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, 1999
( ) 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 6, 1999.
Part I. Financial Information:
Citizens Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited-amounts in thousands, except per share amounts)
ASSETS June 30 December 31,
1999 1998
Cash and due from banks $ 11,276 $ 13,081
Federal funds sold 264 553
Interest bearing deposits 2,115 11,125
Investment securities:
Held to maturity 8,313 14,314
Available for sale 46,003 36,175
Other investments 1,004 1,271
Total investments 55,320 51,760
Loans, net of unearned income 119,632 118,063
Less allowance for loan losses (1,730) (1,703)
Loans, net 117,902 116,360
Loans held for sale 422 406
Premises and equipment, net 7,223 5,957
Cash value of life insurance 4,684 4,030
Other assets 5,491 3,555
Total assets $ 204,697 $ 206,827
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 50,006 $ 49,612
Interest-bearing 131,590 135,060
Total deposits 181,596 184,672
Other borrowed funds 2,319 1,428
Accrued expenses and other liabilities 2,573 2,198
Total liabilities 186,488 188,298
Stockholders' 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
Retained earnings 10,231 9,606
Accumulated other comprehensive income (360) 585
Total stockholders' equity 18,209 18,529
Total liabilities and stockholders'equity $ 204,697 $ 206,827
Citizens Bancshares Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income(loss)
(unaudited-amounts in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
INTEREST INCOME:
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Loans, including fees $ 2,944 $ 2,849 $ 5,855 $ 5,715
Investment securities:
Taxable 727 477 1,364 962
Tax-exempt 113 66 225 124
Interest bearing deposits 67 196 192 301
Federal funds sold 6 32 12 82
Total interest income 3,857 3,620 7,648 7,184
INTEREST EXPENSE:
Deposits 1,264 1,268 2,552 2,477
Other borrowed funds 46 32 77 56
Total interest expense 1,310 1,300 2,629 2,533
Net interest income 2,547 2,320 5,019 4,651
Provision for loan losses 75 50 137 50
Net interest income after
provision for loan losses 2,472 2,270 4,882 4,601
NONINTEREST INCOME:
Service charges on deposit accounts 874 1,043 1,805 1,984
Commission and fees 927 777 1,774 1,370
Other operating income 258 199 610 482
Total noninterest income 2,059 2,019 4,189 3,836
NONINTEREST EXPENSE:
Salaries and employee benefits 1,910 1,809 3,743 3,619
Net occupancy and equipment 560 652 1,208 1,296
Other operating expenses 1,468 1,271 2,762 2,227
Total other noninterest expense 3,938 3,732 7,713 7,142
Income before income taxes 593 557 1,358 1,295
Income tax expense 188 112 408 346
Net income $ 405 $ 445 $ 950 $ 949
Other comprehensive income (loss),
net of taxes (687) $ (34) $(945) $ (41)
Comprehensive income (loss) $ 282 $ 411 $ 5 $ 908
Net income per common share,
basic and diluted $ 0.19 $ 0.21 0.44 $ 0.44
Weighted average outstanding shares,
basic and diluted 2,164 2,164 2,164 2,164
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Citizens Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited-amounts in thousands)
Six Months
Ended June 30,
1999 1998
Cash flows from operating activities:
Net income $ 950 $ 949
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Provision for loan losses 137 50
Depreciation and amortization 574 568
Amortization (accretion), net 4 (17)
Gain on investments (7) (11)
Loss on sale of assets 18 -
Net change in loans held for sale (16) 197
Increase in other assets (2,184) (681)
Increase (decrease) in accrued expenses
and other liabilities 375 (38)
Net cash (used in) provided by operating activities (149) 1,017
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 5,998 4,725
Proceeds from maturities of investment securities
available for sale 5,619 6,595
Purchases of investment securities held to maturity - -
Purchases of investment securities available for sale (16,254) (13,208)
Net decrease in other investments 267 729
Net (increase) decrease in loans (1,679) 4,937
Increase in cash surrender value (654) (389)
Purchases of premises and equipment (1,840) (955)
Net change in interest bearing deposit 9,010 (9,601)
Net change in federal funds sold 289 936
Proceeds from sale of real estate acquired through
foreclosure 97 785
Net cash provided by (used in) investing activities 853 (5,446)
Cash flows from financing activities:
Net increase in demand deposits 394 4,329
Net (decrease) increase in time and savings deposits (3,470) 1,139
Net increase (decrease) in other borrowed funds 892 (816)
Principal payment on long-term debt - (585)
Dividends paid (325) -
Net cash (used in) provided by financing activities (2,509) 4,067
Net change in cash and due from banks (1,805) (362)
Cash and due from banks at beginning of period 13,081 10,637
Cash and due from banks at end of period $ 11,276 10,275
Supplemental disclosures of cash paid during the period for:
Interest $ 2,451 $ 2,646
Income taxes $ 445 440
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure $ - $118
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and 1998
(unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Citizens Bancshares Corporation and subsidiaries (the "Company")
is a holding company that provides a full range of commercial
banking and mortgage brokerage services to individual and
corporate customers in metropolitan Atlanta through its wholly
owned subsidiaries, Citizens Trust Bank (the "Bank") and Citizens
Trust Bank Mortgage Services, Inc. ("Mortgage Services"). The
Bank operates under a state charter and serves its customers in
metropolitan Atlanta through ten full-service branches.
Effective January 30, 1998, the Company consummated its merger
with First Southern Bancshares, Inc. and subsidiaries.
The accompanying consolidated financial 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.
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. 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.
The consolidated financial statements of Citizens Bancshares
Corporation and Subsidiaries ( the "Company" ) as of June 30,
1999 and for the three and six month periods ended June 30,1999
and 1998 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
and six month periods have been included.
All adjustments are of a normal recurring
nature. All significant intercompany accounts and transactions
have been eliminated in consolidation.
ACCOUNTING POLICIES
Reference is made to the accounting policies of the Company
described in the notes to the consolidated financial statements
contained in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998. The Company has followed those
policies in preparing this report.
COMMON STOCK
The par value of the Company's common stock is $1, and 5,000,000
shares are authorized. The amount of dividends paid by the Bank
to the Company is limited by various banking regulatory agencies.
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 1999 is approximately $799,000.
On March 15, 1999, the Company paid a cash dividends of
approximately $325,000 or $0.15 per share to shareholders on
record as of December 15, 1998.
NET INCOME PER SHARE
Basic net income per common share (EPS) is computed based on net
income divided by the weighted average number of common share
equivalents outstanding. Diluted EPS is computed based on net
income divided by the weighted average number of common and
potential common shares. The only potential common shares are
those related to stock options; however, such options were
antidilutive, so diluted EPS is the same as basic EPS.
IMPACT OF NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities,
which will require that all derivative financial instruments be
recognized as either assets or liabilities on the balance sheet.
SFAS No. 133 will be effective for the Company's first
quarter of 2001. The Company is evaluating the effects of the
new statement.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the
1999 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
Citizens Bancshares Corporation (the "Company") is a holding
company that wholly owns two subsidiaries, Citizens Trust Bank
(the "Bank") and Citizens Trust Bank Mortgage Services, Inc.
("Mortgage Services"). The Company, through the Bank and
Mortgage Services, provides a full range of commercial banking
and mortgage brokerage services to individuals and corporate
customers in its primary market area , metropolitan Atlanta. The
Bank is a member of the Federal Reserve System and operates under
a state charter. The Company serves its customers through ten
full-service bank branches and the mortgage company headquarters.
The following discussion is of the Company's financial condition
as of June 30, 1999 and the changes in the financial condition
and results of operations for the three and six month periods ended
June 30, 1999 and 1998.
FINANCIAL CONDITION
During the second quarter of 1999, the Company's interest
bearing deposits deceased $9,010,000 or 81.0% and federal funds
sold deceased $289,000 or 52.3%. These decreases in interest
bearing deposits and federal funds sold are partially offset by a
$3,560,000 increase in investment securities and a $1,569,000
increase in loans, net of unearned interest. Also during the
second quarter, the Company purchased its West Peachtree Street
office for approximately $1,400,000 from the Federal Deposit
Insurance Corporation as the culmination of a five-year lease
agreement.
In 1994, CBC's Bank subsidiary purchased deposits and loans from the
Resolution Trust Corporation along with an option to purchase the
building at the end of a five-year lease. The Company,
recognizing the value of Midtown Atlanta property, exercised this
option. As a result, the Company's net fixed assets increased
approximately $1.3 million in the second quarter.
INVESTMENT SECURITIES
The Company invests a portion of its assets in U.S. treasury
bills and notes, U.S. government sponsored agency securities,
mortgage backed bonds, as well as, some equity securities. Other
investments includes Federal Home Loan Bank stock and Federal
Reserve Bank stock. At June 30, 1999 and December 31, 1998, the
Company's investment securities portfolio represented
approximately 27.0% and 25.0% of total assets, respectively. The
carrying value of the investment portfolio increased by
$3,560,000 or 6.9% for the six month period ending June 30, 1999.
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 impaired loans is recognized on the cash basis.
At June 30, 1999, the recorded investment in loans that are
considered to be impaired was approximately $2,116,000, a
decrease of $1,282,000 from December 31, 1998. The related
allowance for loan losses for each of these loans was
approximately $425,000 and $568,000, respectively. For the six
months ended June 30, 1999, the Company recognized approximately
$57,000 in interest income on these impaired loans on an accrual
basis.
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 decreased approximately $865,000 to
$1,288,000 at June 30, 1999 from $2,153,000 at December 31, 1998.
Nonperforming assets represented 1.10% of loans, net of unearned
income and real estate acquired through foreclosure at June 30,
1999 as compared to 1.95% at December 31, 1998.
The table below presents a summary of the Company's nonperforming
assets at June 30, 1999 and December 31, 1998.
1999 1998
(Amounts in thousands, except
financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans $ 1,147 $ 1,683
Past-due loans 141 470
Nonperforming loans 1,288 2,153
Real estate acquired through foreclosure 32 147
Total nonperforming assets $ 1,320 $ 2,300
Ratios:
Nonperforming loans to loans, net of
unearned income 1.08% 1.82%
Nonperforming assets to loans (net of unearned
income) and real estate acquired through
foreclosure 1.10% 1.95%
Nonperforming assets to total assets 0.65% 1.11%
Allowance for loan losses to
nonperforming loans 134.30% 79.10%
Allowance for loan losses to
nonperforming assets 131.06% 74.04%
Interest income on nonaccrual loans which would have been
reported for the six months ended June 30, 1999 totaled
approximately $2,000.
ALLOWANCE FOR LOAN LOSSES
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. The Company's process for
determining an appropriate allowance for loan losses includes
management's judgement and use of estimates. A general reserve
of .5% is applied to the portion of the loan portfolio that is
non-criticized. A specific reserve is applied to all criticized
loans using a percentage formula related to the degree of
impairment based on the standard industry and regulatory grading
systems as follows: 2.5% for loans graded "Special Mention", 15%
for loans graded "Substandard", 50% for loans graded "Doubtful",
and 100% for loans graded "Loss". For the six months ended June
30, 1999 and the year ended December 31, 1998, the allocation of
the allowance for loan losses was expanded to include a component
for potential loan losses relating to Year 2000.
The aggregate of these reserves plus specific allowances as
needed is compared to the actual reserve to determine the
adequacy of the allowance for credit losses. The adequacy of the
allowance for loan losses is reviewed on a monthly basis by
management and the Board of Directors. This assessment is made
in the context of historical losses as well as existing economic
conditions, performance trends within specific portfolio segments
and individual concentrations of credit.
Additions to the allowance for loan losses are made by monthly
charges to the provision for loan losses. The level of the
provision for loan losses is established annually based on
historical net charge-offs, projected growth of the loan
portfolio and economic conditions.
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.
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. The Company's loans
to area churches was approximately $35.9 million at June 30, 1999
compared to $36.7 at December 31, 1998 which is generally secured
by real estate. The accounting loss the Company would incur if
any party to the financial instrument failed completely to
perform according to the terms of the contract and the collateral
proved to be of no value, is equal to the outstanding balance of
the financial instrument.
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, 1999 and December 31, 1998.
1999 1998
(Amounts in thousands, except
financial ratios)
Loans, net of unearned income $119,632 $118,063
Average loans, net of unearned income and the
allowance for loan losses $116,666 $118,484
Allowance for loans losses at the
beginning of year $ 1,703 $ 1,752
Loans charged off:
Commercial, financial and agricultural 71 145
Real estate - loan 118 85
Installment loans to individuals 107 215
Total loans charged off 296 445
Recoveries of loans previously charged off:
Commercial, financial, and agricultural - 21
Real estate - loan 111 69
Installment loans to individuals 75 131
Total loans recovered 186 221
Net loans charged off 110 224
Additions to allowance for loan losses
charged to operating expense 137 175
Allowance for loan losses at period end $1,730 $ 1,703
Ratio of net loans charged off to average loans, net of
unearned income and the allowance for loan losses 0.09% 0.19%
Allowance for loan losses to loans, net of
unearned income 1.45% 1.44%
DEPOSITS
Total deposits deceased $3,076,000 or 1.67% for the six month
period. Noninterest bearing deposits increased $394,000 or 0.8%,
while interest-bearing liabilities decreased $3,470,000 or 2.6%.
The decrease in interest-bearing deposits is primarily due to
interest sensitive customers shifting their funds out of the Bank
as they look for higher yields in a low interest rate
environment.
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 six month period ended
June 30, 1999 increased $368,000 to $5,019,000 compared
to $4,651,000 for the six month period ended June 30, 1998.
For the three month period
ended June 30, 1999, net interest income increased $227,000 or
9.78% compared to the same period last year. The combination of
reducing nonaccrual loans by $536,000 and higher volume in the
investment portfolio and commercial loans which pays a higher
yield then fed funds sold and interest bearing deposits
contributed to these results. Also, lower rates paid on interest
bearing liabilities help to increased the Company's net interest
margin to 5.71% for the six month period ended June 30, 1999
compared to 5.63% in the six month period ended June 30, 1998.
Noninterest income:
Noninterest income increased approximately $353,000 or 9.20% for
the six month period ended June 30, 1999 as compared to the same
period in 1998. For the three month period ended June 30, 1999,
noninterest income increased $40,000 or 1.98% compared to the
same period in 1998. The increase in noninterest income is
primarily due to an increase in commission and fees on mortgage
loans of approximately $404,000 or 29.49% for the six month
period ended June 30, 1999 and $150,000 or 19.31% for the second
quarter as a result of increase volume in loan closings.
Noninterest expense:
Noninterest expense increased approximately $571,000 or 7.99%
during the six month period as compared to the same period in
1998. The increase is attributable to a combination of data
processing costs, professional services and costs associated with
the increased mortgage loan volume. Data processing costs
increased approximately $172,000 due to growth in the Company's
deposit base and having the information systems area outsource.
For the same period in 1998 data processing was handled in-house.
Noninterest expense for the three months ended June 30, 1999,
increased by $206,000 or 5.5% compared to the same period in 1998.
The increase is attributable to a combination of data processing costs,
professional services and cost associated with the increased mortgage
loan volume.
Net income:
The Company had net income of approximately $950,000 or $0.44 per
share during the six months ended June 30, 1999 as compared to
$949,000 or $0.44 per share in 1998. The slight increase in net
income as compared to 1998 is attributable to an increase in net
interest income and noninterest income of approximately $368,000
and $353,000, respectively, which is partially offset by an
increase in noninterest expense of $571,000and an increase in the
provision for loan losses of $87,000. The Company had net income
of approximately $405,000 or $0.19 per share during the second quarter
of 1999 as compared to $445,000 or $0.21 per share during the same
period in 1998. The decrease is due to an increase in noninterest
expense of $206,000 and an increase in tax expense of $76,000 which
is partially offset by an increase in net interest income of $202,000
and an increase in noninterest income of $40,000.
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
interest bearing deposits and managing the maturities of
investment securities. At June 30, 1999, approximately 4% of the
investment portfolio mature within the next year, 33% after one
year but before five years. In addition, interest bearing
deposits averaged approximately $8.4 million during the six month
period ended June 30, 1999. 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
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and
ratios of total and Tier 1 capital to risk weighted assets, and
Tier 1 capital to average assets. As of June 30, 1999, the
Company's total and Tier 1 capital to risk weighted assets and
Tier 1 to average assets were 14%, 13% and 10% respectively.
Management believes, as of June 30, 1999, 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. Y2K computer processing
risk is defined as the risk associated with computer hardware or
software that fails to process data or to operate in the manner
for it was designed as a result of century date changes. This
risk encompasses hardware and software owned, leased, licensed or
otherwise used by the Company or by vendors upon which the
Company depends for mission-critical functions or by customers
with which the Company have a material relationship. In 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 outsource 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 or contingency plans 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 started testing its program renovations in the fall of
1998 and the majority of the testing has been completed.
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 ensure that workstations and file-
servers will be Y2K ready. These upgrades and Y2K consultant
services costed approximately $360,000 in 1998. As of June 1999,
the Company has spent approximately $55,000 related to Y2K cost
in 1999 and expects any additional Y2K costs, if any, to be
minimal.
As part of its normal business practices, the Company maintains
contingency plans in the event of emergency situations, some of
which could arise from Y2K related problems. The Company has
formulated a detailed Y2K contingency plan, which assesses
several possible scenarios to which the Company may be required
to react. However, the Company believes that it is not possible
to know with complete certainty all Y2K problems that could
affect the Company.
The most reasonable likely worse case Y2K scenario would be one
in which electrical service or phone service is disrupted for an
extended period of time. As noted above, the Company's computer
hardware and software, its commercial customer risk and its third
party vendors/supplier risk is progressing as planned. However,
the Company cannot accurately predict how many failures related
to the Y2K problem will occur with its suppliers, customers or
other third parties or the severity, duration or financial
consequences of such failures. As a result, it is possible the
Company could suffer the following consequences:
A number of operational inconveniences and inefficiencies
for the Company, its service providers or its customers that may
divert the Company's time and attention and financial and human
resources from its ordinary business activities.
System malfunctions that may require significant efforts by
the Company, its service providers or its customers to prevent or
alleviate material business disruptions.
Even if the Company does not incur significant costs in
connection with responding to Y2K issues, there can be no
assurance that the failure or delay of the Company's customers,
vendors or other third parties in addressing these issues or the
costs involved in such process will not have a material adverse
effect on the Company's business, financial condition and results
of operations.
The foregoing are forward-looking statements reflecting
management's current assessments and estimates with respect to
the Company's Y2K compliance efforts and the impact of Y2K issues
on the Company's business and operations. Various factors could
cause actual plans and results to differ materially from those
contemplated by such assessments, estimates and forward-looking
statements, many of which are beyond the control of the Company.
Some of these factors include, but are not limited to,
representations by the Company's vendors and customers,
technological advances, economic considerations and consumer
perceptions. The Y2K compliance program is an ongoing process
involving continual evaluation and may be subject to change in
response to new developments.
The Company has also been subject to regulatory review of its
overall Year 2000 plan and will continue to be monitored by its
regulators for its progress.
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
None
ITEM 5. OTHER INFORMATION
None
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 10 1999 By: /s/ James E. Young
James E. Young
President and Chief Executive
Officer
Date: August 10, 1999 By: /s/ Willard C. Lewis
Willard C. Lewis
Senior Executive Vice President and
Chief Operating Officer
Date: August 10, 1999 By: /s/ Samuel J. Cox
Samuel J. Cox
Senior Vice President and Chief
Financial Officer
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