<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________________________ to
___________________________________________________
COMMISSION FILE NUMBER. 0-24625
CFS BANCSHARES, INC.
-------------------------------------------------
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 63-0367958
- ---------------------------------------------------------------- -------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1700 THIRD AVENUE NORTH, BIRMINGHAM, ALABAMA 35203
- ----------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (205) 328-2041
--------------
Securities Registered Pursuant to Section 12(b) of the Act: NONE
----
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. YES X . NO ___.
---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[X]
State issuer's revenues for its most recent fiscal year: $7,033,040
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the last sale of which the registrant was aware (500 shares
at $18.50 per share during June, 1998), was approximately $804,269 as of
December 11, 1998. Solely for the purposes of this calculation, the term
"affiliate" refers to all directors and executive officers of the registrant and
all stockholders beneficially owning more than 5% of the registrant's common
stock.
As of December 11, 1998, there were issued and outstanding 130,000 shares
of the registrant's common stock, of which 86,526 shares were held by
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1998. (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
GENERAL
The Company. CFS Bancshares, Inc. ("the Company") a Delaware corporation
was organized by Citizens Federal Savings Bank ("Citizens Federal" or the
"Bank") to be a savings and loan holding company. The Company was organized at
the direction of the Bank in January 1998 to acquire all of the capital stock of
the Bank upon the consummation of the reorganization of the Bank into the
holding company form of ownership (the "Reorganization"), which was completed on
June 30, 1998. The company's stock, par value $1.00 per share (the "Common
Stock") became registered under the Securities Exchange Act of 1934 on June 30,
1998. The Company has no significant assets other than the corporate stock of
the Bank. For that reason, substantially all of the discussion in this Form 10-
KSB relates to the operations of the Bank and its subsidaries.
The executive offices of the Company are located at 1700 Third Avenue
North, Birmingham, Alabama. The telephone number is (205) 328-2041.
Citizens Federal Savings Bank. Citizens Federal was chartered by the
Federal Home Loan Bank Board, predecessor to the office of Thrift Supervision,
in September 1956. Since its organization it has been a member of the Federal
Home Loan Bank System ("FHLBS"). The Bank's savings accounts are insured up to
the applicable limits by the Savings Association Insurance Fund ("SAIF"), which
is administered by the Federal Deposit Insurance Corporation ("FDIC"). On March
28, 1983, the Bank's charter was restated when it converted from a federal
mutual savings and loan association to a federal capital stock association
through the sale and issuance of 130,000 shares of common stock. On October 10,
1983 the Bank converted from a federal stock savings and loan association to a
federal stock savings bank and on June 30, 1998 became the wholly owned
subsidiary of the Company. The Bank is subject to supervision and regulation by
the Office of Thrift Supervision ("OTS") and the FDIC.
The Bank's operations are conducted through its main office at 1700 Third
Avenue North, Birmingham, Alabama (main telephone number: (205) 328-2041) and
branch offices at 2100 Bessemer Road, Birmingham, Alabama and 213 Main Street,
Eutaw, Alabama. On October 14, 1996, the Bank relocated its entire main office
operation from leased space at 300 18th Street North in Birmingham to a new
building owned by the Bank. See "Item 2. Properties" for more information on
these offices.
The Bank's primary business is the promotion of thrift through the
solicitation of savings accounts from its depositors and the general public, and
the promotion of home ownership through the granting of mortgage loans,
principally to finance the purchase and/or construction of residential dwellings
located within its principal lending area in Jefferson and Greene Counties,
Alabama. The real estate market in the Birmingham, Alabama area, has been
relatively strong in recent years. The
2
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Bank has also been active in using excess funds to purchase mortgage-backed
securities during periods of reduced loan demand.
RECENT DEVELOPMENTS
Proposed Regulatory and Legislative Changes. On May 13, 1998, the U.S.
House of Representatives passed H.R. 10, the "Financial Services Competition Act
of 1998," which calls for a sweeping modernization of the banking system that
would permit affiliations between commercial banks, securities firms, insurance
companies and, subject to certain limitations, other commercial enterprises.
The stated purposes of H.R. 10 are to enhance consumer choice in the financial
services marketplace, level the playing field among providers of financial
services and increase competition.
H.R. 10 removes the restrictions contained in the Glass-Steagall Act of
1933 and the Bank Holding Company Act of 1956, thereby allowing qualified
financial holding companies to control banks, securities firms, insurance
companies, and other financial firms. Conversely, securities firms, insurance
companies and financial firms would be allowed to own or affiliate with a
commercial bank. Under the new framework, the Federal Reserve would serve as an
umbrella regulator to oversee the new financial holding company structure.
Securities affiliates would be required to comply with all applicable federal
securities laws, including registration and other requirements applicable to
broker-dealers. H.R. 10 also provides that insurance affiliates be subject to
applicable state insurance regulations and supervision. H.R. 10 preserves the
thrift charter and all existing thrift powers, but restricts the activities of
new unitary thrift holding companies.
At the adjournment of Congress in October 1998, H.R. 10 had not been acted
on and the legislation had expired. However, a bill substantially similar to
H.R. 10 with some Senate Banking Committee modifications was reintroduced and
will be taken up early in the next Congressional session. At this time, it is
unknown whether financial services modernization legislation will be enacted, or
if enacted, what form the final version of such legislation might take.
MARKET AREA
The Bank considers Jefferson County in the Birmingham, Alabama Metropolitan
area and Greene County, to be its primary market areas for savings and mortgage
loans, although it also makes loans in surrounding counties from time to time.
As of September 30, 1998, there were approximately 3 savings institutions and 18
commercial banks located in its primary market area with total assets of $119
billion. The Company's assets at September 30, 1998 totaled $92.17 million.
3
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ASSET/LIABILITY MANAGEMENT
Citizens Federal, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-bearing assets. Management believes it is
critical to manage the relationship between interest rates and the effect on the
Bank's net portfolio value ("NPV"). This approach calculates the difference
between the present value of expected cash flows from assets and the present
value of expected cash flows from liabilities, as well as cash flows from any
off-balance sheet contracts. Management of the Bank's assets and liabilities is
done within the context of the marketplace, but also within limits established
by the Board of Directors on the amount of change in NPV which is acceptable
given certain interest rate changes.
The OTS has adopted a final rule which uses a net market value methodology
to measure the interest rate risk exposure of thrift institutions. Under this
rule, an institution's "normal" level of interest rate risk in the event of an
assumed change in interest rates is a decrease in the institution's NPV in an
amount not exceeding 2% of the present value of its assets. Beginning July 1,
1994, thrift institutions with greater than "normal" interest rate exposure must
take a deduction from their total capital available to meet their risk-based
capital requirement. The amount of that deduction is one-half of the difference
between (a) the institution's actual calculated exposure to a 200 basis point
(100 basis points equals 1.0%) interest rate increase or decrease (whichever
results in the greater pro forma decrease in NPV) and (b) its "normal" level of
exposure which is 2% of the present value of its assets.
Institutions with less than $300 million in assets and at least a 12% risk-
based capital ratio are not subject to an interest rate risk capital component
(IRR) unless notified by the OTS. The Bank is not currently required to
maintain an interest rate risk capital component.
Presented below is an analysis of the Bank's interest rate risk as measured
by changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 300 basis points and compared
to policy limits set by the Board of Directors and in accordance with OTS
regulations. Such limits have been established with consideration of the dollar
impact of various rate changes and the Bank's capital position.
<TABLE>
<CAPTION>
Change in At September 30, 1998
Interest Rate Board Limit -------------------------
(Basis Points) % Change $ Amount $ Change % Change
- -------------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+300 -70 $ 10,430 $ (2,337) -18%
+200 -50 11,424 (1,343) -11
+100 -25 12,328 (439) -3
0 -- 12,767 -- --
-100 -25 13,274 507 4
-200 -50 13,144 377 3
-300 -70 12,298 (469) -4
</TABLE>
4
<PAGE>
In the above table the first column on the left presents the basis point
increments of yield curve shifts. The second presents the board policy limits
of each 100 basis point increment for the Bank's percent change in NPV. For
example, the Board's policy limit for a 100 basis point shift in the yield curve
up or down indicates that NPV should not decrease by more than 25%. The
remaining columns present the Bank's actual position in dollars, dollar change
and percent change in NPV at each basis point increment.
The OTS rule will not become effective until the OTS adopts the process by
which banks may appeal an interest rate risk deduction determination. However,
if the Bank had been subject to the IRR capital component at September 30, 1998,
no risk-based capital deduction would have been required as the Bank had a
"normal" level of interest rate risk.
The Bank's goal is to continue to monitor and minimize volatility in the
net interest margin by taking an active role in managing the level, mix, and
maturities of assets and liabilities.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table. The primary
assumptions used in determining the Bank's interest rate risk exposure are
prepayment rate estimates for loans and mortgage backed securities obtained from
the OTS "Asset and Liability Price Tables" as of September 30, 1998 and passbook
decay rates determined by the Bank from a core deposit analysis.
LENDING ACTIVITIES
General. The principal lending activity of Citizens Federal has
historically consisted of the origination of conventional loans (loans that are
neither insured nor partially guaranteed by government agencies) on single-
family residential properties. The Bank, to a much lesser degree, also
originates conventional loans on multiple-unit dwellings and on nonresidential
properties. The remainder of the Bank's loan portfolio consists of consumer
loans, commercial loans and loans secured by savings accounts. The Bank makes
loans primarily in Jefferson and Greene Counties and to a lesser extent in
surrounding counties in the State of Alabama. The Bank originates loans
primarily for its own portfolio. During periods of reduced loan demand the Bank
has used excess funds to purchase fixed rate mortgage-backed securities in the
secondary mortgage market. A large percentage of the Bank's mortgage-backed
securities activities are related to institutional jumbo certificates of
deposits (over $100,000) which require collateral. The mortgage-backed
securities are used as collateral for those jumbo certificates.
5
<PAGE>
The loan-to-value ratio, maturity and other provisions of the loans made by
Citizens Federal generally reflect the Bank's policy of making the maximum loan
permissible consistent with applicable regulations, sound lending practices,
market conditions and the Bank's underwriting standards. The Bank has generally
made long term loans, amortized on a monthly basis, with principal and interest
due each month. Interest rates and points charged on loans originated by the
Bank are competitive with other thrift institutions in the general market area.
Because of refinancing and prepayments residential loans generally remain
outstanding for shorter periods than their contractual terms.
Loans to One Borrower Limitations. Under federal regulations, the Bank's
loans-to-one-borrower limit is generally the greater of 15% of the unimpaired
capital and surplus of the Bank or $500,000. Loans and extensions of credit
fully secured by readily marketable collateral (as defined) may comprise an
additional 10% of unimpaired capital and surplus.
At September 30, 1998, the maximum amount the Bank was permitted to lend to
one borrower was $1,179,283. At that date, the Bank's largest loan-to-one-
borrower was $793,167, which was secured by a non-residential property located
in the Bank's primary market area.
Loan and Mortgage-Backed Securities Portfolio Composition. Set forth below
is selected data relating to the composition of the Bank's loan portfolio
(including mortgage-backed securities) on the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- ---------------------
Amount % Amount % Amount %
----------- ------- ----------- ------ ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real Estate:
Insured or guaranteed mortgage loans...... $ 50,530 .07% $ 70,933 .10% $ 143,840 .25%
Conventional loans on existing properties.. 44,283,512 57.42 41,537,547 55.49 30,884,443 52.56
Mortgage-backed securities................. 30,072,819 38.99 30,724,808 41.04 26,021,586 44.28
Loans for other purposes (share loans,
home improvement loans, commercial
loans and consumer loans)................... 2,713,645 3.52 2,525,930 2.01 1,710,492 2.91
------------ ------ ------------ ------ ------------ ------
Total loans............................. $ 77,120,506 100.00% $ 74,859,218 100.00% $ 58,760,361 100.00%
============ ====== ============ ====== ============ ======
Type of Security:
Residential:
Single family........................... $ 32,599,150 42.27% $ 30,102,279 40.21% $ 20,237,247 34.44%
Other dwelling units.................... 176,182 .23 440,148 .59 450,344 .77
Non-residential............................ 11,558,710 14.99 11,066,053 14.78 10,595,249 18.03
Mortgage-backed securities................. 30,072,819 38.99 30,724,808 41.04 26,021,586 44.28
Savings accounts........................... 950,701 1.23 1,020,971 1.37 1,023,115 1.74
Other...................................... 1,762,944 2.29 1,504,959 3.37 432,820 .74
------------ ------ ------------ ------ ------------ ------
Total loans............................. $ 77,120,506 100.00% $ 74,859,218 100.00% $ 58,760,361 100.00%
============ ====== ============ ====== ============ ======
</TABLE>
6
<PAGE>
Residential Real Estate Lending. Citizens Federal has concentrated its
lending activities on the origination of conventional first mortgage loans for
the purchase or refinancing of both new and existing one-to-four family
residential property. These loans have been made on primarily a fixed term,
fixed rate basis. The Bank also offers adjustable rate loans with terms of up to
30 years, but to date has not originated a significant amount of adjustable rate
mortgage loans. The Bank originated $6,305,795 in residential mortgage loans
during the year ended September 30, 1998, all of which were fixed rate loans.
Purchased adjustable rate mortgage loans, mortgage-backed securities and
mortgage-derivative products in the Bank's loan portfolio amounted to 21.96% of
the loan portfolio at September 30, 1998.
The Bank extends loans on single-family dwellings in an amount up to 90% of
the fair market value as determined by a qualified appraiser. In addition, loans
up to 95% of the fair market value are extended if the borrower obtains private
mortgage guarantee insurance to cover a portion of the loan. Loans in excess of
80% of fair market value are limited from time to time as a result of economic
conditions. In addition to the principal and interest payment, the borrower pays
into an escrow account an amount equal to 1/12th of the hazard insurance premium
and property taxes.
Nonresidential Real Estate Loans. Citizens Federal also offers loans for
the acquisition of nonresidential real estate. The primary security on such a
loan is the nonresidential real property, such as churches, small retail
establishments and small commercial buildings. Loans secured by nonresidential
real estate are generally limited to 70% of appraised value and generally have
an initial contractual loan payment period of up to 15 years. Although these
loans are generally considered to be of a higher risk than residential loans and
constitute a lesser portion of the Bank's portfolio, they provide higher loan
origination fees and interest rate yields than residential loans. A substantial
amount of the Bank's nonresidential real estate loans are secured by churches
located in the Bank's primary market area.
The application process includes the same procedures which are required for
other mortgage loans. Total loans originated by the Bank on nonresidential real
estate during the 1998 fiscal year amounted to $2,210,771, which were secured by
churches and commercial property.
Nonresidential real estate lending may entail significant additional risks
compared to residential mortgage lending. The loans may involve large loan
balances to single borrowers or groups of related borrowers. In addition, the
payment experience on loans secured by income producing properties is typically
dependent on the successful operation of the properties and thus may be subject,
to a greater extent, to adverse conditions in the real estate market or in the
economy generally.
Consumer and Other Loans. Federal regulations permit federally chartered
savings institutions to make secured and unsecured consumer loans up to 35% of
the institution's assets. In addition, a federal savings association has lending
authority above the 35% category for certain consumer loans, such as home equity
loans, property improvement loans, mobile home loans and loans secured by
savings accounts. Citizens Federal offers share loans, loans on consumer goods,
7
<PAGE>
as well as home improvement loans, second mortgages, savings account secured
loans and mobile home loans. The Bank's consumer loans have terms of up to 15
years and carry fixed interest rates.
The Bank's consumer loan originations totaled $1,110,935 for the year ended
September 30, 1998. As of September 30, 1998, consumer loans constituted
approximately 2.62% of the Bank's total loan portfolio.
Reference is made to Note 4 of the Notes to Financial Statements for
further information on the Bank's lending activities.
Loan Solicitation, Originations, Purchases and Sales. The Bank actively
solicits mortgage loan applications from existing customers, local realtors,
builders, real estate developers, and various other persons. Upon receipt of a
loan application from a prospective borrower, a credit report is ordered to
verify specific information relating to the loan applicant's employment, income,
and credit standing. This information may be further verified by personal
contacts with other reference sources. An appraisal of the real estate intended
to secure the proposed loan is undertaken by an independent appraiser. The
appraisals of the independent appraiser are supplemented by site visits of an
officer or member of the Bank's Board of Directors, or both. Once the required
information has been obtained and the appraisal completed, the loan is submitted
to the Loan Committee of the Board of Directors which consists of Directors
Stokes, Bennett, and Greene, and Loan Officers Eberhardt and Gilmore. All
actions of the Loan Committee are reviewed and ratified by the full Board of
Directors.
Loan applicants are promptly notified of the decision of the Bank's Loan
Committee within thirty days by telephone or letter setting forth the terms and
conditions of the decision. If approved, these terms and conditions include the
amount of the loan, interest rate, amortization term, a brief description of
real estate to be mortgaged to the Bank, and the required amount of fire and
casualty insurance coverage to be maintained to protect the Bank's interest. The
borrower has a right to select his own settlement attorney or title company, and
his own insurance broker or agent. The borrower is required to pay all costs of
the Bank as well as his own costs in connection with the particular loan
closing.
The Bank's loan portfolio consists of loans originated by the Bank and
purchased whole loans, as well as purchased mortgage-backed securities. In years
where the Bank's excess funds increase significantly, the Bank uses excess funds
to purchase mortgage-backed securities in the secondary mortgage market, from
the Federal National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), and the Government National Mortgage Association
("GNMA"). Mortgage-backed securities purchased during 1996 totaled $1,257,000.
During fiscal 1998 and 1997, the Bank purchased $11,354,871 and $13,357,335,
respectively in mortgage-backed securities, adjustable rates. Of the mortgage-
based securities purchased in fiscal 1998, $6,992,687 carried were adjustable
rates and $4,362,184 carried fixed rates. During fiscal 1997, the Bank purchased
$13,357,335 in mortgage-backed securities, all of which carried adjustable
rates.
8
<PAGE>
Set forth below is a table showing the Bank's loan originations and
purchase and sales activities (including mortgage-backed securities) for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
Loan Originated:
Conventional Real Estate Loans:
Loans on Existing Property........................... $ 2,651,995 $ 5,128,610 $4,135,850
Loans Refinanced..................................... 3,653,800 3,566,380 2,481,680
Other Loans.......................................... 3,321,706 2,123,809 1,583,291
----------- ----------- ----------
Total Loans Originated................................ $ 9,627,501 $10,818,799 $8,200,821
=========== =========== ==========
Loans and Mortgage-backed Securities Purchased:
Real Estate Loans.................................... -- 5,747,077 --
Mortgage-backed Securities........................... 11,354,871 13,357,335 1,256,849
----------- ----------- ----------
Total Loans and Mortgage-Backed Securities Purchased.. $11,354,871 $19,104,412 $1,256,849
=========== =========== ==========
Loans and Mortgage-backed Securities Sold:
Whole Loans........................................... -- -- --
Mortgage-backed securities............................ -- 2,373,709 ---
----------- ----------- ----------
Total Loans Sold...................................... -- 2,373,709 ---
=========== =========== ==========
Other Loan Activity:
Loans Foreclosed Upon................................. $ 88,779 $ 95,541 $ 191,430
Total Other Activity.................................. 88,779 95,541 191,430
----------- ----------- ----------
Total Net Loan Activity............................... $20,893,593 $27,453,961 $9,266,240
=========== =========== ==========
(exclusive of loan repayments)
</TABLE>
9
<PAGE>
Maturity of Loan and Mortgage-Backed Securities Portfolio. The
following table sets forth certain information at September 30, 1998 regarding
the dollar amount of loans and mortgage-backed securities maturing (or
repricing) in the Bank's portfolio based on their contractual maturity date.
Demand loans and loans having no stated maturity are reported as due in one year
or less.
<TABLE>
<CAPTION>
Due more
Due more Due more Due more Due more than
than one than than than ten years Due more
Due in one year two years three years five years to than
year or to two to to five to fifteen fifteen
less years three years years ten years years years
after after after after after after after
9-30-98 9-30-98 9-30-98 9-30-98 9-30-98 9-30-98 9-30-98 Total
----------- ----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans
and mortgage-backed
securities............... $6,272,526 $5,271,802 $4,565,508 $ 8,413,276 $16,504,387 $12,204,402 $21,174,960 $74,406,861
Consumer installment loans. 746,188 542,287 391,465 300,398 30,324 8,559 4,723 2,023,944
Commercial loans........... 284,319 230,688 25,275 58,304 91,115 -- -- 689,701
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
$7,303,033 $6,044,777 $4,982,248 $8,771,978 $16,625,826 $12,212,961 $21,179,683 $77,120,506
=========================== ========== ========== ========== =========== =========== =========== =========== ===========
</TABLE>
The following table sets forth the dollar amount of all loans and
mortgage-backed securities due after one year from September 30, 1998 (end of
the most recent audit year) which have predetermined maturities and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Rate Structure for Loans
Maturing in More Than One Year
-------------------------------
Fixed Interest Floating or
Rate Adjustable Rate
-------------- ---------------
<S> <C> <C>
Real estate mortgage loans and mortgage-backed securities.. $50,936,493 $17,197,842
Consumer installment loans................................. 1,277,756 --
Commercial loans........................................... 197,694 207,688
----------- -----------
$52,411,943 $17,405,530
=========== ===========
</TABLE>
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<PAGE>
Loan Origination Fees and Other Fees. Citizens Federal receives loan
origination fees for originating loans. Loan origination fees are a percentage
of the principal amount of the mortgage loan and are charged to the borrower by
the Bank from creation of the loan. The Bank's loan origination fees are
generally 1% on conventional residential mortgages. The total fee income for
real estate loans for the year ended September 30, 1998 was $86,264. The total
amount of deferred loan fees at September 30, 1998, was $577,277. Any deferred
loan fees are recognized in income as the principal balance is paid down or when
the loan is sold.
The Bank currently receives fee income related to the prepayment, late
payment or nonpayment of existing loans. These fees which are commonly referred
to as prepayment penalties and late charges have not constituted a material
source of income to the Bank. For more information on the Bank's loan fees and
other fees see Note 4 of the Notes to Financial Statements.
The Bank limits immediate recognition of loan origination fees as
revenues in that such income (net of certain loan origination costs) for each
loan is amortized using the interest method over the estimated life of a loan.
Non-Performing Loans and Asset Classification. The Bank's collection
procedures provide that when a loan becomes 15 days delinquent, the borrower is
contacted by mail and payment requested. If the delinquency continues,
subsequent efforts are made to contact and request payment from the delinquent
borrower. In certain instances the Bank may work out a repayment schedule with
the borrower. If the loan continues in a delinquent status for 45 days, the Bank
will generally commence foreclosure proceedings. All property acquired as the
result of foreclosure or by deed in lieu of foreclosure is classified as "real
estate acquired by foreclosure" until such time as it is sold or otherwise
disposed of by the Bank. When such property is acquired, it is recorded at the
lower of the recorded investment in the loan or the property's fair value on the
date of foreclosure, less costs to dispose of the property. Any write-down of
the property at foreclosure is charged to expense.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. Residential mortgage loans are placed on non-accrual status when
either principal or interest is 90 days or more past due. Consumer loans
generally are charged off when the loan becomes over 120 days delinquent.
Commercial real estate loans are placed on non-accrual status when the loan is
90 days or more past due. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan.
11
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. The Bank does not accrue
interest on loans 90 days or more past due. During the periods shown, the Bank
had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real Estate:
Residential............................... $804,615 $316,724 $526,328 $434,212 $617,967
Commercial................................ 144,911 175,000 15,372 242,226 --
Consumer.................................. 24,948 44,377 41,050 5,354 602
-------- -------- -------- -------- --------
Total of nonaccrual.......................... $974,474 $536,101 $582,750 $681,792 $618,569
======== ======== ======== ======== ========
Percentage of total assets................... 1.06% .54% .68% .79% .75%
Other non-performing assets/(1)/............. $ 59,364 $ 99,494 $128,896 $ 61,606 $192,356
======== ======== ======== ======== ========
</TABLE>
_________________________
/(1)/ Other non-performing assets represent property acquired by the Bank
through foreclosure or repossession. This property is carried at the
lower of its fair market value (less costs to dispose) or the recorded
investment in the loan.
During the year ended September 30, 1998, gross interest income of
approximately $80,394 would have been recorded on loans accounted for on a non-
accrual basis if the loans had been current throughout the period. No interest
on such loans was included in income during the year ended September 30, 1998.
The following is information concerning the Bank's non-accrual loans
and other non-performing assets.
Non-accrual Loans. The Bank's non-accrual loans at September 30, 1998
totaled $974,474, and are in various stages of foreclosure or collection. All
accrued uncollected interest has been charged off and the accrual of interest
has ceased. At September 30, 1998, nonaccruals included 14 real estate loans
and seven consumer loans with individual balances outstanding ranging from $538
to $220,000.
The Bank's most significant problem loan is a loan with a balance of
$220,000 at September 30, 1998. The Bank has recorded loan loss provisions for
the full amount of the loan and is exploring legal and other remedies for
collection.
Other Non-performing Assets. Other non-performing assets at September
30, 1998 are four residential properties and one small commercial buildings
acquired through foreclosure with a carrying value of $59,634.
12
<PAGE>
Except as discussed above, at September 30, 1998, there were no loans
which were excluded from the table of non-performing assets, where known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as non-accrual, 90 days past
due or restructured. In addition, the Bank does not have any significant
concentrations of real estate loans or commitments in areas experiencing
deteriorating economic conditions.
Federal regulations require each savings association to review its
asset quality on a regular basis. In addition, in connection with examinations
of such savings associations, federal examiners have authority to identify
problem assets and, if appropriate, classify them. An asset is classified
substandard if it is determined to be inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any. As a
general rule, the Bank will classify a loan as substandard if the Bank can no
longer rely on the borrower's income as the primary source for repayment of the
indebtedness and must look to secondary sources such as guarantors or
collateral. An asset is classified as doubtful if full collection is highly
questionable or improbable. An asset is classified as loss if it is considered
uncollectible, even if a partial recovery could be expected in the future. The
regulations also provide for a special mention classification, described as
assets which do not currently expose a savings association to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or
potential weaknesses deserving management's close attention. Assets classified
as substandard or doubtful require a savings association to establish general
allowances for loan losses. If an asset or portion thereof is classified loss, a
savings association must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified loss, or charge off
such amount. Federal examiners may disagree with a savings association's
classifications and amounts reserved. If a savings association does not agree
with an examiner's classification of an asset, it may appeal this determination
to the OTS District Director. At September 30, 1998, the Bank had $793,515 in
assets classified as substandard, no assets classified as doubtful and $225,439
in assets classified as loss.
At September 30, 1998 the Bank's substandard assets consisted of 12
loans on residential properties and five loans on commercial property and
consumer loans with an aggregate balance of $164,420 and balances outstanding
ranging from $538 to $144,911 and real estate owned of $59,634.
Allowances for Losses on Loans. In making loans, Citizens Federal
recognizes the fact that credit losses will be experienced and that the risk of
loss will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan and, in the case of a
secured loan, the quality of the security for the loan.
13
<PAGE>
It is management's policy to maintain adequate allowances for
estimated losses on the loan portfolio as a whole. Generally, the allowances are
based on, among other things, estimates of the historical loan loss experience,
evaluation of economic conditions, and periodic reviews of the Bank's loan
portfolio. At September 30, 1998, the Bank's reserve for loan losses was
$553,797. During the fiscal year ended September 30, 1998 the Bank made an
addition to the provision for loan losses of $176,000.
Management believes that the current allowance for loan losses which
is equal to 1.18% of gross loans and 56.83% of non-accrual loans, is adequate to
cover any potential future loan losses which may exist in the loan portfolio.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated. The allowance for loan losses applies
primarily to the Bank's mortgage loan portfolio.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period.................... $630,423 $638,770 $659,734 $681,725 $660,146
--------- --------- --------- --------- ---------
Loans Charged-Off:
Real Estate - Mortgage:
Residential..................................... 249,015 4,219 59,566 42,106 7,592
Consumer........................................ 65,975 20,837 --- 371 5,737
--------- --------- --------- --------- ---------
Total Charge-Offs................................. 314,990 25,056 59,566 42,477 13,329
--------- --------- --------- --------- ---------
Total Recoveries.................................. 62,364 16,709 38,602 20,486 34,908
--------- --------- --------- --------- ---------
Net Loans Charged-Off (Recovered)................. 252,626 8,347 20,964 21,991 (21,579)
--------- --------- --------- --------- ---------
Provision for Loan Losses......................... 176,000 --- --- --- ---
--------- --------- --------- --------- ---------
Balance at End of Period.......................... $553,797 $630,423 $638,770 $659,734 $681,725
========= ========= ========= ========= =========
Ratio of Net Charge-Offs (Recoveries) to Average
Loans Outstanding During the Period.............. .70% .02% .07% .07% (.07)%
</TABLE>
INVESTMENT ACTIVITIES
Citizens Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At September 30, 1998,
the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 31.24%.
14
<PAGE>
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
As of September 30, 1998, the Bank had $0 and $6,338,130 classified as
investment and mortgage-backed securities held to maturity, respectively, and
$5,388,048 and $23,734,689 classified as investment and mortgage-backed
securities available for sale, respectively. For more information on the Bank's
mortgage-backed securities, see "Lending Activities".
The following table sets forth an analysis of the Bank's investment
securities (excluding mortgage-backed securities) at the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1998/(1)/ 1997/(1)/ 1996/(1)/
---------- ------------ -----------
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agencies.. $2,811,127 $11,523,106 $14,533,997
Other securities............................ 2,576,921 2,470,671 1,055,526
---------- ----------- -----------
$5,388,048 $13,993,777 $15,589,523
========== =========== ===========
</TABLE>
- -------------------------
/(1)/ Includes securities available for sale which had an amortized cost and
approximate market value of $5,389,903 and $5,388,048, respectively, at
September 30, 1998, and $13,908,477 and $13,968,777, respectively, at
September 30, 1997, and $13,615,475 and $13,564,523, respectively, at
September 30, 1996. Securities available for sale consist of U.S. Treasury
and U.S. Government agency securities and shares in an adjustable rate
mutual fund.
15
<PAGE>
The following table sets forth the contractual maturities, par values,
market values and average yields for the Bank's investment (excluding mortgage-
backed securities) securities at September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998/(1)/
-------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- ------------------- -------------------- -------------------------
Par Average Par Average Par Average Par Average
Value Yield Value Yield Value Yield Value Yield
---------- -------- ---------- ------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations............... $ -- --% $2,807,902 6.35% $ -- --% $ -- --%
Other investments.......... 2,583,543 5.58 -- -- -- -- -- --
---------- ---------- --------- ------
Total................. $2,583,543 $2,807,902 $ -- $ --
========== ========== ========= ======
<CAPTION>
-----------------------------------------
Total Investment Portfolio
-----------------------------------------
Par Market Average
Value Value Yield
---------- ---------- --------
<S> <C> <C> <C>
U.S. Government and agency
obligations............... $2,807,902 $2,811,127 6.35%
Other investments.......... 2,583,543 2,576,921 5.58
---------- ----------
Total................. $5,391,445 $5,388,048
========== ==========
</TABLE>
_____________
/(1)/ Includes investment securities available for sale at September 30, 1998
with an amortized cost and market value of $5,389,903 and $5,388,048,
respectively. Contractual maturities of securities available for sale at
September 30, 1998 range from 14 months to 4 years. Securities available
for sale consist of U.S. Treasury and U.S. government agency securities
and shares in an adjustable-rate mutual fund.
16
<PAGE>
SOURCES OF FUNDS
General. Deposits are the major source of Citizens Federal's funds for
lending and other investment purposes. In addition to deposits, Citizens
Federal also derives funds from loan principal repayments. Loan repayments are
a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates, money market conditions and
adverse publicity regarding the savings institution industry. Borrowings may be
used on a short term basis to compensate for reductions in the availability of
other sources of funds. They may also be used on a longer term basis for
general business purposes. Citizens Federal has not in the past relied on
borrowings from the Federal Home Loan Bank of Atlanta or other sources.
Savings Deposits. Citizens Federal offers a number of alternative deposit
accounts, including passbook savings accounts, NOW and Super NOW accounts, money
market type accounts and certificates currently ranging in maturity from 14 days
to five years. Deposit accounts vary as to terms, with the principal
differences being the minimum balance required, the time period the funds must
remain on deposit and the interest rates paid.
Deposits in the Bank as of September 30, 1998, were represented by various
types of savings programs described below.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum Minimum of Total
Interest Rate Term Category Amount Balances Savings
- ------------- ------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
.50 % None NOW Accounts $ --- $ 8,000,629 10.83%
2.75 None "Super NOW" Accounts 1,000 4,366,743 5.91
2.74 None Passbook Accounts 5 17,539,298 23.74
5.22 91 Days Certificates 500 20,321,138 27.50
5.15 14 days Jumbo Certificates/(1)/ 100,000 23,534,054 31.85
-- N/A Accrued interest on deposits -- 130,327 .17
----------- ------
TOTAL $73,892,189 100.00%
=========== ======
</TABLE>
- ----------------------
/(1)/ Includes Time Deposit Open Account
The following table sets forth the savings deposit activities of the Bank
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Deposits........................................................... $173,199,987 $172,717,725 $170,793,338
Withdrawals........................................................ 178,350,973 176,222,628 173,864,062
------------ ------------ ------------
Net increase (decrease) before interest credited................. (5,150,986) (3,504,903) (3,070,724)
Interest credited.................................................. 2,697,449 3,058,060 3,109,289
------------ ------------ ------------
Net (decrease) increase in savings deposits...................... $ (2,453,537) $ (446,843) $ 38,565
============ ============ ============
</TABLE>
17
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
Balance at Balance at Balance at
September 30, % of Increase September 30, % of Increase September 30, % of
1998 Deposits (Decrease) 1997 Deposits (Decrease) 1996 Deposits
------------- --------- ------------ ------------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW checking accounts...... $ 8,000,629 10.83% $(1,434,891) $ 9,435,520 12.36% $ 1,745,593 $ 7,689,927 10.01%
Jumbo certificates......... 23,534,054 31.85 3,120,649 20,413,405 26.74 (1,645,638) 22,059,043 28.73
"Super" NOW checking
accounts.................. 4,366,743 5.91 799,932 3,566,811 4.67 (1,473,233) 5,040,044 6.56
Passbook and regular
savings................... 17,539,298 23.74 (1,075,715) 18,615,013 24.38 (84,277) 18,699,290 24.35
Certificates of deposit.... 20,321,138 27.50 (3,839,118) 24,160,256 31.65 969,539 23,190,717 30.20
Accrued interest on
deposits.................. 130,327 .17 (24,394) 154,721 .20 41,173 113,548 .15
----------- ------ ------------ ----------- ------ ----------- ----------- ------
TOTAL...................... $73,892,189 100.00% $(2,453,425) $76,345,726 100.00% $ (446,843) $76,792,569 100.00%
=========== ====== ============ =========== ====== =========== =========== ======
</TABLE>
18
<PAGE>
The following table sets forth the time deposits in the Bank
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
3.00 - 4.99%.................. $ 7,417,332 $ 8,534,118 $10,080,258
5.00 - 6.99%.................. 35,976,629 35,621,633 34,445,892
7.00 - 8.99%.................. 454,425 566,482 718,056
9.00 - 10.99%.................. 6,806 6,148 5,554
----------- ----------- -----------
TOTAL........................... $43,855,192 $44,728,381 $45,249,760
=========== =========== ===========
</TABLE>
The following table sets forth the amount and maturities of the Bank's
time deposits at September 30, 1998.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
3.00 - 4.99%..................... $ 7,317,332 $ 100,000 $ -- $ -- $ 7,417,332
5.00 - 6.99%..................... 28,458,296 4,579,936 966,475 1,971,922 35,976,629
7.00 - 8.99%..................... 63,858 172,010 -- 218,557 454,425
9.00 - 10.99%.................... -- 6,806 -- -- 6,806
----------- ---------- ---------- ----------- -----------
$35,839,486 $4,858,752 $ 966,475 $ 2,190,479 $43,855,192
=========== ========== ========== =========== ===========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
<S> <C>
Three months or less........... $15,138,083
Over three through six months.. 8,095,026
Over six through 12 months..... 100,000
Over 12 months................. 200,945
-----------
Total....................... $23,534,054
===========
</TABLE>
19
<PAGE>
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending activities and other general business purposes. However, during
periods when the supply of lendable funds cannot meet the demand for such loans,
the FHLB System seeks to provide a portion of the funds necessary through loans,
called "advances", to its members. Advances may be on a secured or unsecured
basis, depending on a number of factors, including the purpose for which the
funds are being borrowed and existing advances outstanding. During the year
ended September 30, 1997 the Bank secured advances totaling $9.2 million.
SUBSIDIARY ACTIVITIES
As a federal savings bank, Citizens Federal is permitted to invest an
amount equal to 2% of its assets in subsidiaries with an additional investment
of 1% of assets where such investment serves primarily community, inner-city,
and community development purposes. Under such limitations, as of September 30,
1998, Citizens Federal was authorized to invest up to approximately $2.76
million in the stock of or loans to subsidiaries.
On August 21, 1987, the Bank formed Citizens Service Corporation by
acquiring 1,000 shares of $1.00 par value common stock of the new entity,
representing all shares authorized. Citizens Service Corporation did not engage
in any activities during the fiscal year ended September 30, 1998.
Federal regulations require SAIF-insured savings institutions to give
the FDIC and the Director of OTS 30 days prior notice before establishing or
acquiring a new subsidiary, or commencing any new activity through an existing
subsidiary. Both the FDIC and the Director of OTS have authority to order
termination of subsidiary activities determined to pose a risk to the safety or
soundness of the institution. In addition, federal regulations require savings
institutions to deduct the amount of their investments in and extensions of
credit to subsidiaries engaged in activities not permissible to national banks
from capital in determining regulatory capital compliance. See "Regulation --
Regulatory Capital Requirements."
YIELDS EARNED AND RATES PAID
The pre-tax earnings of Citizens Federal depend significantly upon the
spread between the income it receives from its loan and investment portfolios
and its cost of money, consisting of the interest paid on deposit accounts and
borrowings.
Mortgage loans have historically been primarily long-term with fixed
rates of interest. Savings institutions have had difficulty in adjusting the
average rate of interest received on their loan portfolios at the same pace as
changes in their costs of funds represented by the interest such institutions
pay on deposit accounts and borrowings. Interest rates paid on deposits have
become increasingly volatile in recent years due to a shortening of the term on
most accounts, deregulation of interest rates payable, and the relating of
interest rates paid to market rates of interest.
20
<PAGE>
<TABLE>
<CAPTION>
At
September 30, Year Ended September 30,
-------------------------
1998 1998 1997 1996
------------- ------ ----- -----
<S> <C> <C> <C> <C>
Weighted-average yield on loans granted during
the period............................................ 8.39% 8.72% 8.56% 8.41%
Weighted-average yield on all loans during the
period................................................ 8.70 8.88 9.13 9.30
Weighted-average yield on mortgage-backed
securities held to maturity during the period......... 6.19 6.34 6.47 6.54
Weighted-average yield on mortgage-backed
securities available for sale during the period....... 5.86 5.84 6.17 6.05
Weighted-average yield on investment securities
held to maturity during the period..................... 7.00 7.45 6.80 6.38
Weighted-average yield on investment securities
available for sale during the period (1).............. 6.35 6.12 6.43 6.43
Weighted average yield on other interest-earning
assets during the period.............................. 5.08 5.57 5.37 5.98
Weighted-average yield on all interest earnings
assets during the period.............................. 7.32 7.50 7.57 7.44
Weighted-average effective rate paid on savings
deposits during the period............................ 3.95 3.90 4.00 4.14
Weighted-average rate on Federal Home Loan
Bank advances......................................... 5.59 5.93 5.89 --
Weighted-average rate paid on all interest-
bearing liabilities for the period.................... 4.13 4.13 4.03 4.14
Gross margin (spread between weighted-average yield
on all interest-earning assets during the period and
total weighted-average rate paid on all interest-
bearing liabilities for the period)................... 3.19 3.37 3.54 3.30
Net yield (net interest income as a percentage of
average interest-earning assets)...................... 3.19 3.44 3.63 3.49
</TABLE>
- -------------------
(1) Excluding mortgage backed securities.
The Bank has been relatively successful in maintaining the spread
between yields earned and rates paid due to an unusually high percentage of
deposits being held in passbook and regular savings accounts rather than in
higher rate fixed term certificates. In fiscal 1998 the spread between yields
earned and rates paid decreased .17% as the Bank's yield on interest-earning
assets decreased by .07% and the rates paid on interest-bearing liabilities
increased by .10%.
21
<PAGE>
KEY OPERATING RATIOS
The table below sets forth certain performance ratios of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Return on Assets (Net Income Divided by Average Total Assets).. .23% .41% (22)%
Return on Equity (Net Income Divided by Average Equity)........ 2.77 4.80 (2.56)
Equity-to-Assets Ratio (Average Equity Divided by Average
Total Assets)................................................. 8.58 7.83 8.50
Dividend Payout Ratio (Dividends Paid Divided By Net Income)... 44.53 27.73 N/A
</TABLE>
22
<PAGE>
RATE/VOLUME ANALYSIS
The following table shows, for the periods indicated, the change in
interest income and interest expense for each major component of interest-
earning assets and interest-bearing liabilities attributable to (i) changes in
volume (change in volume multiplied by old rate), (ii) changes in rates (change
in rate multiplied by old volume) and (iii) changes in rate/volume (change in
rate multiplied by the change in volume). The change in interest income or
expense attributable to the combination of rate variance and volume variance is
included in the table, but such amount has also been allocated between, and
included in the amounts shown as, changes due to rate and changes due to volume.
The allocation of the change due to rate/volume variance was made in proportion
to the amounts due solely to rate variance and solely to volume variance, which
amounts are not included in the table.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------- ---------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
----------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans.................... $ 812,174 $ (91,708) $ 720,466 $ 464,675 $ (53,022) $ 411,653
Mortgage-backed
securities.............. 321,907 (87,390) 234,517 (96,794) 10,899 (85,895)
Investments.............. (424,825) (39,068) (463,893) (50,756) 4,572 (46,184)
Other.................... 41,343 (4,981) 36,362 (196,289) (34,956) (231,245)
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets.................... 750,599 (223,147) 527,452 120,836 (72,507) 48,329
--------- --------- --------- --------- --------- ---------
Interest expense:
Deposits.................. (48,249) (76,783) (125,032) (2,139) (104,593) (106,732)
FHLB advances............. 482,145 40,785 522,930 64,714 -- 64,714
--------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities............. 433,896 (35,998) 397,898 62,575 (104,593) (42,018)
Net interest income........ $ 316,703 $(187,149) $ 129,554 $ 58,261 $ 32,086 $ 90,347
========= ========= ========= ========= ========= =========
<CAPTION>
Year Ended September 30,
----------------------------------
1996 vs. 1995
----------------------------------
Increase (Decrease) Due to
----------------------------------
Volume Rate Total
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Loans.................... $ 178,161 $ 12,627 $ 190,788
Mortgage-backed
securities.............. (331,458) (27,732) (359,190)
Investments.............. 231,604 (93,332) 138,272
Other.................... 73,713 23,207 96,920
--------- --------- ---------
Total interest-earning
assets.................... 152,020 (85,230) 66,790
--------- --------- ---------
Interest expense:
Deposits.................. (226) 175,992 175,766
FHLB advances............. -- -- --
--------- --------- ---------
Total interest bearing
liabilities............. (226) 175,992 175,766
Net interest income........ $ 152,246 $(261,222) $(108,976)
========= ========= =========
</TABLE>
Note: Variance in interest due to both rate and volume has been allocated in
proportion to the relationship of the absolute dollar amounts of the change in
each.
23
<PAGE>
REGULATION
General. Citizens Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, Citizens Federal is subject to
broad federal regulation and oversight extending to all its operations. The Bank
is a member of the FHLB of Atlanta and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). Citizens Federal is a member of the SAIF and the deposits of Citizens
Federal are insured by the FDIC. As a result, the FDIC has certain regulatory
and examination authority over Citizens Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Congress is considering legislation that would consolidate the supervision
and regulation of all U.S. financial institutions in one administrative body,
expand the powers of financial institutions, and provide regulatory relief to
financial institutions. It cannot be predicted with certainty whether or when
this legislation will be enacted, or the extent to which the Bank would be
affected thereby. See "Recent Developments -- Proposed Legislative and
Regulatory Changes."
On October 18, 1996 and August 4, 1998, the Bank entered into Supervisory
Agreements (the "Agreement") with the OTS whereby the Bank agreed to take
certain actions. These actions primarily include: (a) developing a business plan
covering such matters as lending activities, operating expenses, operating
results and other matters; (b) reviewing by the Bank's board of directors of the
level, trend and causes of delinquent and nonperforming assets; (c) establishing
and implementing procedures for accurate preparation of thrift financial
reports; (d) establishing and implementing written internal control procedures
for all aspects of the Bank's operations; (e) ensuring that the calculation of
compliance with regulatory liquidity requirements is accurate; and (f)
monitoring of the Bank's interest rate risk by the Bank's board of directors.
Management believes it is making good faith efforts to comply with the
Agreement. It is not presently determinable what actions, if any, the regulatory
authorities might take if the Bank does not comply with the provisions of the
Agreement, although any violation of the Agreement could result in the
imposition of significant future penalties on the Bank.
REGULATION OF THE BANK
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of Atlanta,
the Bank is required to acquire and hold shares of capital stock in the FHLB of
Atlanta in an amount at least equal to 1% of the aggregate unpaid principal of
its home mortgage loans, home purchase contracts, and similar obligations at the
end of each year, or 1/20 of its advances (borrowings) from the FHLB of Atlanta,
whichever is greater. The Bank was
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in compliance with this requirement with an investment in FHLB of Atlanta stock
at September 30, 1998 of $670,000.
The FHLB of Atlanta serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Atlanta. Long-term advances
may only be made for the purpose of providing funds for residential housing
finance. At September 30, 1998, the Bank had $9.2 million in advances
outstanding from the FHLB of Atlanta. See "Sources of Funds -- Borrowings."
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptance,
highly rated corporate debt and commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average regulatory liquidity ratio of the Bank, with respect
to liquid assets, for the month of September 1998 was 31.25%.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as, and to be deemed, a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 (the "BHCA") and other
statutes applicable to bank holding companies. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for both a national bank
and a savings institution and immediately repay any outstanding FHLB advances
(subject to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. All of the following may be included as Qualified
Thrift Investments: investments in residential mortgages, home equity loans,
loans made for educational purposes, small business loans, credit card loans and
shares of stock issued by an FHLB. Subject to a 20% of portfolio assets limit,
savings institutions are also able to treat the following as Qualified Thrift
Investments: (i) 50% of the dollar amount of residential mortgage loans subject
to sale under certain conditions, (ii)
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investments, both debt and equity, in the capital stock or obligations of and
any other security issued by a service corporation or operating subsidiary,
provided that such subsidiary derives at least 80% of its annual gross revenues
from activities directly related to purchasing, refinancing, constructing,
improving or repairing domestic residential housing or manufactured housing,
(iii) 200% of their investments in loans to finance "starter homes" and loans
for construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas, (iv) loans
for the purchase, construction, development or improvement of community service
facilities, (v) loans for personal, family, or household purposes, and (vi)
shares of stock issued by FNMA or FHLMC, provided that the dollar amount treated
as Qualified Thrift Investments may not exceed 20% of the savings institution's
portfolio assets.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. At September 30,
1998, the Bank qualified as a QTL.
Uniform Lending Standards. Under OTS regulations, savings banks must adopt
and maintain written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens or interests in real estate
or are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
(the "Interagency Guidelines") that have been adopted by the federal bank
regulators.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner-occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based
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on the support provided by other credit factors. The aggregate amount of loans
in excess of the supervisory loan-to-value limits, however, should not exceed
100% of total capital and the total of such loans secured by commercial,
agricultural, multifamily and other non-one-to-four family residential
properties should not exceed 30% of total capital. The supervisory loan-to-
value limits do not apply to certain categories of loans including loans insured
or guaranteed by the U.S. government and its agencies or by financially capable
state, local or municipal governments or agencies, loans backed by the full
faith and credit of a state government, loans that are to be sold promptly after
origination without recourse to a financially responsible party, loans that are
renewed, refinanced or restructured without the advancement of new funds, loans
that are renewed, refinanced or restructured in connection with a workout, loans
to facilitate sales of real estate acquired by the institution in the ordinary
course of collecting a debt previously contracted and loans where the real
estate is not the primary collateral.
Management believes that the Bank's current lending policies conform to the
Interagency Guidelines and does not anticipate that the Interagency Guidelines
will have a material effect on its lending activities.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and a combination of
core and "supplementary" capital equal to 8% of "risk-weighted" assets. In
addition, the OTS has adopted regulations which impose certain restrictions on
savings institutions that have a total risk-based capital ratio that is less
than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a
ratio of Tier 1 capital to adjusted total assets of less than 4% (or 3% if the
institution is rated Composite 1 under the OTS examination rating system). See
"-- Prompt Corrective Regulatory Action." For purposes of these regulations,
Tier 1 capital has the same definition as core capital. Core capital is defined
as common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, minority interests in the equity
accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts
and pledged deposits and "qualifying supervisory goodwill." Core capital is
generally reduced by the amount of the savings institution's intangible assets
for which no market exists. Limited exceptions to the rule requiring the
deduction of intangible assets are provided for mortgage servicing rights,
purchased credit card relationships and qualifying supervisory goodwill held by
an eligible savings institution. Tangible capital is given the same definition
as core capital, but does not include qualifying supervisory goodwill and is
reduced by the amount of all the savings institution's intangible assets with
only a limited exception for subscribed for mortgage servicing rights and
subscribed for credit card relationships.
Both core and tangible capital are further reduced by an amount equal to
the savings institution's debt and equity investments in subsidiaries engaged in
activities not permissible for national banks, other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and depository institutions or holding companies therefor. At
September 30, 1998, the Bank had no such investments.
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Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includible subsidiaries in which the savings institution holds a minority
interest. Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the savings institution's investments in includible
subsidiaries that must be netted against capital under the capital rules and,
for purposes of the core capital requirement, qualifying supervisory goodwill.
At September 30, 1998, the Company's adjusted total assets for purposes of the
core and tangible capital requirements, were $92.17 million.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital, provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loan and lease loss allowances. Total core and supplementary capital are reduced
by the amount of capital instruments held by other depository institutions
pursuant to reciprocal arrangements, equity investments and that portion of land
loans and non-residential construction loans in excess of 80% loan-to-value
ratio, other than those deducted from core and tangible capital. As of September
30, 1998, the Bank had $127,738 in equity investments for which OTS regulations
required a deduction from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%. Consumer and residential construction loans are assigned a risk weight of
100%. Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight. As of September 30, 1998, the Bank's risk-weighted
assets were approximately $45.33 million.
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The table below provides information with respect to the Bank's compliance
with its regulatory capital requirements at September 30, 1998.
<TABLE>
<CAPTION>
Percent
Amount of Assets(1)
------ ------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital................ $7,900 8.57%
Tangible capital requirement.... 1,382 1.50
------ -----
Excess........................ $6,518 7.07%
====== =====
Core capital.................... $7,900 8.57%
Core capital requirement (2).... 2,765 3.00
------ -----
Excess........................ $5,135 5.57%
====== =====
Risk-based capital.............. $8,273 18.25%
Risk-based capital requirement.. 3,626 8.00
------ -----
Excess........................ $4,647 10.25%
====== =====
</TABLE>
- --------------------
(1) Based on adjusted total assets for purposes of the tangible capital and
core capital requirements, and risk-weighted assets for purpose of the
risk-based capital requirement.
(2) Reflects the capital requirement which the Bank must satisfy to avoid
regulatory restrictions that may be imposed pursuant to prompt corrective
action regulations.
The risk-based capital standards of the OTS require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than 2.0% of the current estimated economic value of
its assets. A savings institution with a greater than normal interest rate risk
will be required to deduct from total capital, for purposes of calculating its
risk-based capital requirement, an amount (the "interest rate risk component")
equal to one-half the difference between the institution's measured interest
rate risk and the normal level of interest rate risk, multiplied by the economic
value of its total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
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<PAGE>
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may be subject to
an additional capital requirement based upon its level of interest rate risk as
compared to its peers. The Bank has determined that, on the basis of current
financial data, it will not be deemed to have more than normal level of interest
rate risk under the rule and believes that it will not be required to increase
its total capital as a result of the rule.
In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. Such circumstances
would include a high degree of exposure to interest rate risk, prepayment risk,
credit risk, concentration of credit risk and certain risks arising from non-
traditional activities. The OTS may treat the failure of any savings
institution to maintain capital at or above such level as an unsafe or unsound
practice and may issue a directive requiring any savings institution which fails
to maintain capital at or above the minimum level required by the OTS to submit
and adhere to a plan for increasing capital. Such an order may be enforced in
the same manner as an order issued by the FDIC.
At September 30, 1998, the Bank exceeded all regulatory minimum capital
requirements.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
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<PAGE>
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Under regulations jointly adopted by the federal banking regulators,
including the OTS, a depository institution's capital adequacy for purposes of
the prompt corrective action rules is determined on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a depository
institution that is not subject to an order or written directive by its primary
federal regulator to meet or maintain a specific capital level will be deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater. An "adequately capitalized" depository
institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite
1 CAMELS rating). An "undercapitalized" depository institution is an
institution that has: (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMELS
rating). A "significantly undercapitalized" institution is defined as a
depository institution that has: (i) a total risk-based capital ratio of less
than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii)
a leverage ratio of less than 3.0%. A "critically undercapitalized" institution
is defined as a depository institution that has a ratio of "tangible equity" to
total assets of less than 2.0%. "Tangible equity" is defined as core capital
plus the institution's outstanding cumulative perpetual preferred stock (and
related surplus) less all intangibles other than qualifying supervisory goodwill
and certain purchased mortgage servicing rights. The appropriate federal
banking agency may reclassify a well capitalized depository institution as
adequately capitalized and may require an adequately capitalized or
undercapitalized institution to comply with the supervisory actions applicable
to institutions in the next lower capital category (but may not reclassify a
significantly undercapitalized institution as critically undercapitalized) if
the OTS determines, after notice and an opportunity for a hearing,
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<PAGE>
that the depository institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any CAMELS rating category. As of September 30, 1998, the Bank was classified
as "well capitalized" under the prompt corrective action regulations.
Deposit Insurance. The Bank is required to pay assessments, based on a
percentage of its insured deposits, to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits, or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority, and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
Historically, institutions with SAIF-assessable deposits, like the Bank,
were required to pay higher deposit insurance premiums than institutions with
deposits insured by the Bank Insurance Fund ("BIF"). In order to recapitalize
the SAIF and address the premium disparity, in November 1996 the FDIC imposed a
one-time special assessment on institutions with SAIF-assessable deposits based
on the amount determined by the FDIC to be necessary to increase the reserve
levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Bank incurred a pre-tax expense of $493,687 during fiscal
year 1996.
The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates to zero for "well
capitalized" institutions with the highest supervisory ratings and 0.27% of
insured deposits for institutions in the highest risk-based premium category.
Until December 31, 1999, SAIF-insured institutions will be required to pay
assessments
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<PAGE>
to the FDIC at the rate of 6.5 basis points to help fund interest payments on
certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to finance takeovers of insolvent thrifts.
During this period, BIF members will be assessed for these obligations at the
rate of 1.3 basis points. After December 31, 1999, both BIF and SAIF members
will be assessed at the same rate for FICO payments, or sooner if the two funds
are merged.
Substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank. The
reduction of SAIF deposit insurance premiums effectively eliminated this
disparity and could have the effect of increasing the net earnings of the Bank
and restoring the competitive equality between BIF-insured and SAIF-insured
institutions.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the savings institution is meeting with
the Tier 1 capital requirement for state non-member banks of 4% of total assets
for all but the most highly rated state non-member banks.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $47.8 million of transaction accounts plus 10% on the remainder.
Because required reserves must be maintained in the form of vault cash or in a
non interest-bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of September 30, 1998, the Bank met its reserve
requirements.
Dividend Restrictions. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of the Bank's
conversion to stock form. In addition, the Bank, as a savings institution
subsidiary of a
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savings and loan holding company, is required by OTS regulations to give the OTS
at least 30 days' prior notice of any proposed declaration of dividends to the
Company.
OTS regulations impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash mergers)
by the Bank. Under these regulations, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulations) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of: (i) 75% of its net income for the previous four quarters; or (ii) up
to 100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital ratio requirements but not in excess of fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. A Tier 1 Association that has been
notified by the OTS that its is in need of more than normal supervision will be
treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1
Association. Under the OTS' prompt corrective action regulations, the Bank is
also prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition. See "--Prompt Corrective
Regulatory Action."
Furthermore, earnings of the Bank appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of cash
dividends or other distributions to the Company without payment of taxes at the
then current tax rate by the Bank on the amount of earnings removed from the
reserves for such distributions. See "Federal and State Taxation." The Company
intends to make full use of this favorable tax treatment afforded to the Bank
and the Company and does not contemplate use of any post-conversion earnings of
the Bank in a manner which would limit either institution's bad debt deduction
or create federal tax liabilities.
Transactions with Related Parties. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (like the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the
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<PAGE>
extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, OTS regulations provide that no savings institution may
(i) make a loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution. Section 106 of the BHCA which applies
to the Bank, prohibits the Bank from extending credit to or offering any other
services, or fixing or varying the consideration for such extension of credit or
service, on the condition that the customer obtain some additional service from
the institution or certain of its affiliates or not obtain services of a
competitor of the institution, subject to certain exceptions.
Loans to Directors, Executive Officers and Principal Stockholders. Savings
institutions are also subject to the restrictions contained in Section 22(h) and
Section 22(g) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to a director,
executive officer and to a greater than 10% stockholder of a savings institution
and certain affiliated entities of such persons, may not exceed, together with
all other outstanding loans to such person and affiliated entities, the
institution's loans-to-one-borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by readily marketable collateral).
Section 22(h) also prohibits loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and greater than 10%
stockholders of a savings institution, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person) as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval by the board of directors
of the depository institution for such extensions of credit to executive
officers of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. In addition, Section 106 of the BHCA prohibits extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms
35
<PAGE>
as those prevailing at the time for comparable transactions with other persons
and does not involve more than the normal risk of repayment or present other
unfavorable features.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for depository institutions under its authority. On July 10, 1995,
the federal banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions. Management believes that the
Bank already meets substantially all the standards adopted in the interagency
guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Bank's operations.
Under federal banking regulations, savings institutions must also adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. A savings institution's real estate lending policy
must reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Real Estate Lending Guidelines") that have been adopted by the
federal banking regulators. The Real Estate Lending Guidelines, among other
things, call upon savings institutions to establish internal loan-to-value
limits for real estate loans that are not in excess of the specified loan-to-
value limits for the various types of real estate loans. The Real Estate
Lending Guidelines state, however, that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.
Additionally, under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its
36
<PAGE>
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management believes that
the asset quality and earnings standards, in the form proposed by the banking
agencies, would not have a material effect on the Bank's operations.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection
with the examination of the Bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in 1998 and received a rating of outstanding.
REGULATION OF THE COMPANY
General. The Company is a unitary savings and loan holding company as
defined by the Home Owners' Loan Act ("HOLA"). As such, the Company is
registered with the OTS and is subject to OTS regulation, examination,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof. The Company is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Securities and Exchange Commission ("SEC") under federal securities laws.
Activities Restrictions. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL test, then such unitary
37
<PAGE>
holding company shall also presently become subject to the activities
restrictions applicable to multiple holding companies and, unless the savings
institution requalifies as a QTL within one year thereafter, register as, and
become subject to, the restrictions applicable to a bank holding company. See "-
- - Regulation of the Bank -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above must also be approved by the Director of the OTS prior to being engaged in
by a multiple savings and loan holding company.
Restrictions on Acquisitions. The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
38
<PAGE>
OTS regulations permit federal savings institutions to branch in any state
or states of the United States and its territories. Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal savings institution may not establish an out-of-
state branch unless (i) the federal savings institution qualifies as a QTL or as
a "domestic building and loan institution" under (S)7701(a)(19) of the Internal
Revenue Code and the total assets attributable to all branches of the savings
institution in the state would qualify such branches taken as a whole for
treatment as a QTL or for a domestic building and loan association and (ii) such
branch would not result in (a) formation of a prohibited multi-state multiple
savings and loan holding company or (b) a violation of certain statutory
restrictions on branching by savings institution subsidiaries of banking holding
companies. Federal savings institutions generally may not establish new
branches unless the savings institution meets or exceeds minimum regulatory
capital requirements. The OTS will also consider the savings institution's
record of compliance with the CRA in connection with any branch application.
FEDERAL AND STATE TAXATION
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code (the "Code") are permitted to establish
reserves for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "non-qualifying loans" is computed under the experience method. For tax
years beginning before December 31, 1995, the amount of the bad debt reserve
deduction for "qualifying real property loans" (generally loans secured by
improved real estate) may be computed under either the experience method or the
percentage of taxable income method (based on an annual election). If a saving
association elected the latter method, it could claim, each year, a deduction
based on a percentage of taxable income, without regard to actual bad debt
experience.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings and loan association over a period of years.
Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
associations, i.e., the quarterly average of the association's total assets or
of the consolidated group of which it is a member, exceeds $500 million for the
year, may no longer be entitled to use the experience method of computing
additions to their bad debt reserve. A "large" association must use the direct
write-off method for deducting bad debts, under which charge-offs are deducted
and recoveries are taken into taxable income as incurred. If the Bank is not a
"large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six-year period its applicable excess reserves, i.e, the balance
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would
39
<PAGE>
have been the balance of such reserves as of the close of the last tax year
beginning before January 1, 1996, had the bank always computed the additions to
its reserves using the experience method. Postponement of the recapture is
possible for a two-year period if an association meets a minimum level of
mortgage lending for 1996 and 1997. As of September 30, 1998, the Bank's bad
debt reserve subject to recapture over a six-year period totaled approximately
$89,000.
If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the association no longer qualifies as a bank. The balance of the pre-
1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
The Bank files a federal income tax return on a fiscal year basis using the
accrual method of accounting. Savings associations, such as the Bank, that file
federal income tax returns as part of a consolidated group are required by
applicable Treasury regulations to reduce their taxable income for purposes of
computing the percentage bad debt deduction for losses attributable to
activities of the non-savings association members of the consolidated group that
are functionally related to the activities of the savings association member.
The Bank has been audited by the IRS or the statute of limitations has
expired with respect to consolidated federal income tax returns through the year
ended September 30, 1991. With respect to years examined by the IRS, either all
deficiencies have been satisfied or sufficient reserves have been established to
satisfy asserted deficiencies. In the opinion of management, any examination of
still open returns (including returns of predecessors of, or entities merged
into, the Bank) would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.
Alabama Taxation. Under the laws of Alabama, the Bank is required to pay
an annual excise tax at the rate of 6% of net income as defined in the statute.
This tax is imposed on financial institutions such as the Bank in lieu of a
general state business corporate income tax.
The Bank's state tax returns have not been audited during the past five
years.
40
<PAGE>
COMPETITION
The Bank faces strong competition in the attraction of savings deposit (its
primary source of lendable funds) and in the origination of real estate loans.
Its most direct competition for savings deposits has historically come from
other savings institutions and from commercial banks located in its primary
market area. Particularly in times of high interest rates, however, the Bank
faces additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities yielding
interest rates which are in some instances higher than those permitted to be
paid under federal regulations by savings institutions on savings deposits. It
also faces competition for savings from credit unions. The Bank's competition
for real estate loans comes principally from other savings institutions,
commercial banks, mortgage banking companies, insurance companies and other
institutional lenders.
The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers, and home builders. It competes for savings by
offering depositors a wide variety of savings accounts, a convenient office
location, tax-deferred retirement programs, and other miscellaneous services.
The competitive environment created by federal legislation in the early
1980's gives thrift institutions such as Citizens Federal the opportunity to
compete in many areas previously reserved for other types of financial
intermediaries, mainly commercial banks. However, the new powers may also
increase the Bank's cost of doing business, and the establishment of the money
market account and the elimination of rate controls may continue to increase the
Bank's cost of funds, especially during periods of high interest rates. The
competitive pressures among thrift institutions, commercial banks and other
financial institutions have increased significantly and will continue to do so.
FIRREA has also increased competitive pressures because of the increased deposit
insurance premiums paid by SAIF-insured institutions.
PERSONNEL
As of September 30, 1998, the Bank had 30 full-time employees and two part-
time employees. The employees are not represented by a collective bargaining
group. The Bank considers its relations with its employees to be excellent.
41
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
W. Kent McGriff is 41 years old and joined Citizens Federal in February
1987. He currently serves as Executive Vice President and Chief Financial
Officer. From May 1985 through January 1987 he worked in real estate
development and management, and from September 1982 through April 1985 he worked
for a private accounting firm as a public accountant.
Cynthia D. Nalls is 33 years old and joined Citizens Federal in June 1993.
She currently serves as Executive Vice President and Chief Operations Officer.
Prior to coming to the Bank, she was an audit manager at KPMG Peat Marwick LLP
where she served financial institutions throughout the state of Alabama
including Citizens Federal.
ITEM 2. PROPERTIES
- -------------------
In October 1996, the Bank moved to a new 19,000 square foot main office
located at 1700 Third Avenue North, Birmingham, which it owns. The Bank's
investment in its main office and adjacent property was $3,407,359 at September
30, 1998.
In May 1984, the Bank opened a branch office in Eutaw, Alabama. This owned
branch office has approximately 3,200 square feet and the net book value of the
Bank's investment in this branch at September 30, 1998 was $173,023.
In July 1991, the Bank opened a branch office in Birmingham, Alabama at
2100 Bessemer Road. This owned branch office has approximately 2,800 square
feet of space and the net book value of the Bank's investment in this branch as
of September 30, 1998 was $322,876.
As of September 30, 1998, the net book value of the Bank's investment in
the premises, furniture and equipment owned by the Bank was $3,903,258.
Citizens Federal utilizes the services of Fiserv in connection with its
record-keeping and accounting functions.
42
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is involved in various real estate foreclosure actions wherein
it enforces its rights as lender, and is involved in certain other legal matters
in its day-to-day operations which are not material to its results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
- -----------------------------------------------------------------------------
MATTERS
-------
The information contained under the caption "Market Information, Capital
Stock and Retained Earnings" in the Annual Report to Stockholders for the fiscal
year ended September 30, 1998 ("Annual Report") is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report, which are listed
under Item 13 herein, are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The registrant, within the 24 months before the date of the most recent
financial statements, has not had any disagreements with its independent auditor
on accounting and financial disclosures, and has not changed its accountants.
43
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
For information on the Company's Directors, the information contained under
the section "Proposal I -- Election of Directors" in the Proxy Statement is
incorporated herein by reference.
For information on the Company's Executive Officers, reference is made to
"Part I --Business -- Executive Officers Who Are Not Directors" which is
incorporated herein by reference.
For information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, the information contained under the section
captioned "Beneficial Ownership Reports" in the Proxy Statement is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors --Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" in the Proxy
Statement.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
44
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements - The Financial Statements and Independent
--------------------
Auditors' Report included in the 1998 Annual Report, listed below, are
incorporated herein by reference.
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for Each of the Years in the
Three-Year Period Ended September 30, 1998
Consolidated Statements of Stockholders' Equity for Each of the Years
in the Three -Year Period Ended September 30, 1998
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended September 30, 1998
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules - All financial statement schedules
-----------------------------
have been omitted as the required information is either inapplicable or included
in the Financial Statements or related notes.
(a)(3) Exhibits - The following exhibits are either filed or attached as
--------
part of this report or are incorporated herein by reference.
Exhibit 3.1 Certificate of Incorporation of CFS Bancshares, Inc.
Exhibit 3.2 Bylaws of CFS Bancshares, Inc.
Exhibit 10.1 Employment Contract of President Bunny Stokes, Jr.
Exhibit 13 1998 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K - No current report on Form 8-K was filed during
-------------------
the last quarter of the fiscal year covered by this Form 10-KSB.
(c) Exhibits - Exhibits to this Form 10-KSB are attached hereto.
--------
(d) Financial Statements Schedules - None.
------------------------------
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITIZENS FEDERAL SAVINGS BANK
Date: December 23, 1998 By: /s/ Bunny Stokes, Jr.
------------------------------
Bunny Stokes, Jr., President
Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act 2 of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Bunny Stokes, Jr. Date: December 23, 1998
------------------------------------------
Bunny Stokes, Jr.
Principal Executive Officer and Director
By: /s/ W. Kent McGriff Date: December 23, 1998
------------------------------------------
W. Kent McGriff
Principal Financial and Accounting Officer
By: /s/ Rev. John T. Porter Date: December 23, 1998
------------------------------------------
Rev. John T. Porter, Director
By: /s/ Odessa Woolfolk Date: December 23, 1998
------------------------------------------
Odessa Woolfolk, Director
By: /s/ James W. Coleman Date: December 23, 1998
------------------------------------------
James W. Coleman, Director
<PAGE>
EXHIBIT 3.1
<PAGE>
CERTIFICATE OF INCORPORATION
OF
CFS BANCSHARES, INC.
ARTICLE I
NAME
The name of the corporation is CFS Bancshares, Inc. (herein the "Corporation").
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is The Corporation Trust Company, at 1209 Orange Street in the City of
Wilmington of New Castle County. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
POWERS
The purpose for which the Corporation is organized is to act as a savings
institution holding company and to transact all other lawful business for which
corporations may be incorporated pursuant to the laws of the State of Delaware.
The Corporation shall have all the powers of a corporation organized under the
General Corporation Law of the State of Delaware.
ARTICLE IV
TERM
The Corporation is to have perpetual existence.
ARTICLE V
INCORPORATOR
The name and mailing address of the incorporator is as follows:
Name Mailing Address
---- ---------------
Bunny Stokes, Jr. 1700 Third Avenue North
Birmingham, Alabama 35203
<PAGE>
ARTICLE VI
INITIAL DIRECTORS
The number of directors constituting the initial board of directors of the
Corporation is four, and the names and addresses of the persons who are to serve
as directors until their successors are elected and qualified, together with the
classes of directorships to which such persons have been assigned, are:
<TABLE>
<CAPTION>
Name Address Class
---- ------- -----
<S> <C> <C>
Bunny Stokes, Jr. 1700 Third Avenue North I
Birmingham, Alabam 35203
Odessa Woolfolk 1700 Third Avenue North II
Birmingham, Alabam 35203
James W. Coleman 1700 Third Avenue North III
Birmingham, Alabam 35203
Rev. John T. Porter 1700 Third Avenue North III
Birmingham, Alabam 35203
</TABLE>
ARTICLE VII
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which the
Corporation has authority to issue is 1,100,000 of which 1,000,000 are to be
shares of common stock, $.01 par value per share, and of which 100,000 are to be
shares of serial preferred stock, $.01 par value per share. The shares may be
issued by the Corporation from time to time as approved by the board of
directors of the Corporation without the approval of the stockholders except as
otherwise provided in this Article VII or the rules of a national securities
exchange if applicable. The consideration for the issuance of the shares shall
be paid to or received by the Corporation in full before their issuance and
shall not be less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered, personal property
(tangible or intangible), real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the judgment of the board of directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate, the holders of
------------
the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holder, except as otherwise expressly set forth in this Certificate.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and sinking fund or retirement fund or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock, and on any
<PAGE>
class or series of stock entitled to participate therewith as to dividends, out
of any assets legally available for the payment of dividends, but only when and
as declared by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of common stock of the Corporation, except as otherwise expressly set forth in
this Certificate.
B. Serial Preferred Stock. Except as provided in this Certificate, the
----------------------
board of directors of the Corporation is authorized, by resolution or
resolutions fromtime to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series, and the qualifications, limitations or restrictions
thereof, including, but not limited to determination of any of the following:
(1) the distinctive serial designation and the number of shares
constituting such series;
(2) the dividend rates or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(3) the voting powers, full or limited, if any, of the shares of such
series;
(4) whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions upon which such
shares may be redeemed;
(5) the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(6) whether the shares of such series shall be entitled to the benefits of
a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and, if so entitled, the amount of such
fund and the manner of its application, including the price or prices
at which such shares may be redeemed or purchased through the
application of such funds;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion
price or prices, or the rate or rates of exchange, and the adjustments
thereof, if any, at which such conversion or exchange may be made, and
any other terms and conditions of such conversion or exchange;
(8) the subscription or purchase price and form of consideration for which
the shares of such series shall be issued; and
(9) whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of
the same or any other series of serial preferred stock.
<PAGE>
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series,
except as otherwise expressly set forth in this Certificate.
ARTICLE VIII
PREEMPTIVE RIGHTS
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates or indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the board of directors of the Corporation to
such persons, firms, corporations or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the board of
directors in the exercise of its sole discretion.
ARTICLE IX
REPURCHASE OF SHARES
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE X
MEETINGS OF STOCKHOLDERS; CUMULATIVE VOTING
A. Notwithstanding any other provision of this Certificate or the bylaws
of the Corporation, any action required to be taken at a meeting of
stockholders, or any action which may be taken at a meeting of the shareholders
may be taken without a meeting, if consent in writing, setting forth the actions
thereof shall be given by all the stockholders entitled to vote with respect to
the subject matter thereof.
B. Special meetings of the stockholders of the Corporation for any purpose
or purposes may be called at any time by the chairman of the board, the
president, or a majority of the board of directors of the Corporation, or by
the chairman of the board, the president or the secretary upon the written
request of not less than one-tenth of all outstanding capital stock of the
Corporation. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the Corporation addressed
to the chairman of the board, the president or the secretary.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held at such place as the bylaws may
provide.
<PAGE>
ARTICLE XI
NOTICE FOR NOMINATIONS AND PROPOSALS
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the board of directors of the Corporation or by any stockholder of the
Corporation entitled to vote generally in the election of directors. In order
for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days nor more than sixty days prior to the date
of any such meeting; provided, however, that if less than forty days' notice of
the meeting is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later than the
close of business on the tenth day following the day on which notice of the
meeting was mailed to stockholders. Each such notice given by a stockholder
with respect to nominations for the election of directors shall set forth (i)
the name, age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment of each
such nominee, and (iii) the number of shares of stock of the Corporation which
are beneficially owned by each such nominee. In addition, the stockholder
making such nomination shall promptly provide any other information reasonably
requested by the Corporation.
B. Each such notice given by a stockholder to the Secretary with respect
to business proposals to be brought before a meeting shall set forth in writing
as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of
shares of the Corporation which are beneficially owned by the stockholder; and
(iv) any material interest of the stockholder in such business.
Notwithstanding anything in this Certificate to the contrary, no new business
shall be conducted at the meeting except in accordance with the procedures set
forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may, if
the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding special or annual meeting of the stockholders taking place thirty
days or more thereafter. This provision shall not require the holding of any
adjourned or special meeting of stockholders for the purpose of considering such
defective nomination or proposal.
ARTICLE XII
DIRECTORS
A. Number; Vacancies. The number of directors of the Corporation shall be
-----------------
such number, not less than two nor more than ten (exclusive of directors, if
any, to be elected by holders of preferred stock of the Corporation, voting
separately as a class), as shall be set forth from time to time in the bylaws,
provided that no action shall be taken to decrease or increase the number of
directors unless at least two-thirds of the directors then in office shall
concur in said action. The initial number of directors shall be four.
Vacancies in the board of directors of the Corporation, however caused, and
newly created directorships shall be filled by a vote of a majority of the
directors then in office, whether or not a quorum, and any director so chosen
shall hold office for a term expiring at the next election of directors by
stockholders.
B. Classified Board. The board of directors of the Corporation shall be
----------------
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of
three years and until their successors are elected and qualified. Such classes
shall be as nearly equal in number as the then total number of directors
constituting the entire board of directors shall permit, with the terms of
office of all members of one class expiring each year. Subject to the
provisions of this Article XII, should the number of directors not be equally
divisible by three, the excess director or directors shall be assigned to
Classes II or III as follows: (i) if there shall be an excess of one
directorship over a number equally divisible by three, such extra directorship
shall be classified
<PAGE>
in Class III; and (ii) if there be an excess of two directorships over a number
equally divisible by three, one shall be classified in Class III and the other
in Class II. At the first annual meeting of stockholders, directors of Class I
shall be elected to hold office for a term expiring at the third succeeding
annual meeting thereafter. At the second annual meeting of stockholders,
directors of Class II shall be elected to hold office for a term expiring at the
third succeeding annual meeting thereafter. At the third annual meeting of
stockholders, directors of Class III shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. Thereafter, at each
succeeding annual meeting, directors of each class shall be elected for three
year terms. Notwithstanding the foregoing, the director whose term shall expire
at any annual meeting shall continue to serve until such time as his successor
shall have been duly elected and shall have qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the board of directors shall consist of said
directors so elected in addition to the number of directors fixed as provided in
this Article XII. Notwithstanding the foregoing, and except as otherwise may be
required by law or by the terms and provisions of the preferred stock of the
Corporation, whenever the holders of any one or more series of preferred stock
of the Corporation shall have the right, voting separately as a class, to elect
one or more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
stockholders.
ARTICLE XIII
REMOVAL OF DIRECTORS
Notwithstanding any other provision of this Certificate or the bylaws of
the Corporation, any director or the entire board of directors of the
Corporation may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose. Notwithstanding the foregoing, whenever
the holders of any one or more series of preferred stock of the Corporation
shall have the right, voting separately as a class, to elect one or more
directors of the Corporation, the preceding provisions of this Article XIII
shall not apply with respect to the director or directors elected by such
holders of preferred stock.
ARTICLE XIV
APPROVAL OF CERTAIN BUSINESS COMBINATIONS
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this section.
A. (1) Except as otherwise expressly provided in this Article XIV, the
affirmative vote of the holders of (i) at least 80% of the outstanding
shares entitled to vote thereon (and, if any class or series of shares is
entitled to vote thereon separately, the affirmative vote of the holders of
at least 80% of the outstanding shares of each such class or series), and
(ii) at least a majority of the outstanding shares entitled to vote
thereon, not
<PAGE>
including shares deemed beneficially owned by a Related Person (as hereinafter
defined), shall be required in order to authorize any of the following:
(a) any merger or consolidation of the Corporation with or into a
Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other capital device, of
all or any Substantial Part (as hereinafter defined) of the assets of the
Corporation (including without limitation any voting securities of a
subsidiary) or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person with or into
the Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of
all or any Substantial Part of the assets of a Related Person to the
Corporation or a subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation or a
subsidiary of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a subsidiary of the
Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the Corporation,
or any recapitalization involving the common stock of the Corporation; and
(h) any agreement, contract or other arrangement providing for
any of the transactions described in this Article.
(2) Such affirmative vote shall be required notwithstanding any other
provision of this Certificate, any provision of law, or any agreement with
any regulatory agency or national securities exchange which might otherwise
permit a lesser vote or no vote.
(3) The term "Business Combination" as used in this Article XIV shall
mean any transaction which is referred to in any one or more of
subparagraphs A(1)(a) through (h) above.
B. The provisions of paragraph A shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by any other provision of this
certificate, any provision of law, or any agreement with any regulatory agency
or national securities exchange, if the Business Combination shall have been
approved by a majority vote of the Continuing Directors (as hereinafter
defined); provided, however, that such approval shall only be effective if
obtained at a meeting at which a Continuing Director Quorum (as hereinafter
defined) is present.
C. For the purposes of this Article XIV the following definitions apply:
(1) The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which
together with its "affiliates" (as that term is defined in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of
1934), "beneficially owns" (as that term is defined in Rule 13d-3 of the
General Rules and Regulations under the Securities Act of 1934) in the
aggregate 10% or more of the outstanding shares of the common stock of the
Corporation; and (b) any "affiliate" (as that term is defined in Rule 12b-2
under the Securities Exchange Act of 1934) of any such individual,
corporation, partnership or other person or entity. Without limitation,
any shares of the common stock of the Corporation which any Related Person
has the right to acquire pursuant to any agreement, or upon
<PAGE>
exercise or conversion rights, warrants or options, or otherwise, shall be
deemed "beneficially owned" by such Related Person.
(2) The term "Substantial Part" shall mean more than 25 percent of the
total assets of the Corporation, as of the end of its most recent fiscal
year ending prior to the time the determination is made.
(3) The term "Continuing Director" shall mean any member of the board
of directors of the Corporation who is unaffiliated with the Related Person
and was a member of the board prior to the time that the Related Person
became a Related Person, and any successor of a Continuing Director who is
unaffiliated with the Related Person and is recommended to succeed a
Continuing Director by a majority of Continuing Directors then on the
board.
(4) The term "Continuing Director Quorum" shall mean two-thirds of the
Continuing Directors capable of exercising the powers conferred on them.
ARTICLE XV
EVALUATION OF BUSINESS COMBINATIONS
In connection with the exercise of its judgment in determining what is in
the best interests of the Corporation and of the shareholders, when evaluating a
Business Combination (as defined in Article XIV) or a tender or exchange offer,
the board of directors of the Corporation may, in addition to considering the
adequacy of the amount to be paid in connection with any such transaction,
consider all of the following factors and any other factors which it deems
relevant; (i) the social and economic effects of the transaction on the
Corporation and its subsidiaries, employees, depositors, loan and other
customers, creditors and other elements of the communities in which the
Corporation and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity,
including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
acquisition and other likely financial obligations of the acquiring person or
entity and the possible effect of such conditions upon the Corporation and its
subsidiaries and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its or their
management.
ARTICLE XVI
INDEMNIFICATION
A. Persons. The Corporation shall indemnify, to the extent provided in
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paragraphs B, D or F:
(1) any person who is or was a director, officer, employee, or
agent of the Corporation; and
(2) any person who serves or served at the Corporation's request
as a director, officer, employee, agent, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
--------------------------
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
----------------------------
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
<PAGE>
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of
the suit or action, and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XV) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has
been adjudged liable to the Corporation unless (and only to the extent
that) the court in which the suit was brought shall determine, upon
application, that despite the adjudication but in view of all the
circumstances, he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
-----------------------------
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
-------------------------------
person named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of
the nonderivative suit and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XV) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his
conduct was unlawful. The termination of a nonderivative suit by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
---- ----------
equivalent shall not, in itself, create a presumption that the person
failed to satisfy the standard of this subparagraph E(2).
F. Determination That Standard Has Been Met. A determination that the
----------------------------------------
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in subparagraph C(2) (second sentence), the determination may
be made by:
(1) the board of directors by a majority vote of a quorum consisting
of directors of the Corporation who were not parties to the action, suit or
proceeding; or
(2) independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
(3) the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
---------
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation shall pay in advance any expenses
---------------
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if:
(1) the board of directors authorizes the specific payment; and
<PAGE>
(2) the person receiving the payment undertakes in writing to repay
the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance payment of expenses
------------
provided by paragraphs A through H shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XVI shall
------------
be deemed to be a contract between the Corporation and the persons entitled to
indemnification thereunder, and any repeal or modification of this Article XVI
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts. The indemnification and advance payment provided by paragraphs A
through H shall continue as to a person who has ceased to hold a position named
in paragraph A and shall inure to his heirs, executors and administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through H.
L. Intention and Savings Clause. It is the intention of this Article XVI
----------------------------
to provide for indemnification to the fullest extent permitted by the General
Corporation Law of the State of Delaware, and this Article XVI shall be
interpreted accordingly. If this Article XVI or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVI that shall
not have been invalidated and to the full extent permitted by applicable law.
If the General Corporation Law of the State of Delaware is amended, or other
Delaware law is enacted, to permit further or additional indemnification of the
persons defined in this Article XVI A, then the indemnification of such persons
shall be to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended, or such other Delaware law.
ARTICLE XVII
LIMITATIONS ON DIRECTORS' LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions that are not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived any
improper personal benefit. If the General Corporation Law of the State of
Delaware or other Delaware law is amended or enacted after the date of filing of
this Certificate to further eliminate or limit the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended, or such other Delaware law. Any
repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
<PAGE>
ARTICLE XVIII
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the Corporation is expressly authorized to adopt,
repeal, alter, amend and rescind the bylaws of the Corporation by a vote of two-
thirds of the board of directors. Notwithstanding any other provision of this
Certificate or the bylaws of the Corporation (and notwithstanding the fact that
some lesser percentage may be specified by law), the bylaws shall not be
adopted, repealed, altered, amended or rescinded by the stockholders of the
Corporation except by the vote of the holders of not less than a majority of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed adoption, repeal, alteration, amendment or
rescission is included in the notice of such meeting), or, as set forth above,
by the board of directors.
ARTICLE XIX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII and this Article
XIX may not be repealed, altered, amended or rescinded in any respect unless the
same is approved by the affirmative vote of the holders of not less than 80% of
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting); except that such repeal, alteration,
amendment or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of the Continuing
Directors, as defined in Article XIV of this Certificate.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 6th day of January, 1998.
/s/ Bunny Stokes, Jr.
------------------------------
Bunny Stokes, Jr.
Incorporator
Attest: ________________________
<PAGE>
EXHIBIT 3.2
<PAGE>
BYLAWS
OF
CFS BANCSHARES, INC.
ARTICLE 1.
PRINCIPAL OFFICE
The principal office of CFS Bancshares, Inc. (herein the "Corporation")
shall be at 1700 Third Avenue North, Birmingham, Alabama 35203.
ARTICLE 2.
STOCKHOLDERS
SECTION 1. Place of Meetings. All annual and special meetings of
-----------------
stockholders shall be held at the home office of the Corporation or at such
other place within or without the State in which the home office of the
Corporation is located as the board of directors may determine and as designated
in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
--------------
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held on a date and at the time set by the
Board of Directors during the month of January each year.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes may be called at any time by the majority of the board of
directors, the chairman of the board or by the president in accordance with the
provisions of the Corporation's Certificate of Incorporation or a special
meeting may be called by the secretary of the Corporation upon the written
request of the holders of not less than 10% of all votes entitled to be cast at
the meeting. Such written request shall state the purpose or purposes of the
meeting and the matters proposed to be acted on at the meeting as provided in
the Corporation's Certificate of Incorporation and shall be delivered at the
home office of the Corporation addressed to the chairman of the board, the
president or the secretary. The secretary shall inform the stockholders who
make the request of the reasonably estimated cost of preparing and mailing a
notice of the meeting and, upon payment of these costs to the Corporation, the
secretary shall then notify each stockholder entitled to notice of the meeting.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
-------------------
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. Notice of Meeting. Written notice stating the place, day and
-----------------
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing his duties, not less
than 20 days nor more than 50 days before the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail, addressed to the
stockholder at his address as it appears on the stock transfer books or records
of the Corporation as of the record date prescribed in Section 6 of this Article
II, with postage thereon prepaid. A similar notice shall also be posted in a
conspicuous place on each of the offices of the Corporation during the 20 days
immediately preceding the date of the annual or special meeting. If a
stockholder be present at a meeting, or in writing waive notice thereof before
or after the meeting, notice of the meeting to such stockholder shall be
unnecessary. When any stockholders' meeting, either annual or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any
notice of the time and place of any meeting adjourned for less than 30 days or
of the business to be transacted at such adjourned meeting, other than an
announcement at the meeting at which such adjournment is taken.
<PAGE>
SECTION 6. Fixing of Record Date. For the purpose of determining
---------------------
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than 60 days, and in case of a meeting of stockholders, not less than
20 days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Quorum. A majority of the outstanding shares of the
------
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 8. Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution except for a proxy coupled
with an interest.
SECTION 9. Voting. At each election for directors every stockholder
------
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Unless otherwise provided in the Certificate of
Incorporation, by statute, or by these Bylaws, a majority of those votes cast by
stockholders at a lawful meeting shall be sufficient to pass on a transaction or
matter.
SECTION 10. Voting of Shares in the Name of Two or More Persons. When
---------------------------------------------------
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 11. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer thereof into
his name if authority to do so is contained in an appropriate order of the court
or other public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
Corporation, may not be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
<PAGE>
SECTION 12. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 13. Nominating Committee. The board of directors shall act as a
--------------------
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least twenty days prior to the
date of the annual meeting. Upon delivery such nominations shall be posted on a
conspicuous place at each office of the Corporation. Provided such committee
makes such nominations, no nominations for directors except those made by the
nominating committee shall be voted upon at the annual meeting unless other
nominations by stockholders are made in writing and delivered to the secretary
of the Corporation in accordance with the provisions of the Corporation's
Certificate of Incorporation. Ballots bearing the names of all the persons
properly nominated by the nominating committee and by stockholders shall be
provided for use at the annual meeting.
SECTION 14. New Business. Any new business to be taken up at the annual
------------
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation at least thirty days before the date of the annual meeting.
This provision shall not prevent the consideration and approval or disapproval
at the annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as provided in the Corporation's Certificate of
Incorporation.
SECTION 15. Voting List. At least 20 days before each meeting of the
-----------
stockholders, the officer or agent having charge of the stock transfer books for
shares of the Corporation shall make a complete list of the stockholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
stockholders shall be kept on file at the home office of the Corporation and
shall be subject to inspection by any stockholder at any time during usual
business hours for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to inspection by any stockholder during the entire time of the meeting.
The original stock transfer book shall constitute prima facie evidence of the
stockholders entitled to examine such list or transfer books or to vote at any
meeting of stockholders.
SECTION 16. Informal Action by Stockholders. Any action required to be
-------------------------------
taken at a meeting of the stockholders, or any other action which may be taken
at a meeting of stockholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
stockholders entitled to vote with respect to the subject matter.
<PAGE>
ARTICLE 3.
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
SECTION 2. Number, Term and Election. The board of directors shall
-------------------------
initially consist of four (4) members and thereafter shall consist of such
number of members as determined by the board of directors from time to time in
accordance with the provisions of the Corporation's Certificate of
Incorporation. The board of directors shall be divided into three classes as
nearly equal in number as possible. The members of each class shall be elected
for a term of three years and until their successors are elected or qualified.
The board of directors shall be classified in accordance with the provisions of
the Corporation's Certificate of Incorporation.
SECTION 3. Regular Meetings. A regular meeting of the board of directors
----------------
shall be held without other notice than this Bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The board of directors may
provide, by resolution, the time and place for the holding of additional regular
meetings without other notice than such resolution.
SECTION 4. Special Meetings. Special meetings of the board of directors
----------------
may be called by or at the request of the chairman of the board, the president,
or one third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place as the place for holding any special
meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but shall not constitute presence for the
purpose of compensation pursuant to Section 12 of this Article.
SECTION 5. Notice. Written notice of any special meeting shall be given
------
to each director at least two days previous thereto delivered personally or by
telegram or at least five days previous thereto delivered by mail at the address
at which the director is most likely to be reached. Such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph company if
sent by telegram. Any director may waive notice of any meeting by a writing
filed with the secretary. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
SECTION 6. Quorum. A majority of the number of directors fixed by Section
------
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by Section 5 of this Article III.
SECTION 7. Manner of Acting. The act of the majority of the directors
----------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Corporation's Certificate of Incorporation, or Laws of the State of Delaware.
SECTION 8. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
<PAGE>
SECTION 9. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or the president. Unless otherwise
specified herein such resignation shall take effect upon receipt thereof by the
chairman of the board or the president. More than three consecutive absences
from regular meetings of the board of directors, unless excused by resolution of
the board of directors, shall automatically constitute a resignation, effective
when such resignation is accepted by the board of directors.
SECTION 10. Vacancies. Any vacancy occurring in the board of directors
---------
shall be filled in accordance with the provisions of the Corporation's
Certificate of Incorporation. The term of such director shall be in accordance
with the provisions of the Corporation's Certificate of Incorporation.
SECTION 11. Removal of Directors. Any director or the entire board of
--------------------
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 12. Compensation. Directors, as such, may receive a stated salary
------------
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine. Nothing herein shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
remuneration therefor.
SECTION 13. Presumption of Assent. A director of the Corporation who is
---------------------
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who votes in favor of such action.
SECTION 14. Qualifications. Each director shall at all times be the
--------------
beneficial owner of not less than one hundred shares of capital stock of the
Corporation unless the Corporation is a wholly owned subsidiary of a holding
company.
SECTION 15. Age Limitation. No person shall be eligible for election,
--------------
reelection, appointment or reappointment to the board of directors who is more
than 74 years of age and no person shall continue to serve as a director beyond
the annual meeting of the association immediately following the attainment of
age 75; provided, however, that the foregoing age limitation shall not be
applicable to any director who has reached age 75 prior to the effectiveness of
this age limitation provision. The office of director emeritus may be
established by the board of directors, but no emeritus director shall be
authorized to vote or be counted in determining a quorum or be subject to the
age limitations herein set forth.
ARTICLE 4.
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. Appointment. The board of directors, by resolution adopted by
-----------
a majority of the full board, may designate the chief executive officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
SECTION 2. Authority. The executive committee, when the board of
---------
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter
<PAGE>
or bylaws of the Corporation, or recommending to the stockholders a plan of
merger, consolidation, or conversion; the sale, lease, or other disposition of
all or substantially all of the property and assets of the Corporation otherwise
than in the usual and regular course of its business; a voluntary dissolution of
the Corporation; a revocation of any of the foregoing; or the approval of a
transaction in which any member of the executive committee, directly or
indirectly, has any material beneficial interest.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this Article
------
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
SECTION 4. Meetings. Regular meetings of the executive committee may be
---------
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
SECTION 5. Quorum. A majority of the members of the executive committee
------
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
SECTION 6. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
SECTION 7. Vacancies. Any vacancy in the executive committee may be
---------
filled by a resolution adopted by a majority of the full board of directors.
SECTION 8. Resignations and Removal. Any member of the executive
------------------------
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the savings association. Unless
otherwise specified, such resignation shall take effect upon its receipt; the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 9. Procedure. The executive committee shall elect a presiding
---------
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
SECTION 10. Other Committees. The board of directors may by resolution
----------------
establish an audit, loan, or other committee composed of directors as it may
determine to be necessary or appropriate for the conduct of the business of the
Corporation and may prescribe the duties, constitution, and procedures thereof.
ARTICLE 5.
OFFICERS
SECTION 1. Positions. The officers of the Corporation shall be a
---------
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may (if
appropriate) also designate the chairman of the board as an officer. The
president, who shall be a director, shall be the chief executive officer, unless
the board of directors designates the chairman of the board. The offices of the
secretary and treasurer may be held by the same person and a vice president may
also be either the secretary or the treasurer. The
<PAGE>
board of directors may designate one or more vice presidents as executive vice
president or senior vice president. The board of directors may also elect or
authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform
such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
---------------------------
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; but
no such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of a majority of
-------
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
------------
from time to time by the board of directors and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
ARTICLE 6.
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. To the extent permitted by applicable law, and
---------
except as otherwise prescribed by the Corporation's Certificate of Incorporation
or these Bylaws with respect to certificates for shares, the board of directors
may authorize any officer, employee, or agent of the Corporation to enter into
any contract or execute and deliver any instrument in the name of and on behalf
of the Corporation. Such authority may be general or confined to specific
instances.
SECTION 2. Loans. No indebtedness shall be contracted on behalf of the
-----
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
-------------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the board of directors may select.
<PAGE>
ARTICLE 7.
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. Certificates representing shares of
-----------------------
capital stock of the Corporation shall be in such form as shall be determined by
the board of directors and approved as required under applicable regulations.
Such certificates shall be signed by the chief executive officer or by any other
officer of the Corporation authorized by the board of directors, attested by the
secretary or an assistant secretary, and sealed with the corporate seal or a
facsimile thereof. The signatures of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar other than the savings association itself or one of its
employees. Each certificate for shares of capital stock shall be consecutively
numbered or otherwise identified. The name and address of the person to whom
the shares are issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the Corporation. All certificates
surrendered to the savings association for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like number of
shares has been surrendered and canceled, except that in the case of a lost or
destroyed certificate, a new certificate may be issued upon such terms and
indemnity to the savings association as the board of directors may prescribe.
SECTION 2. Transfer of Shares. Transfer of shares of capital stock of the
------------------
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Corporation. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the savings
association to be the owner for all purposes.
ARTICLE 8.
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 30th day of September
of each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the board of directors. The appointment of such accountants
shall be subject to annual ratification by the stockholders.
ARTICLE 9.
DIVIDENDS
Subject to the provisions of the Corporation's Certificate of Incorporation
and applicable law and regulations, the board of directors may, at any regular
or special meeting, declare dividends on the Corporation's outstanding capital
stock. Dividends may be paid in cash, in property or in the Corporation's own
stock.
ARTICLE 10.
CORPORATE SEAL
The corporate seal of the Corporation shall be in such form as the board of
directors shall prescribe.
ARTICLE 11.
AMENDMENTS
These bylaws may be amended in a manner consistent with applicable
regulations at any time by a two-thirds vote of the full board of directors or
by a majority vote of the votes eligible to be cast by the stockholders of the
savings association at any legal meeting.
<PAGE>
EXHIBIT 10.1
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 15th day of February, 1990, by and between
Citizens Federal Savings Bank (hereinafter referred to as the "Savings Bank")
and Bunny Stokes, Jr. (hereafter referred to as the "Employee").
WHEREAS, the Employee has heretofore been employed by the Savings Bank as
Executive Vice President, the employee is experienced in all phases of the
business of the Savings Bank, and the Board of Directors has determined to
appoint the Employee as President and Chief Executive Officer of the Savings
Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Savings Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the President and Chief
----------
Executive Officer of the Savings Bank. The Employee shall render administrative
and management services to the Savings Bank such as are customarily performed by
persons situated in a similar executive capacity. The Employee shall also
promote, by entertainment or otherwise, as and to the extent permitted by law,
the business of the Savings Bank. The Employee's other duties shall be such as
the Board of Directors of the Savings Bank (the "Board of Directors") may from
time to time reasonably direct, including normal duties as an officer of the
Savings Bank.
2. Base Compensation. The Savings Bank agrees to pay the Employee during
-----------------
the term of this Agreement a salary at the rate of $59,000 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide.
3. Discretionary Bonuses. The Employee shall be entitled to participate
---------------------
in an equitable manner with all other senior management employees of the Savings
Bank in discretionary bonuses that may be authorized and declared by the Board
of Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
4. (a) Participation in Retirement and Medical Plans. The Employee
---------------------------------------------
shall be entitled to participate in any Plan of the Savings Bank relating to
pension, profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Savings Bank may adopt for the benefit of its
employees.
<PAGE>
(b) Employee Benefits; Expenses. The Employees shall be eligible to
---------------------------
participate in any fringe benefits which may be or may become applicable to the
Savings Bank's executive employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors, club
memberships, a reasonable expense account, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Savings Bank shall reimburse Employee for
all reasonable out-of-pocket expenses which Employee shall incur in connection
with his services for the Savings Bank.
5. Term. The Bank hereby employs the Employee, and the Employee hereby
----
accepts such employment under this Agreement, for the period commencing on April
1, 1993 (the "Effective Date"), and ending thirty-six months thereafter on March
31, 1996 (or such earlier date as is determined in accordance with Section 9
hereof). Additionally, on each annual anniversary date from teh Effective Date,
the Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date provided the Board of Directors
of the Bank determines in a duly adopted resolution that the performance of the
Employee has met the board's requirements and standards, and that this Agreement
shall be extended.
6. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the
Savings Bank.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent
or limit the right of Employee to invest in the capital stock or other
securities of any business dissimilar from that of the Savings Bank, or, solely
as a passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
---------
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors. The Savings Bank will provide Employee
with the working facilities and staff customary for similar executives and
necessary for him to perform his duties.
8. Vacation and Sick Leave. At such reasonable times as the Board of
-----------------------
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement; all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Savings Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Savings Bank on account of his failure to take a vacation
and Employee shall not be entitled
<PAGE>
to accumulate unused vacation from one fiscal year to the next, except in either
case to the extent authorized by the Board of Directors for senior management
employees of the Savings Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Savings Bank for such additional periods of time and
for such valid and legitimate reasons as the Board of Directors in its
discretion may determine. Further, the Board of Directors shall be entitled to
grant to the Employee a leave or leaves of absence with or without pay at such
time or times and upon such terms and conditions as the Board of Directors in
its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board of Directors for senior management
employees of the Savings Bank. In the event any sick leave benefit shall not
have been used during any year, such leave shall accrue to subsequent years only
to the extent authorized by the Board of Directors.
9. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated
upon the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which his death
shall have occurred, and any vested rights and benefits of the Employee.
(b) Employee's employment under this Agreement may be terminated at
any time by a decision of the Board of Directors for conduct not constituting
termination for Just Cause. Except as provided pursuant to Section 12 herein, in
the event Employee's employment under this Agreement is terminated by the Board
of Directors without Just Cause, the Savings Bank shall be obligated to continue
to pay the Employee his salary, up to the date of termination of the term
(including any renewal term) of this Agreement and the cost of Employee
obtaining all health, life, disability and other benefits which the Employee
would have been eligible to participate in through such date based upon the
benefit levels substantially equal to those being provided Employee at the date
of termination of employment; provided that the total compensation paid to the
Employee hereunder shall not exceed three times his average annual compensation
for his five most recent taxable years.
(c) The Savings Bank reserves the right to terminate this Agreement at
any time for Just Cause. Termination for "Just Cause" shall mean termination
for personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than a law, rule or
regulation relating to a traffic violation or similar offense), final cease-and-
desist order, termination under the provisions of Subparagraphs (d), (e) or (f)
below, or material breach of any provision of this Agreement. Subject to the
provisions of Section 12 hereof, in the event this Agreement is terminated for
Just Cause, the Savings Bank shall only be obligated to continue to pay
<PAGE>
the Employee his salary up to the date of termination, and the vested rights of
the parties shall not be affected.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8 (e)(4) or 8 (g)(1) of the Federal Deposit Insurance Act
("FDIA") (12 U.S.C. 1818 (e)(4) and (g)(1)), all obligations of the Savings Bank
under this Agreement shall terminate, as of the effective date of the order, but
the vested rights of the parties shall not be affected.
(e) If the Savings Bank is in default (as defined in Section 3 (x)(1)
of FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this Paragraph shall not affect any vested rights of the parties.
(f) All obligations under this Agreement may be terminated: (i) by
the Director of the Office of Thrift Supervision ("Director of OTS"), or his or
her designee, at the time that the Federal Deposit Insurance Corporation
("FDIC") or the Resolution Trust Corporation enters into an agreement to provide
assistance to or on behalf of the Savings Bank under the authority contained in
Section 13 (c) of FDIA; and (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Savings Bank or when the Savings Bank is determined by the Director of the OTS
to be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12 (b), in which case the Employee
shall be entitled to receive only his compensation, vested rights, and all
employee benefits up to the date of his termination.
10. Suspension of Employment.
------------------------
(a) The suspension of the Employee from office and/or temporary
prohibition from participation in the conduct of the affairs of the Savings Bank
pursuant to notice served by the under Sections 8(e)(3) or 8(g)(1) of FDIA
unless stayed by appropriate proceedings, shall suspend, as of the date of such
service, all obligations of the Savings Bank under the terms of this Agreement,
except for the vested rights of the parties.
(b) In the event the charges specified in such notice served as
provided in Subparagraph (a) of this Paragraph 10 shall be dismissed, the
Savings Bank shall (i) pay the Employee the compensation withheld from such
Employee pursuant to the suspension of the Savings Bank's obligations as
required in Subparagraph (a) of this Paragraph and (ii) reinstate the
obligations suspended as required in Subparagraph (a) of this Paragraph.
11. Disability. If the Employee shall become disabled or incapacitated to
----------
the extent that he is unable to perform his duties hereunder, by reason of a
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall
<PAGE>
nevertheless continue to receive the following percentages of his compensation,
inclusive of any benefits which may be payable to Employee under the provisions
of disability insurance coverage in effect for Savings Bank employees, under
Section 2 of this Agreement for the following period of his disability: 50% for
the remaining term of this Agreement. Upon returning to active full-time
employment, the Employee's full compensation as set forth in this Agreement
shall be reinstated. In the event that said Employee returns to active
employment on other than a full-time basis, then his compensation (as set forth
in Paragraph 2 of this Agreement) shall be reduced in proportion to the time
spent in said employment, or as shall otherwise be agreed to by the parties.
12. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event
of involuntary termination of Employee's employment under this Agreement in
connection with , or within six (6) months after, any change in control of the
Savings Bank which has not been approved in advance by a two-thirds (2/3) vote
of the full Board of Directors, or in the event of voluntary termination by the
Employee in connection with, or within six (6) months after, any change in
control of the Savings Bank which has not been approved in advance by a two-
thirds (2/3) vote of the full Board of Directors, Employee shall be paid an
amount equal to the product of 2.99 times the Employee's "base amount"as defined
in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code"). Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination, or in periodic payments
over the remaining term of this Agreement as if Employee's employment had not
been terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. The term "control" shall refer to the ownership, holding or
power to vote more than 25% of the Savings Bank's voting stock, the control of
the election of a majority of the Savings Bank's directors, or the exercise of a
controlling influence over the management or policies of the Savings Bank by any
person or by persons acting as a group within the meaning of Section 13(d) of
the Securities Exchange Act of 1934. This limitation shall not apply to a
transaction in which the Savings Bank forms a holding company without change in
the respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter and appraisal rights, the purchase of
shares by underwriters in connection with a public offering, or the purchase of
shares of up to 25% of any class of securities by a tax-qualified employee stock
benefit plan which is exempt from the approval requirements, set forth under 12
C.F.R.(S)574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The
term "person" means an individual other than the Employee, or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntarily terminate his employment under this Agreement
following a change in control of the Savings Bank, whether approved in advance
by the Board of Directors or otherwise (as defined in Section 12(a) of this
Agreement), and shall thereupon be entitled to receive the payment described in
Section 12(a) of this Agreement, upon the occurrence, or within sixty (60) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary
<PAGE>
office as of the signing of the Agreement; (ii) if in the organizational
structure of the Savings Bank Employee would be required to report to a person
or persons other than the Board of Directors of the Savings Bank; (iii) if the
Savings Bank should fail to maintain existing employee benefits plans, including
material fringe benefit, stock option and retirement plans; (iv) if Employee
would be assigned duties and responsibilities other than those normally
associated with his position as President and Chief Executive Officer or (v) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced.
(c) In the event any dispute shall arise between the Employee and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 12, whether instituted by formal legal proceeding or otherwise,
including any action taken by Employee to enforce the terms of this Section 12
or in defending against any action taken by the Savings Bank, the Savings Bank
shall reimburse Employee for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions,
notwithstanding in the ultimate outcome thereof; provided, however, that the
Savings Bank shall not be obligated to so reimburse the Employee if a court
having jurisdiction over the matter shall specifically find that the Employee's
position or arguments in the dispute have been clearly unreasonable. Such
reimbursement shall be paid within ten (10) days of Employee furnishing to the
Savings Bank written evidence, which may be in the form, among other things, of
a cancelled check or receipt, of any costs or expenses incurred by Employee.
Any such request for reimbursement by Employee shall be made no more frequently
than at sixty (60) day intervals.
13. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Savings Bank which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
14. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by both parties, except as herein
otherwise specifically provided.
15. Applicable Law. This Agreement shall be governed by all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of Alabama, except to the extent that Federal law shall be deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement together with any understanding or
----------------
modifications thereof as approved to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year hereinabove written.
CITIZENS FEDERAL SAVINGS BANK
By: /s/ A.G. Gaston
-------------------------
ATTEST:
/s/ Malia A. Fort
- ------------------------
Malia A. Fort, Secretary
WITNESS:
/s/ E. A. Gardner /s/ Bunny Stokes, Jr.
- ------------------------ -----------------------------
Bunny Stokes, Jr., Employee
<PAGE>
EXHIBIT 13
<PAGE>
To Our Shareholders:
The current economic climate is filled with speculation regarding consolidation
and diversification, as well as the continued lowering of interest rates. I am
pleased to report that Citizens Federal has stayed on course and continued to
prosper during this atmosphere of intense competition. Both our cash and
liquidity positions remain strong, and we realized net income of $218,950
despite recording a $176,000 loan loss provision for the year ended September
30, 1998. Our capital and surplus well exceed the required regulatory levels
set by federal regulation. Our net loans increased by $2,840,607 or 6.67% to
$45,413,484 for the year ended September 30, 1998. Based on our healthy capital
and surplus, our directors declared a dividend to shareholders as of December
11, 1998 of $.75 per share.
Building on our corporate mission to provide quality service, while maintaining
our financial strength and stability, we implemented several initiatives, which
prepare us for the future. Anticipating growth and development opportunities,
our board of directors voted to form CFS Bancshares, Inc. This corporate
restructuring positions us to take advantage of increased flexibility in the
diversification of operations, while limiting the risks generally associated
with an interest rate-sensitive industry.
We also upgraded our technology to include a new product, telephone banking,
which will be implemented by the end of the second quarter of our next fiscal
year. Our new computer system allows us the option to add other services, such
as computer banking, as we prepare our business for the next millennium.
As we approach the year 2000, we also focused on another crucial task readying
our computer system for year 2000 compliance. Our federal regulators require
that all modifications be in place and tested by March 31, 1999. We have
implemented a plan which ensures that Citizens Federal and its vendors will test
their information systems and make changes to software as necessary to meet all
requirements.
The future should be not regarded as a single event, but as a process, charted
by forward thinking and sound planning. With the loyal support of our
customers, we will continue to build today's plans for strong financial growth
and stability. And through the hard work and performance of our efficient,
courteous, professional staff, we will continue to make improvements in customer
service, always providing the highest quality in financial services to our
banking friends.
Our new product campaign reflects Citizens Federal's sustained commitment and
our current goal to be more than you knew and everything you need in a bank.
Sincerely,
/s/ Bunny Stokes Jr.
Bunny Stokes, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE>
Financial Highlights
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30,
1998 1997
<S> <C> <C>
Balance Sheets:
Loans receivable, net $45,413 42,573
Investment securities $35,461 44,719
Interest bearing deposits $73,892 76,346
FHLB advances $ 9,200 9,200
Stockholders' equity $ 7,908 7,798
Book value per share $ 60.83 59.98
Operations:
Net income $ 219 358
Earnings per share $ 1.72 2.75
</TABLE>
PROFILE
CFS Bancshares, Inc. ("the Company") was organized by Citizens Federal
Savings Bank (Citizens Federal or the Bank) to be a savings and loan holding
company. The Company was organized at the direction of the Bank in January 1998
to acquire all of the capital stock of the Bank upon the consummation of the
reorganization of the Bank into the holding company form of ownership, which was
completed on June 30, 1998. The company's stock became registered under the
Securities Act of 1933 on June 30, 1998. The company has no significant assets
other than the corporate stock of the Bank. For that reason the discussion in
the annual report relates to the operations of the Bank.
Citizens Federal Savings Bank was chartered by the Federal Home Loan Bank
Board, predecessor to the Office of Thrift Supervision (OTS), in September 1956
and has been in operation since that time. The Bank is a member of the Federal
Deposit Insurance Corporation (FDIC), with its deposit accounts insured up to
applicable limits by the Savings Association Insurance Fund (SAIF), and of the
Federal Home Bank (FHLB). On March 28, 1983 Citizens Federal's charter was
restated when it converted from a federal mutual savings and loan association to
a federal capital stock association through the sale and issuance of 130,000
shares of common stock. On October 10, 1983 the Bank converted from a federal
stock savings and loan association to a federal stock savings bank.
Citizens Federal's operations are conducted from its main office
headquarters located at 1700 3/rd/ Avenue North, Birmingham, Alabama and branch
offices at 2100 Bessemer Road, Birmingham, Alabama and 213 Main Street, Eutaw,
Alabama. The Bank's primary business is the promotion of thrift through the
solicitation of savings accounts from its depositors and the general public, and
the promotion of home ownership through the granting of mortgage loans,
principally to finance the purchase and/or construction of residential dwellings
and to a lesser extent non-residential buildings located within its principal
lending area in Jefferson and Greene Counties, Alabama.
At the present time, there is neither an established market in which shares
of the CFS Bancshares, Inc. capital stock are regularly traded nor any uniformly
quoted price for such shares. During 1989, the Bank's board of directors
adopted an Employee Stock Ownership Plan (ESOP) for the benefit of the Bank's
employees. As of September 30, 1998 the ESOP owned 30,765 shares or 23.66% of
the Company's outstanding common stock.
Based on recent trades known to the Company, the price per share of the
Company's stock is approximately $18.50 per share. The Bank paid dividends of
$.75 per share in December 1997 and 1996, respectively. A cash dividend of $.75
per share was also declared by the board of directors of CFS Bancshares on
November 19, 1998 payable to all stockholders of record as of December 11, 1998.
As of December 11, 1998 the Bank had 337 stockholders.
<PAGE>
Selected Financial Data
(Dollars in thousands, except for share and per
share amounts)
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS
Total assets 92,166 99,640 85,997 86,119 82,702
Loans, net 45,413 42,573 30,532 28,611 27,418
Investment securities 35,461 44,718 41,611 43,152 48,654
Deposits 73,892 76,346 76,793 76,754 74,040
Borrowed funds 9,200 9,200 - - -
Stockholders' equity 7,908 7,798 7,312 7,751 7,488
Shares outstanding (actual number) 130,000 130,000 130,000 130,000 130,000
Book value per share 60.83 59.98 56.25 59.62 57.60
</TABLE>
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS
Interest income 6,543 6,016 5,967 5,900 5,763
Interest expense 3,525 3,127 3,169 2,993 2,538
Net interest income 3,018 2,889 2,798 2,907 3,225
Provision for loan loss 176 - - - -
Net gains on securities 47 141 - 112 68
Other noninterest income 443 475 380 339 269
SAIF special assessment expense - - 494 - -
Other noninterest expense 2,981 2,947 2,979 2,834 2,676
Income (loss) before income taxes 351 558 (295) 524 886
Income tax benefit (expense) (132) (200) 102 (189) (319)
Effect of accounting method change - - - - 175
Net income (loss) 219 358 (193) 335 742
============================================================
PER SHARE INFORMATION
Net income (loss) per share 1.82 2.75 (1.49) 2.58 5.71
Cash dividends declared 0.75 0.75 0.75 0.75 0.75
Average shares outstanding 120,407 130,000 130,000 130,000 130,000
</TABLE>
<TABLE>
<CAPTION>
At or for the years ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA
Average yield on interest earning assets 7.50% 7.63% 7.49% 7.42% 7.37%
Average rate on deposits and borrowed funds 4.11% 4.01% 4.14% 3.98% 3.47%
Interest rate spread 3.39% 3.62% 3.35% 3.44% 3.90%
Return on average assets 0.23% 0.42% -0.22% 0.40% 0.92%
Return on average stockholders' equity 2.77% 4.80% -2.56% 4.40% 10.38%
Equity to assets ratio 8.58% 7.83% 8.50% 9.00% 9.05%
Dividend payout ratio 44.53% 27.23% n/a 29.07% 13.13%
</TABLE>
<PAGE>
Management's Discussion and Analysis
At September 30, 1998 the Bank's total assets were $92,166,042 as compared
to $99,640,318 at September 30, 1997, a decrease of $7,474,276 or 7.50%. The
decrease in total assets is largely attributable to a significant decrease in
the Bank's investment portfolio. At September 30, 1998 the Bank's investment
portfolio included securities available for sale of $29,122,737 and securities
held to maturity of $6,338,130 as compared to $35,915,192 and $8,803,393,
respectively at September 30, 1997 a decrease of $6,792,455 and $2,465,263,
respectively. The Bank purchased and recorded several investment securities
totaling $4,975,130 during September 1997, which did not settle until October
1997 during the current fiscal year. The payable for investment securities was
satisfied during the first month of the current fiscal year with proceeds from
federal funds sold and overnight deposits and a security which was called during
October 1997. There was no such transaction during the final month of the
fiscal year ended September 30, 1998. Declines in the portfolio also resulted
from significant principal payments on mortgage-backed securities and CMOs and
from calls of investment securities. The excess cash flow from the portfolio
was used to fund increases in the Bank's loan portfolio and net deposit
withdrawals. Net loans increased from $42,572,877 at September 30, 1997 to
$45,413,484 at September 30, 1998 an increase of $2,840,607 or 6.67%. The
Bank's primary emphasis continues to be mortgage lending as 8.52 million or
88.46% of the 9.63 million in loans granted during the year were mortgage loans.
Deposits totaled $73,892,189 at September 30, 1998 compared to $76,345,726
at September 30, 1997, a decrease of $2,453,537 or 3.21%. Deposit declines
occurred in the Bank's transaction accounts which consist of passbook savings
accounts and NOW accounts. Borrowings at September 30, 1998 remained unchanged
from the balance at September 30, 1997 of $9,200,000 as the Bank maintained its
level of borrowing from the Federal Home Loan Bank of Atlanta. The Bank's one
to four family residential mortgage portfolio serves as collateral for the FHLB
advances.
Non-performing assets, which included non-accrual loans and real estate
acquired by foreclosure (REO) increased $398,513 or 62.70% from $635,595 at
September 30, 1997 to $1,034,108 at September 30, 1998 as non-accrual loans
increased from $536,101 at September 30, 1997 to $974,474 at September 30, 1998
and REO declined $39,860 from $99,494 at September 30, 1997 to $59,364 at
September 30, 1998. Due to the increase in the number and amount of non-
performing loans management recorded through earnings an addition of $176,000 to
the provision for loan losses. At September 30, 1998 non-performing assets
represented 1.12% of total assets while non-accrual loans represented 2.07% of
gross loans outstanding, each of which represents an increase from September 30,
1997 when non-performing assets represented .63% of total assets while non-
accrual loans were 1.21% of gross loans outstanding.
Interest rate levels, the health of the economy (particularly the real
estate economy), securities transactions and the amount of non-performing assets
affect the Bank's financial condition and results of operations.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended September 30,
---------------------------------------------------------------------------------
1998 1997 1996
Average Yield or Average Yield or Average Yield or
------------ ------------ ----------- ------------ ----------- ------------
Balance Rate Balance Rate Balance Rate
------------ ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds and interest
Bearing deposits 3,406 5.57% 2,855 5.37% 6,683 5.98%
Investments securities
held to maturity (1) 8,187 6.39% 12,027 6.53% 19,371 6.27%
Investment securities
Available for sale 31,180 5.90% 28,791 6.28% 23,394 6.49%
Loans, net (2) 44,920 8.88% 35,799 9.13% 30,221
----------- ----------- -----------
Total interest earning assets 87,693 7.50% 79,472 7.57% 79,669 7.49%
Loan loss allowances (447) (634) (649)
Non-interest earnings assets 7,711 7,862 7,038
----------- ----------- -----------
Total assets 94,957 86,700 86,058
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits 75,374 3.90% 76,577 4.00% 76,630 4.14%
FHLB advances 9,913 5.93 1,098 5.89% - -
----------- ----------- -----------
Total interest bearing liabilities 85,287 4.13% 77,675 4.03% 76,630 4.14%
Accrued interest on deposits 287 309 144
Other liabilities 1,481 1,251 1,751
Stockholders' equity 7,902 7,465 7,533
----------- ----------- -----------
Total liabilities and stockholders' 94,957 86,700 86,058
equity
=========== =========== ===========
Interest rate spread 3.37% 3.54% 3.35%
============ ============ ============
Net interest margin (3) 3.44% 3.63% 3.51%
============ ============ ============
</TABLE>
(1) Includes Federal Home Loan Bank stock
(2) Loan yields calculated using average balance of gross loans
(3) Net interest income before loan loss provision divided by total average
interest earning assets
<PAGE>
Comparison of years ended September 30, 1998 and September 30, 1997
GENERAL
Net income for the year ended September 30, 1998 was $218,950 compared to
$358,134 for the year ended September 30, 1997 a decrease of $139,364. The
decrease is the result of a provision for loan losses recorded for the year
ended September 30, 1998 in the amount of $176,000 compared to no loan loss
provision for the year ended September 30, 1997. The Bank's operating results
depend largely upon its net interest margin which is the difference between the
income earned on loans and investments, and the interest expense paid on
deposits and borrowings, divided by average total interest earning assets. The
net interest margin is affected by the economic and market factors which
influence interest rates, loan demand and deposit flows. The interest rate
margin decreased from 3.63% for the year ended September 30, 1997 to 3.49% for
year ended September 30, 1998.
INTEREST INCOME
Net interest income before provision for loan losses increased by $129,554
or 4.48% to $3,018,202 for the year ended September 30, 1998 from $2,888,648 for
the year ended September 30, 1997 as a result of an increase in average interest
earning assets from fiscal 1997 to fiscal 1998 of approximately $8,257,000.
Interest and fees on loans increased by $720,466 or 22.03% as the average
balance of loans outstanding increased from $35,799,000 for the year ended
September 30, 1997 to $44,920,000 for the current fiscal year. The increase in
interest and fees on loans was tempered by a decline in the average yield on
loans of 25 basis points from 9.13% for the year ended September 30, 1997 to
8.88% for the year ended September 30, 1998. The increase in interest and fees
on loans was partially offset by declines in interest earned on federal funds,
interest bearing deposits and investment securities which resulted from a
decline in the average yield earned on those investments as well as a modest
decrease in the average outstanding balance between the year ended September 30,
1997 and the current fiscal year. The average yield on interest earning assets
other than loans declined by 32 basis points from 6.29% for the year ended
September 30, 1997 to 5.97% for the current fiscal year while the average
balance outstanding declined approximately $900,000 when comparing the year
ended September 30, 1998 to the prior fiscal year.
INTEREST EXPENSE
Total interest expense increased by $397,898 or 12.72% to $3,524,799 for
the year ended September 30, 1998 from $3,126,901 for the year ended September
30, 1997 as the average balance of interest bearing liabilities increased by
$7,612,000 from $77,675,000 for the year ended September 30, 1997 to $85,287,000
for the current fiscal year. The increase in liabilities relates to FHLB
advances which were acquired during the final three months of the prior fiscal
year and remained outstanding throughout the current fiscal year. The average
rate on interest bearing liabilities increased 10 basis points from 4.13% for
the year ended September 30, 1997 to 4.03% for the current fiscal year as the
higher rate FHLB advances made up a larger percentage of the average balance of
liabilities outstanding during the current fiscal year.
OTHER INCOME
Total other income decreased $126,172 or 20.48% for the year ended
September 30, 1998 compared to the 1997 period. The decline was primarily the
result of a decrease in gains on sale of investment securities from $140,829 for
the year ended September 30, 1997 to $46,594 for the current fiscal year along
with a $27,835 decline in service charges on deposit accounts from $432,581 for
the 1997 fiscal year to $404,746 for the year ended September 30, 1998. The
decline is primarily the result of decreases in the Bank's transaction accounts.
OTHER EXPENSE
Total other expense consists of salaries and employee benefits, occupancy
and equipment, FDIC deposit insurance, data processing expense, legal and
professional services, advertising and other expenses. The costs of carrying
and administering non-performing assets is also included in other expense.
Other expenses remained at approximately the same level increasing by $35,023 or
1.19% from $2,946,533 for the year ended September 30, 1997 to $2,981,556 for
the year ended September 30, 1998. With the exception of data processing
expense and professional services all categories of other expense remained at
the same level as last year or declined. During fiscal 1998 the Bank changed to
a new data processing system and incurred additional expense related to the
conversion to the new system. Data processing expense increased by $18,513 or
8.89% when comparing the results of the current fiscal year to the year
<PAGE>
ended September 30, 1997. Professional services increased by $91,257 or 68.14%
from $133,917 for the year ended September 30, 1997 to $226,734 for the current
fiscal year. During the year the Bank reorganized into the holding company form
of ownership and incurred additional legal and accounting expense. The Bank also
hired a consultant during the year ended September 30, 1998 to assist the Bank
in meeting its obligations in complying with various regulatory rules and
requirements.
Comparison of years ended September 30, 1997 and September 30, 1996
GENERAL
Net income for the year ended September 30, 1997 amounted to $358,134
compared with a net loss of $193,382 for the year ended September 30, 1996 an
increase of $551,516. The principal reasons for the increased net interest
income and other income and decreased other expense (non-interest expense). The
Bank's operating results depend largely upon its net interest margin which is
the difference between the income earned on loans and investments, and the
interest expense paid on deposits and borrowings, divided by average total
interest earning assets. The net interest margin is affected by the economic
and market factors which influence interest rates, loan demand and deposit
flows. The interest rate margin increased from 3.49% for the year ended
September 30, 1996 to 3.63% for the year ended September 30, 1997.
INTEREST INCOME
Net interest income increased by $90,347 or 3.23% to $2,888,648 for the
year ended September 30, 1997 when compared to the year ended September 30, 1996
though the average balance of interest earning assets remained essentially the
same during the two periods. Interest and fees on loan increased $411,653 or
14.40% as a result of an increase in the average balance of net loans
outstanding of $5,088,000 or 16.92% from $30,077,000 for the year ended
September 30, 1996 to an average outstanding balance of $35,165,000 for the year
ended September 30, 1997. The increase in interest and fees on loans was
tempered by a decline in the average yield on loans of 17 basis points from
9.30% for the year ended September 30, 1996 to 9.13% for the year ended
September 30, 1997. Higher interest and fees on loans was partially offset by
declines in interest earned on federal funds sold and interest bearing deposits
(short term investments) and investment securities which resulted both from a
decline in the average balance outstanding as well as a decline in the average
yield earned on those investments. The average outstanding balance of short
term investments and investment securities declined by approximately $3,828,000
and $1,947,000, respectively between the years ended September 30, 1996 and
September 30, 1997 as the proceeds from those assets were used to fund growth in
the Bank's loan portfolio and to pay for the construction of the Bank's new home
office. The average yield earned on short term investments declined from 5.98%
for the year ended September 30, 1996 to 5.36% for the year ended September 30,
1997 while the yield earned on investment securities declined only slightly
between fiscal 1996 and fiscal 1997.
INTEREST EXPENSE
Total interest expense decreased by $42,018 or 1.33% to $3,126,901 for the
year ended September 30, 1997 from $3,168,919 for the year ended September 30,
1996. Interest on deposits declined by $106,732 or 3.37% as the average cost of
deposits declined from 4.14% for the year ended September 30, 1996 to 4.00% for
the year ended September 30, 1997. During the final three months of the fiscal
year ended September 30, 1997 the Bank acquired $9,200,000 in advances from the
Federal Home Loan Bank of Atlanta which had an average rate of 5.89% during the
year ended September 30, 1997.
OTHER INCOME
Total other income increased $235,884 or 62.02% for the year ended
September 30, 1997 compared to the prior fiscal year. The increase was mainly
the result of increases in service charges on deposit accounts and gains on the
sale of investment securities. The increase in service charges resulted from
overall increases in and the addition of fees on deposits accounts the Bank
provides to its customers. The gain on sale of securities was due to favorable
market interest rate during the year and includes approximately $54,000 in
recoveries of losses on securities which had been previously written down
through the statement of operations in the 1994 fiscal year end prior, to the
Bank's adoption of Financial Accounting Standard 115.
<PAGE>
OTHER EXPENSE
Total other expense consists of salaries and employee benefits, occupancy
and equipment expense, FDIC deposit insurance, data processing expense, legal
and professional services, advertising expense and other expenses. Other
expense decreased for the year ended September 30, 1997 by $527,012 or 15.17%
when compared to the year ended September 30, 1996. The primary reason for the
decline relates to the special assessment by the FDIC to capitalize the SAIF
insurance fund which amounted to $493,687 for Citizens Federal and is included
in federal insurance premiums for the year ended September 30, 1996. Other
changes between fiscal year 1996 and 1997 included increases in salaries and
employee benefits and advertising expense of $123,499 and $81,972, respectively
and decreases in professional services of $75,950 and other expenses of $61,745.
The increase in salary expense and advertising expense relate primarily to the
Bank's lending function as additional staff was added to the loan department and
the Bank's advertising was increased in an effort to increase the number and
amount of loans in the Bank's loan portfolio. There were also changes in net
occupancy expense and depreciation and amortization which relate to the Bank's
move to a new main office in October 1996. Net occupancy expense declined by
$136,674 and depreciation expense increased $133,540 between fiscal 1996 and
1997 as the Bank discontinued lease payments on its previous headquarters and
began depreciating the cost of the new main office which is wholly owned and
occupied by Citizens Federal.
LIQUIDITY AND CAPITAL RESOURCES
The holding company's primary source of liquidity is dividends from the
Bank. The Bank's primary sources of liquidity are deposits, loan payments,
maturing investment securities, principal and interest payments on investments,
mortgage-backed securities and CMOs, and advances from the Federal Home Loan
Bank of Atlanta. Management believes it is prudent to maintain an investment
portfolio that not only provides a source of income, but also provides a source
of liquidity through its principal payments and maturities to meet lending
demands and fluctuations in deposit flows. The various sources of liquidity are
utilized to fund withdrawals, new loans and other investments, as well as to pay
expenses of operations. Management believes that the Bank's various sources of
funds are adequate to meet its commitments in the ordinary course of business.
The Bank is required under applicable federal regulations to maintain specified
levels of cash and liquid investments equal to a required percentage of net
withdrawable deposit accounts. The Bank exceeded all regulatory liquidity
requirements during the years ended September 30, 1998 and 1997.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of September 30, 1998, that
the Bank meets all capital adequacy requirements and meets the requirements to
be classified as "well capitalized."
<TABLE>
<CAPTION>
FOR CAPITAL WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998:
Total capital
(to risk weighted assets) $8,272,808 18.25% $3,626,080 8.00% $4,532,600 10.00%
Tier I capital
(to risk weighted assets) $7,900,450 17.43% $1,813,040 4.00% $2,719,560 6.00%
Tier I capital
(to average assets) $7,900,450 8.32% $3,798,280 4.00% $4,747,850 5.00%
</TABLE>
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation. Unlike most industrial companies, virtually all the
assets and liabilities of the thrift institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. Because the Bank's
primary assets are loans and investment securities, which include more fixed
rate, fixed term loans and securities than adjustable rate loans and
investments, changes in interest rates in the economy have a gradual impact on
yield on assets. The Bank's principal liability is deposit accounts, which are
primarily short term in nature and, therefore, adjust rapidly with changes in
the economy. In general, periods of high inflation are accompanied by high
interest rates. When rates move up rapidly, the Bank's cost of funds increases
rapidly while the yield on its assets increases slowly, resulting in a negative
impact on net income. Conversely, during periods of low inflation lower and
more moderate interest rates are normally present, which results in a low cost
of funds and a more favorable impact on net income.
Contingencies and Commitments
The Bank is defending various claims arising out of the conduct of its
business. While the ultimate results of these claims cannot be predicted with
the certainty, in the opinion of management, the ultimate disposition of these
matters will not have a significant effect on the consolidated financial
position of the Company.
Effective October 18, 1996 and July 23, 1998, the Bank entered into
Agreements with the Office of Thrift Supervision (OTS) intended to correct
certain deficiencies, about which the OTS expressed supervisory concern.
Pursuant to the Agreements, the Bank agreed to adopt certain guidelines,
procedures and policies. The Bank also agreed to adopt a business plan covering
such matters as lending activities, operating expenses, operating results and
other matters.
The Bank believes it is in substantial compliance with or will be in
compliance with the terms of the Agreements within the time periods stated
within the agreements. If the Bank were not to comply with the Agreements, the
OTS would have certain enforcement rights, possibly including the right to
commence an action to remove directors and/or officers or to appoint a
conservator or a receiver for the Bank. Although compliance with the Agreements
has not had and is not expected to have a material impact on the operations of
the Bank, there can be no assurance that Agreements will not have an adverse
impact on the Bank's future operations.
Year 2000 Issues
The Bank is a user of computers, computer software and equipment utilizing
embedded microprocessors that are affected by the year 2000 issue. The year
2000 issue exists because many computer systems and application use two digit
date fields to designate a year. As the century date change occurs, date
sensitive systems may recognize the year 2000 as 1900, or not at all. The
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
Citizens Federal Savings Bank has prepared an action plan to evaluate our
computer systems, software products and vendor services for year 2000
compliance. The Bank's plan consists of the following:
PROBLEM AWARENESS - The Bank is aware of the problems that could
potentially arise from year 2000 problems and has analyzed internal systems
as well as services provided by third parties. Educational initiatives
with regard to customer awareness will continue into 1999.
ASSESSMENT PHASE - The Bank has inventoried technology assets and contacted
third party vendors and service providers to assess exposure to year 2000
problems. The Bank's third party data processing arrangement has been
identified as the primary mission critical system for Citizens Federal.
RENOVATION PHASE - Hardware and software which was identified during the
assessment phase as not being year 2000 compliant has been upgraded,
replaced or scheduled for replacement during the early part of 1999. A
third party processor provides the Bank's data processing and one set of
<PAGE>
testing was done between the Bank and the processor during September 1998.
Based on the results from testing which has already been conducted the
mission critical third party data processing system will be ready for year
2000 processing.
VALIDATION - The Bank's internal systems as well as the third party
processor which provides the Bank's primary data processing requirements
have been tested for year 2000 compliance. Additional testing of those
critical applications is scheduled for the early part of 1999. In addition
to the testing conducted by Citizens Federal with the third party
processor, only 100 other users of the system have also conducted tests and
will be doing additional testing for year 2000 readiness. The Bank has
received certifications from other vendors and service providers and will
rely on those where complete testing is not possible.
IMPLEMENTATION Replacement of non-compliant technology at the institution
is essentially complete. Results from additional tests, which are
scheduled for early 1999, will be thoroughly reviewed and remedial actions,
which are determined to be necessary for year 2000 compliance, will be
taken.
During the year ended September 30, 1998 the Bank incurred approximately
$15,000 in capital expenditures to upgrade and replace computer equipment and
approximately $5,000 in operating expenses associated with year 2000 compliance.
Additional expenditures to attain year 2000 readiness are not expected to have a
material financial impact on the Bank.
Information About Forward-Looking Statements
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the Bank
or its business, whether expressed or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described in
the Bank's filings with the Securities and Exchange Commission, including this
Annual Report on Form 10-KSB. If any of these assumptions or opinions prove
incorrect, any forward-looking statements made on the basis of such assumptions
or opinions may also prove materially incorrect in one or more respects.
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
CFS Bancshares, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CFS Bancshares,
Inc. and subsidiaries (the Company) as of September 30, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CFS Bancshares, Inc.
and subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
November 6, 1998
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,392,435 2,963,847
Federal funds sold and overnight deposits 1,924,850 3,521,268
------------ ------------
Total cash and cash equivalents 5,317,285 6,485,115
Interest-earning deposits in other financial institutions 159,515 157,574
Investment securities held to maturity (fair value of
$6,406,439 and $8,826,498, respectively) 6,338,130 8,803,393
Investment securities available for sale, at fair value (cost of
$29,110,859 and $35,872,942, respectively) 29,122,737 35,915,192
Federal Home Loan Bank stock 670,000 460,000
Loans receivable, net 45,413,484 42,572,877
Premises and equipment, net 4,030,996 4,202,944
Real estate acquired by foreclosure, net 59,634 99,494
Accrued interest receivable on investment securities 71,252 63,367
Accrued interest receivable on mortgage-backed securities 217,817 163,779
Accrued interest receivable on loans 352,244 412,654
Other assets 412,948 303,929
------------ ------------
Total assets $ 92,166,042 99,640,318
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest-bearing deposits $ 73,892,189 76,345,726
Advance payments by borrowers for taxes and insurance 300,648 324,174
Other liabilities 719,682 866,479
Employee stock ownership plan debt 145,471 130,941
FHLB advances 9,200,000 9,200,000
Payables for investment securities transactions -- 4,975,130
------------ ------------
Total liabilities 84,257,990 91,842,450
Stockholders' equity:
Serial preferred stock; 300,000 shares authorized;
none outstanding -- --
Common stock of $1 par value; 700,000 shares authorized;
130,000 shares issued and outstanding 130,000 130,000
Additional paid-in capital 1,167,160 1,160,760
Retained earnings-substantially restricted 6,732,461 6,611,011
Unrealized gain on investment securities
available for sale, net of taxes 7,602 27,038
Unearned common stock held by ESOP (129,171) (130,941)
------------ ------------
Total stockholders' equity 7,908,052 7,797,868
------------ ------------
Commitments and contingencies (notes 12 and 13)
------------ ------------
Total liabilities and stockholders' equity $ 92,166,042 99,640,318
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,990,297 3,269,831 2,858,178
Interest and dividend income on
investment securities 478,512 942,405 988,589
Interest income on mortgage-backed securities 1,884,643 1,650,126 1,736,021
Interest income on federal funds sold 112,612 99,006 245,312
Other interest income 76,937 54,181 139,120
----------------- ----------------- -----------------
Total interest income 6,543,001 6,015,549 5,967,220
Interest expense:
Interest on deposits 2,937,155 3,062,187 3,168,919
Interest on FHLB advances 587,644 64,714 --
----------------- ----------------- -----------------
Total interest expense 3,524,799 3,126,901 3,168,919
Net interest income 3,018,202 2,888,648 2,798,301
Provision for loan losses 176,000 -- --
----------------- ----------------- -----------------
Net interest income after provision
for loan losses 2,842,202 2,888,648 2,798,301
Other income:
Service charges on deposit accounts 404,746 432,581 309,433
Gains on sales of investment securities 46,594 140,829 --
Other 38,699 42,801 70,894
----------------- ----------------- -----------------
Total other income 490,039 616,211 380,327
Other expense:
Salaries and employee benefits 1,330,058 1,331,028 1,207,529
Net occupancy expense 128,439 128,943 265,617
Federal insurance premiums 100,106 117,915 696,120
Data processing expenses 226,734 208,221 219,561
Professional services 225,174 133,917 209,867
Depreciation and amortization 277,258 295,374 161,834
Advertising expense 137,931 150,545 68,573
Office supplies 67,759 78,989 74,375
Insurance expense 60,509 60,337 67,060
Other 427,588 441,264 503,009
----------------- ----------------- -----------------
Total other expense 2,981,556 2,946,533 3,473,545
----------------- ----------------- -----------------
Income (loss) before income taxes 350,685 558,326 (294,917)
Income tax expense (benefit) 131,735 200,192 (101,535)
----------------- ----------------- -----------------
Net income (loss) $ 218,950 358,134 (193,382)
================= ================= =================
Basic earnings (loss) per share $ 1.72 2.75 (1.49)
================= ================= =================
Basic weighted average shares outstanding 127,218 130,000 130,000
================= ================= =================
Diluted earnings (loss) per share $ 1.57 2.75 (1.49)
================= ================= =================
Diluted weighted average shares outstanding 139,218 130,000 130,000
================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
RETAINED INVESTMENT EMPLOYEE
ADDITIONAL EARNINGS - SECURITIES STOCK TOTAL
COMMON PAID-IN SUBSTANTIALLY AVAILABLE OWNERSHIP STOCKHOLDERS'
STOCK CAPITAL RESTRICTED FOR SALE PLAN DEBT EQUITY
--------- ---------- ------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1995 $ 130,000 1,160,760 6,641,259 80,640 (261,881) 7,750,778
Net loss -- -- (193,382) -- -- (193,382)
Payment of Employee Stock
Ownership Plan debt -- -- -- -- 65,470 65,470
Change in unrealized loss on
investment securities available
for sale, net -- -- -- (213,081) -- (213,081)
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
--------- ---------- ------------- ----------- ---------- --------------
Balance September 30, 1996 130,000 1,160,760 6,350,377 (132,441) (196,411) 7,312,285
Net income -- -- 358,134 -- -- 358,134
Payment of Employee Stock
Ownership Plan debt -- -- -- -- 65,470 65,470
Change in unrealized gain on
investment securities available
for sale, net -- -- -- 159,479 -- 159,479
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
--------- ---------- ------------- ----------- ---------- --------------
Balance September 30, 1997 130,000 1,160,760 6,611,011 27,038 (130,941) 7,797,868
Net income -- -- 218,950 -- -- 218,950
Change in unrealized gain
on investment securities
available for sale, net -- -- -- (19,436) -- (19,436)
Employee Stock Ownership Plan
shares allocated -- 6,400 -- -- 16,300 22,700
Acquisition of Employee Stock
Ownership Plan shares -- -- -- -- (80,000) (80,000)
Payment of Employee Stock
Ownership Plan debt -- -- -- -- 65,470 65,470
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
--------- ---------- ------------- ------------ ----------- --------------
Balance September 30, 1998 $ 130,000 1,167,160 6,732,461 7,602 (129,171) 7,908,052
========= ========== ============= ============ =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 218,950 358,134 (193,382)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for loan losses 176,000 -- --
Depreciation and amortization 277,258 295,374 161,834
Net amortization of premium and accretion of
discount on investment securities 85,517 11,385 27,423
Net accretion of discount on loans (78,356) (15,376) (2,296)
Compensation expense recognized on ESOP shares
allocation 85,700 -- --
Gains on sale of investment securities available
for sale, net (43,717) (140,829) --
Gain on calls of investment securities
available for sale, net (2,877) -- --
Loss on sale of real estate acquired by foreclosure 4,243 19,001 1,549
Loss on disposal of equipment -- 390 --
Charge-off of investment security held to maturity 25,000 -- --
(Increase) decrease in accrued interest receivable (1,513) (4,619) (37,923)
(Increase) decrease in other assets (98,083) 115,793 (139,834)
(Increase) decrease in refundable income tax -- -- 106,894
Increase (decrease) in other liabilities (146,797) (486,849) 478,379
Increase (decrease) in accrued interest on deposits (24,394) 41,173 (60,155)
---------- ---------- ----------
Net cash provided by operating activities 476,931 193,577 342,489
---------- ---------- ----------
</TABLE>
(Continued)
5
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Net (increase) decrease in interest-earning deposits in
other financial institutions (1,941) 98,117 (3,573)
Proceeds from maturities or calls of
investment securities held to maturity -- 3,000,000 --
Purchases of investment securities held to maturity -- (1,470,643) (3,004,013)
Proceeds from principal collected on mortgage-
backed securities held to maturity 2,418,154 2,701,576 2,624,701
Proceeds from sales of investment securities
available for sale 5,890,772 7,119,866 --
Proceeds from maturities or calls of investment
securities available for sale 5,692,097 3,000,000 2,500,000
Purchases of investment securities available for sale (1,135,691) (6,567,938) (1,037,515)
Purchases of mortgage-backed securities available for sale (16,330,001) (7,911,562) (1,256,849)
Proceeds from principal collected on mortgage-backed
securities available for sale 7,652,962 2,297,985 1,354,427
Purchase of FHLB stock (210,000) -- --
Net change in loans (2,938,251) (12,178,490) (2,110,651)
Purchase of premises and equipment (105,310) (697,741) (2,035,474)
Proceeds from sale of real estate acquired by foreclosure 121,305 121,565 122,591
Improvements to real estate acquired by foreclosure (399) (15,622) --
Purchase of real estate acquired by foreclosure (85,289) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 968,408 (10,502,887) (2,846,356)
Cash flows from financing activities:
Net increase (decrease) in interest-bearing deposits (2,429,143) (488,016) 98,720
Cash dividends (97,500) (97,500) (97,500)
Increase (decrease) in advance payments by borrowers for
taxes and insurance (23,526) 38,849 (134,180)
Net proceeds from FHLB advances -- 9,200,000 --
Repayment of ESOP debt (63,000) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (2,613,169) 8,653,333 (132,960)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,167,830) (1,655,977) (2,636,827)
Cash and cash equivalents at beginning of year 6,485,115 8,141,092 10,777,919
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,317,285 6,485,115 8,141,092
============ ============ ============
Supplemental information on cash payments:
Interest paid $ 3,538,547 3,085,728 3,229,074
Income taxes paid $ 110,000 35,000 96,782
Supplemental information on noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 88,779 95,541 191,430
Real estate sold and financed by the Bank $ 121,305 108,165 --
Securities transferred from held to maturity to
available for sale $ -- -- 25,939,464
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CFS Bancshares, Inc. is a holding company for Citizens Federal Savings Bank
(the Bank) and the Bank's wholly-owned subsidiary, Citizens Service
Corporation - collectively the Company. The holding company was formed June
30, 1998 and all outstanding shares of the Bank were exchanged for shares
of the holding company upon formation. The exchange was recorded as a
pooling of interests whereby the historical basis of the Bank's amounts
were carried over to the holding company. The Bank is a federally chartered
stock savings bank regulated by the Office of Thrift Supervision (OTS) and
certain other federal agencies. The Bank provides a full range of banking
services to customers through its offices in Birmingham and Eutaw, Alabama.
The Bank is subject to competition from other financial institutions in the
market in which it operates. The following is a description of the more
significant accounting and reporting policies which the Company follows in
preparing and presenting its financial statements:
(A) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CFS
Bancshares, Inc. and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
disclosure of contigent assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
One estimate that is particularly susceptible to a significant change
in the near term relates to the determination of the allowance for
loan losses. A significant portion of the Bank's mortgage loans are
secured by real estate in Alabama, primarily in Jefferson County and
the surrounding areas. The ultimate collectibility of the loan
portfolio is susceptible to changes in market conditions in Alabama.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an internal part of their examination process,
periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance
based on their judgments about information available to them at the
time of their examination.
7
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(B) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from financial institutions and
federal funds sold. Generally, federal funds are purchased and sold
for one-day periods.
(C) INVESTMENT SECURITIES
The Bank classifies its investment securities in two categories:
available for sale or held to maturity. Held to maturity securities
are those securities for which the Bank has the ability and intent to
hold the security until maturity. All other securities are classified
as available for sale.
Available for sale securities are recorded at fair value. Held to
maturity securities are recorded at cost adjusted for the amortization
or accretion of premiums and discounts. Unrealized holding gains and
losses, net of the related income tax effects, on securities available
for sale are excluded from earnings and are reported as a separate
component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary
results in a charge to earnings and the establishment of a new cost
basis for the security. At September 30, 1998, the Bank did not have
any securities with other than temporary declines in value for which a
new cost basis had not been established.
Premiums and discounts are amortized or accreted over the life of the
related investment security as an adjustment to yield using the level-
yield method and prepayment assumptions. Dividend and interest income
are recognized when earned. Realized gains and losses for investment
securities sold are included in earnings and are derived using the
specific identification method for determining the cost of the
security sold.
The investment in the stock of the Federal Home Loan Bank is required
of insured institutions that utilize the services of the Federal Home
Loan Bank. The stock has no quoted fair value and no ready market
exists. However, the Federal Home Loan Bank has historically
repurchased the stock at cost. Accordingly, the stock is reported in
the financial statements at cost.
(D) LOANS AND INTEREST INCOME
Loans receivable are stated at their unpaid principal balance less the
undisbursed portion of loans in process, unearned interest income and
an allowance for loan losses. Interest income on loans is recorded
using a simple interest method. It is the general policy of the Bank
to discontinue the accrual of interest when principal or interest
payments are delinquent 90 days or more or the ultimate collection of
either is in doubt. Unearned discount on loans purchased is accreted
to income over the remaining life of the loans purchased using the
level-yield method.
8
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
At September 30, 1998, approximately 18 percent of the Bank's loan
portfolio consists of mortgage loans to churches. The Bank's exposure
to credit loss in the event of nonperformance by the parties to
financial instruments for mortgage loans to churches is represented by
the contractual amounts of these instruments.
(E) ALLOWANCE FOR LOAN LOSSES
Additions to the allowance for loan losses are based on management's
evaluation of the loan portfolio under current economic conditions,
including such factors as the volume and character of loans
outstanding, past loss experience, and such other factors which, in
management's judgment, deserve recognition in estimating loan losses.
Loans are charged to the allowance when, in the opinion of management,
such loans are deemed to be uncollectible. Provisions for loan losses
and recoveries of loans previously charged to the allowance are added
to the allowance.
One of the procedures used by management in establishing the allowance
for loan losses is the evaluation of potential impairment on selected
loans. A loan is considered impaired when, based on current
information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the note
agreement. Impaired loans are measured based on the present value of
expected future cash flows, discounted at the loan's effective
interest rate, or at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. Loans
that are determined to be impaired require a valuation allowance
equivalent to the amount of impairment. Impairment losses are included
in the allowance for loan losses through a charge to the provision for
loan losses. Cash receipts on impaired loans which are accruing
interest are applied to principal and interest under the contractual
terms of the loan agreement. Cash receipts on impaired loans for which
the accrual of interest has been discontinued are applied to reduce
the principal amount of such loans until the principal has been
recovered and are recognized as interest income thereafter.
(F) LOAN FEES
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as a yield
adjustment using a method which approximates the level-yield method.
(G) REAL ESTATE ACQUIRED BY FORECLOSURE
For real estate acquired through foreclosure, a new cost basis is
established at the lower of cost or fair value, adjusted for estimated
costs to sell, at the time of foreclosure. Subsequent to foreclosure,
foreclosed assets are carried at the lower of fair value less
estimated costs to sell or cost, with the difference recorded as a
valuation allowance, on an individual asset basis. Changes in the
valuation allowance are recognized as charges or credits to earnings.
9
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(H) INCOME TAXES
The Company provides for income taxes based upon pretax income,
adjusted for permanent differences between reported and taxable
earnings. 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 those temporary differences are
expected to be realized or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the period
that includes the enactment date.
(I) PREMISES AND EQUIPMENT
Land is stated at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is provided over the estimated
useful lives of the respective assets on primarily the straight-line
method.
(J) NET INCOME PER SHARE
During 1996, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 128, Earnings per Share, ("FAS128").
FAS128 specifies the computation, presentation and disclosure
requirements for earnings per share, replacing the presentation of
primary earnings per share with the presentation of basic earnings per
share. For entities with complex capital structures, the presentation
of fully diluted earnings per share is replaced with diluted earnings
per share. FAS128 is effective for both interim and annual financial
statements issued for periods ending after December 15, 1997. The
Company adopted FAS128 in 1998, and, as required, all periods
presented in the consolidated financial statements have been restated
to reflect the adoption of the statement.
Presented below is a summary of the components used to calculate
diluted earnings per share for the year ended September 30, 1998,
1997, and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
DILUTED EARNINGS PER SHARE:
Weighted average common shares
outstanding 127,218 130,000 130,000
Net effect of the assumed exercise of stock
options-based on the treasury stock method
using average market price for the year 12,000 -- --
------- ------- -------
Total weighted average common shares and
potential common stock outstanding 139,218 130,000 130,000
======= ======= =======
</TABLE>
10
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(K) EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan which is
accounted for in accordance with the American Institute of Certified
Public Accountants' Statement of Position 93-6, Employers' Accounting
for Employee Stock Ownership Plans.
(L) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Financial Accounting Standard No. 130,
Reporting Comprehensive Income, ("FAS130"). This standard establishes
standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements.
FAS130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed in equal prominence with
the other financial statements. The term "comprehensive income" refers
to revenues, expenses, gains, and losses that are included in
comprehensive income but excluded from earnings under current
accounting standards. Currently, "other comprehensive income' for the
Company consists of items recorded in equity under Financial
Accounting Standard No. 115, Accounting for Certain Investments in
Debt and Equity Securities. FAS130 is effective for financial
statements for years beginning after December 15, 1997.
In June 1997, the FASB issued Financial Accounting Standard No. 131,
Disclosures about Segments of an Enterprise and Related Information,
("FAS131"). FAS131 establishes new standards for the disclosures made
by public business enterprises to report information about operating
segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. FAS131 is effective for
financial statements for years beginning after December 15, 1997.
In June 1998, the FASB issued Financial Accounting Standard No. 133,
Accounting for Derivative Instruments and Hedging Activities,
("FAS133"). The standard establishes comprehensive accounting and
reporting standards for derivative instruments and hedging activities.
FAS133 requires that all derivative instruments be recorded in the
statement of financial position at fair value; the accounting for
gains or losses due to changes in fair value of the derivative
instruments depends on whether the derivative instruments qualify as
hedging instruments. If a derivative instrument does not qualify as a
hedge, the gain or loss is reported in earnings when it occurs.
However, if the derivative qualifies as a hedging instrument, the
accounting varies based on the type of risk being hedged, and includes
either recognizing earnings for changes in fair value each reporting
period, or accumulating changes in other comprehensive income and
recognizing earnings during the period that the hedged forecasted item
impacts earnings. FAS133 is effective for financial statements for the
first quarter of fiscal years beginning after June 15, 1999. The
Company has no derivative financial instruments which would be
accounted for at fair value under FAS133.
11
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(2) CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
The Bank is required to maintain certain daily reserve balances in
accordance with the Federal Reserve Board requirements. The Bank exceeded
the required balances of approximately $25,000 at September 30, 1998 and
1997.
(3) INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities held
to maturity at September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
Alabama Minority Enterprise
Small Business Investment
Corporation stock $ -- -- 25,000 25,000
Mortgage-backed securities 4,833,089 4,865,315 6,980,689 7,004,917
Collateralized mortgage obligations 1,505,041 1,541,124 1,797,704 1,796,581
--------- --------- --------- ---------
$ 6,338,130 6,406,439 8,803,393 8,826,498
========= ========= ========= =========
</TABLE>
The amortized cost and approximate fair value of investment securities
available for sale at September 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 2,806,360 2,811,127 11,468,592 11,523,106
Equity securities 2,583,543 2,576,921 2,439,885 2,445,671
Mortgage-backed securities 15,843,419 15,859,592 9,692,496 9,716,660
Collateralized mortgage obligations 7,877,536 7,875,097 12,271,969 12,229,755
---------- ---------- ---------- ----------
$29,110,859 29,122,737 35,872,942 35,915,192
========== ========== ========== ==========
</TABLE>
The gross unrealized gains and losses of investment securities held to
maturity at September 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- -------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 32,514 288 52,530 28,302
Collateralized mortgage obligations 36,083 -- -- 1,123
------- ------ ------ ------
$ 68,597 288 52,530 29,425
======= ====== ====== ======
</TABLE>
12
<PAGE>
CFS BANCSHARS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
The gross unrealized gains and losses of investment securities available for
sale at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 4,767 -- 70,118 15,604
Equity securities -- 6,622 5,786 --
Mortgage-backed securities 62,237 46,064 42,184 18,020
Collateralized mortgage obligations 5,251 7,690 22,786 65,000
------ ------ ------- ----------
$ 72,255 60,376 140,874 98,624
====== ====== ======= ==========
</TABLE>
The amortized cost and approximate fair value of debt investment securities
available for sale at September 30, 1998, by contractual maturities are shown
below. Actual maturities could differ from contractual maturities due to call or
prepayment provisions.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ---------
<S> <C> <C>
Due from one to five years $ 1,806,151 1,808,626
Due from five to ten years 1,000,209 1,002,500
Mortgage-backed securities and collateralized
mortgage obligations 23,720,956 23,734,690
----------- ----------
$26,527,316 26,545,816
=========== ==========
</TABLE>
There were no sales of investment securities available for sale in 1996.
Proceeds from sales of investment securities available for sale were $5,890,772
and $7,119,866 for the years ended September 30, 1998 and 1997, respectively.
Gross gains of $43,717 and $140,829 were realized on those sales for the years
ended September 30, 1998 and 1997, respectively.
In 1998, an investment of $25,000 in a community small business incubator was
written off when the incubator filed for bankruptcy.
Investment securities with amortized cost of $24,590,595 and $29,558,918 at
September 30, 1998 and 1997, respectively, were pledged to secure public
deposits as required by law and for other purposes. Additionally, in accordance
with Office of Thrift Supervision regulations, the Bank is required to maintain
a certain percentage (4 percent at September 30, 1998), of its withdrawable
deposits and current borrowings in cash, U.S. Treasury obligations, or other
approved investments which are readily convertible into cash. The Bank met this
liquidity requirement at September 30, 1998.
13
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
During 1996, the Bank transferred investment securities with an amortized
cost of $25,939,464 from held to maturity to available for sale. The fair
market value of the investment securities on the date of transfer was
$25,924,334 resulting in a decrease in the unrealized gain on investment
securities available for sale of $15,130. The investment securities were
transferred as a result of the reassessment of the appropriateness of the
classification of all securities following the issuance of the FASB Special
Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities.
(4) LOANS
At September 30, 1998 and 1997, the Bank had the following net loans:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Total loans $47,047,687 44,134,410
Less: Unearned discount on loans purchased 2,296 5,750
Unamortized loan origination fees 577,277 564,077
Undisbursed portion of loans in process 500,833 361,283
Allowance for loan losses 553,797 630,423
---------- ----------
1,634,203 1,561,533
---------- ----------
Net loans $45,413,484 42,572,877
========== ==========
</TABLE>
The composition of the total loan portfolio was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Residential real estate mortgage $ 32,775,332 30,542,426
Consumer installment 2,023,944 2,204,929
Nonresidential mortgage 11,558,710 11,066,054
Commercial 689,701 321,001
---------- ----------
Total loans $ 47,047,687 44,134,410
========== ==========
</TABLE>
A summary of the transactions in the allowance for loan losses for the years
ended September 30, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 630,423 638,770 659,734
Net charge-offs:
Gross charge-offs (314,990) (25,056) (59,566)
Gross recoveries 62,364 16,709 38,602
Provision charged to earnings 176,000 -- --
-------- ------- -------
Balance at end of year $ 553,797 630,423 638,770
======== ======= =======
</TABLE>
14
<PAGE>
CFS BANCSHARS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
Impaired loans at September 30, 1998 and 1997 totaled $225,435 and
$427,992, respectively. The allowance amounts, which were $225,435 and
$287,792 in 1998 and 1997, respectively, were primarily determined using
the fair value of the related collateral. The average recorded investment
in impaired loans for the years ended September 30, 1998 and 1997, was
$300,639 and $365,000, respectively. The interest income recognized on
impaired loans for the years ended September 30, 1998, 1997, and 1996 was
approximately $410, $6,041, and $2,445, respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land $ 733,242 733,242
Buildings and leasehold improvements 3,026,861 3,018,361
Furniture, fixtures and equipment 2,029,126 1,938,336
--------- ---------
5,789,229 5,689,939
Less: accumulated depreciation 1,758,233 1,486,995
--------- ---------
$4,030,996 4,202,944
========= =========
</TABLE>
(6) REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure, net, as of September 30, 1998 and 1997
totaled $59,634 and $99,494, respectively. There were no transactions in
the allowance for losses on the real estate acquired by foreclosure in 1998
or 1997.
15
<PAGE>
CFS BANCSHARS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(7) INTEREST-BEARING DEPOSITS
At September 30, 1998 and 1997, the composition of interest-bearing
deposits an applicable interest rates was as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
NOW accounts (1998 - .50%, 1997 - 1.00%) $ 8,000,629 9,435,520
Super NOW accounts (1998 - 2.75%, 1997 - 2.75%) 4,366,743 3,566,811
Passbook savings (1998 - 2.75%, 1997 - 2.75%) 17,539,298 18,615,013
Time deposits:
Certificates of deposit (1998 - 4.63% to 8.50%, 1997 - 4.75% to 8.50%)
Jumbo accounts (1998 - 4.87% to 5.75%, 1997 - 4.65% to 20,321,138 24,160,256
6.00%) 23,534,054 20,413,405
---------- ----------
Total time deposits 43,855,192 44,573,661
Accrued interest on deposits 130,327 154,721
---------- ----------
Total deposits $ 73,892,189 76,345,726
========== ==========
</TABLE>
Weighted average interest rates on deposit accounts were as follows at
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
NOW and demand deposit accounts .50% .88%
Super NOW accounts 2.75% 2.75%
Passbook savings accounts 2.74% 2.75%
Certificates of deposit 5.22% 5.27%
Jumbo accounts 5.15% 5.28%
Total 3.74% 4.01%
</TABLE>
Interest on deposits is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NOW accounts $ 86,957 94,328 92,221
Super NOW accounts 96,667 118,974 135,595
Passbook savings 478,354 486,639 507,602
Time deposits 2,275,177 2,362,246 2,433,501
---------- ---------- ----------
$ 2,937,155 3,062,187 3,168,919
========== ========== ==========
</TABLE>
16
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
The amounts and maturities of time deposits at September 30, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Within one year $ 35,839,486 37,156,692
Within two years 4,858,752 2,898,609
Within three years 966,475 2,844,905
Within four years 1,059,345 237,967
Within five years 861,070 1,173,004
Greater than five years 270,064 262,484
---------- ----------
$ 43,855,192 44,573,661
========== ==========
</TABLE>
(8) BORROWED FUNDS
The Company was liable to the Federal Home Loan Bank of Atlanta on the
following advances at September 30, 1998:
<TABLE>
<CAPTION>
FIXED
MATURITY DATE INTEREST RATE 1998
-------------- ------------- -----------
<S> <C> <C>
September 2002 5.66% $ 5,000,000
June 2008 5.51% 4,200,000
-----------
Total (weighted average rate of 5.60%) $ 9,200,000
===========
</TABLE>
At September 30, 1998, the advances were collateralized by a blanket pledge
of first-mortgage residential loans. The September 2002 advance and the
June 2008 advance are callable in September 1999 and June 2003,
respectively.
(9) INCOME TAXES
For the years ended September 30, 1998, 1997, and 1996, income tax expense
(benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal $ 88,604 (43,520) 161,495
State -- (8,862) 18,063
-------- ------- --------
88,604 (52,382) 179,558
-------- ------- --------
Deferred:
Federal 37,606 220,908 (250,985)
State 5,525 31,666 (30,108)
-------- ------- --------
43,131 252,574 (281,093)
-------- ------- --------
$131,735 200,192 (101,535)
======== ======= ========
</TABLE>
17
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
The income tax expense above represents an effective tax rate of 37.6
percent, 35.9 percent, and 34.4 percent, for 1998, 1997 and 1996,
respectively. The actual income tax expense (benefit) for 1998, 1997 and
1996 differs from the "expected" income tax expense (benefit) for those
years which is computed by applying the U.S. Federal corporate income tax
rate of 34.0 percent for 1998, 1997 and 1996 to income before income taxes
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" income tax (expense) benefit $ 119,233 189,831 (100,272)
State tax, net of federal effect 4,208 15,051 (8,354)
Dividends paid to ESOP (6,824) (7,205) (7,326)
Other, net 15,118 2,515 14,417
------- ------- --------
$ 131,735 200,192 (101,535)
======= ======= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Loans - allowance for loan losses $103,645 84,338
Loans - unearned loan fee income 20,099 31,755
Capital loss carryforward 8,500 --
Nonaccrual interest 46,320 --
Foreclosed property 23,521 --
Accrued legal fees 20,718 --
Prepaid expenses and accruals 7,229 34,312
Other 29,240 31,981
-------- -------
259,272 182,386
-------- -------
Deferred tax liabilities:
FHLB stock 52,128 52,128
Unrealized gain on investment securities available for sale 4,279 15,212
Premises and equipment - differences in depreciation expense 49,231 23,005
Loan basis - book to tax difference 93,704 --
Other 2,741 2,656
-------- -------
202,083 93,001
-------- -------
Net deferred tax asset $ 57,189 89,385
======== =======
</TABLE>
Management believes results of future operations will generate sufficient
taxable income and resulting tax liabilities to realize the deferred tax
asset. There was no valuation allowance at September 30, 1998 or 1997, or
any change in the valuation allowance during the years ended September 30,
1998, 1997 or 1996.
18
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(10) EMPLOYEE BENEFITS PLANS
The Company sponsors an Employee Stock Ownership Plan (ESOP). The ESOP is
available to all employees who have met certain age and service
requirements. Contributions to the plan are determined by the board of
directors, based on a percentage of the total payroll and certain
limitations as to the deductibility for tax purposes. The Company intends
to make contributions to the Plan that, when combined with dividends on
unallocated shares, are sufficient to fund interest and principal payments
on the ESOP debt. The ESOP has borrowed funds on three occasions to
purchase shares of common stock of the Bank for the benefit of the ESOP
participants.
The common stock of the Company acquired by the ESOP is held as collateral
for the loans. As of September 30, 1998, the ESOP holds 30,765 (24 percent)
shares of the Company's outstanding stock, of which 20,440 shares have been
allocated to the participants. The Company makes contributions to the ESOP
which are used to make loan interest and principal payments. Shares are
released and allocated to the participants prorata with the paydowns on the
ESOP debt. All dividends paid on allocated and unallocated shares are used
to reduce interest expense related to the ESOP debt.
The first ESOP loan (1989 loan) is due on demand and is repayable in
monthly installments of interest at 80 percent of the prime rate or $4,912,
$7,307, and $9,632 for the years ended September 30, 1998, 1997, and
1996, respectively, and annual installments of principal in the amount of
$41,275. The interest rate is 6.8 percent at September 30, 1998 and 1997.
The principal outstanding is $41,275 and $82,550 at September 30, 1998 and
1997, respectively.
The second ESOP loan (1995 loan) is repayable in annual installments of
interest at 6.75 percent and annual installments of principal in the amount
of $24,195. The principal outstanding at September 30, 1998 and 1997 is
$24,196 and $48,391, respectively. The principal balance approximates the
fair value of the unearned shares securing the loan (1995 shares) of 559
and 1,119 at September 30, 1998 and 1997, respectively.
The third ESOP loan (1998 loan) is repayable in monthly installments of
interest at the prime rate and annual installments of principal in the
amount of $8,000. The loan originated on March 9, 1998 to purchase 4,005
shares (1998 shares). The principal oustanding at September 30, 1998 was
$80,000 and the fair value of the 4,005 unearned shares was $210,263.
Contributions to fund the installments on the 1989 loan are recorded as
compensation expense. Such contributions approximated $46,000, $49,000 and
$52,000 in 1998, 1997, and 1996, respectively. The fair value of the
committed-to-be-released 1995 and 1998 shares are also reported as
compensation expense. Such shares totaled 760, 560, and 560 for 1998, 1997,
and 1996 respectively. The related compensation expense approximated
$39,000, $22,400, and $23,520 for 1998, 1997, and 1996, respectively.
19
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
The Bank also sponsors a 401(k) retirement plan (401(k)). The 401(k) is a
trusteed, salary reduction plan which is available to all employees who
have completed one year of service and have attained the age of 21. 401(k)
participants may elect to defer a percentage of their compensation each
year up to a certain dollar limit established by law. The Bank's management
may make a discretionary matching contribution equal to a percentage of the
amount of salary reduction 401(k) participants elected to defer. Such
discretionary contributions for the years ended September 30, 1998, 1997,
and 1996 were $24,994, $21,800, and $25,952, respectively. The Bank also
provides major medical and dental coverage funded through pre-tax
withholdings from the participants.
(11) STOCKHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital to risk-weighted assets, and
of Tier I capital to average assets as set forth in the table below.
<TABLE>
<CAPTION>
FOR CAPITAL WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
-------------------------- ------------------------ -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total capital
(to risk weighted assets) $8,272,808 18.2% $3,626,080 8.0% $4,532,600 10.0%
Tier I capital
(to risk weighted assets) $7,900,450 17.4% 1,813,040 4.0% 2,719,560 6.0%
Tier I capital
(to average assets) $7,900,450 8.3% 3,798,286 4.0% 4,747,857 5.0%
</TABLE>
20
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------- ----------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Total capital
(to risk weighted assets) $8,007,691 17.5% $3,655,338 8.0% $4,581,667 10.0%
Tier I capital
(to risk weighted assets) $7,770,829 17.0% 1,832,667 4.0% 2,749,000 6.0%
Tier I capital
(to average assets) $7,770,829 9.0% 3,459,160 4.0% 4,323,950 5.0%
</TABLE>
Savings institutions with more than a "normal" level of interest rate risk
are required to maintain additional total capital. A savings institution
with a greater than normal interest rate risk is required to deduct
specified amounts from total capital, for purposes of determining its
compliance with risk-based capital requirements. The Bank was in compliance
with capital standards at September 30, 1998 and 1997.
Retained earnings at September 30, 1998 and 1997, include approximately
$2,200,000 for which no provision for income tax has been made. This amount
represents allocations of income to bad debt deductions for tax computation
purposes. If, in the future, this portion of retained earnings is used for
any purpose other than to absorb tax bad debt losses, income taxes may be
imposed at the then applicable rates. An additional $1,400,000 of retained
earnings is also restricted at September 30, 1998 and 1997, as a result of
the liquidation account established upon conversion to a stock company. No
dividends may be paid to stockholders if such dividends would reduce the
net worth of the Bank below the amount required by the liquidation account.
(12) CONTINGENT LIABILITIES AND COMMITMENTS
The Company is defending various lawsuits and claims arising out of the
conduct of its business. While the ultimate results of these lawsuits and
claims cannot be predicted with certainty, in the opinion of management,
the ultimate disposition of these matters will not have a significant
effect on the consolidated financial position or results of operations of
the Company.
Effective October 18, 1996 and July 23, 1998, the Bank entered into
Agreements with the Office of Thrift Supervision (OTS) intended to correct
certain deficiencies, about which the OTS expressed supervisory concern.
Pursuant to the Agreements, the Bank agreed to adopt certain guidelines,
procedures and policies. The Bank also agreed to adopt a business plan
covering such matters as lending activities, operating expenses, operating
results and other matters.
21
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
The Company believes it is in substantial compliance with or will be in
compliance with the terms of the Agreements within the time periods stated
within the agreements. If the Bank were not to comply with the Agreements,
the OTS would have certain enforcement rights, possibly including the right
to commence an action to remove directors and/or officers or to appoint a
conservator or a receiver for the Bank. Although compliance with the
agreements has not had and is not expected to have a material impact on the
operations of the Bank, there can be no assurance that the Agreements will
not have an adverse impact on the Bank's future operations.
(13) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Such
instruments involve elements of credit risk in excess of the amounts
recognized in the financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of these instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
The off-balance sheet financial instruments whose contract amounts
represent credit risk as of September 30, 1998, are as follows:
<TABLE>
<S> <C>
Commitments to extend credit $ 1,785,200
Commitments to fund lines of credit 298,449
---------
$ 2,083,649
=========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
(14) OTHER EXPENSE
Components of other expense exceeding 1 percent of total interest and other
income included miscellaneous losses of $116,708 in 1996, consisting
primarily of costs related to bank robberies and settlements of and
provisions for various legal issues. There were no such components
exceeding the 1 percent criteria as stated which are not presented
separately in the 1998 and 1997 consolidated statements of operations.
22
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(15) STOCK OPTION PLAN
In 1991, under the terms of the Bank's incentive stock option plan, the
Bank granted 12,000 common stock options to officers and key employees.
The exercise price for the options is equal to $14 per share. All options
are exercisable through 2001. As of September 30, 1998, no options had
been exercised.
(16) SAVINGS ASSOCIATION INSURANCE FUND SPECIAL ASSESSMENT
On September 30, 1996, the Federal Deposit Insurance Corporation imposed a
special assessment on Savings Association Insurance Fund (SAIF) assessable
deposits of depository institutions to recapitalize the SAIF. The Bank's
assessment of $493,687 was reflected in the statement of operations for the
year ended September 30, 1996.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides fair values of the Bank's financial
instruments at September 30, 1998 and 1997. 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 Bank's entire holdings of a particular financial instrument.
Because no market exists for a portion of the Bank's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. 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. 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 any of the estimates. The
assumptions used in the estimation of the fair value of the Bank's
financial instruments are explained below. Where quoted market prices are
not available, fair values are based on estimates using discounted cash
flow and other valuation techniques. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. The following fair value estimates
cannot be substantiated by comparison to independent markets and should not
be considered representative of the liquidation value of the Bank's
financial instruments, but rather a good-faith estimate of the fair value
of financial instruments held by the Bank.
The following methods and assumptions were used by the Bank in estimating
the fair value of its financial instruments:
Cash and Cash Equivalents and Interest-earning Deposits in Other Banks --
Fair value equals the carrying value of such assets due to their nature.
23
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
Investment Securities and Accrued Interest Receivable -- The fair value of
investments is based on quoted market prices. The carrying amount of related
accrued interest receivable approximates its fair value.
Federal Home Loan Bank Stock -- The Federal Home Loan Bank has historically
repurchased its stock at cost. Therefore, the carrying amount is considered
a reasonable estimate of its fair value.
Loans Receivable -- The fair value of loans is calculated using discounted
cash flows by loan type. The discount rate used to determine the present
value of the loan portfolio is an estimated market discount rate that
reflects the credit and interest rate risk inherent in the loan portfolio.
The estimated maturity is based on the Bank's historical experience with
repayments adjusted to estimate the effect of current market conditions. The
carrying amount of related accrued interest receivable approximates its fair
value.
Deposits -- Fair values for certificates of deposit have been determined
using discounted cash flows. The discount rate used is based on estimated
market rates for deposits of similar remaining maturities. The carrying
amount of all other deposits, due to their short-term nature, approximate
their fair values. The carrying amount of related accrued interest payable
approximates its fair value.
FHLB Advances -- Fair value has been determined using discounted cash flows.
The discount rate used is based on estimated current rates for advances with
similar maturities.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,317,285 5,317,285 6,485,115 6,485,115
Interest-earning deposits in other banks 159,515 159,515 157,574 157,574
Investment securities 35,460,867 35,529,176 44,718,585 44,741,690
Federal Home Loan Bank stock 670,000 670,000 460,000 460,000
Loans receivable, net 45,413,484 46,655,779 42,572,877 43,737,467
Accrued interest receivable 641,313 641,313 639,800 639,800
Financial liabilities:
Deposits, including accrued
interest payable 73,892,189 74,083,190 76,345,726 76,197,065
FHLB advances 9,200,000 9,546,000 9,200,000 9,202,000
</TABLE>
24
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(18) DIVIDENDS FROM SUBSIDIARY
Dividends paid by the subsidiary bank are the primary source of funds
available to the Company for payment of dividends to its stockholders and
for other needs. Applicable federal and state statutes and regulations
impose restrictions on the amounts of dividends that may be declared by the
subsidiary bank. In addition, the subsidiary bank is also required to
maintain minimum amounts of capital to total "risk-weighted" assets, as
defined by banking regulators. Capital adequacy considerations could
further limit the availability of dividends from the subsidiary bank. At
September 30, 1998, the Bank could have declared dividends of approximately
$3,188,000 without prior approval of regulatory authorities. Accordingly,
at September 30, 1998, approximately $4,750,000 of the parents investment
in its subsidiary was restricted from transfer in the form of dividends.
(19) PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information for CFS Bancshares, Inc. (Parent
Company Only) is presented as follows:
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash $ 100,000
Investment in subsidiary Bank 7,938,297
------------
Total assets $ 8,038,297
============
LIABILITIES
Note payable (ESOP debt) $ 145,471
Other liabilities 30,939
------------
Total liabilities 176,410
------------
STOCKHOLDERS' EQUITY
Serial preferred stock --
Common stock 130,000
Additional paid-in capital 1,160,760
Retained earnings 6,708,996
Unrealized gain on investment securities of subsidiary 7,602
Employee Stock Ownership Plan debt (145,471)
------------
Total stockholders' equity 7,861,887
------------
Total liabilities and stockholders' equity $ 8,038,297
============
</TABLE>
25
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM JUNE 30, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Income:
<S> <C>
Cash dividends from Bank $ 100,000
Expense 30,939
----------
Earnings before equity in undistributed
earnings of subsidiary 69,061
Equity in undistributed earnings
of subsidiary 76,675
----------
Net earnings $ 145,736
==========
</TABLE>
26
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM JUNE 30, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings $145,736
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiary (76,675)
Increase in other liabilities 30,939
--------
Net cash provided by
operating activities 100,000
--------
Net increase in cash 100,000
Cash at beginning of year --
--------
Cash at end of year $100,000
========
</TABLE>
27
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
1700 3/rd/ Avenue North
Birmingham, Alabama 35203
(205) 328-2041
BESSEMER OFFICE EUTAW OFFICE
2100 Bessemer Road 213 Main Street
Birmingham, Alabama 35208 Eutaw, Alabama 35462
(205) 214-3000 (205) 372-9307
STOCK TRANSFER AGENT INDEPENDENT AUDITORS
Registrar and Transfer Company KPMG Peat Marwick LLP
10 Commerce Drive Certified Public Accountants
Cranford, New Jersey 07016 Financial Center, Suite 1200
Birmingham, Alabama 35203
ANNUAL MEETING
The Annual Meeting of
CFS Bancshares, Inc. will be held
January 27, 1999 at 2:00 PM
Second Floor Auditorium at
300 North 18 Street
Birmingham, Alabama
SPECIAL LEGAL COUNSEL
Housley, Kantarian & Bronstein, P.C.
1220 19th Street NW, Suite 700
Washington, DC 20036
FORM 10-KSB
A copy of Form 10-KSB, including financial statement schedules as filed with the
Securities and Exchange Commission will be furnished without charge to
stockholders of the record date upon written request to the secretary, CFS
Bancshares, Inc., Post Office Box 10022, Birmingham, Alabama 35202.
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Parent Incorporation Ownership
- ------ ------------- ---------
<S> <C> <C>
CFS Bancshares, Inc. Delaware N/A
Subsidiary (1)
- ----------
Citizens Federal Savings Bank United States 100%
Subsidiaries of Citizens Federal Savings Bank (1)
- ---------------------------------------------
Citizens Service Corporation Alabama 100%
</TABLE>
__________________
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the Annual Report to
Stockholders attached hereto as Exhibit 13.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<MULTIPLIER> 1000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,392,435
<INT-BEARING-DEPOSITS> 159,515
<FED-FUNDS-SOLD> 1,924,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,122,737
<INVESTMENTS-CARRYING> 6,338,130
<INVESTMENTS-MARKET> 6,406,439
<LOANS> 45,413,484
<ALLOWANCE> 553,797
<TOTAL-ASSETS> 92,166,042
<DEPOSITS> 73,892,189
<SHORT-TERM> 145,471
<LIABILITIES-OTHER> 1,020,330
<LONG-TERM> 9,200,000
0
0
<COMMON> 130,000
<OTHER-SE> 7,778,052
<TOTAL-LIABILITIES-AND-EQUITY> 72,166,042
<INTEREST-LOAN> 3,990,297
<INTEREST-INVEST> 2,363,155
<INTEREST-OTHER> 189,549
<INTEREST-TOTAL> 6,543,001
<INTEREST-DEPOSIT> 2,937,155
<INTEREST-EXPENSE> 3,524,799
<INTEREST-INCOME-NET> 3,018,202
<LOAN-LOSSES> 176,000
<SECURITIES-GAINS> 46,594
<EXPENSE-OTHER> 2,981,556
<INCOME-PRETAX> 350,685
<INCOME-PRE-EXTRAORDINARY> 350,685
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,950
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 7.50
<LOANS-NON> 974,474
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 974,474
<ALLOWANCE-OPEN> 630,423
<CHARGE-OFFS> 314,990
<RECOVERIES> 62,364
<ALLOWANCE-CLOSE> 553,797
<ALLOWANCE-DOMESTIC> 225,439
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 328,358
</TABLE>
