SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) TO THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
( )TRANSITION REPORT UNDER SECTION 13 OR 15 (d) TO THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission File No: 0 - 14535
CITIZENS BANCSHARES CORPORATION
(Name of small business issuer in its charter)
Georgia 58 - 1631302
(State or other jurisdiction of IRS Employer identification No.)
incorporation or organization)
175 John Wesley Dobbs Avenue, N.E., Atlanta, Georgia 30303
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (404)659-5959
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months
( or for such shorter period that the registrant was required to file
such reports ), and (2) has been subject to such filing requirements for
the 90 days. Yes X No .
State the number of shares outstanding if 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 August 1, 1998.
Part I. Financial Information:
Citizens Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(unaudited-amounts in thousands, except per share amounts)
ASSETS
1998 1997
Cash and due from banks $10,275 10,637
Interest bearing deposits 10,458 857
Federal funds sold 2,520 3,456
Investment securities:
Held to maturity 18,416 13,164
Available for sale 16,670 20,796
Other Investments 1,288 2,017
Total Investments 36,374 35,977
Loans, net of unearned income 116,353 121,414
Less allowance for loan losses 1,618 1,752
Loans, net 114,735 119,662
Loans held for sale 426 623
Premises and equipment, net 6,231 5,844
Cash value of life insurance 4,029 3,640
Other assets 5,021 4,437
Total assets $190,069 185,133
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $47,962 43,633
Interest-bearing 121,450 120,311
Total deposits 169,412 163,944
Treasury, tax and loan account 137 195
Short-term debt 1,035 1,851
Long-term debt - 585
Other liabilities 2,369 2,349
172,953 168,924
Shareholders' equity:
Common stock-$1 par value. Authorized
5,000,000 shares; issued and outstanding
2,164,065 shares 2,164 2,164
Additional Paid-In Capital 6,174 6,174
Accumulated other comprehensive income -11 31
Retained earnings 8,789 7,840
Total shareholders' equity 17,116 16,209
Total liabilities and shareholders equity $190,069 185,133
Citizens Bancshares Corporation and Subsidiaries
Consolidated Statements of Earnings and Comprehensive Income
(unaudited-amounts in thousands, except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
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INTEREST INCOME:
Loans, including fees $2,849 2,708 5,715 5,275
Investment securities:
Taxable 477 749 962 1,557
Tax-exempt 66 60 124 110
Interest bearing deposits 196 10 301 10
Federal funds sold 32 24 82 116
Total interest income 3,620 3,551 7,184 7,068
INTEREST EXPENSE:
Deposits 1,268 1,241 2,477 2,518
Other borrowed funds 27 48 39 68
Long-term debt 5 14 17 30
Total interest expense 1,300 1,303 2,533 2,616
Net interest income 2,320 2,248 4,651 4,452
Provision for loan losses 50 45 50 90
Net interest income after provision
for loan losses 2,270 2,203 4,601 4,362
NONINTEREST INCOME:
Service charges on deposit accounts 1,043 1,011 1,984 2,054
Commission and fees 777 298 1,370 536
Other operating income 199 288 482 596
Total noninterest income 2,019 1,597 3,836 3,186
NONINTEREST EXPENSE:
Salaries and employee benefits 1,809 1,947 3,619 3,917
Net occupancy and equipment 652 579 1,296 1,151
Other operating expenses 1,271 1,149 2,227 2,171
Total other expense 3,732 3,675 7,142 7,239
Earnings before income taxes 557 125 1,295 309
Income taxes 112 23 346 84
Net earnings $445 102 949 225
Net earnings 445 102 949 225
Other comprehensive income, net of tax:
Unrealized holding losses ( 34) 230 (41) 29
Comprehensive income 411 332 908 254
Net earnings per common share $0.21 0.05 0.44 0.10
Average outstanding shares 2,164 2,164 2,164 2,164
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Citizens Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended June 30, 1998 and 1997
(unaudited-amounts in thousands, except per share amounts)
1998 1997
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Cash flows from operating activities:
Net earnings $949 225
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Provision for loan losses 50 90
Depreciation and amortization 568 546
Provision for deferred taxes (4) (6)
Amortization (accretion), net (17) 4
Accretion (amortization) of deferred loan fees 46 17
Gain on investments (11) (10)
Increase in other assets (1,634) (3,697)
Increase in accrued expenses and other liabilities 20 315
Net cash (used) provided by operating activities (33) (2,516)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held to maturity 4,725 6,565
Proceeds from maturities of investment
securities available for sale 6,595 10,996
Proceeds from sale of investment
securities held to maturity - 250
Purchases of investment securities available for sale (12,489) (6,616)
Net decrease ( increase) in other investments 729 (1,130)
Net decrease (increase) in loans 4,937 (1,931)
Purchases of premises and equipment (955) (1,017)
Proceeds from sale of real estate acquired
through foreclosure 785 95
Net cash provided (used) by investing activities 4,327 7,212
Cash flows from financing activities:
Net increase (decrease) in demand deposits 4,329 (11,099)
Net increase in time and savings deposits 1,139 (3,284)
Net (decrease) increase in short-term debt (816) 3,600
Principal payment on long-term debt (585) (90)
Proceeds from sale of stock - 260
Dividends paid - (23)
Net(decrease) increase in treasury, tax and loan accoun (58) 16
Net cash provided (used) by financing activities 4,009 (10,620)
Net increase (decrease) in cash and cash equivalents 8,303 (5,924)
Cash and cash equivalents at beginning of period 14,950 23,327
Cash and cash equivalents at end of period $23,253 17,403
Supplemental disclosures of cash paid during the period for:
Interest $2,646 2,642
Income taxes $440 55
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure $118 836
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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
June 30, 1998 and 1997
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited statements have been prepared pursuant to the
rules and regulations for reporting on Form 10 - QSB. Accordingly, certain
disclosures required by generally accepted accounting principles are not
included herein. These interim statements should be read in conjunction
with the financial statements and notes thereto included in the company's
latest Annual Report on Form 10 - KSB.
On January 30, 1998, Citizens Bancshares Corporation (the "Company") and
First Southern Bancshares, Inc. ("First Southern), a bank holding company
that wholly owned one bank and a non-bank subsidiary, merged. The
transaction was a tax-free exchange. The merger was accounted for as a
pooling of interest with the Company being the surviving entity.
First Southern also owned FSB Mortgage Services, Inc. ("FSB Mortgage") which
originates residential mortgages through a variety of products. The mortgage
subsidiary is now wholly owned by the Company.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Citizens Trust Bank ( the "Bank" ) and FSB
Mortgage. The Bank has a wholly owned subsidiary, Atlanta Mortgage Brokerage
and Servicing Co., whose accounts are also included. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements of Citizens Bancshares Corporation and
Subsidiaries ( the "Company" ) as of June 30, 1998 and for the three and six
month periods ended June 30,1998 and 1997 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of the
financial position and results of operations and cash flows for the three
month period have been included. All adjustments are of a normal recurring
nature.
2. ACCOUNTING AND REGULATORY MATTERS
IMPAIRED LOANS
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 nonaccrual loans
is generally recognized on the cash basis.
At June 30, 1998, the recorded investment in loans that are considered
to be impaired was approximately $916,000 a decrease of $314,000 from
December 31, 1997. At The related allowance for loan losses for each of
these loans was approximately $116,000 and $244,000, respectively. For the
Three and six month periods ended June 30, 1998, the Company recognized
approximately $4,000 and $7,000 in interest income on these impaired loans
on an accrual basis, respectively.
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans, real estate acquired
through foreclosure and repossessed assets. Nonperforming loans consist
of loans which are past due with respect to principal or interest more
than 90 days or have been placed on nonaccrual status.
With the exception of the loans included within nonperforming assets in the
table below, management is not aware of any loans classified for regulatory
purposes as loss, doubtful, substandard, or special mention that have not
been disclosed which(1) represent or result from trends or uncertainties
which management reasonably expects will materially impact future operating
results, liquidity, or capital resources, or (2) represent any information
on material credits which management is aware that causes management to have
serious doubts as to the abilities of such borrowers to comply with the loan
repayment terms.
Nonperforming loans increased approximately $775,000 to $1,887,000 at
June 30, 1998, from $1,112,000 at December 31, 1997. Nonperforming assets
represented 1.78% of loans, net of unearned income and real estate acquired
through foreclosure at June 30, 1998 as compared to 1.79% at
December 31, 1997.
3. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") was issued. SFAS 131 establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of
this statement will not impact the Company's consolidated financial position,
results of operations or cash flows. The Company will adopt this Statement
in its annual financial statements for the year ending December 31, 1998.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132") was issued. SFAS 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer useful. SFAS 132 is effective
for fiscal years beginning after December 15, 1997. The Statement is not
expected to have an effect on the Company's financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
was issued. SFAS 133 establishes standards for derivative instruments and
hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The
Statement is not expected to have an effect on the Company's financial
statements.
The table below presents a summary of the Company's nonperforming assets
at June 30, 1998 and December 31, 1997.
1998 1997
(Amounts in thousands, except
financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans $ 775 1,005
Past-due loans 1,112 107
Nonperforming loans 1,887 1,112
Real estate acquired
through foreclosure 183 1,075
Total nonperforming assets $ 2,070 2,187
Ratios:
Nonperforming loans to loans, net of
unearned income 1.62% .92
Nonperforming assets to loans(net of unearned
income) and real estate acquired through
foreclosure 1.78% 1.79
Nonperforming assets to
total assets 1 .09% 1.18
Allowance for loan losses to
Nonperforming loans 85.74% 157.55
Allowance for loan losses to
nonperforming assets 78.16% 80.11
Interest income on nonaccrual loans which would have been reported for
the three and six month periods ended June 30, 1998 totaled approximately
$19,000 and $43,000. The Company recorded approximately $22,000 in income
on these loans for the six month period ended June 30, 1998.
ALLOWANCE FOR LOAN LOSSES
The following table summarizes loans, changes in the allowance for loans
losses arising from loans charged off, recoveries on loans previously
charged off by loan category, and additions to the allowance which have
been charged to operating expense as of and for the periods ended
June 30, 1998 and December 31, 1997.
1998 1997
Loans, net of unearned income $ 116,353 121,414
Average loans, net of unearned
income and the allowance for
loan losses $ 118,551 115,657
Allowance for loans losses at the
beginning of year $ 1,752 1,806
Loans charged off:
Commercial, financial,
and agricultural 110 68
Real estate- mortgage 35 169
Installment loans to
individuals 171 436
Total loans charged off 316 673
Recoveries of loans previously charged off:
Commercial, financial,
and agricultural 5 84
Real estate- mortgage 43 85
Installment loans to
individuals 84 149
Total loans recovered 132 318
Net loans charged off 184 355
Additions to allowance for loan losses
charged to operating expense 50 301
Allowance for loan losses at
period end $ 1,618 1,752
Ratio of net loans charged off to average
loans, net of unearned income and the allowance
for loan losses .16% .31
Allowance for loan losses to loans, net of
unearned income 1.39% 1.44
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. These reviews are also reviewed
by 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 the allowance for loan losses is adequate at
June 30, 1998.
A substantial portion of the Company's loan portfolio is secured by real
estate in the metropolitan Atlanta market. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
Citizens Bancshares Corporation ( the "Company" ), a one-bank holding
company, 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 through ten full service branches.
The following discussion is of the Company's financial condition as of
June 30, 1998 and the changes in the financial condition and results of
operations for the three and six month periods ended June 30, 1998 and 1997.
RESULTS OF OPERATIONS
Net Interest Income:
Net interest income represents the excess of income received on
interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income for the three and six month period ended June 30, 1998
increased approximately $72,000 and $199,000 or 3% and 4%, respectively.
The combination of higher loan volume, lower rates paid on interest bearing
liabilities and lower volume and yield on the investment portfolio increased
the Company's net interest margin to 5.63% for the period ended June 30, 1998
compared to 5.31% in 1997.
Noninterest income:
Noninterest income increased approximately $422,000 or 26% for the three
month period ended June 30, 1998 and approximately $650,000 or 20% for the
six month period ended June 30, 1998 as compared to the same period in 1997.
The increase in noninterest income is due primarily to an increase in
commission and fees on mortgage loans, of approximately $834,000, as a result
of an increase in the volume of loan closings.
Noninterest expense:
Noninterest expense decreased approximately $97,000 for the six month period
ended June 30, 1998 as compared to the same period in 1997. The decrease is
attributable to a combination of a decrease in salaries and employee benefits
of $298,000 and an increase in occupancy expense of $145,000. The decrease
in salaries and employee benefit costs is due to a reduction in staff due to
the merger.
Net earnings:
The Company had net earnings of approximately $445,000 or $0.21 per share and
$949,000 or $0.44 per share for the three and six month period ended
June 30, 1998 as compared to $102,000 and $225,000 or $0.05 and $0.10
per share in 1997. The $724,000 increase in net earnings as compared to 1997
is attributable to an increase in net interest income and noninterest income
of approximately $199,000 and $650,000 and a decrease in noninterest expense
of approximately $97,000.
LIQUIDITY
Liquidity is a bank's ability to meet deposit withdrawals, while also,
providing for the credit needs of customers. In the normal course of
business, the Company's cash flow is generated from interest and fees on
loans and other interest-earning assets. The Company continues to meet
liquidity needs primarily through the sale of federal funds and managing
the maturities of investment securities. At June 30,1998, approximately 15%
of the investment portfolio matures within the next year, 43% after one year
but before five years. In addition, interst bearing deposits and federal
funds sold averaged approximately $10.1 and $3.5 million, respectively
during the six month period ended June 30, 1998. The Company is
a member of the Federal Home Loan Bank of Atlanta, the Federal Reserve
System and maintains relationships with several correspondent banks and, thus,
could obtain funds on short notice. 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.
CAPITAL RESOURCES
Quantitive measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and
Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets.
As of June 30, 1998, the Company's total and Tier 1 capital to risk weighted
assets and Tier 1 to average assets were 14%, 13% and 9% respectively.
Management believes, as of June 30, 1998, that the Company meets all capital
adequacy requirements to which it is subject.
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 vendor's plans.
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. 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 $500,000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings to which
the Company or its subsidiary is a party or to which any of their property
is subject.
ITEM 2. CHANGES IN SECURITIES
The Bank is restricted as to dividend payments to the Company by regulatory
requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual shareholders? meeting was held on May 27, 1998 and the following
individuals were elected to the Board of Directors Herman J. Russell,
Gregory T. Baranco, Thomas E. Boland, Bernard H. Bronner, Johnnie L. Clark,
and James E. Young. There were 1,380,209 votes for, 3,734.48 against and
780,121.52 non votes for the election of the above mentioned Board members.
ITEM 5. OTHER INFORMATION
Pursuant to Rule 14a-4(c)(1) promulgated under the Securities Exchange Act
of 1934, as amended, shareholders desiring to present a proposal for
consideration at the Company's 1999 Annual Meeting of Shareholders must
notify the Company in writing at its principal office at 175 John Wesley
Dobbs Avenue, NE., Atlanta, Georgia 30303 of the contents of such proposal
no later than March 15, 1999. Failure to timely submit such a proposal
will enable the proxies appointed by management to exercise their discretion
voting authority proposal is raised at the Annual Meeting of
Shareholders without any discussion of the matter in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CITIZENS BANCSHARES CORPORATION
Date: August 14, 1998 By: /s/ James E. Young
James E. Young
President and Chief Executive Officer
Date: August14, 1998 By: /s/ Willard C. Lewis
Willard C. Lewis
Senior Executive Vice President and
Chief Operating Officer
