254				254				—				254				—
		Notional				Estimated
		Amount				Fair Value
Off-balance-sheet financial instruments:
Commitments to extend credit		$	26,833			$	—
Commercial letters of credit			2,027				—

 

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,
		2015				2014
Balance—beginning of period		$	4,668			$	7,404
Additions			88				1,201
Sales			(371	)			(3,411	)
Write downs			(3	)			(526	)
Balance—end of period		$	4,382			$	4,668

 

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 Condensed 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 (in thousands):

 

		March 31, 2015								December 31, 2014
		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
Unamortized intangible asset:
Goodwill		$	362			$	—			$	362			$	—
Amortized intangible assets:
Core deposit intangibles		$	3,303			$	2,832			$	3,303			$	2,714

 

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

 

		Three months ended March 31,
		2015				2014
Aggregate amortization expense of core deposit intangibles:		$	118			$	118
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2015		$	472
2016		$	117
2017 and thereafter		$	—

 

7. 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. For the three months ended March 31, 2015 and 2014, 32,777 and 49,277 options, respectively, were excluded from computation of diluted earnings per share because the exercise prices were greater than the average market price of the Company’s stock during the period. For the three months ended March 31, 2015, 16,500 options were dilutive and were therefore included in the computation of diluted earnings per share. There were no dilutive options for the same period in prior year. 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 months ended March 31, 2015 and 2014 (in thousands, except per share data):

 

		Net Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount
Three Months ended March 31, 2015
Basic earnings per share available to common stockholders		$	369				2,194			$	0.17
Nonvested restricted stock grant			—				16				—
Effect of dilutive securities: options to purchase common shares			—				—				—
Diluted earnings per share		$	369				2,210			$	0.17
Three Months ended March 31, 2014
Basic earnings per share available to common stockholders		$	357				2,161			$	0.17
Nonvested restricted stock grant			—				10				(0.01	)
Effect of dilutive securities: options to purchase common shares			—				—				—
Diluted earnings per share		$	357				2,171			$	0.16

 

8. SUBSEQUENT EVENTS

 

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

 

9. RECLASSIFICATIONS

 

Certain amounts in the 2014 consolidated financial statements were reclassified to conform to the 2015 presentation. These reclassifications had no effect on shareholders’ equity or the results of operations as previously presented.

 

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 10 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, 2015 and December 31, 2014, and the changes in the financial condition and results of operations for the three month periods ended March 31, 2015 and 2014.

 

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 2015 or 2014.

 

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 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, 2014. The Company has followed those policies in preparing this report.

 

FINANCIAL CONDITION

 

At March 31, 2015, the Company had total assets of $398,589,000 compared to $395,639,000 at December 31, 2014. The $2,950,000 increase is primarily related to a $10,774,000 increase in interest bearing deposits with banks, and an increase in net loans outstanding of $2,786,000, partially offset by a $10,500,000 decrease in available for sale investments. The decrease in available for sale securities is primarily attributed to securities sold to manage the Company’s asset/liability position. 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 in light of the current economic environment. At March 31, 2015, total assets consisted primarily of $116,351,000 in investment securities and $191,525,000 in net loans representing 29% and 48% of total assets, respectively. Investment securities and net loans represented 32% and 48% of total assets at December 31, 2014.

 

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 loans receivable increased by $2,786,000 at March 31, 2015 compared to December 31, 2014. This was primarily a result of an increase in commercial, financial and agriculture loans of $3,863,000 and an increase in single-family residential loans of $641,000 due to volume of new loans added to the portfolios, offset by a decline in commercial real estate of $1,739,000 due to normal principal paydowns, maturities and pay-offs to the portfolio. The Company continues to pursue opportunities to enhance its lending and continues to invest in the resources and lending associates to strengthen our efforts.

 

At March 31, 2015, OREO decreased by $286,000 to $4,382,000 compared to $4,668,000 reported at the year-end of 2014. This decrease primarily related to the sale of OREO properties totaling $371,000 during the quarter and $3,000 in write-downs, partially offset by $88,000 in additions to the OREO balance.

 

Cash value of life insurance, a comprehensive compensation program for directors and certain senior managers of the Company, increased by $53,000 to $10,135,000 at March 31, 2015. The increase primarily represents the earnings on the premiums paid over the life of the insurance contract.

 

The Company’s liabilities at March 31, 2015 totaled $348,222,000 and consisted primarily of $343,263,000 in deposits, representing an increase of $2,374,000 compared to total deposits of $340,889,000 at December 31, 2014. FHLB advances totaled $249,000 compared to $254,000 at December 31, 2014.

 

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.

 

At March 31, 2015 and December 31, 2014, the investment securities portfolio represented approximately 29% and 32%, respectively, of the Company’s total assets.

 

LOANS

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

 

		March 31,				December 31,
		2015				2014
Commercial, Financial, and Agricultural		$	37,171			$	33,308
Commercial Real Estate			114,698				116,437
Single-Family Residential			32,581				31,940
Construction and Development			2,902				2,925
Consumer			6,399				6,428
			193,751				191,038
Allowance for loan losses			2,226				2,299
		$	191,525			$	188,739

 

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 Quarterly Report on Form 10-Q. 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 loans.  At March 31, 2015 and December 31, 2014, real estate loans, which represent commercial and industrial real estate and other loans secured by single-family properties, totaled $147.3 million and $148.4 million, respectively, and represented 76.0% and 77.7% of loans, respectively, net of unearned income for the period.

 

As stated above, a substantial portion of the Company’s loan portfolio is collateralized by real estate in metropolitan Atlanta and Birmingham markets. Accordingly, the ultimate collectability 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, which are generally secured by real estate, were approximately $40.0 million and $41.9 million at March 31, 2015 and December 31, 2014, respectively.

 

·

The Company’s loans to area convenience stores were approximately $7.2 million and $7.3 million at March 31, 2015 and December 31, 2014, respectively. Loans to convenience stores are generally secured by real estate.

 

·

The Company’s loans to area hotels, which are generally secured by real estate, were approximately $21.1 million and $21.3 million at March 31, 2015 and December 31, 2014, respectively.

 

NONPERFORMING ASSETS

 

Nonperforming assets include nonperforming loans, real estate acquired through foreclosure, and repossessed assets. Nonperforming loans generally include loans and leases whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties or are past due with respect to principal or interest more than 90 days and have been placed on nonaccrual status.

 

Accrued interest income is reversed when a loan is placed on nonaccrual status. Interest collections on nonaccruing loans and leases for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. Nonperforming loans may be restored to accrual status when all principal and interest is current and the full repayment of the remaining contractual principal and interest is expected, or when the loan becomes well-secured and is in the process of collection.

 

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.

 

For the period, nonperforming assets increased by $2,000,000, or 22.57%, to $10,863,000 compared to $8,863,000 at December 31, 2014. The increase is primarily attributed to a $2,286,000 increase in nonperforming loans and a reduction of $286,000 in other real estate owned. The Company charged-off $235,000 in nonperforming loans during the first three months of 2015 which is an increase of $35,000 compared to the $200,000 charged-off for the same period last year. At March 31, 2015, nonperforming assets represent 2.73% of total assets compared to 2.24% at December 31, 2014. There were no loans greater than 90 days past due and still accruing interest at March 31, 2015. At December 31, 2014, there was one loan greater than 90 days past due and still accruing interest.

 

The table below presents a summary of the Company’s nonperforming assets at March 31, 2015 and December 31, 2014.

 

		March 31,				December 31,
		2015				2014
		(in thousands, except financial ratios)
Nonperforming assets:
Nonperforming loans:
Restructured nonperforming loans (TDRs)		$	3,446			$	2,883
Other nonaccrual loans			3,035				1,277
Past-due loans of 90 days or more and still accruing			—				35
Nonperforming loans			6,481				4,195
Real estate acquired through foreclosure			4,382				4,668
Total nonperforming assets		$	10,863			$	8,863
Ratios:
Nonperforming loans to loans, net of unearned income			3.35	%			2.20	%
Nonperforming assets to loans, net of unearned income,and real estate acquired through foreclosure			5.48	%			4.53	%
Nonperforming assets to total assets			2.73	%			2.24	%
Allowance for loan losses to nonperforming loans			34.35	%			54.80	%
Allowance for loan losses to nonperforming assets			20.49	%			25.94	%

 

TROUBLED DEBT RESTRUCTURINGS

 

Loans to be restructured are identified based on an assessment of the borrower’s credit status, which involves, but is not limited to, a review of financial statements, payment delinquency, non-accrual status, and risk rating. Determining the borrower’s credit status is a continual process that is performed by the Company’s staff with periodic participation from an independent external loan review group.

 

Troubled debt restructurings (“TDR”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company seeks to assist these borrowers by working with them to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan while ensuring compliance with the Federal Financial Institutions Examination Council (FFIEC) guidelines. To facilitate this process, a formal concessionary modification that would not otherwise be considered may be granted resulting in classification of the loan as a TDR. All concessionary modifications are considered troubled debt restructurings.

 

The modification may include a change in the interest rate or the payment amount or a combination of both. Substantially all modifications completed under a formal restructuring agreement are considered TDRs. Modifications can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. These restructurings rarely result in the forgiveness of principal or interest.

 

With respect to commercial TDRs, an analysis of the credit evaluation, in conjunction with an evaluation of the borrower’s performance prior to the restructuring, are considered when evaluating the borrower’s ability to meet the restructured terms of the loan agreement. Nonperforming commercial TDRs may be returned to accrual status based on a current, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment under the modified terms. This evaluation must include consideration of the borrower’s sustained historical repayment performance for a reasonable period (generally a minimum of six months) prior to the date on which the loan is returned to accrual status.

 

In connection with consumer loan TDRs, a nonperforming loan will be returned to accruing status when current as to principal and interest and upon a sustained historical repayment performance (generally a minimum of six months).

 

The following table summarizes the Company’s TDRs and loans modifications (in thousands):

 

		March 31, 2015				December 31, 2014
Troubled Debt Restructured Loans:
Restructured loans still accruing		$	5,248			$	5,839
Restructured loans nonaccruing			3,446				2,883
Total restructured and modified loans		$	8,694			$	8,722

 

Troubled debt restructured loans that have performed in accordance with the restructured terms of the agreement for one year and for which an interest rate concession was not granted are removed from the TDR classification.

 

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.

 

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in the judgment of management, should be charged-off. For the first quarter of 2015, a provision for loan losses of $75,000 was charged against operating earnings. In the first quarter of 2014, based on the Company’s evaluation, and the continued overall improvement of the credit quality in the loan portfolio, a provision for loan losses was deemed not necessary. Approximately $318,000 of the allowance for loan losses was allocated to loans management considered impaired at March 31, 2015 compared to $142,000 at December 31, 2014.

 

At March 31, 2015, 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 months ended March 31, 2015 and 2014 (amount in thousands, except financial ratios):

 

		2015				2014
Loans, net of unearned income		$	193,751			$	181,196
Average loans, net of unearned income and the allowance for loan losses		$	189,205			$	179,338
Allowance for loan losses at the beginning of period		$	2,299			$	3,157
Loans charged-off:
Commercial, financial, and agricultural			—				—
Real estate - loans			180				157
Installment loans to individuals			55				43
Total loans charged-off			235				200
Recoveries of loans previously charged off:
Commercial, financial, and agricultural			5				10
Real estate - loans			67				89
Installment loans to individuals			15				13
Total loans recovered			87				112
Net loans charged-off			148				88
Additions to allowance for loan losses charged to operating expense			75				—
Allowance for loan losses at period end		$	2,226			$	3,069
Ratio of net loans charged-off to average loans, net of unearned income and the allowance for loan losses			0.08	%			0.05	%
Ratio of allowance for loan losses to loans, net of unearned income			1.15	%			1.69	%

 

The following table presents the allocation of the allowance for loan losses. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses, and other factors that may affect future loan losses in the categories of loans shown (amount in thousands):

 

		March 31, 2015								December 31, 2014
						Percent of								Percent of
		Amount				Total Loans				Amount				Total Loans
Commercial, financial, and agricultural		$	289				19	%		$	415				17	%
Commercial Real Estate			1,308				59	%			1,366				61	%
Single-family Residential			350				17	%			254				17	%
Construction and Development			52				2	%			72				2	%
Consumer			227				3	%			192				3	%
Total allowance for loan losses		$	2,226				100	%		$	2,299				100	%

 

DEPOSITS

 

Deposits are the Company’s primary source of funding loan growth. Total deposits at March 31, 2015 increased by 0.7% or $2,374,000 to $343,263,000 compared to December 31, 2014. The bank has a stable core deposit base with a high percentage of non-interest bearing deposits. Noninterest-bearing deposits increased by $2,234,000, or 2.7% to $86,052,000 and interest-bearing deposits increased by $140,000, or 0.1%, to $257,211,000 for the three month period ending March 31, 2015. On an average basis, noninterest-bearing deposits increased by $5,761,000 to $89,298,000 for the first three months of the year compared to $83,537,000 for the year ended December 31, 2014. Average interest-bearing deposits decreased by $13,033,000 to $254,919,000 at March 31, 2015 compared to $267,952,000 for the year ended December 31, 2014. At March 31, 2015, the Company’s cost of funds was approximately 0.20% compared to 0.24% for the same period last year.

 

The Company participates in Certificate of Deposit Account Registry Services (“CDARS”), a program that allows its customers the ability to benefit from the FDIC insurance coverage on their time deposits over the $250,000 limit. At March 31, 2015 and December 31, 2014, the Company had $21,156,000 and $24,789,000, respectively, in CDARS deposits. Participation in this program has enhanced the Company’s ability to retain customers with time deposits higher than the FDIC $250,000 insurance coverage limit.

 

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 were $38,775,000 and $47,478,000 as at March 31, 2015 and December 31, 2014, respectively.

 

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

 

		March 31,				December 31,
		2015				2014
NOW and money market accounts		$	96,766			$	84,620
Savings accounts			35,301				33,556
Time deposits of $100,000 or more			94,421				108,109
Other time deposits			30,723				30,786
		$	257,211			$	257,071

 

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.

 

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, 2015 and December 31, 2014, total loans pledged as collateral were $32,196,000 and $31,727,000, respectively.

 

Maturity	Callable		Type				March 31, 2015								December 31, 2014
											(in thousands)
August 2026				(1	)			—			$	249				—			$	254
Total Principal Outstanding											$	249							$	254
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, 2015 the Company had a $79.0 million line of credit facility at the FHLB of which $20.2 million was committed consisting of advances of $0.2 million and a letter of credit to secure public deposits in the amount of $20.0 million. The Company also had approximately $23.0 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, 2015, net interest income decreased by $174,000 or 5.50% to $2,990,000 compared to $3,164,000 reported for the same period last year. Total interest income decreased $202,000, or 5.98%, to $3,174,000 compared to $3,376,000 for the same three month period in 2014. Interest income on loans declined by a nominal $74,000 due to a 44 bps decline in yields earned on loans caused by the challenging lending environment and lower lending rates. Interest income on investment securities decreased by $137,000 primarily due to the investment portfolio having a lower average investment balance and a 15 bps decrease in investment yields compared to the first quarter of 2014. Total interest expense for the period decreased by $28,000 or 13.21% compared to the same three month period in 2014 as the Company continues to lower its funding cost and improve its deposit mix. At March 31, 2015, the Company’s cost of funds was approximately 0.20% compared to 0.24% for the same period last year. At March 31, 2015, the Company maintained an annualized net interest margin on a fully tax equivalent basis of 3.40% compared to 3.69% reported at March 31, 2014.

 

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 quarter of 2015, the Company charged against operating earnings a provision for loan losses of $75,000. In the first quarter of 2014, a provision for loan losses was deemed not necessary.

 

The allowance for loan losses was $2,226,000, $2,299,000, and $3,069,000 at March 31, 2015, December 31, 2014, and March 31, 2014, respectively. The allowance for loan losses was 34.35%, 54.80%, and 47.24% of nonperforming loans at March 31, 2015, December 31, 2014, and March 31, 2014, respectively. 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, 2015 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 $1,164,000 for the three month period ended March 31, 2015, an increase of $185,000, or 18.9% compared with the same period last year. This increase is primarily due to gains on the sale of investments of $191,000 reported for the first quarter of 2015. There were no gains on sale of investments for the same period in 2014. Service charges on deposits declined by $35,000 and other operating income increased by $29,000 compared to the same period last year.

 

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 2015 decreased by $86,000 to $3,558,000 compared to $3,644,000 for the same quarter last year. OREO related expenses declined by $212,000 compared to the same period last year. Salaries and employee benefits expense, FDIC insurance expense and other operating expenses increased by $140,000, $16,000 and $12,000, respectively, compared to the same period in prior year. The increase in salaries and employee benefits are due to the hiring of an additional lending officer to enhance loan production, and the filling of two officer level positions that were vacant in 2014. Net occupancy and equipment expense decreased by $42,000 primarily due to lower real estate taxes, equipment maintenances and insurance costs compared to the same period of 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 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, 2015. 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, 2015.

 

		Cumulative amounts as of March 31, 2015
		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		$	56,427			$	—			$	—			$	—			$	56,427
Certificates of deposit			—				350				—				—				350
Investments			—				4,215				10,855				101,281				116,351
Loans			25,662				36,605				86,630				44,854				193,751
Total interest-sensitive assets		$	82,089			$	41,170			$	97,485			$	146,135			$	366,879
Interest-sensitive liabilities:
Deposits  (a)		$	157,757			$	58,089			$	41,365			$	—			$	257,211
Other borrowings			—				—				—				249				249
Total interest-sensitive liabilities		$	157,757			$	58,089			$	41,365			$	249			$	257,460
Interest-sensitivity gap		$	(75,668	)		$	(16,919	)		$	56,120			$	145,886			$	109,419
Cumulative interest-sensitivity gap			(75,668	)			(92,587	)			(36,467	)			109,419				109,419
Cumulative interest-sensitivity gap to total interest-sensitive assets			(20.62	)%			(25.24	)%			(9.94	)%			29.82	%			29.82	%

 

(a) Savings, NOW, and money market deposits totaling $132,067 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 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.

 

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 from the Federal Reserve Bank Discount Window and the Federal Home Loan Bank are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity. At March 31, 2015 the Company had a $79.0 million line of credit facility at the FHLB of which $20.2 million was committed consisting of advances of $0.2 million and a letter of credit to secure public deposits in the amount of $20.0 million. The Company also had $22.9 million of borrowing capacity at the Federal Reserve Bank discount window. 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 $801,000 for the three month period ended March 31, 2015 primarily due to an increase in other comprehensive income, net of income taxes, of $402,000. This increase is attributed to the volatility in interest rates and swings in credit spreads, and their impact on the fair value of the Company’s available for sale securities portfolio. Retained earnings also increased by $369,000 due to net income of $428,000, partially offset by a $59,000 preferred dividend paid to the U.S. 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. Effective January 1, 2015, the regulation now also requires the Company to maintain a minimum amount and ratio of common equity Tier 1 capital to risk weighted assets. The Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets, common equity Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 25%, 24%, 19% and 12%, respectively, at March 31, 2015. The Company’s total and Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 19%, 19% and 11%, respectively, at December 31, 2014. The Bank’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets, common equity Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 21%, 20%, 20% and 12%, respectively, at March 31, 2015. The Bank’s total and Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 19%, 18% and 11%, respectively, at December 31, 2014. At March 31, 2015, the Company and the Bank met all capital adequacy requirements to which it is subject and is considered to be ’‘well capitalized” under regulatory standards.

 

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 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 and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2015 in accumulating and communicating information to management, including the Chief Executive 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, 2015, 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.

 

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, 2014. 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 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.  MINE SAFETY DISCLOSURES

 

Not Applicable

 

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.

 

Exhibit 101

 

Interactive data files providing financial information from the Registrant’s Report on Form 10-Q as of and for the three months ended March 31, 2015 in XBRL. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

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 15, 2015	By:	/s/ Cynthia N. Day
		Cynthia N. Day
		President and Chief Executive Officer
Date:   May 15, 2015	By:	/s/ Samuel J. Cox
		Samuel J. Cox
		Executive Vice President and
		Chief Financial Officer