SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No: 0-14535
December 31, 1997
Citizens Bancshares Corporation
(Name of small business issuer in its charter)
Georgia 58-1631302
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
175 John Wesley Dobbs Avenue., N.E., Atlanta, Georgia 30303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 659-5959
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(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 issuer 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 in this form, and no disclosure will
be contained, to the best of the 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: $13,716,967
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $7,482,890 as of March 1, 1998. Because
there is no established public trading market for the registrant's Common
Stock, the aggregate market value of the voting stock held by
nonaffiliates of the registrant is based upon the most recent trades of
the voting stock of which the registrant is aware.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 2,164,065
shares of Common Stock, $1.00 par value, outstanding on March 1, 1998.
Transitional Small Business Issuer Format: Yes No X
Documents incorporated by reference: None
PART I
ITEM 1. BUSINESS
General
Citizens Bancshares Corporation (the "Company") was
organized as a business corporation under the laws of Georgia
in 1972 and is registered under the Federal Bank Holding
Company Act of 1956. The Company's principal asset is its
wholly-owned subsidiary, Citizens Trust Bank (the "Bank"),
which was organized as a banking corporation under the laws of
Georgia in 1921 and is a member of the Federal Reserve System.
All of the business of the Company is conducted by the
Bank. The Bank operates a full service banking business in
areas of metropolitan Atlanta, Georgia, providing such
customary banking services as consumer and commercial checking
accounts, negotiable order of withdrawal (NOW) accounts,
savings accounts, various types of time deposits, safe deposit
facilities and money transfers. It finances commercial and
consumer transactions, makes secured and unsecured loans and
provides other financial services. The Bank conducts limited
trust activities, which primarily include serving as trustee
for bond issues for two colleges and for local governments.
The City of Atlanta is located in a Metropolitan
Statistical Area ("MSA") which encompasses 18 counties with an
area of 5,147 square miles and a population of 2,853,511. The
central eight metro Atlanta counties (Clayton, Cobb, DeKalb,
Douglas, Fulton, Gwinnett, Henry and Rockdale), as defined by
the Atlanta Regional Commission, had a combined population as
of April 1, 1990 of 2,146,000. The Company's and the Bank's
primary market within the Atlanta MSA is Fulton and DeKalb
Counties which had a combined population as of April 1, 1990
of 1,020,597. As of April, 1993, the Atlanta MSA ranked
nationally ninth in population, first in number of residential
units authorized, eight in retail sales, and tenth in net
effective buying income. Average income per household in 1993
was $47,557.
Deposits. The Bank offers a full range of depository
accounts which include: interest checking accounts for non-profit and
individual customers; noninterest-bearing checking
accounts for commercial and individual customers; money market
accounts which pay variable interest rates; statement savings
accounts; individual retirement accounts; and fixed-rate,
fixed-term time deposits. At December 31, 1997, noninterest
bearing accounts represented approximately 29.5% of the Bank's
total deposits.
Loans. The Bank's lending activities include real
estate, consumer, and commercial loans to individuals, firms,
and corporations on a secured and unsecured basis. The real
estate portfolio includes traditional first mortgage loans to
individuals on single-family homes, loans secured by farmland
and construction loans. Its consumer loan portfolio includes
installment loans to individuals for personal, family and
household purposes, including loans for automobiles, home
improvements and investments. The Bank's commercial lending
is directed principally toward businesses located within its
trade area with a demand for funds that falls within the
Bank's legal lending limit. At December 31, 1997, commercial,
financial and agricultural loans and consumer loans
represented approximately 19.7% and 22.4%, respectively, of
the Bank's total loan portfolio, and real estate mortgage and
construction loans represented approximately 57.9% of the
Bank's total loan portfolio.
Credit decisions are based upon determination of the
borrower's ability and willingness to repay the loans, which
in turn are impacted by such factors as an individual
borrower's income, employment stability, previous credit
history and collateral for the loan. For commercial
customers, credit decisions are based upon the borrower's cash
flow, sales trends, inventory levels and relevant economic
conditions. Risks associated with loans can be significant
and include, but are not limited to, fraud, bankruptcy,
economic downturn, deteriorated or non-existing collateral and
changes in interest rates.
Minority Control. A majority of the outstanding shares
of the Company's Common Stock is held by minority individuals.
The Company thus views itself as having a social obligation to
help members of the minority community. Accordingly, a
majority of the Bank's customers are from the minority
communities.
Asset/Liability Management. At December 31, 1997, the
Bank's ratio of loans to deposits was 74%. Liquidity needs
are met primarily through the sale of federal funds and the
maturing of loans and short term securities. Maturities in
the Bank's loan portfolio are monitored monthly to avoid
matching short-term deposits with long-term loans. Other
assets and liabilities are also carefully controlled in an
effort to balance liquidity, asset quality and income.
Correspondent Banks. At December 31, 1997, the Bank had
correspondent relationships with five commercial banks in
Georgia and two commercial banks in other states. NationsBank
in Atlanta, Georgia is the Bank's principal correspondent
bank. The Bank's correspondent banks provide certain services
for the Bank such as processing checks and other items, buying
federal funds, handling money transfers and exchanges,
providing safekeeping of securities or other valuable items,
and furnishing limited management information and advice. As
compensation for these services, the Bank maintains certain
balances with its correspondents in noninterest-bearing
accounts.
Employees
On December 31, 1997, the Company and the Bank had full
time equivalent employees of 125. See Note 8, Employee
Benefits, of the "Notes to Consolidated Financial Statements".
Neither the Company nor the Bank is a party to any collective
bargaining agreement and the Company believes that its
employee relations are satisfactory.
Monetary Policies
The results of operations of the Bank, and therefore of
the Company, are affected by monetary policies of regulatory
authorities, particularly the Board of Governors of the
Federal Reserve System (the "Board of Governors"). The
instruments of monetary policy employed by the Board of
Governors include open market operations in U.S. Government
securities, changes in the discount rate on bank borrowings
and changes in reserve requirements against bank deposits. In
view of changing conditions in the national economy and in the
money markets and the unknown effect of action by monetary and
fiscal authorities, including the Federal Reserve System, no
prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand, or the business
and earnings of the Company and the Bank.
Competition
The banking business is highly competitive. The Bank
competes with other financial service organizations, including
other banks, savings and loan associations, finance companies,
insurance companies, credit unions and certain governmental
agencies. Many of these institutions have greater resources
than are available to the Bank. To the extent that banks must
maintain noninterest-earning reserves against deposits, they
may be at a competitive disadvantage when compared with other
financial service organizations that are not required to
maintain reserves against substantially equivalent sources of
funds. Further, deregulation of banks, savings and loan
associations and other financial institutions and the
increased competition from investment bankers and brokers and
other financial service organizations may have a significant
impact on the competitive environment in which the Bank
operates.
Supervision and Regulation
The following discussion sets forth the material elements of
the regulatory framework applicable to banks and bank holding companies
and provides certain specific information related to the Company.
General. The Company is a bank holding company registered with
the Board of Governors of the Federal Reserve System (the "Federal Reserve")
under the Bank Holding Company Act of 1956, as amended (the "BHC Act").
As such, the Company and, if applicable, its non-bank subsidiaries are subject
to the supervision, examination, and reporting requirements of the BHC Act
and the regulations of the Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (a) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or
control more than 5% of the voting shares of the bank; (b) it or any of
its subsidiaries, other than a bank, may acquire all or substantially all of
the assets of any bank; or it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of
which may be substantially to lessen competition or to tend to create a
monopoly in any section of the country, or that in any other manner
would be in restraint of trade, unless the anticompetitive effects of the
proposed transaction are clearly outweighed by the public interest in meeting
the convenience and needs of the community to be served. The Federal
Reserve is also required to consider the financial and managerial
resources and future prospects of the bank holding companies and banks
concerned and the convenience and needs of the community to be served.
Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of
banks by bank holding companies, such that the Company, and
any other bank holding company located in Georgia may now acquire a bank
located in any other state, and any bank holding company located outside
Georgia may lawfully acquire any Georgia-based bank, regardless of state
law to the contrary, in either case subject to certain deposit-percentage,
aging requirements, and other restrictions. The Interstate Banking Act
also generally provides that, as of June 1, 1997, national and
state-chartered banks may branch interstate through acquisitions of banks in
other states. By adopting legislation prior to that date, a state had the
ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether.
Additionally, on January 26, 1996, the Georgia General Assembly adopted
the Georgia Interstate Branching Act which permits Georgia-based banks and
bank holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge any lawfully acquired bank into an interstate branch
network. The Georgia Interstate Branching Act also allows banks to
establish de novo branches on a limited basis as of July 1, 1996.
Beginning July 1, 1998, the number of de novo branches that may be
established will no longer be limited.
The BHC Act generally prohibits the Company from engaging in
activities other than banking or managing or controlling banks or other
permissible subsidiaries and from acquiring or retaining direct or
indirect control of any company engaged in any activities
other than those activities determined by the Federal Reserve to be so
closely related to banking or managing or controlling banks as to be a
proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance
of such an activity reasonably can be expected to produce benefits to the
public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. For example, factoring accounts
receivable, acquiring or servicing loans, leasing personal property,
conducting discount securities brokerage activities, performing
certain data processing services, acting as agent or broker in selling
credit life insurance and certain other types of insurance in connection
with credit transactions, and performing certain insurance underwriting
activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. The BHC Act does not place
territorial limitations on permissible non-banking activities of bank
holding companies. Despite prior approval, the Federal Reserve has the
power to order a holding company or its subsidiaries to terminate any
activity or to terminate its ownership or control of any subsidiary when it
has reasonable cause to believe that continuation of such activity or such
ownership or control constitutes a serious risk to the financial safety,
soundness, or stability of any bank subsidiary of that bank holding company.
The bank subsidiary of the Company is a member of the Federal Deposit
Insurance Corporation (the "FDIC"), and as such, its deposits are insured by
the FDIC to the maximum extent provided by law. Such subsidiary is also
subject to numerous state and federal statutes and regulations that affect
its business, activities, and operations, and it is supervised and examined
by one or more state or federal bank regulatory agencies.
The FDIC and the Georgia Department of Banking and Finance (the "Georgia
Department") regularly examine the operations of the Bank and is given
authority to approve or disapprove mergers, consolidations, the
establishment of branches, and similar corporate actions. The FDIC and
the Georgia Department also have the power to prevent the continuance or
development of unsafe or unsound banking practices or other violations
of law.
Payment of Dividends. The Company is a legal entity separate and
distinct from its banking subsidiary. The principal sources of cash flow
of the Company, including cash flow to pay dividends to its shareholders,
are dividends by the Bank. There are statutory and regulatory limitations
on the payment of dividends by the Bank to the Company as well as by the
Company to its shareholders.
If, in the opinion of the federal banking regulator, a depository
institution under its jurisdiction is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial
condition of the depository institution, could include the payment of
dividends), such authority may require, after notice and hearing, that such
institution cease and desist from such practice. The federal banking
agencies have indicated that paying dividends that deplete a depository
institution's capital base to an inadequate level would be an unsafe and
unsound banking practice. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), a depository institution may not pay
any dividend if payment would cause it to become undercapitalized
or if it already is undercapitalized. See "-- Prompt Corrective Action."
Moreover, the federal agencies have issued policy statements that provide
that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
The payment of dividends by the Company and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
Capital Adequacy. The Company and the Bank are required to comply with
the capital adequacy standards established by the Federal Reserve and the
appropriate federal banking regulator in the case of Bank. There are two
basic measures of capital adequacy for bank holding companies that have
been promulgated by the Federal Reserve: a risk-based measure and a
leverage measure. All applicable capital standards must be
satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and
bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and
off-balance-sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as
a percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital
Ratio") of total capital ("Total Capital") to risk-weighted assets
(including certain off-balance-sheet items, such as standby letters of
credit) is 8%. At least half of Total Capital must comprise common stock,
minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less goodwill and certain other
intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock, and a limited amount
of loan loss reserves ("Tier 2 Capital"). At December 31, 1997, the Company's
consolidated Total Risk-Based Capital Ratio and its Tier 1 Risk-Based Capital
Ratio (i.e., the ratio of Tier 1 Capital to risk-weighted assets) were 12%
and 11%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a
minimum ratio (the "Leverage Ratio") of Tier 1 Capital to average assets,
less goodwill and certain other intangible assets, of 3% for bank holding
companies that meet certain specified criteria, including having the
highest regulatory rating. All other bank holding companies generally are
required to maintain a Leverage Ratio of at least 3%, plus an additional
cushion of 100 to 200 basis points. The Company's Leverage Ratio at December
31, 1997 was 7%. The guidelines also provide that bank holding companies
experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and
other indicia of capital strength in evaluating proposals for expansion or
new activities.
The Bank is subject to risk-based and leverage capital requirements
adopted by the FDIC, which are substantially similar to those adopted by
the Federal Reserve for bank holding companies.
The Bank was in compliance with applicable minimum capital
requirements as of December 31, 1997. The Company has not been advised
by any federal banking agency of any specific minimum capital ratio
requirement applicable to it or its subsidiary depository institution.
Failure to meet capital guidelines could subject a bank to a variety
of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking
of brokered deposits, and certain other restrictions on its business.
As described below, substantial additional restrictions can be imposed
upon FDIC-insured depository institutions that fail to meet applicable capital
requirements. See "-- Prompt Corrective Action."
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the Federal Reserve and the FDIC have, pursuant
to FDICIA, recently adopted final regulations, which will become mandatory
on January 1, 1998, requiring regulators to consider interest rate risk
(when the interest rate sensitivity of an institution's assets does
not match the sensitivity of its liabilities or its off-balance-sheet
position) in the evaluation of a bank's capital adequacy. The bank
regulatory agencies' methodology for evaluating interest rate risk
requires banks with excessive interest rate risk exposure to hold
additional amounts of capital against such exposures. The market risk
rules apply to any bank or bank holding company whose trading activity
equals 10% or more of its total assets, or whose trading activity equals
$1 billion or more.
Support of Subsidiary Institutions. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength for, and to
commit resources to support, each of its banking subsidiaries. This
support may be required at times when, absent such Federal Reserve
policy, the Company may not be inclined to provide it. In addition, any
capital loans by a bank holding company to any of its banking subsidiaries
are subordinate in right of payment to deposits and to certain other
indebtedness of such banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a banking subsidiary will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC after August 9, 1989,
in connection with (a) the default of a commonly controlled
FDIC-insured depository institution or (b) any assistance provided by the FDIC
to any commonly controlled FDIC-insured depository institution "in danger
of default." "Default" is defined generally as the appointment of a
conservator or receiver, and "in danger of default" is defined
generally as the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance. The FDIC's claim
for damages is superior to claims of shareholders of the insured depository
institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution. The
subsidiary depository institutions of the Company are subject to these
cross-guarantee provisions. As a result, any loss suffered by the
FDIC in respect of these subsidiaries would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against
the depository institution's banking affiliates, and a potential loss of
the Company's investment in such other subsidiary depository institutions.
Prompt Corrective Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, which became effective in December 1992, the federal
banking regulators are required to establish five capital categories (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized) and to take certain
mandatory supervisory actions, and are authorized to take other discretionary
actions, with respect to institutions in the three undercapitalized
categories, the severity of which will depend upon the capital category in
which the institution is placed. Generally, subject to a narrow exception,
FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized.
The federal banking agencies have specified by regulation the relevant
capital level for each category.
The capital levels established for each of the categories are as follows:
Total
Risk-Based Tier 1 Risk-
Capital Category Tier 1 Capital Capital Based Capital Other
Well Capitalized 5% or more 10% or more 6% or more Not subject
to a capital
directive
Adequately
Capitalized 4% or more 8% or more 4% or more --
Undercapitalized less than 4% less than 8% less than 4% --
Significantly
Undercapitalized less than 3% less than 6% less than 3% --
Critically 2% or less
Undercapitalized tangible equity -- -- --
For purposes of the regulation, the term "tangible equity" includes core
capital elements counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets
with certain exceptions. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking
agency. Under FDICIA, a bank holding company must guarantee that a
subsidiary depository institution meets its capital restoration plan, subject
to certain limitations. The obligation of a controlling holding company under
FDICIA to fund a capital restoration plan is limited to the lesser of 5% of an
undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. An undercapitalized institution is also
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or
with the approval of the FDIC. In addition, the appropriate federal
banking agency is given authority with respect to any undercapitalized
depository institution to take any of the actions it is required to or
may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
At December 31, 1997, the Bank had the requisite capital levels to
qualify as well capitalized.
FDIC Insurance Assessments. Pursuant to FDICIA, the FDIC adopted a
risk-based assessment system for insured depository institutions that takes
into account the risks attributable to different categories and
concentrations of assets and liabilities. The system assigns an
institution to one of three capital categories: (a) well capitalized;
(b) adequately capitalized; and undercapitalized. These three categories
are substantially similar to the prompt corrective action categories
described above, with the "undercapitalized" category including
institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective
action purposes. An institution is also assigned by the FDIC to one of
three supervisory subgroups within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal
regulator and information which the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by
the institution's state supervisor). An institution's insurance assessment
rate is then determined based on the capital category and supervisory
category to which it is assigned. Under the risk-based assessment system,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. Assessment rates for members of both the Bank Insurance Fund
("BIF") and the Savings Association Insurance Fund ("SAIF") for the first
half of 1995 ranged from 23 basis points (0.23% of deposits) for an
institution in the highest category (i.e., "well capitalized" and "healthy")
to 31 basis points (0.31% of deposits) for an institution in the lowest
category (i.e., "undercapitalized" and "substantial supervisory concern").
These rates were established for both funds to achieve a designated ratio
of reserves to insured deposits (i.e., 1.25%) within a specified period
of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so
that, beginning in 1996, the deposit insurance premiums for 92% of all BIF
members in the highest capital and supervisory categories were set at $2,000
per year, regardless of deposit size. The FDIC elected to retain the
existing assessment rate range of 23 to 31 basis points for SAIF
members for the foreseeable future given the undercapitalized nature of
that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates had
adverse consequences for SAIF-insured institutions and other banks with
SAIF assessed deposits, including reduced earnings and an impaired ability
to raise funds in capital markets and to attract deposits, the Deposit
Insurance Funds Act of 1996 (the "Funds Act") was enacted by Congress as
part of the omnibus budget legislation and signed into law on September 30,
1996. As directed by the Funds Act, the FDIC implemented a
special one-time assessment of approximately 65.7 basis points (0.657%) on a
depository institution's SAIF-insured deposits held as of March 31, 1995
(or approximately 52.6 basis points on SAIF deposits acquired by banks in
certain qualifying transactions).
In addition, the FDIC has implemented a revision in the SAIF assessment
rate schedule that effected, as of October 1, 1996 (a) a widening in the
assessment rate spread among institutions in the different capital and risk
assessment categories, (b) an overall reduction of the assessment rate
range assessable on SAIF deposits of from 0 to 27 basis points, and
a special interim assessment rate range for the last quarter of 1996 of
from 18 to 27 basis points on institutions subject to Financing Corporation
("FICO") assessments. Effective January 1, 1997, assessments to help pay off
the $780 million in annual interest payments on the $8 billion FICO bonds
issued in the late 1980s as part of the government rescue of the thrift
industry were imposed on both BIF- and SAIF-insured deposits in
annual amounts presently estimated at 1.29 basis points and 6.44 basis
points, respectively. Beginning in January 2000, BIF- and SAIF- insured
institutions will share the FICO interest costs at equal rates currently
estimated 2.43 basis points.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Proposed Legislation and Regulatory Action. New regulations and
statutes are regularly proposed that contain wide-ranging proposals for
altering the structures, regulations and competitive relationships of the
nation's financial institutions. It cannot be predicted whether or what
form any proposed regulation or statute will be adopted or the extent to
which the business of the Company may be affected by such regulation
or statute.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Selected Statistical Information
The following tables set forth certain selected statistical information
and should be read in conjunction with the consolidated financial
statements and related notes and "Management's Discussion and Analysis or
Plan of Operation" appearing in other sections of this Annual Report.
Averages referred to in the following statistical information are
generally average daily balances.
AVERAGE BALANCE SHEETS, INTEREST
RATES, AND INTEREST DIFFERENTIAL
Condensed consolidated average balance sheets for the years indicated are
presented below.
Years ended December 31,
1997 1996
(amounts in thousands)
ASSETS:
Cash and due from banks $ 8,535 10,171
Interest-earning assets:
Loans,net(a) 80,868 73,576
Taxable investment Securities 32,006 43,120
Tax-exempt investment securities 1,479 958
Federal funds sold 3,718 8,188
Total interest-earning assets 118,071 125,842
Premises and equipment, net 3,050 2,866
Other Assets 4,611 2,422
TOTAL ASSETS $ 134,267 141,301
LIABILITIES AND SHAREHOLDER EQUITY
Noninterest-bearing deposits $ 36,433 42,348
Interest-bearing liabilities:
Savings and interest-bearing demand
deposits 42,617 49,593
Time deposits 43,042 36,818
Other borrowed funds 1,099 1,508
Total interest-bearing liabilities 86,758 87,919
Accrued expenses and other liabilities 1,137 1,217
Total liabilities 124,328 131,484
Shareholders' equity:
Common stock 1,330 1,330
Additional paid-in capital 1,470 1,470
Retained earnings 7,139 7,017
Total shareholders' equity 9,939 9,817
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $134,267 141,301
(a)Average loans are shown net of unearned income and the allowance for
possible loan losses. Nonperforming loans are also included.
Years ended December 31,
1997 1996
(amounts in thousands,except ratios)
Total interest-earning assets $ 118,071 125,842
Total interest-bearing liabilities 86,758 87,919
Excess of interest-earning assets over
Interest-bearing liabilities $ 31,313 37,923
INTEREST EARNED ON:
Loans, net(b) $ 7,503 7,048
Taxable investment Securities 2,085 2,806
Tax-exempt investment securities(a) 138 114
Federal funds sold 210 428
Total interest income 9,936 10,396
INTEREST PAID ON:
Savings and interest-bearing demand deposits 869 1,130
Time deposits 2,142 1,860
Other borrowed funds 78 95
Total interest expense 3,089 3,085
NET INTEREST EARNED $ 6,847 7,311
AVERAGE YIELD EARNED ON:
Loans, net 9.28 % 9.58%
Taxable investment securities 6.51 6.51
Tax-exempt investment securities(a) 9.33 11.90
Federal funds sold 5.65 5.23
TOTAL INTEREST-EARNING ASSETS 8.42 8.26
AVERAGE RATE PAID ON:
Savings and interest-bearing
demand deposits 2.04 2.28
Time deposits 4.98 5.05
Other borrowed funds 7.10 6.30
TOTAL INTEREST-BEARING LIABILITIES 3.56 3.51
INTEREST RATE DIFFERENTIAL 4.86 4.75
NET INTEREST MARGIN 5.80 5.81
(a) Reflects taxable equivalent adjustments using a tax rate of 34% to adjust
interest on tax-exempt investment securities to a fully taxable basis,
including the impact of the disallowed interest expense related to carrying
such tax-exempt securities.
(b) Included in interest earned on loans are fees of approximately $232,000
in 1997 and $221,000 in 1996.
The following table sets forth, for the year ended December 31, 1997, a
summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates:
<TABLE>
<CAPTION>
Increase Due to changes in (a)
1997 1996 (decrease) Volume Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans, net $ 7,503 7,048 455 688 (233)
Taxable investment securities 2,085 2,806 (721) (724) 3
Tax-exempt investment
securities(b) 138 114 24 55 (31)
Federal funds sold 210 428 (218) (243) 25
TOTAL INTEREST INCOME 9,936 10,396 (460) (648) 188
INTEREST PAID ON:
Savings and demand deposits 869 1,130 (261) (151) (110)
Certificates of deposits 2,142 1,860 282 312 ( 30)
Other borrowed funds 78 95 ( 17) ( 27) 10
TOTAL INTEREST EXPENSE 3,089 3,085 4 (41) 45
NET INTEREST EARNED $ 6,847 7,311 (464) (451) (13)
<FN>
<F1>
(a)The change in interest due to both rate and volume has been allocated
proportionately to the volume and rate components.
<F2>
(b)Reflects taxable equivalent adjustments using a tax rate of 34% to
adjust interest on tax-exempt investment securities to a fully taxable
basis, including the impact of the disallowed interest expense related
to carrying such tax-exempt securities.
</FN>
</TABLE>
The following table sets forth, for the year ended December 31, 1996, a
summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates:
<TABLE>
<CAPTION>
Increase Due to changes in (a)
1996 1995 (decrease) Volume Rate
INTEREST EARNED ON:
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 7,048 6,416 632 498 134
Taxable investment securities 2,806 2,752 54 30 24
Tax-exempt investment
securities(b) 114 162 (48) (47) ( 1)
Federal funds sold 428 528 (100) (50) (50)
TOTAL INTEREST INCOME 10,396 9,858 538 362 176
INTEREST PAID ON:
Savings and demand deposits 1,130 1,207 (77) ( 8) (69)
Certificates of deposits 1,860 1,682 178 152 26
Other borrowed funds 95 93 2 4 (2)
TOTAL INTEREST EXPENSE 3,085 2,982 103 96 7
NET INTEREST EARNED $ 7,311 6,876 435 254 181
<FN>
<F1>
(a)The change in interest due to both rate and volume has been allocated
proportionately to the volume and rate components.
<F2>
(b)Reflects taxable equivalent adjustments using a tax rate of 34% to
adjust interest on tax-exempt investment securities to a fully taxable
basis, including the impact of the disallowed interest expense related
to carrying such tax-exempt securities.
</FN>
</TABLE>
INVESTMENT SECURITIES
The carrying values of investment securities - held to maturity at the
indicated dates are presented below:
December 31,
1997 1996
(amounts in thousands)
U.S. Treasury and U.S. Government agencies $ 9,000 15,677
Mortgage-backed securities 7,382 9,525
State, county, and municipal securities 700 870
Totals $17,082 26,072
The carrying values of investment securities - available for sale at the
indicated dates are presented below:
December 31,
1997 1996
(amounts in thousands)
U.S. Government agencies $ 6,194 12,638
State, county, and municipal securities 924 -
Totals $ 7,118 12,638
The following table shows the contractual maturities of all investment
securities at December 31, 1997 and the weighted average yields (on a
fully taxable basis assuming a 34% tax rate) of such securities. Expected
maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Maturing
After 1 but After 5 but
Within 1 Year Within 5 Years Within 10 Years After 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S
Government agencies $ 2,500 5.03% $ 10,500 6.22% $ 1,698 6.80% $ 498 7.02%
Mortgage-backed
securities (a) 1,072 5.89% 1,515 7.37% 2,356 7.56% 2,439 6.82%
State, county, and
municipal 400 14.58% 303 8.82% 113 7.20% 806 7.89%
Other equity
securities(b) -- -- -- -- -- -- 1,182 (b)
Totals $ 3,972 7.70% $ 12,318 6.44% $ 4,167 7.26% 4,925 5.37%
<FN>
<F1>
(a) Mortgage-backed securities have been categorized according to the
maturity dates of the underlying loans. Principal repayments will
occur at varying dates throughout the terms of the mortgages.
<F2>
(b) Other equity securities are primarily comprised of an investment in
stock of the Federal Reserve Bank and the Federal Home Loan Bank of
Atlanta. These investments have no specific maturity date or yield.
</FN>
</TABLE>
The Company did not have any investments with a single issuer which exceeded
10% of the company's shareholders' equity at December 31, 1997, except for U.S.
Treasury and U.S. Government agencies as shown in the table above.
LOANS
The amount of loans outstanding at the indicated dates are shown in the
following table according to the type of loan:
December 31,
1997 1996
(amounts in thousands)
Commercial, financial, and agricultural $ 17,058 13,728
Installment and single payment individual 19,454 13,850
Real estate - commercial 20,741 31,115
Real estate - residential 24,316 22,064
Real estate - construction 5,209 1,830
86,778 82,587
Less:
Unearned income 195 179
Allowance for loan losses 1,305 1,441
Loans, net 85,278 80,967
The Company does not have any concentrations of loans exceeding 10% of total
loans of which management is aware and which are not otherwise disclosed as
a category of loans in the table above or in other sections of this Annual
Report on Form 10-KSB. A substantial portion of the Company's loan portfolio
is secured by real estate in metropolitan Atlanta.
<TABLE>
The following table sets forth certain information at December 31, 1997,
regarding the contractual maturities and interest rate sensitivity of
certain categories of the Company's loans.
<CAPTION>
Due after one Due after
One year year through five
or less five years years Total
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 6,544 8,099 2,415 17,058
Installment and single
payment individual 6,674 9,447 3,333 19,454
Real estate - commercial 2,164 12,136 6,441 20,741
Real estate - residential 869 6,595 16,852 24,316
Real estate - construction 4,024 1,000 185 5,209
$ 20,275 37,277 29,226 86,778
Loans due after one year:
Having predetermined interest rates $ 41,833
Having floating interest rates 24,670
Total $ 66,503
</TABLE>
Actual repayments of loans may differ from the contractual maturities reflected
above because borrowers may have the right to prepay obligations with or
without prepayment penalties. Additionally, the refinancing of such loans or
the potential delinquency of such loans could also cause differences between
the contractual maturities reflected above and the actual repayments of such
loans.
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and real estate acquired
through foreclosure. Nonperforming loans consist of loans which are past
due with respect to principal or interest more than 90 days
("past-due loans") or have been placed on nonaccrual of interest status
("nonaccrual loans"). Generally, past-due loans and nonaccrual loans
which are delinquent more than 90 days will be charged off against the Company's
allowance for possible loan losses unless management determines that the loan
has sufficient collateral to allow for the recovery of unpaid principal and
interest and reasonable prospects for the resumption of principal and interest
payments.
Accrual of interest on loans is discontinued when reasonable doubt exists as
to the full, timely collection of interest or principal or when loans become
contractually in default for 90 days or more as to either interest or
principal unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual status, previously accrued and
uncollected interest is charged to interest income on loans unless management
feels that the accrued interest is recoverable through the liquidation of
collateral.
FASB has issued SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" which requires that all creditors value all specifically reviewed loans
for which it is probable that the creditor will be unable to collect all
amounts due according to the terms of the loan agreement at either the
present value of expected cash flows, market price of the loan, or value of
the underlying collateral. Discounted cash flows are required to be computed at
the loan's original effective interest rate.
FASB has issued SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," that amends SFAS No. 114 to allow
a creditor to use existing methods for recognizing interest income
on an impaired loan and by not requiring additional disclosures about how a
creditor recognizes interest income on impaired loans. SFAS No. 118 is to be
implemented concurrently with SFAS No. 114.
On January 1, 1995, the Company adopted the provisions of SFAS No. 114 and 118.
Under the provisions of SFAS No. 114 and 118, the allowance for loan losses
related to impaired loans is based on discounted cash flows using the loan's
initial effective interest rate or the fair market value of the underlying
collateral for certain collateralized dependent loans. Prior to 1995,
the allowance for loan losses was based upon nondiscounted cash flows or the
fair value of the collateral dependent loans. The adoption of SFAS No. 114 and
118 required no increase in the total allowance for loan losses and had no
impact on net income in 1995. The impact to historical and current amounts
related to in-substance foreclosures was not material, and accordingly,
historical amounts have not be restated.
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired under SFAS No.114 was $1,077,000 and $1,959,000,
respectively (of which approximately $852,000 and $1,286,000 were on a
nonaccrual basis). The related allowance for loan losses was $174,000 and
$302,000, respectively. For the years ended December 31, 1997 and 1996,
the Company recognized $17,000 and $129,000, respectively in interest income
on those impaired loans on an accrual basis income recognition method.
With the exception of the loans included within nonperforming assets in the
table below, management is not aware of any loans classified for regulatory
purposes as loss, doubtful, substandard, or special mention that have not been
disclosed which (1) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (2) represent material credits about which
management is aware of any information which causes management to have
serious doubts as to the abilities of such borrower to comply with the loan
repayment terms.
Nonperforming loans decreased to $938,000 at December, 1997, from $1,365,000
at December 31, 1996. Real estate acquired through foreclosure increased
$665,000 from $63,000 at December 31, 1996 to $728,000 at December 31,1997.
Nonperforming assets represent 1.91% of loans net of unearned income and real
estate acquired through foreclosure at December 31, 1997 as compared to 1.73%
at December 31, 1996.
The table below presents a summary of the Company's nonperforming assets at
December 31, 1997 and 1996.
December 31,
1997 1996
(amounts in thousands,
except financial ratios)
Nonperforming assets:
Nonperforming loans
Nonaccrual loans $ 852 1,286
Past-due loans 86 79
Nonperforming loans 938 1,365
Real estate acquired through foreclosure 728 63
Total nonperforming assets $ 1,666 1,428
Ratios:
Nonperforming loans to loans,
net of unearned income 1.08% 1.66%
Nonperforming assets to loans
(net of unearned income) and real
estate acquired through foreclosure 1.91% 1.73%
Nonperforming assets to total assets 1.30% .99%
Allowance for loan losses to
nonperforming loans 139.13% 105.57%
Allowance for loan losses to
nonperforming assets 78.33% 100.91%
Interest income on nonaccrual loans which would have been reported for the
years ended December 31, 1997, 1996, and 1995 is summarized as follows:
1997 1996 1995
(amounts in thousands)
Interest at contracted rate $ 137 83 91
Interest at recorded as income 113 10 --
Reduction of interest income $ 24 73 91
ALLOWANCE FOR LOAN LOSSES
The following table summarizes loans at the end of each year and average loans
during the year, changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off by loan category,
and additions to the allowance which have been charged to operating expense:
December 31,
1997 1996
(amounts in thousands)
Loans, net of unearned income at end of year $ 86,583 82,408
Average loans, net of unearned income and
allowance for loan losses 80,868 73,576
Allowance for loan losses at beginning of year $ 1,441 1,566
Loans charged off:
Real estate loans 148 237
Commercial, financial, and agricultural 18 111
Installment and single payment individual 365 76
Total loans charged off 531 424
Recoveries of loans previous charged off:
Real estate loans 85 104
Commercial, financial and agricultural 66 38
Installment and single payment individual 123 92
Total loans recovered 274 234
Net loans charged off 257 190
Additions to allowance for loan losses
charged to operating expense 121 65
Allowance for loan losses at end of year $ 1,305 1,441
Ratio of net loans charged off to
average loans, net of unearned
Income and the allowance for loan losses .32% .26%
Allowance for loan losses to loans,
net unearned income at end of year 1.51% 1.75%
Credit reviews of the loan portfolio designed to identify potential charges
to the allowance for loan losses, as well as to determine the adequacy of
the allowance for loan losses, are made on a continuous basis throughout the
year. These reviews are conducted by management, lending officers, and
independent third parties and are reviewed with the Board of Directors, who
consider such factors as the financial strength of borrowers, the value of
applicable collateral, past loan loss experience, anticipated loan losses,
growth in the loan portfolio, and other factors including prevailing and
anticipated economic conditions. Management believes that the allowance for
loan losses is adequate at December 31, 1997.
A substantial portion of the Company's loan portfolio is secured by real
estate in the metropolitan Atlanta market. Accordingly, the ultimate
collectibility of the substantial portion of the Company's loan portfolio
is susceptible to changes in market conditions in the metropolitan Atlanta area.
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES
The Company has allocated the allowance for loan losses according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the categories of loans set forth in the table below.
This allocation is based on management's evaluation of the loan portfolio
under current economic conditions, past loan loss experience, adequacy and
nature of collateral, and such other factors which, in the judgement of
management, deserve recognition in estimating loan losses. Regulatory
agencies, as an integral part of their examination process, periodically
review the Company's allowance for loan losses and the Company's valuation
of real estate acquired through foreclosure. Such agencies may require the
Company to recognize additions to the allowance or adjustments to the
valuations based on their judgements about information available to them at the
time of their examination. Because the allocation is based on estimates and
subjective judgement, it is not necessarily indicative of the specific
amounts or loan categories in which charge-offs may occur. The amount of
such components of the allowance for loan losses and the ratio of each loan
category to total loans outstanding are presented below:
<TABLE>
<CAPTION>
Commercial Installment
financial, and single
and payment Real
agricultural individual Estate Total
(amounts in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
December 31, 1997
Allowance amount $ 349 357 599 1,305
Percent of loans in each
category to total loans 19.7% 22.4 57.9 100.0
December 31, 1996
Allowance amount $ 442 161 838 1,441
Percent of loans in each
category to total loans 16.6% 16.8 66.6 100.0
</TABLE>
DEPOSITS
The average amount of and average rate paid on deposits by category for the last
two years are presented below:
Year ended December 31
1997 1996
Amount Rate Amount Rate
(amounts in thousands, except percentages)
Noninterest-bearing deposits $ 36,433 -% 42,348 -%
Savings and interest-bearing
deposits 42,617 2.04 49,593 2.28
Time deposits 43,042 4.98 36,818 5.05
Total average deposits $ 122,092 2.47% 128,759 2.35%
The maturities of time deposits of $100,000 or more as of December 31, 1997 are
present below (amounts in thousands):
3 months or less $ 14,124
Over 3 months through 6 months 1,864
Over 6 months through 12 months 2,926
Over 12 months 1,477
Total outstanding $ 20,391
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity management involves managing the potential impact of
interest rate movements on net interest income within acceptable levels of
risk. The Company seeks to accomplish this by structuring the balance sheet
so that repricing opportunities exist for both assets and liabilities in
equivalent amounts and time intervals. Imbalances in these repricing
opportunities at any point in time constitutes a financial institution's
interest rate risk. The Company's ability to reprice assets and liabilities
in the same dollar amounts and at the same time minimizes interest rate risk.
One method of measuring the impact of interest rate sensitivity is the
cumulative gap analysis. The difference between interest rate sensitive
assets and interest rate sensitive liabilities at various time
intervals is referred to as the "gap". The Company is liability sensitive
on a short-term basis as reflected in the following table. Generally, a
net liability sensitive position indicates that there would be a negative
impact on net interest income in an increasing rate environment. However,
interest rate sensitivity gap does not necessarily indicate the impact of
general interest rate movements on the net interest margin, since all interest
rates and yields do not adjust at the same velocity and the repricing of
various categories of assets and liabilities is subject to competitive
pressures and the needs of the Company's customers. In addition, various
assets and liabilities indicated as repricing within the same period may in
fact reprice at different times within such period and at different rates.
For conservative purposes, the Company has included demand deposits such as
NOW, money market and savings accounts in the three month category.
However, the actual repricing of these accounts may lag beyond twelve months.
The interest rate sensitivity gap is only a general indicator of potential
effects of interest rate changes on net interest income. The following table
sets forth the distribution of the repricing of the Company's interest rate
sensitive assets and interest rate sensitive liabilities as of
December 31, 1997.
Cumulative amounts as of December 31, 1997
Maturing and repricing within
Three Twelve Five
Months Months Years Total
(amounts in thousands, except ratios)
Interest-sensitive assets:
Investments $ 6,282 8,004 20,329 25,382
Loans 30,369 41,738 71,721 86,778
Federal funds sold 975 975 975 975
Total interest-sensitive assets$ 37,626 50,717 93,025 113,135
Interest-sensitive liabilities:
Deposits 61,325 76,260 81,413 81,618
Other borrowings 240 375 780 780
Total interest-sensitive
liabilities 61,565 76,635 82,193 82,398
Interest-sensitivity gap $(23,939) (25,918) 10,832 30,737
Cumulative interest-
sensitivity gap to
total interest-
sensitivity assets (21.16)% (22.91) 9.57 27.17
ITEM 2. PROPERTIES
The Bank's main office, which is located at 175 John Wesley Dobbs Ave., N.E.
in the City of Atlanta, contains approximately 30,000 square feet and is
leased by the Bank. The Bank has ten full service branches, one of which is
located in a supermarket and in South DeKalb Mall. As discussed at "Item 6-
Management's Discussion and Analysis or Plan of Operation," three of the
branches were acquired during the merger with First Southern Bancshares, Inc..
The branch offices are located in Fulton and DeKalb County, Georgia. The
Bank owns the land and buildings of six free-standing branches near the Atlanta
University Center, in the Adamsville section of the City of Atlanta, in the
City of East Point and in DeKalb County. The Bank leases the space for its
supermarket branch under license agreement, a free-standing facility in the
Midtown section of the City of Atlanta and in South DeKalb Mall.
The addresses of the ten branch locations are as follows:
Main Office
75 Piedmont Avenue
Atlanta, Georgia 30303
West Peachtree
712 West Peachtree
Atlanta, Georgia 30379
Westside
965 Martin Luther King Jr., Drive
Atlanta, Georgia 30314
Panola
2727 Panola Road
Lithonia, Georgia 30058
Adamsville
3610 Martin Luther King Jr., Drive
Atlanta, Georgia 30331
Wesley Chapel
2592 S. Hariston Road
Decatur, Georgia 30035
East Point
2840 East Point Street
East Point, Georgia 30344
Rockbridge Plaza Branch
5771 Rockbridge Road
Stone Mountain, Georgia 30087
Greenbriar
2841 Greenbriar
Atlanta, Georgia 30331
South DeKalb
2801 Candler Road
Decatur, Georgia 30034
The Bank is a member of the Southeast Switch Inc. Network (the "Network"), an
organization of Georgia banks, savings and loan associations and credit
unions. The organization has established a network of automated teller
machines ("ATMs") owned by its members so that customers of each member may
use their ATM cards at machines owned or operated by other members to
transact business with respect to their accounts. The use of the Network
has significantly increased the ability of the Bank's depositors to withdraw
or deposit funds. Management believes that the Bank's membership in the
Network has substantially improve the Bank's competitive position in
attracting depositors at a much more moderate cost to the Bank than the
alternative of constructing new branch facilities.
Management believes that the Company's physical facilities are suitable for
its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceeding to which
the Company or its subsidiary is a party or to which any of their property is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public trading market for the Common Stock, $1.00 par
value, of the Company. The following table sets forth high and low bid
information for the Common Stock for each of the quarters in which trading has
occurred.
Calendar Period Sales Price
1997 High Low
First Quarter $4.50 $4.50
Second Quarter 5.00 5.00
Third Quarter - -
Fourth Quarter - -
1996 High Low
First Quarter $4.50 $4.50
Second Quarter 5.00 5.00
Third Quarter 5.00 5.00
Fourth Quarter 4.50 4.00
At March 1, 1998, there were 1,650 shareholders of record of the Company's
Common Stock.
Dividends
No dividends were paid by the Company during 1997. A $0.10 per share cash
dividend was paid for fiscal year ended December 31, 1996. Payment of
dividends by the Company is restricted by certain covenants in
its long-term debt agreement, and is dependent upon payment by the Bank of
dividends to the Company. Under the provisions of applicable law, the Bank
may pay dividends subject to limitation imposed by the banking regulations.
See "Item 1. Business - Bank Regulation, of this Annual Report". See Note 12,
"Regulatory Matters" of "Notes to Consolidated Financial Statements."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
Citizens Bancshares Corporation (the "Company") is a one-bank holding company
whose wholly owned subsidiary is Citizens Trust Bank (the "Bank"). The Bank
operates under a state charter and at December 31, 1997 served its customers
in metropolitan Atlanta through seven full-service branch offices.
On January 30, 1998, the Company and First Southern Bancshares, Inc. ("First
Southern"), a bank holding company that wholly owned one bank and a non-bank
mortgage subsidiary, merged. The transaction was a tax-free exchange, with
each outstanding share of First Southern stock being converted into 1.508 shares
of common stock of the combined company. The merger was accounted for as a
pooling of interest with the Company being the surviving entity. The merger
resulted in the creation of the fourth largest African-American owned
commercial bank in the United States, with assets of approximately $190 million.
First Southern's bank subsidiary, First Southern Bank, chartered by the State of
Georgia in 1987, was a full service commercial bank operating three retail
locations in south DeKalb County. First Southern also owned FSB Mortgage
Services, which originates residential mortgages through a variety of
products. The mortgage subsidiary is now wholly owned by the Company.
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Company's consolidated
financial statements and related notes and Selected Statistical
Information appearing in other sections of the Annual Report on Form 10-KSB.
Net income for the year ended December 31, 1997 decreased 87% to approximately
$84,000 from $643,000 earned for the same period in 1996. As a consequence,
net income per share was $.06 in 1997 compared to $.48 earned in 1996,
return on assets dropped to .06% in 1997 from .46% in 1996 and return on
equity was .85% in 1997 compared to 6.55% in 1996. The decrease in net
income can be attributed to the decrease in net interest income and
noninterest income of 6.3% and 5.9%, respectively, compared to 1996.
The Company's total assets also decreased 11.5% or approximately $16.7 million
during the year ended December 31, 1997 as compared to $128,160,000 in 1996.
Loans, net of unearned income, increased 5.1% or $4.2 million and total
deposits decreased 12.9% or $17 million during the year ended December 31, 1997.
Average assets for the year ended December 31, 1997 totaled $134,267,000, a
decrease of 5% or $7 million as compared to 1996.
The following selected financial data for Citizens Bancshares Corporation and
subsidiary should be read in conjunction with the consolidated financial
statements and related notes appearing in another section of this Annual
Report on Form 10-KSB.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995 1994 1993
(amounts in thousands, except per share data and financial ratios)
<S> <C> <C> <C> <C> <C> <C>
Statement of operating data:
Net interest income $ 6,808 7,274 6,826 5,935 5,278
Provision for loan losses $ 121 65 417 735 899
Net earnings (loss) $ 84 643 1,253 701 (386)
Per share data:
Net earnings (loss) $ .06 .48 .94 .53 (.29)
Book value $ 7.59 7.49 7.20 6.23 5.88
Cash dividends declared $ - .10 .10 - -
Balance sheet data:
Loans, net of unearned income $ 86,584 82,408 70,084 69,261 50,404
Deposits $ 115,803 132,889 116,380 122,145 108,710
Long-term debt and obligations
under capital leases $ 585 765 900 1,293 760
Total assets $ 128,160 144,879 128,389 133,206 118,304
Average shareholders' equity $ 9,939 9,817 8,854 7,873 7,578
Average assets $ 134,267 141,301 135,503 128,130 124,746
Ratios:
Net earnings (loss) to
average assets .06% .46 .92 .55 (.31)
Net earnings (loss) to
average shareholders'
equity .85% 6.55 14.15 8.90 (5.09)
Dividend payout ratio - 20.83 10.64 - -
Average shareholders' equity to
average assets 7.40% 6.95 6.53 6.14 6.07
</TABLE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income represents the amount by which the income received on
interest-bearing assets exceeds the interest paid on interest-bearing
liabilities. The following table presents the Company's net interest
income on a tax-equivalent basis. Interest income on tax-exempt investment
securities has been adjusted to reflect the income on a tax-equivalent basis
(considering the effect of the disallowed interest expense related to carrying
these tax-exempt investment securities) using a nominal tax rate of 34% for
1997, 1996, and 1995.
Years ended
December 31,
1997 1996 1995
(amounts in thousands)
Interest income $ 9,897 10,359 9,808
Tax-equivalent adjustment 39 37 50
Interest income, tax-equivalent basis 9,936 10,396 9,858
Interest expense (3,089) (3,085) (2,982)
Net interest income, tax-equivalent basis 6,847 7,311 6,876
Provision for loan losses (121) (65) (416)
Noninterest income 3,820 4,060 4,136
Noninterest expense (10,338) (10,247) (9,218)
Earnings before income taxes 208 1,059 1,378
Income tax expense (85) (379) (75)
Tax-equivalent adjustment (39) ( 37) (50)
Income tax expense, tax-equivalent basis (124) (416) (125)
Net earnings $ 84 643 1,253
Net interest income on a fully taxable equivalent basis accounted for 64.2% of
net interest income and noninterest income before any provision for loan
losses in 1997, 64.3% in 1996 and 62.4% in 1995. The level of such income is
influenced primarily by changes in volume and mix of earning assets and sources
of funding, market rates of interest, and income tax rates. The Company has
an Asset/Liability Management Committee ("ALCO"), which is responsible for
managing changes in net interest income and net worth resulting from changes
in interest rates based on acceptable limits established by the Board of
Directors.
ALCO reviews economic conditions, the interest rate outlook, the demand for
loans, the availability of deposits, current operating results, liquidity,
capital, and interest rate exposure. Based on such reviews, ALCO formulates
a strategy that is intended to implement objectives set forth in the
asset/liability management policy.
Net interest income on a tax-equivalent basis decreased $464,000 or 6.3% for
the year ended 1997 as compared to the same period in 1996. The decrease in
net interest income can be attributed to the decline in average earning
assets of approximately $7.8 million. During 1997, the net interest margin
was 5.80% on average earning assets of approximately $118,071,000 compared to
5.81% on average earning assets of approximately $125,842,000 in 1996.
In 1996, net interest income on a tax-equivalent basis increased $435,000 or
6.3% as compared to 1995. The Company's net interest margin increased to
5.81% in 1996 from 5.66% in 1995.
Provision for Loan Losses
The provision for loan losses is maintained to absorb future losses inherent in
the credit portfolio. The reserve is the charge to operating earnings that
management considers necessary to maintain an adequate allowance for loan
losses. In 1997, the provision for loan losses was $121,000, an increase of
$56,000 from the provision of $65,000 for 1996. Due to the increase in the
volume of the loan portfolio, it was determined by management that the
current level of allowance for loan losses was adequate. The provision is
determined based on growth of the loan portfolio, the amount of net loan
losses incurred, and management's estimation of potential future loan losses
based on an evaluation of loan portfolio risks, adequacy of underlying
collateral, and economic conditions. At December 31, 1997 and 1996, the
Company's allowance for loan losses was approximately $1,305,000 or 1.51%
compared to $1,441,000 or 1.75%, respectively, of loans, net of unearned
income.
Factors considered in determining the level of the reserve include: trends in
portfolio volume, quality, maturity and composition; industry concentrations;
lending policies; new products; adequacy of collateral; historical loss
experience; the status and amount of non performing and past-due loans;
specific known risks; and current, as well as anticipated, specific and
general economic factors that may affect certain borrowers. While management
uses available information to recognize losses on loans, future additions to
the allowance for loan losses may be necessary based on changes in
environmental conditions, particularly in the Company's primary market,
metropolitan Atlanta.
Noninterest Income
Noninterest income decreased approximately $240,000 or 5.9% from 1996 to
1997, the decrease is a result of a decrease in service charges on deposit
accounts primarily due to lower account transaction volume for both retail
and commercial customers. A large component of the Company's service charges
on deposit accounts continues to be related to insufficient funds, returned
check charges and other customer service fees.
Noninterest income decreased approximately $76,000 or 1.8% from 1995 to 1996
as a result of $96,000 net gain on sale of assets in 1995 compared to
$19,000 in 1996.
Noninterest Expense
In 1997, noninterest expense increased marginally to $91,000 to $10.3 million.
The increase is due to a combination of an increase in salaries and employee
benefits of $278,000, increase in net occupancy and equipment of $103,000
and a decrease in other operating expenses of $290,000.
In 1996, noninterest expense increased $1 million or 11.2% as compared to 1995.
The increase was primarily due to salary and employee benefits and operating
expenses. Salaries and employee benefits increased $503,000 or 10.5% as a
result of increases in the number of senior level officers, staffing for
system conversion and normal salary adjustments. Other operating expenses
increased $463,000 or 17.3% as compared to 1995. The increase was due to
teller and other losses, director fees, data processing due to the
out-sourcing of the proof department and other miscellaneous expenses.
Income Taxes
At December 31, 1997, the Company's net deferred tax asset was approximately
$538,000. No valuation allowance was recorded for this asset since it is
more likely than not that future tax benefits of such assets will be fully
realized.
In 1997, the Company recognized income tax expense of $85,000, or 50% of its
earnings before income taxes as compared to an income tax expense of $379,000
and $75,000 in 1996 and 1995, respectively, or 37% or 6%, respectively, of
its earnings.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 131 specifies the
presentation and disclosure of operating segment information reported in the
annual report and interim reports issued to stockholders. The provisions of
both statements are effective for fiscal years beginning after
December 15, 1997. The management of the Company believes the adoption of
these statements will not have a material impact on the Company's financial
position, results of operations or liquidity.
Liquidity
Liquidity management involves the matching of the cash flow requirements of
customers, either depositors withdrawing funds or borrowers needing assurance
that sufficient funds will be available to meet their credit needs, and the
ability of the Company to meet those needs. In the normal course of business,
the Company's cash flow is generated from interest and fee income on loans
and other interest-earning assets, repayments of loans, and maturities of
investment securities. The Company continues to meet immediate liquidity
needs primarily through maintaining appropriate levels of cash and due from
banks and federal funds sold.
At December 31, 1997, approximately 16% of the investment securities
portfolio had maturity dates within the next year and approximately 51%
after one but within the next five years (mortgage-backed securities have
been categorized according to the maturity dates of the underlying loans;
however, principal repayments will occur at varying dates throughout the
terms of the mortgages). During 1997, federal funds sold averaged
approximately $4 million, thereby providing sufficient funds to meet
immediate liquidity needs.
The Company is a member of the Federal Reserve System, the Federal Home Loan
Bank of Atlanta and maintains relationships with several correspondent banks
and thus could obtain funds on short notice, if needed. Company management
closely monitors and maintains appropriate levels of interest-earning
assets and interest-bearing liabilities so that maturities of assets are
such that adequate funds are provided to meet customer withdrawals and loan
demand while net interest margins are maximized.
Capital Resources
The Company has maintained an adequate level of capital as measured by its
average shareholders' equity to average assets ratio of approximately 7.40%
and 6.95% in 1997 and 1996, respectively. At December 31, 1997, the Company
and the Bank's regulatory capital was well above the required minimum amounts.
See note 12, "Regulatory Matters" to the "Consolidated Financial Statements"
included in another section of this Annual Report on Form 10-KSB.
The Company is restricted as to dividend payments to its shareholders by
certain covenants in its long-term debt agreement and the Bank is restricted
as to dividend payments to the Company by certain regulatory requirements.
See notes 6, 11, and 12 to the consolidated financial statements included in
another section of this Annual Report on Form 10-KSB.
Inflation
Inflation affects the financial condition and results of operations of all
companies. Financial institutions are more sensitive to inflation since most
of their assets and liabilities are interest rate sensitive. The Company has
adopted strategies to cope with the effects of inflation. First, the Company
has adopted an asset/liability management program to monitor the Company's
interest rate sensitivity and to ensure the Company is competitive in the
deposit market. Secondly, the Company performs periodic reviews to ensure
its banking services and products are priced appropriately.
Year 2000 Processing Risk
The Board and management consider the Year 2000 ("Y2K") computer processing
risk to be a very serious risk for the banking and financial services
industry in particular and for all businesses which depend on computer
hardware and software to perform the critical functions of their businesses.
In the third quarter of 1997, the Board established a Y2K Policy and Y2K
Compliance Committee. The Committee is headed by senior management, meets
monthly and regularly reports to the Audit and Compliance Committee of the
Board and to the full Board.
The Company and Bank do not use proprietary computer hardware or software.
Therefore, they depend upon outsourced data processing services and third
party software. Management has identified all mission critical hardware and
software applications and is following the general guidelines promulgated
by the FDIC to assure that all mission critical applications will be renovated
with testing in progress, by December 31, 1998, or contingency plans will be
in the process of implementation. At this time, the servicing vendors
appear to have completed their assessments and have described to the Bank
their time lines for renovation and testing. Management has no reason to
believe at this time, that all mission critical applications for the Bank
and Company will not be adequately addressed by our vendors' plans.
The Bank's core processing, which maintains all customer record keeping and
financial management information systems, is handled by Alltel Information
Services ("Alltel"), an international company which provides application
software and outsourcing services to financial services, mortgage,
telecommunication and health care industries, serving more that 1,100
companies in 45 countries. Alltel has reported that it will begin testing
its program renovations in the fall of 1998.
Management is currently reviewing all of the Bank's significant commercial
loan relationships to determine how much Y2K risk may exist in the Bank's
customer base. To the extent that such risk is identified, management will
request such customers to develop their own compliance strategy and will
require those customers to keep us informed of their progress. Management's
current plans are to help the Bank's customers understand the risks involved,
to share the Bank's strategies and to encourage those customers to satisfy
their compliance requirements on time lines that are consistent with those of
the Bank. The Bank's loan agreements and credit review processes are being
modified to address this risk. The Bank's contingency plans for customers
who fail to adequately address this risk may include but will not be
limited to, requiring such customers to pay off their loans.
The costs of implementing Y2K solutions on mission critical systems have not
been fully determined as of the date of this report. The Bank's local area
computer network was already budgeted for upgrade in 1998 to workstations
and file-servers that will be Y2K ready. The budget for these upgrades is
approximately $100,000. Management expects that some of our mission critical
processing vendors will charge the Bank for conducting tests on renovated
systems. While management has requested that these vendors provide
estimates of any renovation or testing charges, none have been provided to
date, citing that such charges, if any, have not yet been determined.
The Bank's core application processor, Alltel, has told us that we will
not be charged for renovation work, however, testing charges may be assessed.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the report of
independent auditors are included in this Report beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 3, 1996, Citizens Bancshares dismissed KPMG Peat Marwick LLP as
its independent accountants. The report of KPMG Peat Marwick LLP on the
financial statements for 1995 contained no adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principle. The Company's Board of Directors
participated in and approved the decision to change independent accountants.
In connection with it's audit for 1995 through September 3, 1996, there have
been no disagreements with KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements if not resolved to the satisfaction of KPMG
Peat Marwick LLP would have caused them to make reference thereto in their
report on the financial statements for 1995. KPMG Peat Marwick LLP
furnished the Company with a letter addressed to the SEC stating whether or
not it agrees with the above statements. A copy of such letter is filed as
Exhibit 16 to this Form 10-KSB.
The Registrant engaged Porter Keadle Moore, LLP as its new independent
accountants as of September 3, 1996. During the two most recent fiscal
years and through September 3, 1996, the Registrant has not consulted with
Porter Keadle Moore, LLP on items which (1) were or should have been subject
to SAS 50 or (2) concerned the subject matter of a disagreement or reportable
event with the former auditor.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The responses to these items are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held May 1998. Under headings
Election of Directors, Principal Officers and Beneficial Ownership of Common
Stock and compliance with 16(a) of the Security Exchange Act of 1934
and are incorporate herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The responses to this item is included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held May 1998. Under heading
Executive Compensation and are incorporate herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The responses to this item is included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held May 1998. Under heading
Beneficial Ownership of Common Stock and are incorporate herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to this item is included in the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held May 1998. Under heading
Certain Transactions and are incorporate herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are required to be filed with this Report by
Item 601 of Regulation S-B:
Exhibit
Number Description of Exhibit
2 Agreement and Plan of Merger dated October 1, 1997 between Citizens
Bancshares Corporation and First Southern Bancshares, Inc.
(included as Exhibit 2 to the Company's Registration Statement on
Form S-4 previously filed with the Commission and incorporated
herein by reference).
3.1 & 4.1 Articles of Incorporation of Citizens Bancshares Corporation
(included as Exhibits 3.1 and 4.1 to the Company's Registration
Statement on Form 10, File No. 0-14535, previously filed with the
Commission and incorporated herein by reference).
3.2 By-laws of Citizens Bancshares Corporation as amended. (included as
Exhibit 3.2 to the Company's Registration Statement on Form 10,
File No. 0-14535, previously filed with the Commission and incorporated
herein by reference).
3.3 & 4.2Amendment to Articles of Incorporation of Citizens Bancshares
Corporation, as filed with the Secretary of State of Georgia on
July 21, 1987 (included as Exhibits 3.3 and 4.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1987, File No. 0-14535, previously filed with the
Commission and incorporated herein by reference).
10.1 Employment Agreement dated June 30, 1992 between Citizens Trust
Bank and William L. Gibbs. (included as Exhibits 10.6 to the
Company's Registration Statement on Form 10, File No. 0-14535,
previously filed with the Commission and incorporated herein by
reference).
10.2 Lease and Option Agreement by and between Citizens Trust Bank and
Resolution Trust Corporation, dated April 22, 1994. (included as
Exhibits 10.10 to the Company's Registration Statement on Form 10,
File No. 0-14535, previously filed with the Commission and
incorporated herein by reference).
10.3 Employment Agreement dated September 8, 1995, First Amended and
Restated between Citizens Trust Bank and William L. Gibbs. (included
as Exhibits 10.11 to the Company's Registration Statement on
Form 10, File No. 0-14535, previously filed with the Commission and
incorporated herein by reference).
10.4 Loan Agreement by and between Citizens Bancshares Corporation
and SunTrust, Atlanta dated April 22, 1996. (included as Exhibit
10.4 on the Compnay's Registration Statement on Form 10, File No.
0-14535, previously filed with the Commission and incorporated
herein by reference).
16 KPMG Peat Marwick LLP letter to the Securities and Exchange Commission
regarding statements listed in Item 8 of this Form 10-KSB dated
September 9, 1996.
22 List of Subsidiaries of the Company (included as Exhibit 22 to
the Company's Registration Statement on Form 10, File No. 0-14535,
previously filed with the Commission and incorporated herein
by reference).
24 Power of Attorney for Directors included herein after signature page.
27 Financial Data Schedule.
99 KPMG Peat Marwick LLP unqualified opinion as to December 31,
1995 Consolidated Financial Statements.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
By:/s/James E. Young
James E. Young
President and Chief Executive Officer
Date: March 31, 1998
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James E.Young and Willard C. Lewis, or either
of them, as attorney-in-fact, with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any
amendment to this Report on Form 10-KSB and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes,
may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the date indicated.
SIGNATURE CAPACITY
/s/Herman J. Russell Chairman of the Board
Herman J. Russell of Directors
/s/ Gregory T. Baranco Vice Chairman of the
Gregory T. Baranco Board of Directors
/s/ James E. Young President, Chief Executive Officer
James E. Young And Director
/s/Thomas E. Boland Director
Thomas E. Boland
/s/ Bernard H. Bronner Director
Bernard H.Bronner
/s/Johnnie L. Clark Director
Johnnie L. Clark
Date: March 18, 1998.
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
2 Agreement and Plan of Merger dated October 1, 1997 between
Citizens Bancshares Corporation and First Southern
Bancshares, Inc. (included as Exhibit 2 to the Company's
Registration Statement on Form S-4 previously filed with
the Commission and incorporated herein by reference).
3.1 & 4.1 Articles of Incorporation of Citizens Bancshares Corporation
(included as Exhibits 3.1 and 4.1 to the Company's
Registration Statement on Form 10, File No. 0-14535,
previously filed with the Commission and incorporated herein
by reference).
3.2 By-laws of Citizens Bancshares Corporation (included as Exhibit
3.2 to the Company's Registration Statement on Form 10, File
No. 0-14535, previously filed with the Commission and incorporated
herein by reference).
3.3 & 4.2 Amendment to Articles of Incorporation of Citizens Bancshares
Corporation, as filed with the Secretary of State of Georgia on
July 21, 1987 (included as Exhibits 3.3 and 4.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1987, File No. 0-14535, previously filed with
the Commission and incorporated herein by reference).
10.1 Employment Agreement dated June 30, 1992 between Citizens
Trust Bank and William L. Gibbs. (included as Exhibits 10.6
to the Company's Registration Statement on Form 10, File
No. 0-14535, previously filed with the Commission and
incorporated herein by reference).
10.2 Lease and Option Agreement by and between Citizens Trust
Bank and Resolution Trust Corporation, dated April 22, 1994.
(included as Exhibits 10.10 to the Company's Registration
Statement on Form 10, File No. 0-14535, previously filed
with the Commission and incorporated herein by reference).
10.3 Employment Agreement dated September 8, 1995, First
Amended and Restated between Citizens Trust Bank and
William L. Gibbs. (included as Exhibits 10.11 to
the Company's Registration Statement on Form 10, File
No. 0-14535, previously filed with the Commission and
incorporated herein by reference).
10.4 Loan Agreement by and between Citizens Bancshares
Corporation and SunTrust Bank, Atlanta, dated April 22, 1996.
(included as Exhibits 10.4 on Form 10, File No. 0-14535,
previously filed with the Commission and incorporated herein
by reference).
16 KPMG Peat Marwick LLP letter to Securities and Exchange
Commission regarding statements listed in Item 8 of this Form
10-KSB dated September 9, 1996.
22 List of Subsidiaries of the Company (included as Exhibit 22
to the Company's Registration Statement on Form 10, File
No. 0-14535, previously filed with the Commission and
incorporated herein by reference).
24 Power of Attorney for Directors included herein after signature page.
27 Financial Data Schedule.
99 KPMG Peat Marwick LLP unqualified opinion as to December 31,
1995 Consolidated Financial Statements. 43
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Financial Statements
Index to Consolidated Financial Statements
Page
Citizens Bancshares Corporation and subsidiary:
Independent Auditors' Report.......................................F-2
Consolidated Balance Sheets - December 31, 1997 and 1996...........F-3
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996, and 1995.................................F-4
Consolidated Statements of Shareholders' Equity for the Years
ended December 31, 1997, 1996, 1995..............................F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996, and 1995................................F-6
Notes to Consolidated Financial Statements.........................F-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Citizens Bancshares Corporation
We have audited the accompanying consolidated balance sheets of
Citizens Bancshares Corporation and subsidiary as of December 31,
1997 and 1996, and the related statements of earnings, changes in
stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits. The
consolidated financial statements as of December 31, 1995 and for
the year then ended were audited by other auditors whose report
dated February 9, 1996 expressed an unqualified opinion on those
financial statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Citizens Bancshares
Corporation and subsidiary, and the results of their operations
and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/Porter Keadle Moore, LLP
Atlanta, Georgia
February 20, 1998
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets
1997 1996
Cash and due from banks, including reserve
requirements of
$1,646,000 and $2,165,000 $ 7,688,865 8,968,430
Federal funds sold
975,000 10,200,000
Cash and cash equivalents 8,663,865 19,168,430
Investment securities available for sale 7,118,850 12,638,096
Investment securities held to maturity 17,081,933 26,072,230
Other investments 1,181,651 630,951
Loans, net 85,279,128 80,966,676
Premises and equipment, net 2,947,354 2,891,437
Cash surrender value of life insurance 2,499,755 -
Other assets 3,387,859 2,510,788
$128,160,395 144,878,608
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits $ 34,185,634 46,328,256
Interest-bearing deposits 81,617,710 86,560,487
Total deposits 115,803,344 132,888,743
Treasury, tax and loan account 195,335 116,415
Long-term debt 585,000 765,000
Accrued expenses and other liabilities 1,477,791 1,145,963
Total liabilities 118,061,470 134,916,121
Commitments
Stockholders' equity:
Common stock - $1 par value; 5,000,000 shares
authorized;
1,329,684 shares issued and outstanding 1,329,684 1,329,684
Additional paid-in capital 1,470,210 1,470,210
Retained earnings 7,277,466 7,193,210
Unrealized gain (loss) on investment
securities available
For sale, net of tax 21,565 (30,617)
Total stockholders' equity 10,098,925 9,962,487
$128,160,395 144,878,608
See accompanying notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Interest income:
Loans, including fees $ 7,503,167 7,048,133 6,415,508
Investment securities:
Taxable 2,085,153 2,805,944 2,751,717
Tax-exempt 97,769 77,052 112,646
Federal funds sold 210,481 427,763 527,748
Total interest income 9,896,570 10,358,892 9,807,619
Interest expense:
Deposits 3,011,505 2,990,421 2,888,047
Treasury, tax and loan account 5,319 6,696 14,315
Long-term debt 71,799 87,675 79,124
Total interest expense 3,088,623 3,084,792 2,981,486
Net interest income 6,807,947 7,274,100 6,826,133
Provision for loan losses 121,000 65,000 416,670
Net interest income after provision
for loan losses 6,686,947 7,209,100 6,409,463
Noninterest income:
Service charges on deposit accounts 3,346,114 3,745,993 3,771,170
Gain on sale of assets 45,204 19,042 96,360
Other operating income 429,079 294,886 268,537
Total noninterest income 3,820,397 4,059,921 4,136,067
Noninterest expense:
Salaries and employee benefits 5,563,841 5,286,500 4,783,799
Net occupancy and equipment 1,929,798 1,826,313 1,762,799
Other operating expenses 2,844,366 3,134,012 2,671,437
Total noninterest expense 10,338,005 10,246,825 9,218,035
Earnings before income taxes 169,339 1,022,196 1,327,495
Income tax expense 85,083 379,018 74,551
Net earnings $ 84,256 643,178 1,252,944
Net earnings per share $ 0.06 0.48 0.94
Weighted average outstanding shares 1,329,684 1,329,684 1,329,684
See accompanying notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
gain (loss) on
investment
Common stock Additional Retained securities
Shares Amount paid-in capital earnings available for sale Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,329,684 $ 1,329,684 1,470,210 5,563,024 (77,463) 8,285,455
Net earnings - - - 1,252,944 1,252,944
Dividends paid - $0.10 per
share - - - (132,968) - (132,968)
Change in unrealized gain (loss)
on investment securities
available for sale, net of tax - - - - 165,210 165,210
Balance, December 31, 1995 1,329,684 1,329,684 1,470,210 6,683,000 87,747 9,570,641
Net earnings - - - 643,178 - 643,178
Dividends paid - $0.10 per share - - - (132,968) - (132,968)
Change in unrealized gain (loss)
on investment securities
available for sale, net of tax - - - - (118,364) (118,364)
Balance, December 31, 1996 1,329,684 1,329,684 1,470,210 7,193,210 (30,617) 9,962,487
Net earnings - - - 84,256 - 84,256
Change in unrealized gain (loss)
on investment securities
available for sale, net of tax - - - - 52,182 52,182
Balance, December 31, 1997 1,329,684 $ 1,329,684 1,470,210 7,277,466 21,565 10,098,925
</TABLE>
See accompanying notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating
activities:
Net earnings $ 84,256 643,178 1,252,944
Adjustments to reconcile net
earnings to net cash
provided by operating activities:
Provision for loan losses 121,000 65,000 416,670
Depreciation 858,828 685,436 643,611
Amortization and accretion 24,887 (76,997) (244,233)
Provision for deferred income taxes (169,520) 179,070 (213,730)
Gain on sale of assets (58,494) (19,042) (96,360)
Change in other assets (81,598) (327,022) (148,486)
Change in accrued expenses and other
liabilities 331,828 (219,842) 309,156
Net cash provided by operating
activities 1,111,187 929,781 1,919,572
Cash flow from investing activities:
Proceeds from maturities of
investment securities
held to maturity 8,998,044 12,557,117 12,828,965
Proceeds from maturities of
investment securities
available for sale 5,485,896 2,204,200 3,550,000
Purchases of investment securities
held to maturity - (6,500,200) (8,260,943)
Purchases of investment securities
available for sale (6,866,098)(6,188,913) (5,218,435)
Proceeds from sales of investment
securities available for sale 6,982,500 - -
Purchase of other investments (550,700) (385,500) -
Purchases of loans (1,644,318) - -
Net change in loans (3,530,733)(12,603,287) (667,590)
Purchases of premises and equipment (914,745) (1,347,892) (456,973)
Proceeds from sale of premises and
equipment - 9,400 100,000
Purchase of cash value life
insurance policies (2,500,000) - -
Proceeds from sale of real estate
acquired through foreclosure 110,881 293,733 689,683
Net cash provided (used) by
investing activities 5,570,727 (11,961,342) 2,564,707
Cash flows from financing
activities:
Net change in deposits (17,006,479) 16,452,805 (6,017,990)
Principal payments on long-term debt (180,000) (135,000) (393,223)
Dividends paid - (132,968) (132,968)
Net cash (used) provided by
financing activities (17,186,479) 16,184,837 (6,544,181)
Net change in cash and cash
equivalents (10,504,565) 5,153,276 (2,059,902)
Cash and cash equivalents at
beginning of year 19,168,430 14,015,154 16,075,056
Cash and cash equivalents at end
of year $ 8,663,865 19,168,430 14,015,154
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Supplemental disclosures of cash paid
during
the year for:
Interest $ 2,954,869 2,922,016 2,912,000
Income taxes $ - 493,000 159,000
Supplemental disclosure of noncash
investing transactions:
Real estate acquired through
foreclosure $ 835,616 186,962 36,000
Financed sales of other real estate $ 61,673 - -
Change in unrealized gain (loss) on
investment securities available for
sale, net of tax $ 52,182 (118,364) 165,210
See accompanying notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The following is a description of the more significant
accounting policies.
Business
Citizens Bancshares Corporation and subsidiary (the
"Company") is a one-bank holding company that provides a
full range of commercial banking services to individual and
corporate customers in metropolitan Atlanta through its
wholly owned subsidiary, Citizens Trust Bank (the "Bank").
The Bank operates under a state charter and serves its
customers in metropolitan Atlanta through seven full-service
branches. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and
with general practices within the banking industry. In
preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect
the reported amounts in the consolidated financial
statements. Actual results could differ significantly from
those estimates. Material estimates common to the banking
industry that are particularly susceptible to significant
change in the near term are the allowance for loan losses
and valuation allowances associated with the recognition of
deferred tax assets.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks
and federal funds sold. Generally, federal funds are sold
for periods of less than 90 days.
Investment Securities
The Company classifies investments in one of three
categories: held to maturity securities which are reported
at amortized cost, trading securities which are reported at
fair value with unrealized holding gains and losses included
in earnings, and available for sale securities which are
recorded at fair value with unrealized holding gains and
losses included as a separate component of stockholders'
equity. The Company had no investment securities classified
as trading securities during 1997 and 1996.
Premiums and discounts on available for sale and held-to-
maturity securities are amortized and accreted using a
method which approximates a level yield.
Gains and losses on sales of investment securities are
recognized upon disposition, based on the adjusted cost of
the specific security. A decline in market value of any
security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new
cost basis for the security.
Other Investments
Other investments consist of equity securities with no
readily determinable market value. These investments are
carried at cost.
Loans and Allowance for Loan Losses
Loans are reported at principal amounts outstanding less
unearned income and the allowance for loan losses. Interest
income on loans is recognized on a level-yield basis. Loan
fees and certain direct origination costs are deferred and
amortized over the estimated terms of the loans using the
level-yield method. Discounts on loans purchased are
accreted using the level-yield method over the estimated
remaining life of the loan purchased.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Loans and Allowance for Loan Losses, continued
Management considers a loan to be impaired when, based on
current information and events, it is probable that all
amounts due according to the contractual terms of the loan
will not be collected. Impaired loans are measured based on
the present value of expected future cash flows, discounted
at the loan's effective interest rate, or at the loan's
observable market price, or the fair value of the collateral
if the loan is collateral dependent.
Loans are generally placed on nonaccrual status when the
full and timely collection of principal or interest becomes
uncertain or the loan becomes contractually in default for
90 days or more as to either principal or interest unless
the loan is well collateralized and in the process of
collection. When a loan is placed on nonaccrual status,
current period accrued and uncollected interest is charged
to interest income on loans unless management feels the
accrued interest is recoverable through the liquidation of
collateral. Interest income, if any, on impaired loans is
recognized on the cash basis.
The allowance for loan losses is based on management's
evaluation of the loan portfolio under current economic
conditions, historical loan loss experience, adequacy of
collateral, and such other factors which, in management's
judgment, deserve recognition in estimating loan losses.
Loans are charged against the allowance when, in the opinion
of management, such loans are deemed to be uncollectible and
subsequent recoveries are added to the allowance.
Management believes the allowance for loan losses is
adequate. While management uses available information to
recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions,
particularly in the metropolitan Atlanta area. In addition,
regulatory agencies, as an integral part of their
examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based on
their judgments about information available to them at the
time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation which is computed using the straight-line
method over the estimated useful lives of the related
assets. When assets are retired or otherwise disposed, the
cost and related accumulated depreciation are removed from
the accounts, and any resulting gain or loss is reflected in
earnings for the period. The cost of maintenance and repairs
which do not improve or extend the useful life of the
respective asset is charged to earnings as incurred, whereas
significant renewals and improvements are capitalized. The
range of estimated useful lives for premises and equiment
are generally as follows:
Buildings and improvements 5 - 20 years
Furniture and equipment 3 - 7 years
Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is reported at the
lower of cost or fair value less estimated disposal costs,
determined on the basis of current appraisals, comparable
sales, and other estimates of value obtained principally
from independent sources. Any excess of the loan balance at
the time of foreclosure over the fair value of the real
estate held as collateral is treated as a loan loss. Any
subsequent declines in value are charged to earnings.
Intangible Assets
Intangible assets includes deposit assumption premiums from
the purchase of certain assets and liabilities of a
financial institution during 1994. The deposit assumption
premiums are being amortized over five years, the estimated
average life of the deposit base acquired, using the
straight-line method.
Income Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
the assets and liabilities are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income tax expense
in the period that includes the enactment date.
In the event the future tax consequences of differences
between the financial reporting bases and the tax bases of
the Company's assets and liabilities result in deferred tax
assets, an evaluation of the probability of being able to
realize the future benefits indicated by such assets is
required. A valuation allowance is provided for the portion
of a deferred tax asset when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax
assets, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income,
and tax planning strategies.
Net Earnings Per Share
Statement of Financial Accounting Standards "SFAS" No. 128
"Earnings Per Share" became effective for the Company for
the year ended December 31, 1997. This new standard
specifies the computation, presentation and disclosure
requirements for earnings per share and is designed to
simplify previous earnings per share standards and to make
domestic and international practices more compatible.
Earnings per share are based on the weighted average number
of common shares outstanding during the period while the
effects of potential common shares outstanding during the
period are included in diluted earnings per share. All
earnings per share amounts conform to the provisions of SFAS
No. 128.
SFAS No. 128 requires the presentation on the face of the
statement of earnings of earnings per common share with and
without the dilutive effects of potential common stock
issuances from instruments such as options, convertible
securities and warrants. Additionally, the new statement
requires the reconciliation of the amounts used in the
computation of both "earnings per share" and "diluted
earnings per share." As the Company has no potential stock
issuances outstanding, earnings per share amounts for the
years ended December 31, 1997, 1996 and 1995 are computed by
dividing net earnings by weighted average common shares
outstanding.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and
its components in a full set of general-purpose financial
statements. SFAS No. 131 specifies the presentation and
disclosure of operating segment information reported in the
annual report and interim reports issued to stockholders.
The provisions of both statements are effective for fiscal
years beginning after December 15, 1997. The management of
the Company believes the adoption of these statements will
not have a material impact on the Company's financial
position, results of operations, or liquidity.
(2) Investment Securities
Investment securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
At December 31, 1997:
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. Government agencies $8,999,904 1,341 21,590 8,979,655
Mortgage-backed securities 7,382,342 119,286 78,668 7,422,960
State, county, and
municipal securities 699,687 15,792 - 715,479
Totals $17,081,933 136,419 100,258 17,118,094
At December 31, 1996:
U.S. Treasury and
U.S. Government agencies $15,677,378 14,457 158,044 15,533,791
Mortgage-backed securities 9,525,145 166,717 101,364 9,590,498
State, county, and
municipal securities 869,707 43,035 - 912,742
Totals $26,072,230 224,209 259,408 26,037,031
</TABLE>
Investment securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. Government agencies $ 6,188,912 9,591 4,074 6,194,429
State, county, and
municipal securities 897,263 21,158 - 924,421
Totals $ 7,086,175 36,749 4,074 7,118,850
At December 31, 1996:
U.S. Treasury and
U.S. Government agencies $ 12,684,485 37,407 83,796 12,638,096
</TABLE>
(2) Investment Securities, continued
The amortized costs and fair values of investment securities
at December 31, 1997, by contractual maturity, are shown
below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or
prepay obligations with and without call or prepayment
penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 2,900,237 2,907,715 - -
Due after one year through
five years 6,799,354 6,787,419 3,989,984 3,999,574
Due after five years through
ten years - - 1,810,000 1,810,552
Due after ten years - - 1,286,191 1,308,724
Mortgage-backed securities 7,382,342 7,422,960 - -
$ 17,081,933 17,118,094 7,086,175 7,118,850
</TABLE>
Proceeds from sales of securities available for sale during
1997 were $6,982,500. Gross gains of $6,062 were realized
on those sales. There were no sales of securities in 1996
or 1995.
Investment securities with carrying values of approximately
$22,596,000 and $34,373,000 at December 31, 1997 and 1996,
respectively, were pledged to secure public funds on deposit
and for other purposes as required by law.
(3) Loans
Loans outstanding, by classification, are summarized as
follows:
December 31,
1997 1996
Commercial, financial, and agricultural $ 17,058,125 13,727,346
Installment 19,454,268 13,850,289
Real estate - commercial 20,740,642 31,114,851
Real estate - residential 24,316,460 22,064,124
Real estate - construction 5,209,238 1,830,000
86,778,733 82,586,610
Less: Unearned income 194,764 178,803
Allowance for loan losses 1,304,841 1,441,131
$ 85,279,128 80,966,676
A substantial portion of the Company's loan portfolio is
collateralized by real estate in metropolitan Atlanta.
Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio is susceptible to
changes in market conditions in the metropolitan Atlanta
area.
Activity in the allowance for loan losses is summarized as
follows:
Years Ended December 31,
1997 1996 1995
Balance at beginning of year $ 1,441,131 1,566,140 1,047,072
Provision 121,000 65,000 416,670
Loans charged off (531,468) (423,676) (335,711)
Recoveries on loans previously charged
off 274,178 233,667 438,109
Balance at end of year $ 1,304,841 1,441,131 1,566,140
Nonaccrual loans amounted to $852,000 and $1,286,000 at
December 31, 1997 and 1996, respectively, and the interest
income on the nonaccrual loans which would have been
reported for the years ended December 31, 1997, 1996 and
1995 is summarized as follows:
Years Ended December 31,
1997 1996 1995
Interest at contracted rate $ 137,000 83,000 91,000
Interest recorded as income (113,000) (10,000) -
Reduction of interest income $ 24,000 73,000 91,000
At December 31, 1997 and 1996, the recorded investment in
loans that are considered to be impaired was approximately
$1,077,000 and $1,959,000, respectively. The related
allowance for loan losses for each of these loans was
approximately $174,000 and $302,000, respectively. The
average investment in impaired loans during 1997 and 1996
was approximately $1,518,000 and $2,000,000, respectively.
The Company has direct and indirect loans outstanding to
certain executive officers, directors, and principal holders
of equity securities (including their associates).
Management believes such loans are made substantially on the
same terms as those prevailing at the time for comparable
transactions with unaffiliated customers. The following
table summarizes the activity in these loans during 1997:
Balance at December 31, 1996 $ 1,937,000
New loans 2,638,000
Repayments (1,943,000)
Balance at December 31, 1997 $ 2,632,000
(4) Premises and Equipment
Premises and equipment are summarized as follows:
December 31,
1997 1996
Land $ 389,610 389,610
Buildings and improvements 2,086,947 1,578,301
Furniture and equipment 3,432,406 3,607,580
5,908,963 5,575,491
Less accumulated depreciation 2,961,609 2,684,054
$ 2,947,354 2,891,437
Depreciation expense totaled $858,828, $685,436 and $643,611
for the years ended December 31, 1997, 1996 and 1995,
respectively.
(5) Deposits
The following is a summary of interest-bearing deposits:
1997 1996
NOW and money market accounts $ 27,683,296 24,258,804
Savings accounts 13,803,565 14,440,873
Time deposits of $100,000 or more 20,390,661 28,808,299
Other time deposits 19,740,188 19,052,511
$ 81,617,710 86,560,487
At December 31, 1997, maturities of time deposits are
approximately as follows:
Years ended December 31,
1998 $34,902,000
1999 2,094,000
2000 1,239,000
2001 1,820,000
2002 and thereafter 76,000
$ 40,131,000
Demand deposits totaling approximately $77,000 and $164,500
have been reclassified as loan balances at December 31, 1997
and 1996, respectively. Additionally, the Bank has deposits
from related parties totaling approximately $321,000 and
$471,000 at December 31, 1997 and 1996, respectively.
(6) Long-Term Debt
Long-term debt at December 31, 1997 and 1996 consists of a
term loan payable to a bank. The loan accrues interest at
prime less 0.25% and interest is payable quarterly.
Principal is payable in quarterly installments of $45,000
through March 31, 2001. The loan is collateralized by a
pledge of the common stock of the Bank.
The loan agreement contains certain covenants, the most
restrictive of which relate to limitations on dividend
payments, additional debt, and capital expenditures, and to
minimum capital levels of the Company and the Bank, as well
as certain financial ratios. At December 31, 1997, the
Company was in violation of certain of these covenants and
has obtained a waiver from the lender through 1998 for these
violations.
(7) Income Taxes
The components of income tax expense consist of:
1997 1996 1995
Current tax expense $ 254,603 199,948 288,281
Deferred tax expense (benefit) (169,520) 179,070 (213,730)
$ 85,083 379,018 74,551
Income tax expense for the years ended December 31, 1997,
1996 and 1995 differed from the amounts computed by applying
the statutory federal income tax rate of 34% to earnings
before income taxes as follows:
1997 1996 1995
Income tax expense at statutory rate $ 57,575 347,547 451,348
Tax-exempt interest income, net of
disallowed interest expense (31,036) (24,196) (40,662)
Non-deductible merger expenses 40,872 - -
Utilization of alternative minimum tax
credits - - (129,908)
Change in the valuation allowance for
deferred tax assets - (76,000) (211,000)
Other, net 17,672 131,66 4,773
Income tax expense $ 85,083 379,018 74,551
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities are presented below:
1997 1996
Deferred tax assets:
Loans, principally due to difference
in allowance forloan losses and
deferred loan fees $ 307,132 262,106
Alternative minimum tax credit - 45,722
Nonaccrual loan interest 30,613 -
Postretirement benefit accrual 89,109 61,971
Net unrealized loss on securities
available for sale - 15,772
Premium paid in acquisition 51,835 33,978
Premises and equipment 33,669 -
Nondeductible salaries 26,003 -
Empowerment zone tax credit 12,634 -
Other 1,075 11,144
Total gross deferred tax assets 552,070 430,693
Deferred tax liabilities:
Premises and equipment - 32,905
Net unrealized gain on securities
available for sale 11,109 -
Other 2,670 2,136
Total gross deferred tax liabilities 13,779 35,041
Net deferred tax assets $ 538,291 395,652
The Company also has, at December 31, 1997, net operating
loss carryforwards of approximately $17,800,000 for state
income tax purposes, which expire in years 1999 through 2011,
and state income tax credits of approximately $265,000 which
expire in years 1998 through 2002. Due to the uncertainty
relating to the realizability of these carryforwards and
credits, management currently considers these potential tax
attributes to be permanently impaired.
(8) Employee Benefits
Defined Contribution Plan
The Company sponsors a defined contribution 401(k) plan
covering substantially all full-time employees. Employee
contributions are voluntary. The Company matches employee
contributions at 25% up to a maximum of 6% of compensation.
During the years ended December 31, 1997, 1996 and 1995, the
Company recognized $64,453, $37,690 and $31,735,
respectively, in expenses related to this plan.
Other Postretirement Benefit Plans
In addition to the Company's defined contribution plan, the
Company sponsors postretirement medical and life insurance
benefits to full-time employees who meet certain minimum age
and service requirements. The plan contains cost sharing
features with retirees.
The following table presents the plan's funded status
reconciled with amounts recognized in the consolidated
balance sheets at December 31, 1997 and 1996:
1997 1996
Accumulated postretirement benefit
obligation $ (231,314) (302,601)
Unrecognized transition obligation 256,727 272,772
Unrecognized prior service cost (118,308) (125,267)
Unrecognized actuarial gain (122,808) ( 31,198)
Accrued postretirement benefit cost
included in other liabilities $ (215,703) (186,294)
Net periodic postretirement benefit cost includes the following
components:
Years Ended December 31,
1997 1996 1995
Service cost $ 23,140 26,805 12,322
Interest cost 22,131 21,976 18,221
Net amortization 7,846 9,328 7,472
Net periodic postretirement benefit cost $ 53,117 58,109 38,015
For measurement purposes, a 7.5% annual rate of increase in
the per capita cost of covered benefits (i.e., health care
cost trend rate) was assumed for 1998; the rate was assumed
to decrease gradually to 5% over 28 years and remain level
thereafter. The effect of a one percentage point increase in
the assumed health care cost trend rate is not significant.
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% at
January 1, 1998 and 1997.
During 1997, the Bank initiated a postretirement benefit plan
to provide retirement benefits to its key officers and Board
members and to provide death benefits for their designated
beneficiaries. Under the plan, the Bank purchased whole life
insurance contracts on the lives of certain key officers and
Board members. The increase in cash surrender value of the
contracts, less the Bank's cost of funds, constitutes the
Bank's contribution to the plan each year. In the event the
insurance contracts fail to produce positive returns, the
Bank has no obligation to contribute to the plan. At December
31, 1997, the cash surrender value of these insurance
contracts was approximately $2,500,000.
(9)Commitments and Contingencies
The Company is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets.
The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party of the financial instrument
for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in
making commitments and conditional obligations related to off-
balance-sheet financial instruments as it does for the
financial instruments recorded in the consolidated balance
sheet.
Approximate
Contractual Amount
1997 1996
Financial instruments whose contract
amounts
represent credit risk:
Commitments to extend credit $ 14,564,000 12,503,000
Standby letters of credit $ 250,000 1,126,000
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash
requirements. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and
residential and commercial real estate. Standby letters of
credit are commitments issued by the Company to guarantee the
performance of a customer to a third party.
As of December 31, 1997, future minimum lease payments under
all noncancelable lease agreements inclusive of sales tax and
maintenance costs for the next five years are as follows:
Years ended December 31,
1998 $ 297,375
1999 279,188
2000 267,408
2001 10,084
$ 854,055
Rent expense in 1997, 1996 and 1995 approximated $240,000,
$252,000 and $254,000, respectively.
The Bank has entered into a long-term license agreement for
the operation of a branch office in a supermarket which
expires in 2013. Future minimum license fee payments under
this agreement at December 31, 1997 are as follows:
Years ended December 31,
1998 $ 47,425
1999 52,100
2000 52,100
2001 52,100
2002 52,100
Thereafter 555,734
$811,559
License fee expense associated with these agreements for
1997, 1996 and 1995 amounted to $90,000, $89,000 and
$125,000, respectively.
The Company and the Bank are involved in various claims and
legal actions arising in the ordinary course of business. In
the opinion of management, based in part on the advice of
counsel, the ultimate disposition of these matters will not
have a material adverse impact on the Company's consolidated
financial position.
(10) Fair Value of Financial Instruments
Following are disclosures of fair value information about
financial instruments, whether or not recognized on the face
of the balance sheet, for which it is practicable to estimate
that value. The assumptions used in the estimation of the
fair values are based on estimates using discounted cash
flows and other valuation techniques. The use of discounted
cash flows can be significantly affected by the assumptions
used, including the discount rate and estimates of future
cash flows. The following disclosures should not be
considered a surrogate of the liquidation value of the
Company, but rather a good-faith estimate of the increase or
decrease in value of financial instruments held by the
Company since purchase, origination, or issuance.
Cash and Cash Equivalents
For cash, due from banks and federal funds sold, the
carrying amount is a reasonable estimate of fair value.
Investment Securities
Fair value of investment securities are based on quoted
market prices.
Other Investments
The carrying amount of other investments approximates the
fair value.
Loans
The fair value of fixed rate loans is estimated by
discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with
similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value.
Cash Surrender Value of Life Insurance
Cash values of life insurance policies are carried at the
value for which such policies may be redeemed for cash.
Deposits
The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed
rate certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
Long-term Debt
Since the term loan bears a reasonable variable interest
rate, the carrying value approximates fair value.
Commitments to Extend Credit and Standby Letters of
Credit
Because commitments to extend credit and standby letters
of credit are made using variable rates, or are recently
executed, the contract value is a reasonable estimate of
fair value.
Limitations
Fair value estimates are made at a specific point in
time, based on relevant market information and
information about the financial instrument. These
estimates do not reflect any premium or discount that
could result from offering for sale at one time the
Company's entire holdings of a particular financial
instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair
value estimates are based on many judgments. These
estimates are subjective in nature and involve
uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-
balance-sheet financial instruments without attempting to
estimate the value of anticipated future business and the
value of assets and liabilities that are not considered
financial instruments; for example, premises and
equipment. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and
have not been considered in the estimates.
The carrying value and estimated fair value of the Company's
financial instruments at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(in thousands)
<S> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,664 8,664 19,168 19,168
Investment securities $ 24,201 24,237 38,710 38,675
Other investments $ 1,182 1,182 631 631
Loans, net $ 85,279 83,248 80,967 78,958
Cash surrender value of
life insurance $ 2,500 2,500 - -
Financial liabilities:
Deposits $ 115,803 115,883 132,889 132,995
Long-term debt $ 585 585 765 765
Off-balance-sheet financial
instruments:
Commitments to extend credit$ 14,564 14,564 12,503 12,503
Stand-by letters of credit $ 250 250 1,126 1,126
</TABLE>
(11) Condensed Financial Information Of Citizens Bancshares
Corporation (Parent Only)
Condensed Balance Sheets
December 31,
Assets: 1997 1996
Cash $ 25,208 12,298
Investment in Bank 10,619,046 10,658,711
Other assets 39,671 56,478
$ 10,683,925 10,727,487
Liabilities and Stockholders'
Equity:
Long-term debt $ 585,000 765,000
Stockholders' equity 10,098,925 9,962,487
$ 10,683,925 10,727,487
Condensed Statements of Earnings
For the Years
Ended December 31,
1997 1996 1995
Dividend from the Bank $ 255,000 381,484 450,000
Expenses:
Interest 57,968 63,017 60,464
Other 60,600 53,675 45,633
Total expenses 118,568 116,692 106,097
Earnings before income tax
benefit and equity in
undistributed earnings of 136,432 264,792 343,903
Income tax benefit 39,671 39,675 23,786
Earnings before equity in
undistributed
earnings of the Bank 176,103 304,467 367,689
Dividends paid in excess of
earnings of Bank (91,847) - -
Equity in undistributed
earnings of the Bank - 338,711 885,255
Net earnings $ 84,256 643,178 1,252,944
Condensed Statements of Cash Flows
Years Ended December 31,
1997 1996 1995
Cash flows from operating
activities:
Net earnings $ 84,256 643,178 1,252,944
Adjustments to reconcile
net earnings to net cash provided by
operating activities:
Equity in undistributed
earnings of the Bank - (338,711) (885,255)
Dividends paid in excess
of undistributed earnings
of subsidiaries 91,847 - -
Change in other assets 16,807 (28,417) (23,786)
Change in other liabilities - (12,522) 1,271
Net cash provided by
operating activities 192,910 263,528 345,174
Cash flows from financing
activities:
Payment on long-term debt (180,000) (135,000) (225,000)
Dividends paid - (132,968) (132,968)
Net cash used by financing
activities (180,000) (267,968) (357,968)
Net change in cash 12,910 (4,440) (12,794)
Cash at beginning of year 12,298 16,738 29,532
Cash at end of year $ 25,208 12,298 16,738
Supplemental disclosures
of cash flow information:
Cash paid during the year
for:
Interest $ 57,968 75,539 59,193
Income taxes $ - 493,000 159,000
Noncash investing
activities:
Change in Bank's
unrealized gain (loss) on
investment securities
available for sale,
net of tax $ 52,182 (118,364) 165,210
(12) Regulatory Matters
Capital Adequacy
The Company and the Bank are subject to various regulatory
capital requirements administered by state and federal
banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices.
The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum
amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management
believes, as of December 31, 1997, the Company meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997 the most recent notification from
the various regulators categorized the Bank as well
capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk-
based and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification
that management believes have changed the institution's
category.
The Company's and the Bank's actual capital amounts and
ratios are also presented in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31,1997:
Total Capital (to
Risk Weighted
Assets):
Consolidated $ 11,186 11% 7,552 >8% N/A N/A
Bank $ 11,707 12% 7,549 >8% 9,436 >10%
Tier 1 Capital
(to Risk Weighted
Assets):
Consolidated $ 10,006 11% 3,776 >4% N/A N/A
Bank $ 10,527 11% 3,774 >4% 5,662 >6%
Tier 1 Capital
(to Average
Assets):
Consolidated $ 10,006 7% 5,371 >4% N/A N/A
Bank $ 10,527 8% 5,369 >4% 6,712 >5%
As of December 31,
1996:
Total Capital (to
Risk Weighted
Assets):
Consolidated $ 11,002 12% 7,228 >8% N/A N/A
Bank $ 11,699 13% 7,227 >8% 9,033 >10%
Tier 1 Capital
(to Risk Weighted
Assets):
Consolidated $ 9,867 11% 3,614 >4% N/A N/A
Bank $ 10,564 12% 3,613 >4% 5,420 >6%
Tier 1 Capital
(to Average
Assets):
Consolidated $ 9,867 7% 5,652 >4% N/A N/A
Bank $ 10,564 8% 5,651 >4% 7,064 >5%
</TABLE>
Dividend Limitation
The amount of dividends paid to the Company from the Bank is
limited by various banking regulatory agencies. Any such
dividends will be subject to maintenance of required capital
levels. The Georgia Department of Banking and Finance
requires prior approval for a bank to pay dividends in
excess of 50% of its prior year's earnings. The amount of
dividends available from the Bank without prior approval
from the regulators for payment in 1998 is approximately
$82,000.
(13) Supplementary Income Statement Information
Components of other operating expenses in excess of 1% of
total income in any of the respective years are
approximately as follows:
1997 1996 1995
Professional services - legal $ 225,000 262,000 219,000
Professional services - other 118,000 198,000 179,000
Stationery and supplies 207,000 254,000 179,000
Advertising 131,000 147,000 152,000
Data processing 238,000 201,000 135,000
Postage 133,000 147,000 195,000
Telephone 264,000 216,000 157,000
Other losses 247,000 471,000 217,000
Merger related 175,000 - -
(14) Business Combinations
On October 1, 1997, the Company entered into an agreement
with First Southern Bancshares, Inc. (FSB) to merge in a
transaction to be accounted for as a pooling of interest.
The agreement provided that the shareholders of FSB would
receive 1.508 shares of the Company's common stock for each
share of FSB common stock. As a result of the transaction,
former FSB shareholders hold approximately 38.6% of the
outstanding shares of the Company. The transaction received
regulatory approval and the merger was consummated on
January 30, 1998.
The following summarized operating data gives effect to the
merger had it occurred on January 1, 1995:
1997 1996 1995
Total assets 185,133,000 197,023,000 170,620,000
Shareholders equity 16,213,000 15,590,000 14,875,000
Net earnings 317,000 945,000 1,563,000
Earnings per share 0.15 0.45 0.74
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7689
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7119
<INVESTMENTS-CARRYING> 17082
<INVESTMENTS-MARKET> 0
<LOANS> 86584
<ALLOWANCE> 1305
<TOTAL-ASSETS> 128160
<DEPOSITS> 115803
<SHORT-TERM> 195
<LIABILITIES-OTHER> 1478
<LONG-TERM> 585
0
0
<COMMON> 1330
<OTHER-SE> 8769
<TOTAL-LIABILITIES-AND-EQUITY> 128160
<INTEREST-LOAN> 7503
<INTEREST-INVEST> 2183
<INTEREST-OTHER> 210
<INTEREST-TOTAL> 9897
<INTEREST-DEPOSIT> 3012
<INTEREST-EXPENSE> 3089
<INTEREST-INCOME-NET> 6808
<LOAN-LOSSES> 121
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10338
<INCOME-PRETAX> 169
<INCOME-PRE-EXTRAORDINARY> 169
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<YIELD-ACTUAL> 8.42
<LOANS-NON> 852
<LOANS-PAST> 86
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1077
<ALLOWANCE-OPEN> 1441
<CHARGE-OFFS> 531
<RECOVERIES> 274
<ALLOWANCE-CLOSE> 1305
<ALLOWANCE-DOMESTIC> 746
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 559
</TABLE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Citizens Bancshares Corporation
We have audited the accompanying consolidated statement of operations,
shareholders' equity, and cash flows for the year ended December 31, 1995
of Citizens Bancshares Corporation and subsidiary (the "Company").
These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
results of operations and cash flows of Citizens Bancshares
Corporation and subsidiary for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Atlanta, Georgia
February 20, 1998
