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
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________
COMMISSION FILE NUMBER. 0-24625
CFS BANCSHARES, INC.
---------------------------------------
(Name of small business issuer in its charter)
DELAWARE 63-0367958
----------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1700 Third Avenue North, Birmingham, Alabama 35203
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
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: $7,163,329
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 (25 shares
at $18.50 per share during August 2000), was approximately $1,138,582 as of
December 8, 2000. 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 8, 2000, there were issued and outstanding 130,000 shares of the
registrant's common stock, of which 68,455 shares were held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2000. (Parts I and II)
2. Portions of Proxy Statement for the 2001 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 subsidiaries.
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
("OTS"), 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 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
1
<PAGE>
strong in recent years. The Bank has also been active in using excess funds to
purchase mortgage-backed securities during periods of reduced loan demand.
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, 2000, there were approximately three savings
institutions and 19 commercial banks located in its primary market area with
total assets of $146 billion. The Company's assets at September 30, 2000 totaled
$100.6 million.
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 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. 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.
2
<PAGE>
<TABLE>
<CAPTION>
Change in At September 30, 2000
Interest Rate Board Limit -----------------------------
(Basis Points) % Change $ Amount $ Change % Change
-------------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+300 (70) $ 9,622 $ (5,694) (37)%
+200 (50) 11,478 (3,838) (25)
+100 (25) 13,004 (2,312) (15)
0 -- 15,316 -- --
-100 (25) 16,063 747 5
-200 (50) 16,112 796 5
-300 (70) 15,638 322 2
</TABLE>
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 interest rate risk capital component at
September 30, 2000, a risk-based capital deduction of approximately $900,000
would have been required.
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 adjustable-rate mortgage ("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,
2000 and passbook decay rates determined by the Bank from a core deposit
analysis.
3
<PAGE>
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 loans from other lenders.
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 by regulation)
may comprise an additional 10% of unimpaired capital and surplus.
At September 30, 2000, the maximum amount the Bank was permitted to
lend to one borrower was $1,294,743. At that date, the Bank's largest
loan-to-one-borrower was $993,552, which was secured by a non-residential
property located in the Bank's primary market area.
4
<PAGE>
Loan Portfolio Composition. Set forth below is selected data relating to
the composition of the Bank's loan portfolio on the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
2000 1999
---------------------- -------------------------
Amount % Amount %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Type of Loan:
Conventional loans on existing real estate properties.. $ 48,187,825 95.02% 43,392,722 94.53
Loans for other purposes (share loans,
home improvement loans, commercial
loans and consumer loans)............................. 2,525,091 4.98 2,511,484 5.47
------------ ----- ------------ ------
Total loans....................................... $ 50,712,916 100.00% $ 45,904,206 100.00%
============ ====== ============ ======
Type of Security:
Residential:
Single family (1)................................... $ 32,274,026 63.64% $ 29,353,617 63.95%
Other dwelling units................................ 150,528 .30 942,201 2.05
Non-residential (2).................................. 15,763,271 31.08 14,039,105 30.58
Savings accounts..................................... 790,867 1.56 856,566 1.87
Other................................................ 1,734,224 3.42 712,717 1.55
------------ ------ ------------ ------
Total loans....................................... $ 50,712,916 100.00% $ 45,904,206 100.00%
============ ====== ============ ======
<FN>
--------------
(1) Includes construction/permanent loans with a gross balance of $1,206,850
and $1,080,701 and undisbursed loans in process of $145,106 and $830,085 at
September 30, 2000 and 1999, respectively.
(2) Includes construction/permanent loans on church properties with a gross
balance of $1,834,924 and $1,285,000 undisburseed loans in process of
$1,371,277 and $630,908 at September 30, 2000 and 1999, respectively.
</FN>
</TABLE>
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 ARM loans. The
Bank originated $3,066,319 in residential mortgage loans during the year ended
September 30, 2000, all of which were fixed rate loans. The Bank purchased
$393,947 of fixed rate loans and $2,722,167 of adjustable rate mortgages during
the year ended September 30, 2000. Purchased adjustable rate mortgage loans in
the Bank's loan portfolio amounted to 10.76% of the total loan portfolio at
September 30, 2000.
The Bank extends loans on single-family dwellings in an amount up to 90% of
the fair value of the property 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 value of the property 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
5
<PAGE>
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 for non-residential real estate loans includes the
same procedures which are required for other mortgage loans. Total loans
originated by the Bank on nonresidential real estate during the 2000 fiscal year
amounted to $4,984,000, 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,
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 and commercial loan originations totaled $1,110,938 for
the year ended September 30, 2000. As of September 30, 2000, consumer and
commercial loans constituted approximately 4.98% 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
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<PAGE>
of Directors Stokes and Greene, Chief Operating Officer Nalls and Loan Officer
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.
Set forth below is a table showing the Bank's loan originations and
purchase and sales activities for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Loan Originated:
Conventional Real Estate Loans:
Loans on Existing Property................................ $ 1,818,980 $ 694,531
Construction/Permanent.................................... 1,575,000 1,352,701
Loans Refinanced.......................................... 3,545,401 3,855,250
Other Loans................................................ 1,110,938 951,169
------------- -------------
Total Loans Originated...................................... $ 8,050,319 $ 6,853,651
============= =============
Loans Purchased:
Real Estate Loans.......................................... $ 3,116,114 $ --
------------- -------------
Total Loans Purchased....................................... $ 3,116,114 $ --
============= =============
Loans Sold:
Whole Loans................................................. $ -- $ --
------------- -------------
Total Loans Sold............................................ $ -- $ --
============= =============
Other Loan Activity:
Loans Foreclosed Upon....................................... $ 75,998 $ 127,604
------------- -------------
Total Net Loan Activity (exclusive of loan repayments)...... $ 11,090,435 $ 6,726,047
============= =============
</TABLE>
7
<PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 2000 regarding the dollar amount of loans and
mortgage-backed securities maturing (or repricing) in the Bank's portfolio based
on their contractual maturity date.
<TABLE>
<CAPTION>
Due
Due During Through Due After
the Year Ending 5 Years After 5 Years After
September 30, 2001 September 30, 2000 September 30, 2000 Total
------------------ ------------------ ------------------ -------
<S> <C> <C> <C> <C>
Single family residential
mortgage loans.................. $ 2,099,022 $ 7,320,230 $ 23,005,302 $ 32,424,554
Multifamily and nonresidential
mortgage loans.................. 1,051,273 3,814,231 10,897,767 15,763,271
Consumer and commercial loans....... 650,902 1,735,904 138,285 2,525,091
----------- ----------- ------------ -------------
Total.......................... $ 3,801,197 $12,870,365 $ 34,041,354 $ 50,712,916
=========== =========== ============ =============
</TABLE>
The following table sets forth the dollar amount of all loans due after one
year from September 30, 2000 which have predetermined maturities and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates Total
------------- ---------------- -----
<S> <C> <C> <C>
Single family residential mortgage loans......... $ 26,564,549 $ 3,760,983 $ 30,325,532
Multifamily and nonresidential mortgage loans.... 14,529,869 182,129 14,711,998
Consumer and commercial loans.................... 884,189 990,000 1,874,189
------------ ----------- --------------
Total....................................... $ 41,978,607 $ 4,933,112 $ 46,911,719
============ =========== ==============
</TABLE>
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 for 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, 2000 was $113,791. The total
amount of deferred loan fees at September 30, 2000, was $635,214. 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 for the Bank. For more information on the Bank's loan fees and
other fees see Note 4 of the Notes to Financial Statements.
8
<PAGE>
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 is 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 after 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.
9
<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,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Real Estate:
Residential.......................................... $ 928,369 $ 392,085
Non-residential...................................... 349,127 743,741
Consumer and commercial................................. 477,515 255,854
----------- ----------
Total of nonaccrual............................ $ 1,755,011 $1,391,680
=========== ==========
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential.......................................... -- --
Non-residential...................................... -- --
Consumer and commercial................................. -- --
----------- ----------
Total of 90 days past due loans............... $ -- $ --
=========== ==========
Total of non-accrual and 90 days past.........
due loans................................. $ 1,755,011 $1,391,680
=========== ==========
Percentage of total assets................................ 1.75% 1.45%
Other non-performing assets(1)............................ $ 86,237 $ 47,270
=========== ==========
<FN>
-------------------------
(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 its cost basis.
</FN>
</TABLE>
During the year ended September 30, 2000, gross interest income of
approximately $66,594 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, 2000.
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, 2000
totaled $1,755,011, 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, 2000, nonaccruals included 17 real estate loans and
eight consumer loans with individual balances outstanding ranging from $457 to
$269,392.
The Bank has two significant problem loans. The most significant
problem loan is a single family residential loan with a balance of $206,505. The
house was damaged by fire and the Bank is awaiting a settlement from the
insurance company. A second problem loan is one with a 66% Small Business
Administration ("SBA") guarantee and a balance of $153,239 at
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<PAGE>
September 30, 2000. The Bank has recorded loan loss provisions for the amount of
the loan which is not guaranteed by the SBA and is exploring legal and other
remedies for collection.
Other Non-performing Assets. Other non-performing assets at September
30, 2000 are two residential properties acquired through foreclosure with a
carrying value of $48,929 and four repossessed automobiles with a carrying value
of $37,308.
Except as discussed above, at September 30, 2000, there were no loans
that 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, 2000, the Bank had $748,261 in
assets classified as substandard, $0 in assets classified as doubtful and
$54,572 in assets classified as loss.
At September 30, 2000 the Bank's substandard assets consisted of six
loans on residential properties and eight loans on commercial property and
consumer loans with an aggregate balance of $662,164 and balances outstanding
ranging from $420 to $195,888 and real estate owned and repossessed automobiles
of $86,097.
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,
11
<PAGE>
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.
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
estimates of the historical loan loss experience, evaluation of economic
conditions, and periodic reviews of the Bank's loan portfolio. At September 30,
2000, the Bank's reserve for loan losses was $342,156. During the fiscal year
ended September 30, 2000 the Bank made an addition to the provision for loan
losses of $50,000. Also during fiscal 2000, the Bank reduced its loan loss
provision by $154,500 for loans charged off in prior years.
Management believes that the current allowance for loan losses which is
equal to .67% of gross loans and 19.50% 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,
-----------------------------
2000 1999
------------ ----------
<S> <C> <C>
Real Estate:
Balance at Beginning of Period.......................... $ 310,157 $ 553,797
----------- ---------
Loans Charged-Off:
Residential mortgage.................................... 44,573 257,501
Consumer................................................ 39,828 69,089
----------- ---------
Total Charge-Offs......................................... 84,401 326,590
----------- ---------
Total Recoveries (1)...................................... 220,900 37,950
----------- ---------
Net Loans Charged-Off (Recovered)......................... (136,499) 288,640
----------- ---------
Provision for (Recovery of) Loan Losses................... (104,500) 45,000
------------ ---------
Balance at End of Period (Recoveries)..................... $ 342,156 $ 310,157
=========== =========
Ratio of Net Charge-Offs to Average
Loans Outstanding During the Period....................... (.30)% .66%
<FN>
-------------
(1) Includes recoveries on residential mortgages of $180,587 and on consumer
loans of $40,313.
</FN>
</TABLE>
For more information on the Bank's loan loss allowance see Note 4 of
the Notes to Financial Statements.
12
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
2000 1999
---------------------- -----------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------ ------ -----------
<S> <C> <C> <C> <C>
Real estate - mortgage:
Residential........................... $ 121,982 63.94% $ 82,401 63.95%
Non-residential....................... 91,097 31.08 170,078 30.58
Commercial business..................... 48,537 2.38 31,243 1.98
Consumer................................ 80,540 2.60 26,435 3.49
--------- ----- -------- -----
Total allowance for loan losses..... $ 342,156 100.00% $310,157 100.00%
========= ====== ======== ======
</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, 2000,
the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 27.54%.
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, 2000, the Bank had $500,000 and $3,027,879
classified as investment and mortgage-backed securities held to maturity,
respectively, and $8,529,274 and $30,846,887 classified as investment and
mortgage-backed securities available for sale, respectively.
13
<PAGE>
The following table sets forth an analysis of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------
2000(1) 1999(1)
-------------- ---------------
<S> <C> <C>
U.S. Treasury and U.S. Government agencies.................... $ 9,029,274 $ 7,233,203
Mortgage backed securities ................................... 30,816,902 27,592,465
Other securities.............................................. 3,057,864 3,708,398
------------- -------------
$ 42,904,040 $ 38,534,066
============= =============
<FN>
_____________
(1) Includes securities available for sale which had an amortized cost and
approximate fair value of $40,099,815 and $39,376,161, respectively, at
September 30, 2000 and $34,389,879 and $33,604,258, respectively, at
September 30, 1999, and securities held to maturity which had an amortized
cost and approximate market value of $3,527,879 and $3,506,924,
respectively at September 30, 2000 and $4,929,808 and $4,919,789 at
September 30, 1999. Securities available for sale consist of U.S. Treasury
and U.S. Government agency securities, U.S. Government agency mortgage
backed securities (including CMOs) and shares in an adjustable rate mutual
fund.
</FN>
</TABLE>
14
<PAGE>
The following table sets forth the contractual maturities, par values, fair
values and average yields for the Bank's investment securities (excluding
mortgage-backed securities) at September 30, 2000.
<TABLE>
<CAPTION>
At September 30, 2000(1)
----------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
----------------- ------------------- -------------------
Par Average Par Average Par Average
Value Yield Value Yield Value Yield
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations................................ $ 500,000 5.89% $ 3,000,000 5.63% $5,970,000 6.23%
Other investments........................... 3,102,882 6.37 -- -- -- --
----------- ----------- ----------
Total.................................. $ 3,602,882 $ 3,000,000 $5,970,000
=========== =========== ==========
<CAPTION>
At September 30, 2000(1)
------------------------------------------------------
More than Ten Years Total Investment Portfolio
-------------------- ---------------------------
Par Average Par Fair Average
Value Yield Value Value Yield
------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations................................. $ -- -- % $9,470,000 $ 9,025,634 6.02%
Other investments............................ -- -- 3,102,882 3,057,864 6.37
--------- ----------- -----------
Total................................... $ -- $12,572,882 $12,083,498
========= =========== ===========
<FN>
-------------
(1) Includes investment securities available for sale at September 30, 2000
with an amortized cost and fair value of $11,907,546 and $11,587,138,
respectively, and securities held to maturity at September 30, 2000 with an
amortized cost of $500,000 and market value of $496,360. Contractual
maturities of securities available for sale at September 30, 2000 range
from ten months to eight and a half years. Securities available for sale
consist of U.S. Treasury and U.S. Government agency securities and shares
in an adjustable-rate mutual fund.
</FN>
</TABLE>
15
<PAGE>
Maturity of Mortgage-Backed Securities Portfolio. The following table sets
forth certain information at September 30, 2000 regarding the dollar amount (par
value) of mortgage-backed securities maturing (or repricing) in the Bank's
portfolio based on their contractual maturity date.
<TABLE>
<CAPTION>
Due more Due more than Due more than Due more than
Due in one than one year two years to three years five years to
year or less to two years three years to five years ten years
after 9-30-00 after 9-30-00 after 9-30-00 after 9-30-00 after 9-30-00
------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities.......... $ 1,298,716 $ 642,728 $ 687,920 $ 1,524,594 $ 3,513,535
CMOs................................ 435,800 466,682 499,787 1,108,617 2,483,242
----------- ----------- ----------- ------------- ------------
$ 1,734,516 $ 1,109,410 $ 1,187,707 $ 2,633,211 $ 5,996,777
=========== =========== =========== ============= ============
<CAPTION>
Due more than
ten years to Due more than
fifteen years fifteen years
after 9-30-00 after 9-30-00 Total
--------------- --------------- -----------
<S> <C> <C> <C>
Mortgage-backed securities.......... $ 2,634,107 $ 5,677,863 $15,979,463
CMOs................................ 2,844,635 7,193,163 15,031,926
----------- ----------- -----------
$ 5,478,742 $12,871,026 $31,011,389
=========== =========== ===========
</TABLE>
The following table sets forth the dollar amount of all mortgage-backed
securities due after one year from September 30, 2000.
<TABLE>
<CAPTION>
Rate Structure for Mortgage-Backed
Securities Maturing in More Than One Year
-----------------------------------------
Predetermined Floating or
Interest Rate Adjustable Rate
------------- ---------------
<S> <C> <C>
Mortgage-backed securities ..............$ 9,706,071 $ 4,974,676
CMOs..................................... 2,893,745 11,702,381
----------- -----------
$12,599,816 $16,677,057
=========== ===========
</TABLE>
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, 2000 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>
.43% None NOW Accounts $ -- $ 8,755,081 11.47%
2.27 None "Super NOW" Accounts 1,000 4,699,077 6.15
2.49 None Passbook Accounts 5 16,464,242 21.57
5.09 91 Days Certificates 500 18,572,682 24.33
5.93 14 days Jumbo Certificates(1) 100,000 27,585,937 36.14
-- N/A Accrued interest on deposits -- 257,422 .34
------------ ------
TOTAL $ 76,334,441 100.00%
============ ======
<FN>
___________
(1) Includes Time Deposit Open Account
</FN>
</TABLE>
The following table sets forth the savings deposit activities of the
Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
2000 1999
---------------- -------------
<S> <C> <C>
Deposits...................................................... $ 177,448,161 $ 129,937,594
Withdrawals................................................... 175,799,596 131,309,513
------------- -------------
Net (decrease) before interest credited.................. (1,648,565) (1,371,919)
Interest credited............................................. 2,802,683 2,660,053
------------- -------------
Net increase in savings deposits............................ $ 1,154,118 $ 1,288,134
============= =============
</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
September 30, % of Increase September 30, % of
2000 Deposits (Decrease) 1999 Deposits
-------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
NOW checking accounts.................... $ 8,755,081 11.47% $ 369,974 $ 8,385,107 11.15%
Jumbo certificates....................... 27,585,937 36.14 3,131,409 24,454,528 32.53
"Super" NOW checking accounts............ 4,699,077 6.15 (339,070) 5,038,147 6.70
Passbook and regular savings............. 16,464,242 21.57 (991,219) 17,455,461 23.22
Certificates of deposit.................. 18,572,682 24.33 (1,105,623) 19,678,305 26.18
Accrued interest on deposits............. 257,422 .34 88,647 168,775 .22
------------ ------ ------------ ------------ ------
TOTAL.................................... $ 76,334,441 100.00% $ 1,154,118 $ 75,180,323 100.00%
============ ====== ============ ============ ======
</TABLE>
The following table sets forth the time deposits in the Bank classified
by rates as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
3.00 - 4.99%.............................................. $ 7,827,489 $ 33,258,630
5.00 - 6.99%.............................................. 37,609,287 10,469,275
7.00 - 8.99%.............................................. 721,843 397,394
9.00 - 10.99%.............................................. -- 7,534
------------- --------------
TOTAL....................................................... $ 46,158,619 $ 44,132,833
============= ==============
</TABLE>
The following table sets forth the amount and maturities of the Bank's
time deposits at September 30, 2000.
<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%.................. $ 5,711,580 $ 1,476,543 $ 465,300 $ 174,066 $ 7,827,489
5.00 - 6.99%.................. 32,769,569 2,747,710 1,596,820 495,188 37,609,287
7.00 - 8.99%.................. 443,507 156,965 102,370 19,001 721,843
------------- ------------- ------------- ------------- -------------
$ 38,924,656 $ 4,381,218 $ 2,164,490 $ 688,255 $ 46,158,619
============= ============= ============= ============= =============
</TABLE>
18
<PAGE>
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, 2000.
Certificates
Maturity Period of Deposit
--------------- ------------
Three months or less .................................... $17,142,844
Over three through six months ........................... 9,625,945
Over six through 12 months .............................. 317,148
Over 12 months .......................................... 500,000
-----------
Total ............................................. $27,585,937
===========
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, 2000 the Bank secured advances totaling $3.10 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,
2000, Citizens Federal was authorized to invest up to approximately $3.01
million in the stock of or loans to subsidiaries.
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
19
<PAGE>
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.
<TABLE>
<CAPTION>
At Year Ended September 30,
September 30, ------------------------
2000 2000 1999
---- ---- -----
<S> <C> <C> <C>
Weighted-average yield on loans granted during
the period.................................................. 8.69% 8.64% 8.39%
Weighted-average yield on all loans during the
period...................................................... 8.66 8.58 8.70
Weighted-average yield on investment securities
held to maturity during the period........................... 6.08 6.19 6.56
Weighted-average yield on investment securities
available for sale during the period........................ 6.79 6.53 5.70
Weighted average yield on other interest-earning
assets during the period................................... 5.96 5.67 4.75
Weighted-average yield on all interest earnings
assets during the period.................................... 7.75 7.54 7.41
Weighted-average effective rate paid on savings
deposits during the period.................................. 4.11 3.78 3.70
Weighted-average rate on Federal Home Loan
Bank advances............................................... 6.08 5.89 5.68
Weighted-average rate paid on all interest-
bearing liabilities for the period.......................... 4.43 4.06 3.93
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)........................ 3.32 3.48 3.48
Net yield (net interest income as a percentage of
average interest-earning assets)............................ 3.32 3.60 3.56
</TABLE>
20
<PAGE>
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 2000 the spread between yields
earned and rates paid remained the same as the Bank's yield on interest-earning
assets increased by .13% and the rates paid on interest-bearing liabilities
increased by .13%.
Key Operating Ratios
The table below sets forth certain performance ratios of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------
2000 1999
----- ----
<S> <C> <C>
Return on Assets (Net Income Divided by Average Total Assets).......... .52% .42%
Return on Equity (Net Income Divided by Average Equity)................ 6.40 4.95
Equity-to-Assets Ratio (Average Equity Divided by Average
Total Assets)......................................................... 8.11 8.46
Dividend Payout Ratio (Dividends Paid Divided By Net Income)........... 19.53 25.29
</TABLE>
21
<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,
-------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
-------------------------------------- -------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans................................... $ 64,219 $ (129,054) $ (64,835) $ (6,312) $ (9,015) $ (15,327)
Mortgage-backed securities.............. 157,267 104,788 262,055 57,721 (78,479) (20,758)
Investments............................. 121,436 113,024 234,460 (28,924) (137,450) (166,374)
Other................................... 342 20,658 21,000 (53,983) (31,547) (85,530)
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets............. 343,264 109,416 452,680 (31,498) (256,491) (287,989)
----------- ----------- ----------- ----------- ----------- -----------
Interest expense:
Deposits................................. 56,677 51,782 108,459 (71,090) (146,789) (217,879)
FHLB advances............................ 143,766 20,352 164,118 (30,913) (24,467) (55,380)
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities...... 200,443 72,134 272,577 (102,003) (171,256) (273,259)
Net interest income....................... $ 142,831 $ 37,282 $ 180,103 $ 70,505 $ (85,235) $ (14,730)
=========== =========== =========== =========== =========== ===========
<CAPTION>
Year Ended September 30,
---------------------------------------
1998 vs. 1997
-------------------------------------
Increase (Decrease) Due to
-------------------------------------
Volume Rate Total
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Loans................................... $ 812,174 $ (91,708) $ 720,466
Mortgage-backed securities.............. 321,907 (87,390) 234,517
Investments............................. (424,825) (39,068) (463,893)
Other................................... 41,343 (4,981) 36,362
----------- ------------ -----------
Total interest-earning assets............. 750,599 (223,147) 527,452
----------- ------------ -----------
Interest expense:
Deposits................................. (48,249) (76,783) (125,032)
FHLB advances............................ 482,145 40,785 522,930
----------- ----------- -----------
Total interest bearing liabilities...... 433,896 (35,998) 397,898
Net interest income....................... $ 316,703 $ (187,149) $ 129,554
=========== =========== ===========
</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.
22
<PAGE>
Regulation of the Bank
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.
Financial Modernization Legislation. On November 12, 1999, President
Clinton signed legislation which could have a far-reaching impact on the
financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding companies and national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to bank holding
companies are securities and insurance brokerage, securities underwriting,
insurance underwriting and merchant banking. The Federal Reserve Board, in
consultation with the Secretary of the Treasury, may approve additional
financial activities. The G-L-B Act, however, prohibits future acquisitions of
existing unitary savings and loan holding companies, like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary savings and loan holding companies formed after May 4, 2000.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions became
effective in November 2000 with full compliance required by July 1, 2001.
The G-L-B Act contains significant revisions to the FHLB System. The
G-L-B Act imposes new capital requirements on the FHLBs and authorizes them to
issue two classes of stock with differing dividend rates and redemption
requirements. The G-L-B Act deletes the current requirement that the FHLBs
annually contribute $300 million to pay interest on certain government
obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible uses of FHLB advances by community financial institutions (under
$500 million in
23
<PAGE>
assets) to include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the FHLB voluntary for
federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its and the
Bank's operations and competitive environment at this time. Although the G-L-B
Act reduces the range of companies with which the Company may affiliate, it may
facilitate affiliations with companies in the financial services industry.
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 in compliance with this requirement with an
investment in FHLB of Atlanta stock at September 30, 2000 of $747,500.
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 and small businesses, small farms and small agri-businesses. At
September 30, 2000, the Bank had $14.95 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 2000 was 27.54%.
24
<PAGE>
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; and (iii)
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.
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) 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, 2000, the Bank qualified as a QTL.
25
<PAGE>
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 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.
26
<PAGE>
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 4% (3% if the institution is rated Composite 1
under the OTS examination rating system) of adjusted total assets and a
combination of core and "supplementary" capital equal to 8% of "risk-weighted"
assets. In addition, OTS regulations 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. At September 30,
2000, the Bank had no such investments.
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, 2000, the Bank's adjusted total assets for purposes of the core
and tangible capital requirements, were $101.29 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, a portion of the savings association's general loan
and lease loss allowances and up to 45% of unrealized gains on equity
securities. Total core and supplementary capital are reduced by the amount of
capital instruments held by other depository institutions pursuant to reciprocal
arrangements, equity
27
<PAGE>
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, 2000, the Bank had $116,932 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, 2000, the Bank's
risk-weighted assets were approximately $49.99 million.
The table below provides information with respect to the Bank's
compliance with its regulatory capital requirements at September 30, 2000.
<TABLE>
<CAPTION>
Percent
Amount of Assets(1)
------ ------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital.......................................... $ 8,610 8.50%
Tangible capital requirement.............................. 1,519 1.50
----------- -----
Excess................................................. $ 7,091 7.00%
=========== ======
Core capital.............................................. $ 8,610 8.50%
Core capital requirement (2).............................. 3,039 3.00
----------- -----
Excess................................................. $ 5,571 3.50%
=========== ======
Risk-based capital........................................ $ 8,780 17.60%
Risk-based capital requirement............................ 3,997 8.00
----------- -----
Excess................................................. $ 4,783 9.60%
=========== ======
<FN>
____________
(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.
</FN>
</TABLE>
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
28
<PAGE>
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
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, 2000, the Bank exceeded all regulatory minimum capital
requirements.
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless
29
<PAGE>
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 does not submit an
acceptable capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of 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 may 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 provisions. If an institution's ratio
of tangible capital to total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the institution will
be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators,
including the OTS, generally measure an institution's capital adequacy on the
basis of its 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). The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
<FN>
-----------
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>
30
<PAGE>
A "critically undercapitalized" savings institution is defined as an
institution that has a ratio of "tangible equity" to total assets of less than
2.0%. Tangible equity is defined as core capital plus cumulative perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The FDIC
may reclassify a well capitalized savings 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 FDIC determines, after notice
and an opportunity for a hearing, that the savings 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.
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.
31
<PAGE>
The SAIF deposit insurance assessment rate set by the FDIC is 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 paid assessments 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, BIF members
were assessed for these obligations at the rate of 1.3 basis points. After
December 31, 1999, both BIF and SAIF members are assessed at the same rate for
FICO payments.
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.
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 $44.3 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, 2000, 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
32
<PAGE>
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.
Savings institutions must submit notice to the OTS prior to making a
capital distribution if (a) they would not be well-capitalized after the
distribution, (b) the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its regulatory
capital, or (c) the institution is a subsidiary of a holding company. A savings
institution must make application to the OTS to pay a capital distribution if
(x) the institution would not be adequately capitalized following the
distribution, (y) the institution's total distributions for the calendar year
exceeds the institution's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or (z) the distribution
would otherwise violate applicable law or regulation or an agreement with or
condition imposed by the OTS.
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
33
<PAGE>
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 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
34
<PAGE>
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 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
35
<PAGE>
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 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 1999 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
36
<PAGE>
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 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
37
<PAGE>
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).
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 ss.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.
38
<PAGE>
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 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, 2000, the
Bank's bad debt reserve subject to recapture over a six-year period totaled
approximately $69,000.
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
39
<PAGE>
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, 1992. 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.
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
40
<PAGE>
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, 2000, the Bank had 31 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.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
W. Kent McGriff is 43 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 35 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 $3,204,138 at September
30, 2000.
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, 2000 was $169,804.
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, 2000 was $270,894.
As of September 30, 2000, the net book value of the Bank's investment
in the premises, furniture and equipment owned by the Bank was $3,644,836.
Citizens Federal utilizes the services of Fiserv in connection with its
record-keeping and accounting functions.
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<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, 2000.
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, 2000 ("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.
42
<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.
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<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 2000 Annual Report, listed below, are
incorporated herein by reference.
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 and 1999
Consolidated Statements of Operations for Each of the Years in
the Three-Year Period Ended September 30, 2000
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for Each of the Years in the Three-Year Period
Ended September 30, 2000
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended September 30, 2000
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 Citizens Federal Savings Bank Stock Option Plan *
Exhibit 10.2 Employment Contract of President Bunny Stokes, Jr. *
Exhibit 13 2000 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 27 Financial Data Schedule
[FN]
------------
o Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1998.
</FN>
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(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 29, 2000 By:/s/ Bunny Stokes
----------------------------------
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 29, 2000
---------------------------------------------
Bunny Stokes, Jr.
Principal Executive Officer and Director
By: /s/ W. Kent McGriff Date: December 29, 2000
---------------------------------------------
W. Kent McGriff
Principal Financial and Accounting Officer
By: /s/ Rev. John T. Porter Date: December 29, 2000
---------------------------------------------
Rev. John T. Porter, Director
By: /s/ Odessa Woolfolk Date: December 29, 2000
---------------------------------------------
Odessa Woolfolk, Director
By: /s/ James W. Coleman Date: December 29, 2000
---------------------------------------------
James W. Coleman, Director
46
