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 [Fee required] For fiscal year ended December 31, 1998
Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No fee required] For the transition period from
___________ to ____________
Commission file number 0-14535
Citizens Bancshares Corporation
(Name of Small Business Issuer in Its Charter)
Georgia 58-1631302
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
75 Piedmont Avenue, N.E., Atlanta, Georgia 30302
(Address of Principal Executive Offices) (Zip Code)
(404) 659-5959
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
5,000,000 Shares of 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 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 past 90 days.
Yes x No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. x
State issuer's revenues for its most recent fiscal year: $22,469,647
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: $11,116,732 as of March 1, 1999. Because
there is not established public trading market for the registrant's Common
Stock, the aggregate market value of the voting stock held by non-affiliates
of the registrant is based upon the most recent trades of voting stock of
which the registrant is aware.
Traditional Small Business Users Format: Yes No x
Page 1 of ______ pages Exhibit Index on Page ____
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1998 are incorporated by reference into Part II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders,
scheduled to be held on May 26, 1999, are incorporated by reference into Part
III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
General
The Company was incorporated as a Georgia business corporation in 1972
and became a bank holding company by acquiring all of the common stock of
Citizens Trust Bank (the "Bank"). The Company presently has two operating
subsidiaries, the Bank and Citizens Trust Bank Mortgage Services, Inc.
("Mortgage Services"), a mortgage company. The Company was organized to
facilitate the Bank's ability to serve its customers' requirements for
financial services. The holding company structure provides flexibility for
expansion of the Company's banking business through the possible acquisition
of other financial institutions and the provision of additional banking-
related services that the traditional commercial bank may not provide under
present laws. For example, banking regulations require that the Bank maintain
a minimum ratio of capital to assets. In the event that the Bank's growth is
such that this minimum ratio is not maintained, the Company may borrow funds,
subject to capital adequacy guidelines of the Federal Reserve, and contribute
them to the capital of the Bank and otherwise raise capital in a manner that
is unavailable to the Bank under existing banking regulations.
On January 30, 1998, the Company merged with First Southern Bancshares,
Inc., whose banking subsidiary, First Southern Bank simultaneously merged into
the Bank. The Company also acquired Mortgage Services as a result of the
merger. Mortgage Services is a mortgage company licensed by the State of
Georgia and has received lender approval from the Department of Housing and
Urban Development, FHA, Fannie Mae and the Veterans Administration.
The Company has no present plans to acquire any additional operating
subsidiaries. The Company may, however, make additional acquisitions in the
future in the event that such acquisitions are deemed to be in the best
interests of the Company and its shareholders. Such acquisitions, if any,
will be subject to certain regulatory approvals and requirements. See
"Business - Bank Holding Company Regulations."
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.
The Bank
General
The Bank, a state bank headquartered in Atlanta, Georgia, was organized
in 1921 and is a member of the Federal Reserve System. The Bank is the
Company's principal earning subsidiary.
The Bank's home office is located at 75 Piedmont Avenue, N.E., Atlanta,
Georgia 30302. The Bank operates nine branch offices located in Atlanta, East
Point, Lithonia, Decatur and Stone Mountain, Georgia. The Bank conducts a
general commercial banking business that serves Fulton and DeKalb Counties,
acts as an issuing agent for U.S. savings bonds, travelers checks and cashiers
checks, and offers collection teller services. The Bank has no subsidiaries.
The Bank does not engage in any line of business in addition to normal
commercial banking activities. The Bank does not engage in any operations in
foreign countries nor is a material portion of the Bank's revenues derived
from customers in foreign countries.
The Bank's Primary Service Area
The Bank's primary service area is Fulton and DeKalb Counties, along
with certain portions of Rockdale County. The primary focuses of the Bank are
the small business and commercial/service firms in the area plus individuals
and households who reside in or commute to the area. The majority of the
Bank's customers are drawn from the described area.
Competition
The Bank must compete for both deposit and loan customers with other
financial institutions with greater resources than are available to the Bank.
Currently, there are numerous branches of regional and local banks, as well as
other types of entities offering financial services, located in the Bank's
market area.
Deposits
The Bank offers a wide range of commercial and consumer deposit
accounts, including non-interest bearing checking accounts, money market
checking accounts (consumer and commercial), negotiable order of withdrawal
("NOW") accounts, individual retirement accounts, time certificates of
deposit, and regular savings accounts. The sources of deposits typically are
residents and businesses and their employees within the Bank's market area,
obtained through personal solicitation by the Bank's officers and directors,
direct mail solicitation, radio advertisements, television advertisements and
printed advertisements published in the local media. The Bank pays
competitive interest rates on time and savings deposits and has a service
charge fee schedule competitive with other financial institutions in the
Bank's market area, covering such matters as maintenance fees on checking
accounts, per item processing fees on checking accounts, returned check
charges and the like.
Loan Portfolio
The Bank engages in a full complement of lending activities, including
consumer/installment loans, home equity lines of credit, construction loans
and commercial loans, with particular emphasis on small business loans. The
Bank believes that the origination of short-term fixed rate loans and loans
tied to floating interest rates are the most desirable method of conducting
its lending activities.
Consumer Loans
The Bank's consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including loans for
automobiles, home improvements and investments. This category of loans also
includes loans secured by second mortgages on the residences of borrowers.
Commercial Lending
Commercial lending is directed principally toward businesses whose
demands for funds fall within the Bank's legal lending limits and which are
existing deposit customers of the Bank. This category of loans includes loans
made to individual, partnership or corporate borrowers and obtained for a
variety of business purposes.
Investments
As of December 31, 1998, investment securities (based on held to
maturity, available for sale and other investments) comprised approximately
25.0% of the Bank's assets, with loans (net of loan loss reserves) comprising
approximately 56.3% of assets. The Bank invests primarily in obligations of
the United States or obligations guaranteed as to principal and interest by
the United States and other taxable securities.
Asset/Liability Management
It is the objective of the Bank to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan, investment, borrowing and capital policies.
Certain officers of the Bank are charged with the responsibility for
developing and monitoring policies and procedures that are designed to ensure
acceptable composition of the asset/liability mix. It is the overall
philosophy of management to support asset growth primarily through growth of
core deposits, which include deposits of all categories made by individuals,
partnerships and corporations. Management of the Bank seeks to invest the
largest portion of the Bank's assets in consumer/installment, commercial and
construction loans.
The Bank's asset/liability mix is monitored on a daily basis with a
report reflecting the interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to the Bank's Board of Directors on a
monthly basis. The objective of this policy is to control interest-sensitive
assets and liabilities so as to minimize the impact of substantial movements
in interest rates on the Bank's earnings.
Correspondent Banking
Correspondent banking involves the provision of services by one bank to
another bank that cannot provide that service for itself from an economic or
practical standpoint. The Bank purchases correspondent services offered by
larger banks, including check collections, security safekeeping, investment
services, wire transfer services, coin and currency supplies, overline and
liquidity loan participation, and sales of loans to or participation with
correspondent banks.
Mortgages Services
The Company offers residential mortgage products through Mortgage
Services. Mortgage Services, organized in 1996, is headquartered in
metropolitan Atlanta, Georgia and provides mortgage related services to
communities in and around Fulton, DeKalb and Rockdale Counties. Mortgage
Services is licensed by the State of Georgia and has received lender approval
from the Department of Housing and Urban Development, FHA, Fannie Mae and the
Veterans Administration (VA). Mortgage Services brokers FHA/VA loans through
a warehouse agreement with another bank and originates 1-4 family conventional
loans for sale.
Employees
As of December 31, 1998 the Company had 197 full-time employees. The
Bank is not a party to any collective bargaining agreement and, in the opinion
of management, the Bank enjoys excellent relations with its employees.
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 its non-bank subsidiary 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 (c) 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
national and state-chartered banks may branch interstate through acquisitions
of banks in other states. By adopting legislation prior to June 1, 1997, the
effective date of the interstate branching provision, 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.
In February 1996, the Georgia Legislature adopted the "Georgia
Interstate Branching Act" effective June 1, 1997. The Georgia Interstate
Banking Act 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 allowed banks to establish de novo branches.
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 to the banking business. 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. Each such subsidiary is also
subject to numerous state and federal statutes and regulations that affect its
business, activities, and operations, and each is supervised and examined by
one or more state or federal bank regulatory agencies.
The bank subsidiary of the Company is also a member of the Federal
Reserve system. As such, the Federal Reserve and the Georgia Department of
Banking and Finance (the "Georgia Department") regularly examine the
operations of the subsidiary bank and are given authority to approve or
disapprove mergers, consolidations, the establishment of branches, and similar
corporate actions. The Federal Reserve 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 and
other subsidiaries. The principal sources of cash flow of the Company,
including cash flow to pay dividends to its shareholders, are dividends by its
subsidiary bank. There are statutory and regulatory limitations on the
payment of dividends by the subsidiary 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 subsidiary 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 its subsidiary 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 its banking subsidiary.
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,
1998, 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 14.7% and 13.4%, 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, 1998 was 8.96%. 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.
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, pursuant to FDICIA,
adopted final regulations, which became 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 have concurrently proposed a
methodology for evaluating interest rate risk which would require banks with
excessive interest rate risk exposure to hold additional amounts of capital
against such exposures. The market risk rules will 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, its banking
subsidiary, 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. Any subsidiary depository
institutions of the Company are subject to these cross-guarantee provisions.
As a result, any loss suffered by the FDIC in respect to commonly controlled
banking 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 Total 1 Risk
Capital Category Tier 1 Risk- Based Based Capital Other
Capital Capital
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
Undercapitalized 2% or less
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.
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, which went into effect on January 1, 1994, assigns an institution to
one of three capital categories: (a) well capitalized; (b) adequately
capitalized; and (c) 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.
Once the designated ratio of reserves to insured deposits (i.e., 1.25%)
for the BIF was reached in May 1995, the FDIC reduced the assessment rate
applicable to BIF deposits, so that 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.
Effective January 1, 1997, FICO assessments were imposed on BIF- as well
as SAIF-insured deposits in annual amounts of 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 which 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.
SELECTED FINANCIAL AND STATISTICAL DATA
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,
1998 1997
(amounts in thousands)
ASSETS:
Cash and due from banks $ 9,821 $10,768
Interest-earning assets:
Loans, net(a) 118,484 115,634
Taxable investment securities 31,370 41,011
Tax-exempt investment securities 6,759 4,222
Federal funds sold 2,034 4,074
Interest bearing deposits 10,004 681
Total interest-earning assets 168,651 165,622
Premises and equipment, net 5,978 5,646
Other assets 9,810 7,325
TOTAL ASSETS $ 194,260 $ 189,361
LIABILITIES AND STOCKHOLDERS' EQUITY:
Noninterest-bearing deposits $ 45,306 $ 45,812
Interest-bearing liabilities:
Savings and interest-bearing deposits 61,144 53,554
Time deposits 65,733 68,910
Other borrowed funds 1,778 3,333
Total interest-bearing liabilities 128,655 125,797
Accrued expenses and other liabilities 3,016 1,873
Total liabilities 176,977 173,482
Stockholders' equity:
Common stock 2,164 2,161
Additional paid-in capital 6,174 6,159
Retained earnings 8,331 7,030
Accumulated other comprehensive income 614 529
Total stockholders' equity 17,283 15,879
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 194,260 $189,361
(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,
1998 1997
(amounts in thousands, except ratios)
Total interest-earning assets $ 168,651 $165,622
Total interest-bearing liabilities 128,655 125,797
Excess of interest-earning assets over
Interest-bearing liabilities $ 39,996 $ 39,825
INTEREST EARNED ON:
Loans, net $ 11,391 $ 11,261
Taxable investment Securities (b) 2,004 2,689
Tax-exempt investment securities(a) 508 342
Federal funds sold 103 234
Interest bearing deposits 564 45
Total interest income 14,570 14,571
INTEREST PAID ON:
Savings and interest-bearing demand deposits 1,574 1,258
Time deposits(includes TT&L) 3,506 3,663
Other borrowed funds 109 212
Total interest expense 5,189 5,133
NET INTEREST EARNED $ 9,381 $ 9,438
AVERAGE YIELD EARNED ON:
Loans, net 9.61% 9.74%
Taxable investment securities 6.39 6.56
Tax-exempt investment securities(a) 7.51 8.11
Federal funds sold 5.06 5.74
Interest bearing deposits 5.64 6.61
TOTAL INTEREST-EARNING ASSETS 8.64 8.80
AVERAGE RATE PAID ON:
Savings and interest-bearing demand deposits 2.57 2.35
Time deposits 5.33 5.32
Other borrowed funds 6.13 6.36
TOTAL INTEREST-BEARING LIABILITIES 4.03 4.08
INTEREST RATE DIFFERENTIAL 4.61 4.72
NET INTEREST MARGIN 5.56 5.70
(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) Includes dividend income.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
Selected Statistical Information
AVERAGE BALANCE SHEETS, INTEREST RATES
AND INTEREST DIFFERENTIAL Continued
The following table sets forth, for the year ended December 31, 1998, a
summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates:
Increase Due to changes in (a)
1998 1997 (decrease) Volume Rate
INTEREST EARNED ON:
Loans, net (d) $ 11,391 11,261 130 276 (146)
Taxable investment
securities (c) 2,004 2,689 (685) (624) (61)
Tax-exempt investment
securities(b) 508 342 166 199 (33)
Federal funds sold 103 234 (131) (110) (21)
Interest-bearing deposits 564 45 519 571 (52)
TOTAL INTEREST INCOME 14,570 14,571 (1) 312 (313)
INTEREST PAID ON:
Savings and interest-bearing 1,574 1,258 316 187 129
deposits
Time deposits 3,506 3,663 (157) (169) 12
Other borrowed funds 109 212 (103) (97) (6)
TOTAL INTEREST EXPENSE 5,189 5,133 56 (79) 135
NET INTEREST EARNED 9,381 9,438 (57) 391 (448)
(a) The change in interest due to both rate and volume has been allocated
proportionately to the volume and rate components.
(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.
(c) Includes dividend income.
(d) Included in interest earned on loans are fees of approximately $397,000
in 1998 and $257,000 in 1997.
AVERAGE BALANCE SHEETS, INTEREST RATES
AND INTEREST DIFFERENTIAL Continued
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>
Increase Due to changes in (a)
1997 1996 (decrease) volume Rate
INTEREST EARNED ON:
<S> <C> <C> <C> <C> <C> <C>
Loans, net (d) $ 11,261 10,152 1,109 1,422 (313)
Taxable investment
securities (c) 2,689 3,421 (732) (761) 29
Tax-exempt investment
securities (b) 342 249 93 111 (18)
Federal funds sold 234 633 (399) (439) 40
Interest bearing deposits 45 - 45 23 22
TOTAL INTEREST INCOME 14,571 14,455 116 356 (240)
INTEREST PAID ON:
Savings and interest-bearing
deposits 1,258 1,397 (139) (111) (28)
Time deposits 3,663 3,343 320 364 (44)
Other borrowed funds 212 116 96 102 (6)
TOTAL INTEREST EXPENSE 5,133 4,856 277 355 (78)
NET INTEREST EARNED $ 9,438 9,599 (161) 1 (162)
(a) The change in interest due to both rate and volume has been allocated
proportionately to the volume and rate components.
(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.
(c) Includes dividend income.
(d) Included in interest earned on loans are fees of approximately $257,000
in 1997 and $263,000 in 1996.
INVESTMENT SECURITIES
The carrying values of investment securities - held to maturity at the
indicated dates are presented below:
December 31,
1998 1997
(amounts in thousands)
U.S. Treasury and U.S. Government agencies $ 4,998 $ 10,995
Mortgage-backed securities 5,634 8,690
State, county, and municipal securities $ 3,682 3,442
Totals $ 14,314 $ 23,127
The carrying values of investment securities - available for sale at the
indicated dates are presented below:
December 31,
1998 1997
(amounts in thousands)
U.S. Treasury and Government agencies $ 29,018 $ 9,650
State, county, and municipal securities 6,127 925
Mortgage-backed securities 164 259
Equity securities 866 944
Totals $ 36,175 $ 11,778
The following table shows the contractual maturities of all investment
securities at December 31, 1998 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>
<TABLE>
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
U.S. Treasury and
U.S. Government
<S> <C> <C> <C> <C> <C> <C> <C> <S>
agencies $ 899 6.50% $ 21,848 5.93% $ 11,269 6.32% $ - -
Mortgage-backed
Securities (a) 393 6.50% 1,225 8.31% 2,450 8.05% 1,730 6.61%
State, county, and
Municipal 300 8.94% 1,442 6.66% 1,427 7.11% 6,640 7.46%
Other equity
securities(b) - - - - - - 866 (b)
Totals $ 1,592 7.07% $ 24,515 6.40% $ 15,146 6.48% $ 9,236 7.01%
(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.
(b) Other equity securities are primarily comprised of an investment in stock
of the Fannie Mae Corporation. These investments have no specific
maturity date or yield.
The Company did not have any investments with a single issuer which exceeded 10%
of the company's shareholders' equity at December 31, 1998, 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,
1998 1997
(amounts in thousands)
Commercial, financial, and agricultural $ 37,506 $ 39,571
Installment and single payment individual 10,764 7,994
Real estate - mortgage 48,244 49,116
Real estate - construction 5,298 8,338
Other 16,497 16,590
118,309 121,609
Less:
Net deferred loan fees 247 195
Allowance for loan losses 1,702 1,752
Loans, net $ 116,360 $119,662
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.
The Company's loans to area churches was approximately $36.7 million and $33.3
million at December 31, 1998 and 1997, respectively, 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 sets forth certain information at December 31, 1998,
regarding the contractual maturities and interest rate sensitivity of certain
categories of the Company's loans.
Due after one Due after
One year Year through five
or less five years years Total
(amounts in thousands)
Commercial, financial, and agricultural $14,033 $20,360 $ 3,113 $ 37,506
Installment and single payment
individual and other 13,750 10,848 2,663 27,261
Real estate - commercial mortgage 10,912 1,457 6,467 18,836
Real estate - residential mortgage 4,260 10,992 14,156 29,408
Real estate - construction 1,913 1,620 1,765 5,298
Total $44,868 $45,277 $28,164 $118,309
Loans due after one year:
Having predetermined interest rates $50,430
Having floating interest rates 23,011
Total $73,441
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-off against interest income on loans unless management
believes 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.
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $3,398,044 and $2,811,605,
respectively (of which approximately $1,683,129 and $1,005,354 were on a
nonaccrual basis). The related allowance for loan losses was $568,431 and
$292,080, respectively. The average investment in impaired loans during 1998
and 1997 was $3,104,825 and $2,626,323, respectively. For the years ended
December 31, 1998 and 1997, the Company recognized approximately $233,000 and
$144,000, 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 increased to $2,153,000 at December 31, 1998, from
$1,112,000 at December 31, 1997. Real estate acquired through foreclosure
decreased $928,000 to $147,000 at December 31, 1998 from $1,075,000 at
December 31, 1997. Nonperforming assets represent 1.95% of loans net of
unearned income and real estate acquired through foreclosure at December 31,
1998 as compared to 1.79% at December 31, 1997.
The table below presents a summary of the Company's nonperforming assets at
December 31, 1998 and 1997.
December 31,
1998 1997
(amounts in thousands,
except financial ratios)
Nonperforming assets:
Nonperforming loans
Nonaccrual loans $ 1,683 $1,005
Past-due loans 470 107
Nonperforming loans 2,153 1,112
Real estate acquired through foreclosure 147 1,075
Total nonperforming assets $ 2,300 $2,187
Ratios:
Nonperforming loans to loans, net of unearned income 1.82% .92%
Nonperforming assets to loans (net of unearned
income) and real estate acquired through foreclosure 1.95% 1.79%
Nonperforming assets to total assets 1.11% 1.18%
Allowance for loan losses to nonperforming loans 79.10% 157.55%
Allowance for loan losses to nonperforming assets 74.04% 80.11%
Interest income on nonaccrual loans, which would have been reported for the
years ended December 31, 1998, 1997, and 1996 is summarized as follows:
1998 1997 1996
(amounts in thousands)
Interest at contracted rate $ 177 153 101
Interest at recorded as income 38 119 14
Reduction of interest income $ 139 34 87
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,
1998 1997
(amounts in thousands)
$ 118,062 $121,414
Loans, net of unearned income at end of year
Average loans, net of unearned income and allowance
for loan losses $ 118,484 $115,634
Allowance for loan losses at beginning of year $ 1,752 $ 1,806
Loans charged off:
Real estate loans 85 199
Commercial, financial, and agricultural 145 39
Installment and single payment individual 215 436
Total loans charged off 445 674
Recoveries of loans previous charged off:
Real estate loans 69 86
Commercial, financial and agricultural 21 84
Installment and single payment individual 131 149
Total loans recovered 221 319
Net loans charged off 224 355
Additions to allowance for loan losses charged to
operating expense 175 301
Allowance for loan losses at end of year $ 1,703 $ 1,752
Ratio of net loans charged off to average loans, net
of unearned income and the allowance for loan losses .19% .31%
Allowance for loan losses to loans, net unearned income
at end of year 1.44% 1.44%
The allowance for credit losses is primarily available to absorb losses
inherent in the loan portfolio. Credit exposures deemed uncorrectable are
charged against the allowance for credit losses. Recoveries of previously
charged-off amounts are credited to the allowance for credit losses.
Individually identified impaired loans are measured based on the present value
of payments expected to be received, observable market prices, or for loans
solely dependent on the collateral for repayment, the estimated fair market
value of the collateral. If the recorded investment in the impaired loan
exceeds the measure of estimated fair value, a valuation allowance is
established as a component of the allowance for credit losses.
All loans that are past due 90 days or more as to principal and interest, or
where reasonable doubt exists as to timely collection, are generally
classified as non-performing loans unless well secured and in the process of
collection.
The Company's process for determining an appropriate allowance for credit
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 "Sub-standard", 50% for loans graded
"Doubtful" and 100% for loans graded "Loss". For the year ended December 31,
1998, the allocation of the allowance for credit 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 credit losses is reviewed on a
monthly basis by management and the Board of Directors. On a quarterly basis a
comprehensive review of the adequacy of allowance for credit losses is
performed. 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 credit losses are made by monthly charges to
the provision for credit losses. The level of the provision for credit losses
is established annually based on historical net charge-offs, projected growth
of the loan portfolio and economic conditions.
The allowance for credit losses at year ended December 31, 1998 was
approximately $1,703,000, representing 1.44% of total loans compared to
approximately $1,752,000 at December 31, 1997, which represented 1.44% of
total loans, net of unearned income. The quality of the portfolio showed
improvement during 1998 with net charge-offs of $224,000 compared to net
charge-offs of $355,000 during 1997. For the year ended December 31, 1998,
loans graded as Sub-standard or worse (Classified Loans) were approximately
$3,398,000, representing 2.9% of total loans, compared to approximately
$3,833,000 or 3.2% of total loans at December 31, 1997. However, based on
management's outlook on the economy, the uncertainty of Year 2000 risks and an
expected slow down in residential and commercial real estate development, it
has been recommended that the level of the allowance for loan losses remains
at the current level.
The method of allocation of allowance for credit losses among loans has been
based on specific impairment of all loans determined by management and did not
change materially from 1997 to 1998. In 1998 a group of consumer loans were
written down individually to net market value and assigned an additional
general allowance for credit losses equal to 15% of the principal balance.
There were no other significant reallocations of the allowance for credit
losses among certain types of loans. Management believes that the allowance
for loan losses is adequate at December 31, 1998.
A substantial portion of the Company's loan portfolio is secured by real
estate in the metropolitan Atlanta market, including a concentration of church
loans. The Company's church loans were approximately $36.7 million and $33.3
million at December 31, 1998 and 1997, respectively. 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 that, 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:
Commercial Installment
financial, and single
and payment Real
agricultural individual Estate Total
(amounts in thousands, except percentages)
December 31, 1998 Allowance amount $512 $352 $839 $1,703
Percent of loans in each
category to total loans 30.0% 20.7% 49.3% 100%
December 31, 1997 Allowance amount $500 $412 $840 $1,752
Percent of loans in each
category to total loans 28.5% 23.5% 48.0% 100%
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
1998 1997
Amount Rate Amount Rate
(amounts in thousands, except percentages)
Noninterest-bearing deposits $ 45,306 -% $ 45,812 -%
Savings and interest-bearing deposits 61,144 2.57 53,554 2.35
Time deposits 65,733 5.33 68,910 5.32
Total average deposits $ 172,183 2.95% $168,276 2.92%
The maturities of time deposits of $100,000 or more as of December 31, 1998 are
present below (amounts in thousands):
3 months or less $ 18,064
Over 3 months through 6 months 11,936
Over 6 months through 12 months 3,321
Over 12 months 1,204
Total outstanding $ 34,525
SHORT TERM BORROWINGS
There were no short-term borrowing for which the average balance out standing
during the period was more than 30% of stockholders' equity for each of the
years ended December 31, 1998, 1997 and 1996.
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 constitute 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, 1998.
Cumulative amounts as of December 31, 1998
Maturing and repricing within
3 3 to 12 1 to 5 5 years
Months Months Years over Total
(amounts in thousands, except ratios)
Interest-sensitive assets:
Investments $ 583 $ 1,009 $24,515 $24,382 $50,489
Loans 29,670 15,198 45,277 28,164 118,309
Federal funds sold 553 - - - 553
Interest bearing deposits with banks 11,125 - - - 11,125
Total interest-sensitive assets 41,931 16,207 69,792 52,546 180,476
Interest-sensitive liabilities:
Deposits 97,902 21,872 15,285 - 135,059
Other borrowings 1,035 392 - - 1,427
Total interest-sensitive liabilities 98,937 22,264 15,285 - 136,486
Interest-sensitivity gap $(57,006) $(6,057) $54,507 $52,546 $43,990
Cumulative interest-sensitivity gap to
Total interest-sensitivity assets (31.59)% (34.94)% (4.74)% 24.37% 24.37%
ITEM 2. DESCRIPTION OF PROPERTIES
The Bank's main office building is located at 75 Piedmont Avenue, N.E.,
Atlanta, Georgia. The Bank also operates nine branch offices: the office
located at 2727 Panola Road, Lithonia, Georgia, which is owned by the Bank; the
office located at 3610 M.L. King, Jr. Drive, Atlanta, Georgia, which is owned by
the Bank; the office located at 965 M.L. King Jr. Drive, Atlanta, Georgia, which
is owned by the bank; the office located in Cub Foods at 2841 Greenbriar
Parkway, S.W., Atlanta, Georgia, which is leased (the lease expires in July
2013); the office located at 2840 East Point Street, East Point, Georgia, which
is owned by the bank; the office located at 712 West Peachtree, Atlanta,
Georgia, which is leased (the lease expires in April 1999); the office located
at 2592 S. Hairston Road, Decatur, Georgia, which is owned by the bank; the
office located at South DeKalb Mall, 2801 Candler Road, Decatur, Georgia, which
is leased (the lease expires in June 2001); and the office located at Rockbridge
Plaza, 5771 Rockbridge Road, Stone Mountain, Georgia, which is owned by the
Bank. Citizens Trust Bank Mortgage Services, Inc., the Company's wholly owned
mortgage company, is located at 5240-B Panola Industrial Boulevard, Decatur,
Georgia, which is leased.
Other than normal commercial lending activities of the Bank, the Company
generally does not invest in real estate, interests in real estate, real estate
mortgages, or securities of or interests in entities primarily engaged in real
estate activities.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of its properties are subject; nor are there material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the Company, or any associate of any of the foregoing, is a
party or has an interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
The Company's common stock, $1.00 par value ("Common Stock"), is not
traded on an established trading market, and there is only very limited trading.
The following table sets forth high and low bid information for the Common Stock
for each of the quarters in which trading has occurred since January 1, 1997
(information for 1997 is for the Bank's Common Stock prior to its merger with
First Southern Bancshares, Inc.). The prices set forth below reflect only
information that has come to management's attention and do not include retail
mark-ups, markdowns or commissions and may not represent actual transactions.
Quarter Ended: High Bid Low Bid
March 31, 1997 $ 4.50 $ 4.50
June 30, 1997 5.00 5.00
September 30, 1997 ---- ----
December 31, 1997 ---- ----
March 31, 1998 5.00 5.00
June 30, 1998 5.00 5.00
September 30, 1998 7.50 5.00
December 31, 1998 7.50 7.50
As of March 15, 1999, there were 1,329 holders of record of Common Stock.
On January 22,1999, the Company declared and paid an annual cash dividend of
$.15 per share for stockholders of record at December 15, 1998. No dividends
were paid by the Company during 1998. The Company's dividend policy in the
future will depend on the Bank's earnings, capital requirements, financial
condition, and other factors considered relevant by the Board of Directors of
the Company. See "Description of Business - Bank Regulation."
The Company did not have a
ny sales of unregistered securities during 1998, 1997 or 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
Effective January 30, 1998, the Company consummated its merger with First
Southern Bancshares, Inc. and its subsidiaries, First Southern Bank and FSB
Mortgage Services, Inc. FSB Mortgage Services, Inc. name was changed to
Citizens Trust Bank Mortgage Services, Inc. on July 8, 1998. The Company
exchanged 837,027 shares of its common stock and cash of approximately $4,469
for all of the stock and options of First Southern Bancshares, Inc. The merger
was accounted for as a pooling of interests. The merger resulted in the
creation of the fourth largest African-American owned commercial bank in the
United States, with assets of approximately $207 million. The financial
statements of the Company as of December 31, 1997 and for the years ended
December 31, 1997 and 1996 have been restated to include First Southern
Bancshares, Inc., First Southern Bank and FSB Mortgage Services.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
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 this Annual Report.
Net income for the year ended December 31, 1998 increased 457% to approximately
$1,766,000 from $317,000 earned for the year-ended December 31, 1997. As a
result, net income per share increased to $.82 in 1998 compared to $.15 earned
in 1997, return on assets increased to .91% in 1998 from .17% in 1997 and return
on equity increased to 10.22% in 1998 compared to 2.00% in 1997. The increase
in net income is primarily due to the increase in noninterest income of 24.07%
or $1,566,000 and a corresponding reduction in noninterest expense of 2.91% or
$438,000, compared to year end 1997. The major components of the noninterest
income were origination fees from the mortgage company which increased $960,000
to $2,123,000 in 1998 from $1,163,000 in 1997 and gains on sale of loans by the
mortgage company which totaled $760,000 in 1998 compared to $349,000 in 1997.
Mortgage Services primarily originates single dwelling home mortgages then sells
them in the secondary market. The Company also realized approximately $381,000
in gains primarily on the sale of a portion of its equity securities portfolio.
The Company decided to reduce the level of equity securities it maintains to
limit the Company's opportunity risk in the event of a correction in the
equities market. The Company continues to maintain a portfolio of high-grade
equity securities consisting primarily of Fannie Mae stock. The total equity
portfolio had a fair market value of approximately $866,000 at December 31,
1998.
The Company's total assets increased 11.35% or approximately $21.1 million to
$206,827,000 at December 31, 1998 compared to $185,745,000 at December 31, 1997.
However, loans, net of unearned income, decreased 2.8% or $3.4 million and total
deposits increased 12.6% or $20.7 million for the year ended December 31, 1998.
Although loans, net of unearned income, decreased during 1998, interest income
on loans, including fees, increased a modest $130,000 or 1.15%, and interest
expense on deposits also increased a modest $159,000 or 3.24% on growth of
interest bearing deposits of 12.26% or $14.7 million 1998. Average assets for
the year ended December 31, 1998 totaled $194,260,000, an increase of 2.6% or
$4.9 million as compared to December 31, 1997.
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.
Years ended December 3
(amounts in thousands, except per share data and financial ratios)
1998 1997 1996
Statement of operating data:
Net interest income $ 9,209 $ 9,322 $ 9,515
Provision for loan losses 175 301 205
Net income 1,766 317 945
Per share data:
Net income .82 .15 .45
Book value 8.56 7.76 7.52
Cash dividends declared - .013 .075
Balance sheet data:
Loans, net of unearned income $118,062 $121,414 $115,100
Deposits 184,672 163,943 178,424
Notes payable 1,427 275 400
Advances from Federal Home Loan Bank - 1,576 -
Long-term debt and obligations
under capital leases - 585 782
Total assets $206,827 $185,745 $197,023
Average shareholders' equity 17,283 15,879 15,235
Average assets 194,260 189,361 189,978
Ratios:
Net income to average assets .91% .17% .50%
Net income to average shareholders'
equity 10.22% 2.00% 6.20%
Dividend payout ratio -% 8.73% 16.83%
Average shareholders' equity to
average assets 8.90% 8.39% 8.02%
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the Company's principal source of earnings, represents
the amount by which the income received on interest-bearing assets (primarily
loans and investment securities) exceeds the interest paid on interest-bearing
liabilities (mainly deposits). The following table represents the Company's
net interest income on a tax-equivalent basis. Interest income on tax-exempt
investment securities was 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 1998, 1997, and 1996.
Years ended
December 31
1998 1997 1996
(amounts in thousands)
Interest income $14,398 $14,455 $14,371
Tax-equivalent adjustment 172 116 84
Interest income, tax-equivalent basis 14,570 14,571 14,455
Interest expense (5,189) (5,133) (4,856)
Net interest income,tax-equivalent basis 9,381 9,438 9,599
Provision for loan losses (175) (301) (205)
Noninterest income 8,072 6,506 5,567
Noninterest expense (14,637) (15,075) (13,476)
Income before income taxes 2,641 568 1,485
Income tax expense (703) (135) (456)
Tax-equivalent adjustment (172) (116) (84)
Income tax expense, tax-equivalent basis (875) (251) (540)
Net income $ 1,766 $ 317 $ 945
Net interest income, on a fully taxable equivalent basis, accounted for 53.8%
of net interest income and noninterest income before any provision for loan
losses in 1998, 59.2% in 1997 and 63.3% in 1996. The level of such income is
influenced primarily by changes in volume and mix of earning assets, sources
of noninterest income 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,
interest rate forecasts, the demand for loans, the availability of deposits,
current operating results, liquidity, capital, and interest rate exposure.
Based on such reviews, the 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 $57,000 or 0.60% for
the year ended 1998 as compared to the same period in 1997. During 1998, the
net interest margin was 5.56% on average earning assets of approximately
$168,651,000 compared to 5.70% on average earning assets of approximately
$165,622,000 in 1997.
In 1997, net interest income on a tax-equivalent basis decreased $161,000 or
1.7% as compared to 1996. The Company's net interest margin increased to
5.70% in 1997 from 5.68% in 1996 as a result of lower yields on interest-
bearing liabilities.
Provision for Loan Losses
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the reserve for possible loan losses
at an adequate level. In 1998, the Company was able to reduce its provision
for loan losses by $126,000 from the year-end 1997 largely due to the improved
quality of its loan portfolio and a decrease in the loan portfolio, net of
unearned income. At ended December 31, 1998, the loan portfolio had decreased
to $118,062,000 from $121,414,000 at December 31, 1997. 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, 1998 and 1997, the
Company's allowance for loan losses was approximately $1,703,000 or 1.44% of
loans, net of unearned income compared to $1,752,000 or 1.44% of loans, net of
unearned income. Management believes that the reserve for possible loan losses
was adequate to provide for potential loan losses at December 31, 1998 and
1997.
Reviews of nonperforming loans, designed to identify potential charges to the
reserve for possible loan losses, as well as to determine the adequacy of the
reserve, are made on a continuous basis during the year. These reviews are
conducted by the responsible lending officers, a separate independent review
process, and the internal audit division. They consider such factors as 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. The
conclusions are reviewed and approved by senior management. When a loan, or a
portion thereof, is considered by management to be uncollectible, it is
charged against the reserve. Any recoveries on loans previously charged off
are added to the reserve.
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 not 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 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.
Noninterest Income
The Company offers a wide variety of fee generating services and considers the
expansion of these services a major source of profitability in view of
continuing market pressure on net interest income. Noninterest income
increased approximately $1,566,000 or 24.07% in 1998 from 1997. This increase
is primarily the result of an increase in Mortgage Services' origination fee
revenue of $961,000. This increase was a direct result of an increase in
mortgage loan originations and gain on sale of loans of $411,000, compared to
1997. Also during 1998, the Company liquidated a portion of its equity
investment portfolio in anticipation of changes in market conditions in the
capital markets. The Company realized approximately $360,000 from this
transaction. Service charges on deposit accounts decreased approximately
$229,000 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 is related to insufficient funds, returned check charges and
other customer service fees.
Noninterest income increased approximately $939,000 or 16.87% in 1997 from
1996 as a result of increases of $793,000 and $349,000 in origination fees and
gain on sale of loans, respectively, in 1997 compared to a total of $370,000
in origination fees 1996.
Noninterest Expense
During 1998, noninterest expense decreased $438,000 to $14.6 million. The
decrease is due to a combination of a decrease in salaries and employee
benefits of $835,000, a decrease in net occupancy and equipment of $79,000 and
an increase in other operating expenses of $475,000. The decreases in
salaries and occupancy and equipment expenses are attributed to the
efficiencies gained through the merger with First Southern. Similarly, the
increase in other expenses is primarily due to the merging of the two banks
information systems, promotion of the merger to our customers and other
related merger issues.
In 1997, noninterest expense increased $1.6 million or 11.9% as compared to
1996. The increase was primarily due to salary and employee benefits and
operating expenses. Salaries and employee benefits increased $1,060,000 or
15.4% as a result of increases in the number of senior level officers,
staffing for system conversion and normal salary adjustments. Other operating
expenses increased $329,000 or 7.8% as compared to 1996. The increase was due
to teller and other losses, director fees, data processing related to the out-
sourcing of the proof department and other miscellaneous expenses.
Income Taxes
The effective tax rate for the Company during 1998 was 28.5%, but this rate
does not fully demonstrate the contribution the Company makes as a corporate
taxpayer. The Company's effective tax rate is lower as a result of the
elimination of interest on obligations of qualifying state and municipal
authorities. As this interest is not subject to federal income tax, qualifying
authorities are able to issue these obligations at substantially lower
interest rates compared to rates on taxable obligations. This results in an
indirect subsidy from the federal government to the qualifying state and
municipal authorities. Due to their tax-exempt characteristic, the Company and
other holders of such obligations give up additional interest income which
could have been earned in similar taxable investments since the stated
interest rates on tax-exempt investments are lower than those of taxable
investments.
At December 31, 1998, the Company's net deferred tax asset was approximately
$230,000. A full valuation allowance was recorded for the state net operating
loss and credit carryover since it is more likely than not the related
deferred tax assets will not be realized.
In 1998, the Company recognized income tax expense of $703,000, or 28.5% of
its income before income taxes as compared to an income tax expense of
$135,000 and $456,000 in 1997 and 1996, respectively, or 29.8% or 32.5%,
respectively, of its earnings.
Recent Accounting Pronouncements
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 no later than the first quarter
of 2000. The Company is evaluating the effects of the new statement and when
to implement the new requirements.
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, 1998, approximately 3.2% of the investment securities
portfolio had maturity dates within the next year and approximately 48.6%
had maturity dates 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 1998, interest-bearing
deposits maintained at the Federal Home Loan Bank averaged approximately
$10 million and federal funds sold averaged $2 million, thereby providing
sufficient funds to meet immediate liquidity needs.
The Company is a member of the Federal Reserve System and 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 expected 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 8.90%
and 8.39% in 1998 and 1997, respectively. At December 31, 1998, the Company
and the Bank's regulatory capital was well above the required minimum amounts.
See note 14, "Shareholders' Equity" to the Consolidated Financial Statements
included in another section of this Annual Report.
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 note 14 "Shareholders' Equity" to the Consolidated Financial Statements
included in another section of this Annual Report.
Inflation
The Company's assets and liabilities are monetary in nature. Therefore,
interest rates have a greater impact on the Company's performance than the
effects of general levels 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. 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 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 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. Management expects that
some of our mission critical processing vendors will charge the Bank for
conducting tests on renovated systems. The Company expects to spent an
additional $100,000 related to Y2K system testing, renovations and equipment
purchases.
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.
ITEM 7. FINANCIAL STATEMENTS
The Company's audited financial statements are included in Exhibit 13.1
to this Form 10-KSB:
Reports of Independent Certified Public Accountants
Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountants
(i) On July 17, 1998, Citizens Bancshares dismissed Porter
Keadle Moore LLP as its independent accountants.
(ii) The reports of Porter Keadle Moore LLP on the financial
statements for the past two fiscal years contained no
adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or
accounting principles.
(iii) The registrant's Audit Committee participated in and
approved the decision to change independent accountants.
(iv) In connection with the audits for the two most recent fiscal
years through July 17, 1998, there have been no
disagreements with Porter Keadle Moore 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 Porter
Keadle Moore LLP would have caused them to make reference
thereto in their report on the financial statements for such
years.
(v) During the two most recent fiscal years and through July 17,
1998, there have been no reportable events (as defined in
Regulation S-B Item Section 304(a)(1)(iv).
(vi) The registrant has requested that Porter Keadle Moore LLP
furnish it with a letter addressed to the SEC stating
whether or not it agrees with the above statements. A copy
of such letter dated July 23, 1998 is filed as Exhibit 10.5
to this Form 10-KSB.
(b) New independent accountants
(i) The registrant engaged Deloitte & Touche LLP as its new
independent accountants as of August 26, 1998. During the two
most recent fiscal years, the registrant has not consulted
with Deloitte & Touche 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 (as described in Regulation S-B Item 304(a)(2)).
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The responses to this Item are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on May 26, 1999 under the
headings, "Election of Directors - Director Nominees" at pages 2 and 3,
"Principal Officers" at page 4, "Beneficial Ownership of Common Stock" at
pages 6 through 8, and "Compliance With Section 16(a) of the Securities
Exchange Act of 1934" at page 8, and are incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The responses to this Item are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on May 26, 1999 under the
heading, "Executive Compensation" at pages 5 and 6, and are incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The responses to this item are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on May 26, 1999 under the
heading, "Beneficial Ownership of Common Stock" at pages 6 through 8, and are
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to this Item are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on May 26, 1999 under the
headings "Certain Transactions" at page 6, and are incorporated herein by
reference.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
Exhibit
3.1 The Articles of Incorporation.(1)
3.2 Bylaws.(2)
4.1 Instruments Defining the Rights of Security Holders.(3)
10.1 Employment Agreement dated January 30, 1998 between
James E. Young and the Company.
10.2 Lease and Option Agreement by and between Citizens
Trust Bank and Resolution Trust Corporation dated
April 22, 1994. (4)
13.1 The Company's 1998 audited financial statements including
Reports of Independent Certified Public Accountants and
Notes to the Consolidated Financial Statements.
16 Porter Keadle Moore LLP letter to SEC regarding
statements listed in Item 8 of this Form 10-KSB.(5)
21 List of subsidiaries of the Company.
24.1 Power of attorney. See the signature pages to this
Report.
27.1 Financial Data Schedule (for SEC use only).
__________________
(1) Incorporated herein by reference to exhibit of same number in the
Company's 1987 Form 10 K.
(2) Incorporated by reference to exhibit of same number in the Company's
Registration Statement on Form 10, File No. 0-14535.
(3) See the Articles of Incorporation of the Company at Exhibit 3.1 hereto
and the Bylaws of the Company at Exhibit 3.2 hereto.
(4) Incorporated by reference to Exhibit 10.10 to the Company's Registration
Statement on Form 10, File No. 0-14535.
(5) Incorporated by reference to the Company's current report on Form 8-K
dated July 24, 1998, File No. 0-14535.
(b) No reports on Form 8-K were filed in the fourth quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CITIZENS BANCSHARES CORPORATION
By: /s/ James E. Young
James E. Young
President
Date: April 12, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
on the signature page to this Report constitutes and appoints James E. Young
and Willard C. Lewis and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits hereto, and
other documents in connection herewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Herman J. Russell
Herman J. Russell
Chairman of the Board
April 12,1999
/s/ Gregory T. Baranco
Gregory T. Baranco
Director
April 12,1999
/s/ Bernard H. Bronner
Bernard H. Bronner
Director
April 12,1999
/s/ Thomas E. Boland
Thomas E. Boland
Director
April 12,1999
/s/ Johnnie L. Clark
Johnnie L. Clark
Director
April 12,1999
/s/ James E. Young
James E. Young
Director and President*
April 12,1999
/s/ Samuel J. Cox
Samuel J. Cox
Senior Vice President and
Chief Financial Officer**
April 12,1999
* Principal executive officer
** Principal Accounting and
Financial Officer
EXHIBIT INDEX
Exhibit
Number
Exhibit
Page Number in
Sequentially
Numbered Copy
3.1 The Articles of Incorporation.(1)
3.2 Bylaws.(2)
4.1 Instruments Defining the Rights of Security
Holders.(3)
10.1 Employment Agreement dated January 30, 1998
between James E. Young and the Company.
10.4 Lease and Option Agreement by and between
Citizens Trust Bank and Resolution Trust
Corporation dated April 22, 1994. (4)
13.1 The Company's 1998 Annual Report including Reports
of Independent Certified Public Accountants and
Notes to the Consolidated Financial Statements.
16 Porter Keadle Moore LLP letter to SEC
regarding statements listed in Item 8 of
this Form 10-KSB.(5)
21 List of subsidiaries of the Company.
24.1 Power of attorney. See the signature pages
to this Report.
27.1 Financial Data Schedule (for SEC use only).
(1) Incorporated herein by reference to exhibit of same number in the
Company's 1987 Form 10 K.
(2) Incorporated by reference to exhibit of same number in the Company's
Registration Statement on Form 10, File No. 0-14535.
(3) See the Articles of Incorporation of the Company at Exhibit 3.1 hereto
and the Bylaws of the Company at Exhibit 3.2 hereto.
(4) Incorporated by reference to Exhibit 10.10 to the Company's Registration
Statement on Form 10, File No. 0-14535.
(5) Incorporated by reference to the Company's current report on Form 8-K
dated July 24, 1998, File No. 0-14535.
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 30th day of January, 1998, among
Citizens Bancshares Corporation ("CBC") and its wholly-owned subsidiary,
Citizens Trust Bank (CBC and Citizens Trust Bank collectively being referred
to as the "Employer"), and James E. Young, a resident of the State of Georgia
(the "Executive").
STATEMENT OF FACTS
CBC and First Southern Bancshares, Inc. ("FSB") are parties to an
Agreement and Plan of Merger dated as of October 1, 1997, which provides for
the merger of FSB with and into CBC (the "Company Merger"). Article II of
such Merger Agreement provides that the Executive will serve as President and
Chief Executive Officer of CBC following the Company Merger.
Citizens Trust Bank and First Southern Bank are also parties to an
Agreement and Plan of Merger dated as of December 1, 1997, which provides for
the merger of First Southern Bank with and into Citizens Trust Bank (the "Bank
Merger"). Section 3(c) of such Merger Agreement provides that the Executive
will serve as President and Chief Executive Officer of Citizens Trust Bank
following the Bank Merger.
Both Merger Agreements also provide that the Executive shall have the
authority to select his management team upon consummation of the respective
mergers.
In consideration of the above premises and the mutual agreements
hereinafter set forth, the parties hereby agree as follows:
STATEMENT OF TERMS
1. Definitions. Whenever used in this Agreement, the following terms and
their variant forms shall have the meanings set forth below:
1.1 "Agreement" shall mean this Agreement and any exhibits
incorporated herein together with any amendments hereto made in the manner
described in this Agreement.
1.2 "Affiliate" shall mean any business entity which controls, is
controlled by, or is under common control with the Employer.
1.3 "Area" shall mean the geographic area within the boundaries of
Fulton County, Georgia and Dekalb County, Georgia.
1.4 "Bank Information" shall mean Confidential Information and Trade
Secrets of the Employer.
1.5 "Business of the Employer" shall mean the business conducted by
CBC and Citizens Trust Bank and their respective subsidiaries, which is
commercial and mortgage banking.
1.6 "Cause" shall mean, with respect to termination by the Employer:
1.6.1 A material breach of the terms of this Agreement by the
Executive, including, without limitation, failure by the Executive
to perform his duties and responsibilities in the manner and to
the extent required under this Agreement or a breach of any
representation or warranty of the Executive set forth herein which
breach or failure remains uncured after the expiration of thirty
(30) days following the delivery of written notice of such breach
or failure to the Executive by the Employer;
1.6.2 Conduct by the Executive that amounts to fraud, dishonesty
or willful misconduct in the performance of his duties and
responsibilities hereunder;
1.6.3 The Executive's conviction of a felony, or any other crime
involving depravity;
1.6.4 Conduct by the Executive that amounts to either (a) gross
and willful insubordination or inattention to his duties and
responsibilities hereunder, or (b) gross negligence or willful
misconduct of the Executive that is materially damaging to the
business of the Employer;
1.6.5 Conduct by the Executive that results in removal from his
position as an officer or employee of CBC or Citizens Trust Bank
pursuant to a written order by any federal or state regulatory
agency with authority or jurisdiction over such entities; or
1.6.6 Receipt by either CBC or Citizens Trust Bank of written
notice from its federal or state regulatory agency that such
agency has criticized the Executive's performance or his area of
responsibility, and has either (a) rated CBC or Citizens Trust
Bank a "4" or a "5" under the applicable Uniform Financial Rating
System, or (b) has determined that CBC or Citizens Trust Bank is
in a "troubled condition," as that term is defined under Section
914 of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989, 12 U.S.C. 1811 et seq.
1.7 "Change in Control" shall mean any one of the following events:
1.7.1 The acquisition by any person or persons acting in concert
of the then outstanding voting securities of CBC if, after the
transaction, the acquiring person (or persons) owns, controls, or
holds with power to vote twenty five percent (25%) or more of any
class of voting securities of CBC, or such other transaction as
may be described under 12 C.F.R. 225.41(c)(1) or any successor
thereto; or
1.7.2 Within any twelve-month period, the persons who were the
directors of CBC immediately before the beginning of such twelve-
month period (the "Incumbent Directors") shall cease to constitute
at least a majority of the Board of Directors of CBC; provided
that any director who was not a director as of the consummation of
the Company Merger shall be deemed to be an Incumbent Director if
that director was elected to the Board of Directors by, or on the
recommendation of or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors; and
provided further that no director whose initial assumption of
office is in connection with an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934) relating to
the election of directors shall be deemed to be an Incumbent
Director; or
1.7.3 The approval by the stockholders of CBC of a reorganization,
merger or consolidation, with respect to which persons who were
the stockholders of CBC immediately prior to such reorganization,
merger, or consolidation do not, immediately thereafter, own more
than fifty percent (50%) of the combined voting power entitled to
vote in the election of directors of the reorganized, merged, or
consolidated company's then-outstanding voting securities; or
1.7.4 The sale, transfer, or assignment of all or substantially
all of the assets of CBC and its subsidiaries to any third party.
1.8 "Confidential Information" shall mean data and information
relating to the Business of the Employer (which does not rise to the status of
a Trade Secret) which is or has been disclosed to the Executive or of which
the Executive became aware as a consequence of or through the Executive's
relationship to the Employer and its Affiliates and which has value to the
Employer or its Affiliates and is not generally known to its competitors.
Confidential Information shall not include any data or information that has
been voluntarily disclosed to the public by the Employer (except where such
public disclosure has been made by Executive without authorization) or that
has been independently developed and disclosed by others, or that otherwise
enters the public domain through lawful means.
1.9 "Disability" shall mean a mental or physical incapacity that
renders the Executive unable to perform his duties under this Agreement, with
or without accommodation.
1.10 "Good Reason" shall mean, with respect to termination by the
Executive, a material diminution in the powers, responsibilities or duties of
the Executive hereunder, or a material breach of the terms of this Agreement
by the Employer which remains uncured after the expiration of thirty (30) days
following the delivery of written notice of such breach to the Employer by the
Executive.
1.11 "Trade Secrets" means information including, but not limited to,
technical or nontechnical data, formulas, patterns, compilations, programs,
devices, methods, techniques, drawings, processes, financial data, financial
plans, product plans or lists of actual or potential customers or suppliers
which (a) derives economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or use; and
(b) is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.
2. Duties.
2.1 Position. The Executive is employed as the President and Chief
Executive Officer of CBC and Citizens Trust Bank and shall have the authority
to select his management team and, subject to the direction of the Board of
Directors of the Employer shall perform and discharge well and faithfully the
duties which may be assigned to him from time to time by the Board of
Directors in connection with the conduct of the Business of the Employer. In
addition to the duties and responsibilities specifically assigned to the
Executive by the Board of Directors, the Executive shall:
2.1.1 Devote substantially all of his time, energy and skill
during regular business hours to the performance of the duties of
his employment (reasonable vacations and reasonable absences due
to illness excepted) and faithfully and industriously perform such
duties;
2.1.2 Diligently follow and implement all management
policies and decisions communicated to him by the Board of
Directors;
2.1.3 Timely prepare and forward to the Board of Directors all
reports and accountings as may be requested of the Executive;
2.1.4 Foster a corporate culture that promotes ethical practices,
encourages individual integrity, fulfills social responsibility,
and is conducive to attracting, retaining, and motivating a
diverse group of top-quality employees at all levels;
2.1.5 Work with the Board of Directors to develop a long-term
strategy for the Employer that creates shareholder value;
2.1.6 Use best efforts to achieve the Employer's financial and
operating goals and objectives;
2.1.7 Improve the quality and value of the products and services
provided by the Employer;
2.1.8 Strive to ensure that the Employer maintains a satisfactory
competitive position within its industry;
2.1.9 Develop an effective management team and an active plan for
its development and succession, and make recommendations to the
Board of Directors regarding personnel and employment
compensation; and
2.1.10 Implement major corporate policies.
2.2 Other Activities. The Executive shall devote his entire business
time, attention and energies to the Business of the Employer and shall not
during the term of this Agreement be engaged (whether or not during normal
business hours) in any other business or professional activity, whether or not
such activity is pursued for gain, profit or other pecuniary advantage; but
this shall not be construed as preventing the Executive from (a) investing his
personal assets in businesses which (subject to clause (b) below) are not in
competition with the Business of the Employer and which will not require any
services on the part of the Executive in their operation or affairs and in
which his participation is solely that of an investor, (b) purchasing
securities in any corporation whose securities are regularly traded provided
that such purchase shall not result in his collectively owning beneficially at
any time five percent (5%) or more of the equity securities of any business in
competition with the Business of the Employer and (c) participating in civic
and professional affairs and organizations and conferences, preparing or
publishing papers or books or teaching so long as the Board of Directors
approves of such activities prior to the Executive's engaging in them. Prior
to commencing any activity described in clause (c) above, the Executive shall
inform the Board of Directors in writing of any such activity.
3. Term.
This Agreement shall remain in effect until terminated as provided in
Section 4.
4. Termination.
4.1 By the Employer. The employment of the Executive under this
Agreement may be terminated by the Employer:
4.1.1. For Cause, upon written notice to the Executive, in
which event the Employer shall have no further obligation to the
Executive except for the payment of any Base Salary due and owing
under Section 5.1 on the effective date of termination; or
4.1.2 Without Cause at any time, provided that the Employer shall
give the Executive sixty (60) days' prior written notice of its
intent to terminate, in which event the Employer shall be required
to meet its obligations to the Executive under Section 5 for a
period of twelve (12) months after termination, and such
obligations shall be contingent upon the Executive signing a
Release Agreement.
4.2 By the Executive. The employment of the Executive under this
Agreement may be terminated by the Executive:
4.2.1 With Good Reason, if the Executive provides written notice
to the Employer of the Executive's intention to terminate this
Agreement because of a Good Reason, in which event the Employer
shall be required to meet its obligations to the Executive under
Section 5 for a period of twelve (12) months after termination,
and such obligations shall be contingent upon the Executive
signing a Release Agreement; or
4.2.2 Without Good Reason at any time, provided that the Executive
shall give the Employer sixty (60) days' prior written notice of
his intent to terminate, in which event the Employer shall have no
obligation to the Executive except payment of any Base Salary due
and owing under Section 5.1 on the effective date of termination
4.3 By Mutual Agreement. The employment of the Executive under this
Agreement may be terminated at any time upon the mutual, written agreement of
the parties, in which event the Employer shall have no further obligation to
the Executive except for the payment of any amounts due and owing under
Section 5 on the effective date of termination, unless otherwise set forth in
the written agreement.
4.4 On Change in Control. If a Change in Control occurs and this
Agreement is terminated for any reason within six (6) months thereafter, upon
such termination, the Executive shall receive a lump sum cash payment equal to
two (2) times the Executive's Base Salary.
4.5 On Death. Notwithstanding anything in this Agreement to the
contrary, this Agreement shall end automatically upon the Executive's death.
Should this Agreement terminate as a result of the Executive's death, the
Employer shall continue to meet its obligations to the Executive under Section
5 through the date of such termination, but with respect to Incentive
Compensation, the Employer shall pay the Executive only for Delinquency Rating
and Uniform Financial Institution Rating Incentives which have been earned as
of the date the employment relationship terminates. The Executive's eligible
dependants will be entitled to continue health insurance coverage in
accordance with any applicable plan documents and/or by operation of law. The
Employer agrees to reimburse the Executive's dependants for any applicable
premiums for continued health insurance coverage coverage for a period of one
(1) year following the Executive's death.
4.6 On Disability. This Agreement may be terminated due to the
Disability of the Executive, in which event the Employer shall be required to
continue to meet its obligations to the Executive under Section 5 through the
date of such termination but with respect to Incentive Compensation, the
Employer shall pay the Executive only for Delinquency Rating and Uniform
Financial Institution Rating Incentives which have been earned as of the date
the employment relationship terminates. In the case of termination under this
Section 4.6, the Executive may be eligible for long-term disability benefits
provided in accordance with any group disability insurance policy maintained
by the Employer in which the Executive is a participant and which is in effect
at the time of termination of this Agreement.
4.7 Effect of Termination. Termination of the employment of the
Executive shall be without prejudice to any right or claim which may have
previously accrued to either the Employer or the Executive hereunder and shall
not terminate, alter, supersede or otherwise affect the terms and covenants
and the rights and duties prescribed in this Agreement.
5. Compensation. The Executive shall receive the following salary and
benefits:
5.1 Base Salary. The Executive shall be compensated at a base salary
of one hundred fifty thousand dollars ($150,000) per annum (the "Base
Salary"). The Executive's Base Salary shall be reviewed by the Board of
Directors annually beginning on the first anniversary of the Company Merger,
and the Executive may be eligible to receive annually an increase in such
amount, if any, as may be determined by the Board of Directors in its sole
discretion. The Executive's Base Salary shall be payable in accordance with
the Employer's normal payroll practices.
5.2 Incentive Compensation. The terms and conditions of Executive's
Incentive Compensation plan is set forth as Exhibit A, which is attached
hereto and incorporated by this reference into this Agreement.
5.3 Stock Options.
5.3.1 CBC hereby grants to the Executive an option to purchase, at
a per share purchase price of $9.88, a total of 17,500 shares of
the common stock of CBC. The options granted by this Section
5.3.1 will become vested and exercisable in twenty percent (20%)
increments, commencing on the first anniversary of the effective
date of the Company Merger and continuing for the next four
successive anniversaries until the option is fully vested and
exercisable. The option shall expire upon the earlier of the
termination of the Executive's employment or upon the applicable
"option expiration date." The "option expiration date" shall
refer to a particular option increment and shall mean the tenth
anniversary of the date that the option increment became vested
and exercisable.
5.3.2 In the event of (a) termination by the Executive for Good
Reason pursuant to Section 4.2.1, (b) termination by the Employer
without Cause pursuant to Section 4.1.2, or (c) a Change in
Control pursuant to Section 4.4, all options granted to the
Executive shall become one hundred percent (100%) vested and will
be exercisable for a period of ninety (90) days after the date of
the termination of employment. Any options not exercised within
ninety (90) days after the date of termination of employment shall
expire.
5.4 Automobile. The Employer shall provide an automobile suitable for
business, as determined by the Employer, for the Executive's use and will pay
the expenses associated with operating and maintaining this automobile.
5.5 Memberships. The Employer shall pay for the Executive's
membership in appropriate professional organizations as approved by the Board
of Directors as well as for the Executive's membership (i.e. monthly dues and
business expenses) in the Commerce Club (or comparable dining club).
5.6 Tax Consultant. The Employer shall pay for the services of a tax
consultant of the Executive's choice, subject to the reasonable approval of
CBC's Board of Directors, to provide personal tax consulting service to the
Executive, to include preparation and analysis of personal financial
statements for tax purposes and income tax filing preparation. The
Executive's income tax returns will be reviewed annually by the Chairman of
the Audit Committee.
5.7 Annual Physical. The Employer shall pay for the Executive to
undergo a routine annual medical examination by a physician of the Executive's
choice, subject to the reasonable approval of CBC's Board of Directors.
5.8 Vacation. The Executive shall be entitled to four (4) weeks of
vacation during each year of this Agreement, during which his compensation
shall be paid in full. At least two consecutive weeks each year should be
taken by the Executive for vacation, with other vacation to be taken at a time
or times mutually agreeable to the Employer and the Executive. The
Executive's vacation will not carry over from one year to the next, so that
any unused vacation at the end of the year will be forfeited. Upon the
termination of this Agreement for any reason, the Employer will pay the
Executive for any vacation benefits earned, but unused, as of the termination
date of this Agreement.
5.9 Business Expense Reimbursement The Employer specifically agrees
to reimburse the Executive for reasonable business expenses incurred by him in
performance of his duties hereunder, as approved from time to time by the
Board of Directors, provided that the Executive shall, as a condition of
reimbursement, submit verification of the nature and amount of such expenses
in accordance with reimbursement policies from time to time adopted by the
Employer and in sufficient detail to comply with rules and regulations
promulgated by the Internal Revenue Service.
5.10. Other Benefits. In addition to the Base Salary, the Executive
shall be eligible for such benefits as may be available from time to time for
employees of the Employer similarly situated to the Executive. All such
benefits shall be awarded and administered in accordance with the Employer's
standard policies and practices. Such benefits may include, by way of example
only, profit-sharing plans, retirement or investment funds, dental, health,
life and disability insurance benefits and such other benefits as the Employer
deems appropriate
5.11 Withholding. The Employer may deduct from each payment of
compensation hereunder all amounts required to be deducted and withheld in
accordance with applicable federal and state income, FICA and other
withholding requirements.
6. Bank Information.
6.1 Ownership of Information. All Bank Information received or
developed by the Executive while employed by the Employer will remain the sole
and exclusive property of the Employer.
6.2 Obligations of the Executive. The Executive agrees (a) to hold
Bank Information in strictest confidence, and (b) not to use, duplicate,
reproduce, distribute, disclose or otherwise disseminate Bank Information or
any physical embodiments thereof and may in no event take any action causing,
or fail to take any action necessary in order to prevent any, Bank Information
from losing its character or ceasing to qualify as Confidential Information or
a Trade Secret. In the event that the Executive is required by law to
disclose any Bank Information, he will not make such disclosure unless (and
then only to the extent that) he has been advised by independent legal counsel
that such disclosure is required by law, and then only after prior written
notice is given to the Employer when the Executive becomes aware that such
disclosure has been requested and is required by law. This Section 6 shall
survive for a period of two (2) years following termination of this Agreement
with respect to Confidential Information, and shall survive termination of
this Agreement for so long as is permitted by the then-current Georgia Trade
Secrets Act of 1990, O.C.G.A. 10-1-760 through 10-1-767, with respect to
Trade Secrets.
6.3 Delivery Upon Request or Termination. Upon request by the
Employer, and in any event upon termination of his employment with the
Employer, the Executive will promptly deliver to the Chairman of the Board of
CBC all property belonging to the Employer, including without limitation all
Bank Information then in his possession or control.
7. Non-Solicitation of Customers. The Executive agrees that during his
employment by the Employer hereunder and, in the event he voluntarily
terminates his employment hereunder (i.e., he terminates without Good Reason),
for a period of six (6) months thereafter, he will not (except on behalf of or
with the prior written consent of the Employer), within the Area, on his own
behalf or in the service or on behalf of others, solicit, divert or
appropriate or attempt to solicit, divert or appropriate, directly or by
assisting others, any business from any customers of the Employer or its
Affiliates, including actively sought prospective customers with whom the
Executive has or had material contact at any time during the last twelve (12)
months of his employment, for purposes of providing products or services that
are competitive with those provided by the Employer or its Affiliates.
8. Non-Solicitation of Employees. The Executive agrees that during his
employment by the Employer hereunder and, in the event he voluntarily
terminates his employment hereunder (i.e., he terminates without Good Reason),
for a period of six (6) months thereafter, he will not, within the Area, on
his own behalf or in the service or on behalf of others, solicit, recruit or
hire away or attempt to solicit, recruit or hire away, directly or by
assisting others, any employee of the Employer or its Affiliates, whether or
not such employee is a full-time employee or a temporary employee of the
Employer or its Affiliates and whether or not such employment is pursuant to
written agreement and whether or not such employment is for a determined
period or is at will.
9. Non-Competition. The Executive agrees that during his employment by the
Employer hereunder and, in the event he voluntarily terminates his employment
hereunder (i.e., he terminates without Good Reason), for a period of twelve
(12) months thereafter, he will not, within the Area, on his own behalf or in
the service or on behalf of others, compete with the Employer. The term
"compete" means to engage in, to have any equity or profit interest in, to
make any loan to or for the benefit of, or to render any services of any kind
to, directly or indirectly, on the Executive's own behalf or in the service of
or on behalf of any other individual or entity, either as a proprietor,
employee, agent, independent contractor, consultant, director, officer,
partner, or stockholder (other than a stockholder of a corporation listed on a
national securities exchange or whose stock is regularly traded in the over-
the-counter market, provided that the Executive at no time owns, directly or
indirectly, in excess of five percent (5%) of the outstanding stock of any
class of any such corporation) any business which provides products or
services substantially similar to the Business of the Employer.
10. Remedies. The Executive agrees that the covenants contained in Sections
6 through 9 of this Agreement are of the essence of this Agreement; that each
of the covenants is reasonable and necessary to protect the business,
interests and properties of the Employer; and that irreparable loss and damage
will be suffered by the Employer should the Executive breach any of the
covenants. Therefore, the Executive agrees and consents that, in addition to
all the remedies provided by law or in equity, the Employer shall be entitled
to a temporary restraining order and temporary and permanent injunctions to
prevent a breach or contemplated breach of any of the covenants contained in
Section 6 through 9 of this Agreement. The Employer and the Executive agree
that all remedies available to the Employer or the Executive, as applicable,
shall be cumulative.
11. Severability. The parties agree that each of the provisions included in
this Agreement is separate, distinct and severable from the other provisions
of this Agreement and that the invalidity or unenforceability of any Agreement
provision shall not affect the validity or enforceability of any other
provision of this Agreement. Further, if any provision of this Agreement is
ruled invalid or unenforceable by a court of competent jurisdiction because of
a conflict between the provision and any applicable law or public policy, the
provision shall be redrawn to make the provision consistent with and valid and
enforceable under the law or public policy.
12. No Set-Off by the Executive. The existence of any claim, demand, action
or cause of action by the Executive against the Employer, or any Affiliate of
the Employer, whether predicated upon this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Employer of any of its rights
hereunder.
13. Notice. All notices and other communications required or permitted
under this Agreement shall be in writing and, if mailed by prepaid first-class
mail or certified mail, return receipt requested, shall be deemed to have been
received on the earlier of the date shown on the receipt or three (3) business
days after the postmarked date thereof. In addition, notices hereunder may be
delivered by hand, facsimile transmission or overnight courier, in which event
the notice shall be deemed effective when delivered or transmitted. All
notices and other communications under this Agreement shall be given to the
parties hereto at the following addresses:
(i) If to the Employer, to it at:
c/o Chairman of the Board of Directors
Citizens Bancshares Corporation
175 John Wesley Dobbs Avenue, N.E.
Atlanta, Georgia 30303
(ii) If to the Executive, to him at:
James E. Young
647 Masters Drive
Stone Mountain, Georgia 30087
14. Assignment. No party hereto may assign or delegate this Agreement or any
of its rights and obligations hereunder without the written consent of the
other parties hereto.
15. Waiver. A waiver by the Employer of any breach of this Agreement by the
Executive shall not be effective unless in writing, and no waiver shall
operate or be construed as a waiver of the same or another breach on a
subsequent occasion.
16. Attorneys' Fees. In the event of litigation between the parties
concerning this Agreement, the party prevailing in such litigation shall be
entitled to receive from the other party all reasonable costs and expenses,
including without limitation attorneys' fees, incurred by the prevailing party
in connection with such litigation, and the other party shall pay such costs
and expenses to the prevailing party promptly upon demand by the prevailing
party.
17. Applicable Law. This Agreement shall be construed and enforced under
and in accordance with the laws of the State of Georgia. The parties agree
that any appropriate state or federal court located in Fulton County, Georgia,
shall have exclusive jurisdiction of any case or controversy arising under or
in connection with this Agreement and shall be a proper forum in which to
adjudicate such case or controversy. The parties consent to the jurisdiction
of such courts.
18. Interpretation. Words importing any gender include all genders. Words
importing the singular form shall include the plural and vice versa. The
terms "herein," "hereunder," "hereby," "hereto," "hereof," and any similar
terms refer to this Agreement. Any captions, titles or headings preceding the
text of any article, section or subsection herein are solely for convenience
of reference and shall not constitute part of this Agreement or affect its
meaning, construction or effect.
19. Entire Agreement. This Agreement embodies the entire and final
agreement of the parties on the subject matter stated in the Agreement. No
amendment or modification of this Agreement shall be valid or binding upon the
Employer or the Executive unless made in writing and signed by all parties.
All prior understandings and agreements relating to the subject matter of this
Agreement are hereby expressly terminated.
20. Rights of Third Parties. Nothing herein expressed is intended to or
shall be construed to confer upon or give to any person, firm or other entity,
other than the parties hereto and their permitted assigns, any rights or
remedies under this Agreement.
21. Survival. The obligations of the Executive pursuant to Sections 6, 7,
8, 9, and 10 shall survive the termination of the employment of the Executive
hereunder for the period designated under each of those respective sections.
IN WITNESS WHEREOF, the Employer and the Executive have executed and
delivered this Agreement as of the date first shown above.
THE EMPLOYER:
CITIZENS BANCSHARES CORPORATION
By: /s/ Gregory T. Baranco
Name: Gregory T. Baranco
Title: Vice Chairman
CITIZENS TRUST BANK
By: /s/ Gregory T. Baranco
Name: Gregory T. Baranco
Title: Vice Chairman
THE EXECUTIVE:
By: /s/ James E. Young
Name: James E. Young
EXHIBIT "A"
INCENTIVE COMPENSATION PLAN FOR JAMES E. YOUNG
Preamble
Pursuant to the Employment Agreement entered into between James E. Young
(the "Executive") and Citizens Bancshares Corporation ("CBC") and Citizens
Trust Bank (the "Bank"), collectively referred to as the "Employer," the
following constitutes the terms and conditions of the Incentive Compensation
Plan ( this "Plan").
As a precondition to the Executive's eligibility for any Incentive
Compensation hereunder, the Executive (a) must prepare and submit an annual
budget for calendar year 1998 and each succeeding year (each, a "Budget") to
CBC's Board of Directors which Budget must be approved by CBC's Board of
Directors and (b) must achieve, at a minimum, eighty percent (80%) of such
Budget. In such event, the Executive shall be eligible for Incentive
Compensation as outlined in this Plan. Any Incentive Compensation payable to
the Executive under this Plan shall be calculated annually (unless otherwise
provided below) and shall be payable to the Executive annually (unless
otherwise provided below), as soon as CBC's audited financial statements are
available but no later than ninety (90) days following the applicable year.
Incentive Compensation
1. Budgeted ROA and ROE. If CBC earns, on a consolidated basis, one
hundred percent (100%) of the annual Budgeted ROA and ROE, the Executive shall
receive Incentive Compensation in the amount of ten percent (10%) of his Base
Salary. If CBC earns, on a consolidated basis, one hundred percent (100%) of
the annual Budgeted ROA and one hundred twenty-five percent (125%) of the
annual Budgeted ROE, the Executive shall receive Incentive Compensation in the
amount of twenty percent (20%) of his Base Salary.
2. Uniform Financial Institution Rating System. If CBC and the Bank have a
rating of "2" under their respective Uniform Financial Institution Rating
Systems, the Executive shall receive Incentive Compensation in the amount of
five percent (5%) of his Base Salary. If CBC and the Bank have a rating of "1"
under their respective Uniform Financial Institution Rating Systems, the
Executive shall receive Incentive Compensation in the amount of twenty percent
(20%) of his Base Salary. This Incentive Compensation shall be paid
quarterly, within forty-five (45) days following the applicable quarter.
3. Customer Service Average. The Bank conducts monthly surveys which
assess, among other things, customer satisfaction with the Bank's products and
services. If the annual "Customer Service Average" during shows a customer
satisfaction rating of ninety percent (90%), the Executive shall receive
Incentive Compensation in the amount of ten percent (10%) of his Base Salary.
If the annual "Customer Service Average" shows a customer satisfaction rating
of ninety-eight percent (98%), the Executive shall receive Incentive
Compensation in the amount of twenty percent (20%) of his Base Salary.
4. Core Deposit Growth. If the "Core Deposits" of the Bank, excluding
deposits obtained as a result of the Employer's acquisition of or merger with
another entity, grow by twenty percent (20%) during the year, the Executive
shall receive Incentive Compensation in the amount of ten percent (10%) of his
Base Salary. If the "Core Deposits" of the Bank grow by twenty-five percent
(25%) in the year, the Executive shall receive Incentive Compensation in the
amount of twenty percent (20%) of his Base Salary. For purposes of this
Section 4, "Core Deposits" shall not include either (a) public funds or (b)
deposits equal to or in excess of one hundred thousand dollars ($100,000).
5. Loan Delinquency Rates. If the Bank's loan delinquency rates are
(a) between 1.5% and 2.5%, provided that the delinquency rate does not exceed
2.5% at any month-end during the quarter, then the Executive shall receive
Incentive Compensation in the amount of ten percent (10%) of his Base Salary,
or (b) less than 1.5%, provided that the delinquency rate does not exceed
1.5% at any month-end during the quarter, then the Executive shall receive
Incentive Compensation in the amount of twenty percent (20%) of his Base
Salary. This Incentive Compensation shall be paid quarterly, within forty-
five (45) days following the applicable quarter.
EXHIBIT 13.1
Citizens Bancshares Corporation and Subsidiaries
Consolidated Financial Statements
as of December 31, 1998 and 1997
and for the Years Ended
December 31, 1998, 1997 and 1996
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Citizens Bancshares Corporation
We have audited the accompanying consolidated balance sheet of
Citizens Bancshares Corporation and subsidiaries (the "Company")
as of December 31, 1998, and the related consolidated statements
of income, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these 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
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 audit
provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of the Company at December 31, 1998, and the
results of their operations and their cash flows for the year
ended December 31, 1998 in conformity with generally accepted
accounting principles.
The consolidated financial statements give retroactive effect to
the merger of Citizens Bancshares Corporation and First Southern
Bancshares, Inc. in 1998, which has been accounted for as a
pooling of interests as described in Note 2 to the consolidated
financial statements. The consolidated balance sheet of Citizens
Bancshares Corporation and subsidiary as of December 31, 1997, and
the related consolidated statements of income, stockholders' equity,
and cash flows for the years ended December 31, 1997 and 1996, prior
to the Company's restatement for the 1998 pooling of interests, were
audited by other auditors. The contribution of Citizens Bancshares
and subsidiary to total consolidated assets was 69.3% at December 31, 1997
and to total consolidated revenues for 1997 and 1996 was 65.4% and 72.3%
of their respective restated totals. The consolidated financial statements
of First Southern Bancshares, Inc. and subsidiaries as of December 31,
1997, and for the years ended December 31, 1997 and 1996, were audited
and reported on separately by other auditors. We audited the
combination of the accompanying consolidated balance sheet as of
December 31, 1997 and the related consolidated statements of
income, stockholders' equity and cash flows for the years ended
December 31, 1997 and 1996, after restatement for the 1998 pooling
of interests; in our opinion, such consolidated statements have
been properly combined on the basis described in Note 2 to the
consolidated financial statements.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 25, 1999
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
First Southern Bancshares, Inc.
Lithonia, Georgia:
We have audited the consolidated balance sheets of First
Southern Bancshares, Inc. (the "Company") and subsidiaries
as of December 31, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows
for the two years ended December 31, 1997. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the 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 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of First Southern Bancshares, Inc.
and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the two years
ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Banks, Finley, White & Co.
Atlanta, Georgia
February 6, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Citizens Bancshares Corporation
We have audited the consolidated balance sheets of Citizens
Bancshares Corporation and subsidiary as of December 31,
1997 and the related statement of earnings, changes in
stockholders' equity and cash flows for the two years ended
December 31, 1997. 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.
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 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 two years ended December 31, 1997
in conformity with generally accepted accounting principles.
Subsequent to the issuance of the Company's 1997 financial
statements and our report thereon dated February 20, 1998,
we became aware the 1997 and 1996 consolidated financial
statements reported available for sale securities at their
cost bases rather than their fair values. In our original
report, we expressed an unqualified opinion on the 1997 and
1996 consolidated financial statements, and our opinion on
the revised statements, as expressed herein, remains
unqualified.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
November 23, 1998
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
December 31,
ASSETS 1998 1997
Cash and due from banks, including reserve
requirements of $3,009,000 and $1,982,000 $ 13,081,313 $ 10,636,742
Federal funds sold 553,000 3,456,000
Interest bearing deposits with banks 11,124,636 856,558
Investment securities available for sale, at fair
value (amortized cost of $35,287,273 in 1998 and
$10,796,781 in 1997, respectively) 36,175,370 11,777,638
Investment securities held to maturity, at cost
(estimated fair value of $14,516,213 in 1998 and
$23,258,488 in 1997, respectively) 14,314,194 23,127,265
Other investments 1,270,950 1,999,250
Loans held for sale 405,550 622,600
Loans, net 116,360,105 119,662,506
Premises and equipment, net 5,956,775 5,844,269
Cash surrender value of life insurance 4,029,726 3,640,045
Foreclosed real estate, net 147,378 1,075,297
Other assets 3,407,867 3,046,381
$206,826,864 $185,744,551
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits $ 49,612,546 $ 43,632,723
Interest-bearing deposits 135,059,565 120,310,617
Total deposits 184,672,111 163,943,340
Accrued expenses and other liabilities 2,198,050 2,540,586
Notes payable 1,427,443 275,000
Advances from Federal Home Loan Bank 1,576,298
Long-term debt 585,000
Total liabilities 188,297,604 168,920,224
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $1 par value; 5,000,000
shares authorized; 2,164,065 and 2,166,711
shares issued and outstanding at
December 31, 1998 and 1997, respectively 2,164,065 2,166,711
Additional paid-in capital 6,173,505 6,186,241
Retained earnings 9,606,515 7,840,219
Treasury stock, 2,194 shares at cost at
December 31, 1997 - (10,913)
Accumulated other comprehensive income -
unrealized gain on investment securities
available for sale 585,175 642,069
Total stockholders' equity 18,529,260 16,824,327
$206,826,864 $185,774,551
See notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Year Ended December 31,
1998 1997 1996
Interest income:
Loans, including fees $ 11,391,213 $ 11,261,174 $ 10,151,931
Investment securities:
Taxable 1,896,510 2,570,971 3,370,160
Tax-exempt 335,317 225,686 164,478
Dividends 107,481 117,674 50,694
Federal funds sold 102,674 233,887 633,329
Interest-bearing deposits 564,418 45,398 -
Total interest income 14,397,613 14,454,790 14,370,592
Interest expense:
Deposits 5,080,536 4,921,114 4,740,087
Other borrowings 108,539 211,809 115,448
Total interest expense 5,189,075 5,132,923 4,855,535
Net interest income 9,208,538 9,321,867 9,515,057
Provision for loan losses 175,000 301,000 205,000
Net interest income after provision
for loan losses 9,033,538 9,020,867 9,310,057
Noninterest income:
Service charges on deposit accts 3,966,959 4,195,811 4,569,160
Gain on sales of securities 380,510 5,863 14,124
Gain on sales of assets 39,142 19,042
Gain on sales of loans 759,769 349,246
Origination fees from mortgage co. 2,123,259 1,162,615 369,800
Other operating income 841,537 753,321 594,714
Total noninterest income 8,072,034 6,505,998 5,566,840
Noninterest expense:
Salaries and employee benefits 7,088,975 7,923,754 6,863,978
Net occupancy and equipment 2,549,798 2,628,806 2,419,016
Other operating expenses 4,997,684 4,522,305 4,193,161
Total noninterest expense 14,636,457 15,074,865 13,476,155
Income before income taxes 2,469,115 452,000 1,400,742
Income tax expense 702,819 134,897 455,721
Net income $ 1,766,296 $ 317,103 $ 945,021
Net income per share - basic
and diluted $ 0.82 $ 0.15 $ 0.45
Weighted average outstanding
shares - basic and diluted 2,164,290 2,157,977 2,119,980
See notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional other
Common Stock Paid-in Treasury Stock Retained comprehensive
Shares Amount Capital Shares Par Value Earnings income Total
<C> <C> <C> <C> <C> <C> <C> <C>
Balance,December 31, 1995 2,123,362 $2,123,362 $5,939,652 (7,163) $(45,647) $6,764,817 416,801 $15,198,985
Net income - - - - - 945,021 - 945,021
Unrealized holding losses arising
during the period, net of taxes
of $25,752 - - - - - (49,988) (49,988)
Less: Reclassification adjustment for
gains included in net income, net of
taxes of $4,802 - - - - - - (9,322) (9,322)
Comprehensive income - - - - - - - 885,711
Sale of common stock 3,990 3,990 22,470 - - - - 26,460
Purchase of treasury stock - - - (2,571) (12,788) - - (12,788)
Sale of treasury stock - - 2,478 7,540 47,522 - - 50,000
Dividends declared - $0.075 per share - - - - - (159,047) - (159,047)
Balance, December 31, 1996 2,127,352 2,127,352 5,964,600 (2,194) (10,913) 7,550,791 357,491 15,989,321
Net income - - - - - 317,103 - 317,103
Unrealized holding gains arising
during the period, net of taxes
of $148,594 - - - - - - 288,448 288,448
Less: Reclassification adjustment
for gains included in net income,
net of taxes of $1,993 - - - - - - (3,870) (3,870)
Comprehensive income - - - - - - - 601,681
Sale of common stock 39,359 39,359 221,641 - - - - 261,000
Dividends declared - $0.013 per share - - - - - (27,675) - (27,675)
Balance, December 31, 1997 2,166,711 2,166,711 6,186,241 (2,194) (10,913) 7,840,219 642,069 16,824,327
Net income - - - - - 1,766,296 - 1,766,296
Unrealized holding gains arising
during the period, net
of taxes of $96,874 - - - - - - 194,243 194,243
Less: Reclassification adjustment
for gains included in net income,
net of taxes of $129,373 - - - - - - (251,137) (251,137)
Comprehensive income - - - - - - - 1,709,402
Purchase and retirement of
fractional shares (452) (452) (4,017) - - - - (4,469)
Retirement of treasury stock (2,194) (2,194) (8,719) 2,194 10,913 - - -
Balance, December 31, 1998 2,164,065 $2,164,065 $6,173,505 - $ - $9,606,515 $585,175 $18,529,260
</TABLE>
See accompanying notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Year Ended December 31,
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 1,766,296 $ 317,103 $ 945,021
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 175,000 301,000 205,000
Provision for losses on
foreclosed real estate 227,042
Depreciation 1,086,087 1,213,217 979,665
Amortization and accretion, net (30,670) 20,505 (72,173)
Provision for deferred income taxes 18,299 (159,377) 176,698
Gain on sale of assets and securities (380,510) (58,295) (33,166)
Gain on sale of mortgage loans
held for sale (759,769) (349,246) -
Originations of mortgage loans
held for sale (41,275,398) (16,929,412) -
Proceeds from sale of mortgage
loans held for sale 42,252,217 16,656,058 -
Change in other assets (347,286) (134,196) (365,033)
Change in accrued expenses and
other liabilities (339,169) (581,281) (168,612)
Net cash provided by
operating activities 2,392,139 296,076 1,667,400
INVESTING ACTIVITIES:
Proceeds from maturities of investments:
Securities held to maturity 9,629,597 10,435,680 15,825,715
Securities available for sale 14,143,081 6,096,540 3,447,722
Purchases of investments:
Securities held to maturity (789,006) - (11,487,212)
Securities available for sale (38,609,930) (7,116,098) (9,186,536)
Proceeds from sales of investment
securities available for sale 360,017 7,232,734 1,012,892
Proceeds from sales of securities
held to maturity - - 199,828
Purchase of other investments (157,900) (1,530,100) (385,500)
Proceeds from sales of other
investments 886,200 144,300 -
Purchases of loans - (1,644,318) -
Net change in loans 3,014,666 (5,862,585) (23,056,964)
Purchases of premises
and equipment (1,198,593) (1,256,298) (2,479,342)
Proceeds from sale of
premises and equipment - - 9,400
Increase of cash value life
insurance policies (389,681) (2,500,000) -
Proceeds from sale of real estate
acquired through foreclosure 830,256 289,599 293,733
Net expenditures on foreclosed
real estate (16,644) (52,046) -
Net change in interest bearing
deposits with banks (10,268,078) (856,558) -
Net change in Federal Funds sold 2,903,000 8,044,000 (1,800,000)
Net cash (used in) provided by
investing activities (19,663,015) 11,424,850 (27,606,264)
FINANCING ACTIVITIES:
Net change in deposits $ 20,728,771 (14,401,807) 25,605,074
Borrowings from line of credit 1,152,443 - 320,000
Principal payments on debt (585,000) (305,000) (135,000)
Payments on capital lease - (16,555) -
Net change in FHLB advances (1,576,298) 1,576,298 -
Sale of common stock - 261,000 26,460
Purchase and retirement of
common stock (4,469) - -
Sale of treasury stock - - 50,000
Purchase of treasury stock - - (12,788)
Dividends paid - (25,175) (149,887)
Net cash provided by (used in)
financing activities 19,715,447 (12,911,239) 25,703,859
Net change in cash and
due from banks 2,444,571 (1,190,313) (235,005)
CASH AND FROM BANKS
Beginning of year 10,636,742 11,827,055 12,062,060
End of year $ 13,081,313 $ 10,636,742 $ 11,827,055
Supplemental disclosures of cash paid during the year for:
Interest $ 5,344,853 $ 4,938,377 $ 4,573,431
Income taxes $ 908,546 $ 145,030 $ 577,453
Supplemental disclosure of noncash investing activities:
Real estate acquired
through foreclosure $ 112,735 $ 908,388 $ 556,301
Financed sales of other real estate - 61,673 -
Capital expenditures financed
by capital leases $ - $ - $ 16,555
Change in unrealized gain (loss) on investments
securities available for sale,
net of tax $ (56,894) $ 284,578 $ (59,310)
Supplemental disclosure of noncash financing activity -
Retirement of treasury stock $ 10,913 $ - $ -
See notes to consolidated financial statements.
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 AND FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting
policies:
Business - 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. ("CTBM"). 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 (see Note 2). 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 Due from Banks - Cash and due from banks includes cash on
hand and amounts due from banks.
Investment Securities - The Company classifies investments in one
of three categories based on management's intent upon purchase:
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 component
of accumulated other comprehensive income. The Company had no
investment securities classified as trading securities during 1998
or 1997.
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 Federal Home Loan
Bank stock and Federal Reserve Bank stock which is restricted and
has no readily determinable market value. These investments are
carried at cost.
Loans Held for Sale - Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses
are recognized through a valuation allowance by charges to income.
During 1998, the Company did not originate any FHA loans nor did
it service any such loans.
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.
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-off against 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. 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 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 loan losses. The adequacy of the allowance for
loan losses is reviewed on a monthly basis by management and the
Board of Directors. On a quarterly basis a comprehensive review
of the adequacy of allowance for loan losses is performed. 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.
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 equipment is as follows:
Buildings and improvements 5-40 years
Furniture and equipment 3-10 years
Foreclosed Real Estate - Foreclosed real estate 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 charge-off against the allowance for
loan losses. Any subsequent declines in value are charged to
earnings.
Intangible Assets - Intangible assets include 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 Income Per Share - Basic net income per common share (EPS) is
computed based on net income divided by the weighted average
number of common shares 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 share equivalents are those related to stock options;
however, such options were antidilutive, so diluted EPS is the
same as basic EPS.
Stock Options - Compensation expense for stock option grants is
measured using the intrinsic value approach under Accounting
Principle Board Opinion No. 25.
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
no later than the Company's first quarter of 2000. The Company is
evaluating the effects of the new statement and when to implement
the new requirements.
Reclassifications - Certain 1997 and 1996 amounts have been
reclassified to conform to the 1998 presentation.
2. ACQUISITION
Effective January 30, 1998, the Company consummated its merger of
First Southern Bank and FSB Mortgage Services into the Company.
The company exchanged 837,027 shares of its common stock and cash
of approximately $4,469 for all of the stock and options to
acquire common stock of First Southern Bancshares Inc. ("FSB"),
parent company of First Southern Bank and FSB Mortgage Services.
The merger was accounted for as a pooling of interests. The
financial statements of the Company as of December 31, 1997 and
for the years ended December 31, 1997 and 1996 have been restated
to include First Southern Bancshares, Inc., First Southern Bank
and FSB Mortgage Services.
The results of operations for the twelve months ended December 31,
1998 include the consolidated FSB results of operations prior to
the consummation date as follows:
Total Revenue Net Income
Company $ 21,769,612 $ 1,712,931
FSB 700,035 53,365
Combined $ 22,469,647 $ 1,766,296
A reconciliation of consolidated revenues, net income and net
income per share as previously reported with restated amounts for
the years ended December 31, 1996 and 1997 are as follows:
<TABLE>
Net Income Per
Common Share-
Total Revenue Net Income Basic
<C> <C> <C> <C> <C> <C>
1997 1996 1997 1996 1997 1996
Company, as previously reported $13,716,967 14,418,813 84,256 643,178 0.06 0.48
FSB 7,243,821 5,518,619 232,847 301,843 0.42 0.57
Company, as restated $20,960,788 19,937,432 317,103 945,021 0.15 0.45
</TABLE>
3. INVESTMENT SECURITIES
Investment securities held to maturity are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
At December 31, 1998:
U.S. Treasury and
U.S. Government agencies $ 4,998,125 $ 16,954 $ - $ 5,015,079
Mortgage-backed securities 5,634,205 94,843 21,716 5,707,332
State, county, and municipal
securities 3,681,864 111,938 - 3,793,802
Totals $ 14,314,194 $ 223,735 $ 21,716 $14,516,213
At December 31, 1997:
U.S. Treasury and
U.S. Government agencies $ 10,994,992 $ 11,062 $ 21,590 $ 10,984,464
Mortgage-backed securities 8,689,700 144,378 78,668 8,755,410
State, county, and municipal
securities 3,442,573 81,619 5,578 3,518,614
Totals $ 23,127,265 $ 237,059 $ 105,836 $23,258,488
Investment securities available for sale are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
At December 31, 1998:
U.S. Treasury and
U.S. Government agencies $29,099,264 $ 40,020 $ 120,909 $ 29,018,375
State, county, and municipal
securities 6,009,388 122,600 4,510 6,127,478
Mortgage-backed securities 161,520 2,076 - 163,596
Equity securities 17,101 848,820 - 865,921
Totals $ 35,287,273 $1,013,516 $ 125,419 $ 36,175,370
At December 31, 1997:
U.S. Treasury and
U.S. Government agencies $ 9,627,720 $ 26,574 $ 4,074 $ 9,650,220
Mortgage-backed securities 254,297 4,427 123 258,601
State, county, and municipal
securities 897,263 27,158 - 924,421
Equity securities 17,501 926,895 - 944,396
Totals $ 10,796,781 $ 985,054 $ 4,197 $ 11,777,638
<TABLE>
The amortized costs and fair values of investment securities at
December 31, 1998, 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.
Held to Maturity Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <S> <C> <S>
Due in one year or less $ 1,199,420 $1,205,916 $ - $ -
Due after one year through five years 5,541,399 5,584,235 17,789,031 17,749,258
Due after five years through ten years 665,000 703,076 12,053,435 12,031,190
Due after ten years 1,274,170 1,315,653 5,266,186 5,365,405
Mortgage-backed securities 5,634,205 5,707,333 161,520 163,596
Equity securities - - 17,101 865,921
$ 14,314,194 $14,516,213 $35,287,273 $36,175,370
</TABLE>
Gross realized gains on securities were $380,510, $6,062, and
$14,124 in 1998, 1997 and 1996, respectively. Gross realized
losses on securities were nil, $199, and nil in 1998, 1997 and
1996, respectively.
Investment securities with carrying values of $32,024,649 and
$27,951,735 at December 31, 1998 and 1997, respectively, were
pledged to secure public funds on deposit and for other purposes
as required by law.
4. LOANS
Loans outstanding, by classification, are summarized as follows:
December 31,
1998 1997
Commercial, financial, and agricultural $ 37,506,002 $ 39,571,125
Installment 10,763,727 7,994,240
Real estate - mortgage 48,244,210 49,116,102
Real estate - construction 5,297,879 8,338,238
Other 16,497,581 16,589,363
118,309,399 121,609,068
Less: Net deferred loan fees 246,771 194,764
Allowance for loan losses 1,702,523 1,751,798
$ 116,360,105 $ 119,662,506
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.
The Company's loans to area churches was approximately $36.7
million and $33.3 million at December 31, 1998 and 1997,
respectively 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.
Activity in the allowance for loan losses is summarized as
follows:
Years Ended December 31,
1998 1997 1996
Balance at beginning of year $ 1,751,798 $ 1,806,362 $ 1,952,701
Provision 175,000 301,000 205,000
Loans charged off (445,330) (674,072) (634,442)
Recoveries on loans previously
charged off 221,055 318,508 283,103
Balance at end of year $ 1,702,523 $ 1,751,798 $ 1,806,362
Nonaccrual loans amounted to $1,683,129 and $1,005,354 at December
31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the recorded investment in loans
that are considered to be impaired was $3,398,044 and $2,811,605,
respectively. The related allowance for loan losses for each of
these loans was $568,431 and $292,080, respectively. The average
investment in impaired loans during 1998 and 1997 was $3,104,825
and $2,626,323, respectively. Interest income recognized on
impaired loans was approximately $233,000, $144,000 and $246,000
in 1998, 1997 and 1996. Interest income recognized on a cash
basis was approximately $38,000, $119,000 and $14,000 for 1998,
1997, and 1996, 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 1998:
Balance at December 31, 1997 $ 5,891,725
New loans 1,134,189
Repayments (3,865,248)
Balance at December 31, 1998 $ 3,160,666
5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
1998 1997
Land $ 1,236,474 $ 849,232
Buildings and improvements 3,959,793 3,894,657
Furniture and equipment 6,263,014 5,548,597
Subtotal 11,459,281 10,292,486
Less accumulated depreciation 5,502,506 4,448,217
$ 5,956,775 $ 5,844,269
6. DEPOSITS
The following is a summary of interest-bearing deposits:
1998 1997
NOW and money market accounts $ 43,615,041 $ 36,555,329
Savings accounts 23,244,202 17,243,236
Time deposits of $100,000 or more 34,524,816 31,308,534
Other time deposits 33,675,506 35,203,518
$ 135,059,565 $ 120,310,617
At December 31, 1998, maturities of time deposits are approximately as follows:
1999 $ 52,914,659
2000 8,818,859
2001 3,159,054
2002 1,407,851
2003 and thereafter 1,899,899
$ 68,200,322
7. OTHER BORROWINGS
Notes Payable - At December 31, 1998, the Company had $1,035,000
outstanding under two unsecured notes payable. The notes bear
interest at a rate 50 basis points below the lender's prime rate
(7.25% at December 31, 1998) and is payable quarterly. The
principal balance on both notes is due March 19, 1999.
At December 31, 1998, the Company had $392,443 outstanding under a
$10,000,000 line of credit. The line of credit bears interest at
a rate equal to 200 basis points above LIBOR (7.75% at December
31, 1998) and is payable monthly. The line of credit expires
September 21, 1999 and is secured by the underlying mortgages
originated using proceeds from draws on the line of credit.
At December 31, 1997, the Company had $275,000 outstanding under a
$450,000 line of credit arrangement, due on demand and expired on
July 1, 1998. The note bore interest at the bank's prime rate.
Long-term debt - At December 31, 1997 long-term debt consisted of
a term loan payable to a bank. The loan accrued interest at prime
less 0.25% and interest was payable quarterly. The loan was paid
in full in 1998.
Federal Home Loan Bank (FHLB) Advances - The Bank had outstanding
advances of $1,576,298 from the FHLB at December 31, 1997 and no
outstanding amounts at December 31, 1998. Specific mortgage
loans, with an aggregate balance of approximately $1,659,261 at
December 31, 1997 were pledged as collateral.
8. INCOME TAXES
The components of income tax expense consist of:
1998 1997 1996
Current tax expense $ 684,520 $ 304,417 $ 276,651
Deferred tax expense (benefit) 18,299 (169,520) 179,070
$ 702,819 $ 134,897 $ 455,721
Income tax expense for the years ended December 31, 1998, 1997 and
1996 differed from the amounts computed by applying the statutory
federal income tax rate of 34% to earnings before income taxes as
follows:
1998 1997 1996
Income tax expense at statutory rate $ 839,500 $ 153,680 $ 476,253
Tax-exempt interest income, net of
disallowed interest expense (113,601) (74,528) (53,942)
Non-deductible expenses 7,899 48,271 1,442
Other, net (30,979) 7,474 31,968
Income tax expense $ 702,819 $ 134,897 $ 455,721
The tax effects of temporary differences that give rise to
significant amounts of deferred tax assets and deferred tax
liabilities are presented below:
1998 1997
Deferred tax assets:
State net operating losses and credits $ 1,212,722 $ 1,329,978
Loans, principally due to difference in allowance
For loan losses and deferred loan fees 481,632 406,189
Nonaccrual loan interest 10,649 30,613
Postretirement benefit accrual 112,331 89,109
Premium paid in acquisition 51,835
Nondeductible salaries 26,003
Empowerment zone tax credit 12,634
Other 38,150 1,075
Gross deferred tax asset 1,855,484 1,947,436
Valuation allowance (1,306,446) (1,360,565)
Total deferred tax assets 549,038 586,871
Deferred tax liabilities:
Premises and equipment 14,582 34,801
Net unrealized gain on securities
available for sale 301,453 333,952
Other 3,355 2,670
Total gross deferred tax liabilities 319,390 371,423
Net deferred tax assets $ 229,648 $ 215,448
The Company has, at December 31, 1998, net operating loss
carryforwards of approximately $15,590,000 for state income tax
purposes, which expire in years 1999 through 2011, and state
income tax credits of approximately $277,000 which expire in years
1999 through 2003. Due to the uncertainty relating to the
realizability of these carryforwards and credits, management
currently considers it more likely than not that not all related
deferred tax assets will be realized, thus, a full valuation
allowance has been provided for all state tax attributes at
December 31, 1998.
9. 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 25% of the employee contributions up to a maximum of 6% of
compensation. During the years ended December 31, 1998, 1997, and
1996, the Company recognized $96,470, $64,453, and $37,690,
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 change in benefit
obligation for the years ended December 31, 1998 and 1997:
1998 1997
Benefit obligation at beginning of year $ 231,314 $ 302,601
Service cost 27,004 23,140
Interest cost 18,238 22,131
Change in assumption 10,918
Actuarial gain (88,527) (140,265)
Company contributions for retirees 2,203 23,707
Benefit obligation at end of year $ 201,150 $ 231,314
The following table presents the plan's funded status reconciled
with amounts recognized in the consolidated balance sheets at
December 31, 1998 and 1997:
1998 1997
Accumulated postretirement benefit obligation $ (201,150) $ (231,314)
Unrecognized transition obligation 240,682 256,727
Unrecognized prior service cost (111,349) (118,308)
Unrecognized actuarial gain (187,764) (122,808)
Accrued postretirement benefit cost
included in other liabilities $ (259,581) $ (215,703)
Net periodic postretirement benefit cost includes the following components:
Years Ended December 31,
1998 1997 1996
Service cost $ 27,004 $ 23,140 $ 26,805
Interest cost 18,238 22,131 21,976
Net amortization 839 7,846 9,328
Net periodic postretirement benefit cost $ 46,081 $ 53,117 $ 58,109
For measurement purposes, a 7.0% annual rate of increase in the
per capita cost of covered benefits (i.e., health care cost trend
rate) was assumed for 1999; 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 7.0% and 7.5% at January 1, 1998 and 1997,
respectively.
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, 1998 and 1997, the cash surrender value of
these insurance contracts was $4,029,726 and $3,640,045,
respectively.
10. 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
1998 1997
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 37,770,851 $ 25,273,106
Standby letters of credit 1,351,885 279,200
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, 1998, future minimum lease payments under all
noncancelable lease agreements inclusive of sales tax and
maintenance costs for the next five years are as follows:
1999 $ 483,208
2000 428,441
2001 96,935
2002 7,561
2003 and thereafter 572
$ 1,016,717
Rent expense in 1998, 1997 and 1996 was $415,367, $320,000, and
$304,547, 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; however, the Bank may cancel the agreement every five years.
Future minimum license fee payments under this agreement at
December 31, 1998 are as follows:
1999 $ 53,100
2000 53,100
2001 53,100
2002 53,100
2003 33,563
Thereafter -
$ 245,963
License fee expense associated with these agreements for 1998,
1997, and 1996 amounted to approximately $50,000, $90,000 and
$89,000, 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.
11. STOCK OPTIONS
The Company previously granted to the president of the Company,
options to purchase a total of 7,540 shares of common stock at
$6.63 per share. These options, each of which are exercisable for
a period of five (5) years from the date of vesting, were vested
at the rate of 1,508 shares each year, beginning July 6, 1994, the
first anniversary of the president's employment.
On January 30, 1998, the Company granted its president an option
to purchase 17,500 shares of common stock of the Company at an
exercise price of $9.88 per share (the "1998 Options") as compared
to recent trades of stock at $5.00 per share. The 1998 options
vest at a rate of 20% per year, commencing on January 30, 1999.
The option's term is ten years from the date of vesting.
The fair value of the 1998 Option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of .26%; expected volatility
of 13%; risk free interest rate of 4% and an expected life of 6
years. The fair value of the 1998 Option grant is immaterial
since the exercise price significantly exceeded the market price
of the stock.
A summary of the status of the Company's stock options as of
December 31, 1998, 1997 and 1996 and changes during the years
ending on those dates is presented below:
1998 1997 1996
Weighted Average Weighted Average Weighted Average Weighted Average
Shares Excercise Contractual Life Shares Excercise Shares Exercise
Price Price Price
Outstanding at beginning of year
7,540 $ 6.63 2.5 years 7,540 6.63 7,540 $ 6.63
Granted
17,500 9.88 12.0 years
Outstanding at end of year
25,040 $8.90 7,540 6.63 7,540 $ 6.63
Options exercisable at year end
7,540 $6.63 6,032 $ 6.63 4,524 $ 6.63
12. 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, federal
funds sold and interest-bearing deposits with banks, the carrying
amount is a reasonable estimate of fair value due to the short
term nature of such items.
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 Held for Sale - The fair value for mortgage loans held for
sale is based on sales contracts in place at year-end.
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.
Notes Payable - Since the notes payable bear a variable interest
rate, the carrying value approximates fair value.
Advances from the Federal Home Loan Bank- Since the advances from
the Federal Home Loan Bank are short term in nature, the carrying
value approximates fair value.
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, 1998 and 1997 are as
follows:
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(in thousands)
Financial assets:
Cash and due from banks $ 13,081 $ 13,081 $ 10,637 $ 10,637
Federal funds sold 553 553 3,456 3,456
Interest bearing deposits with banks 11,125 11,125 857 857
Investment securities 50,490 50,692 34,905 35,036
Other investments 1,271 1,271 1,999 1,999
Loans held for sale 406 406 623 623
Loans, net 116,360 116,845 119,663 117,858
Cash surrender value of life insurance 4,030 4,030 3,640 3,640
Financial liabilities:
Deposits 184,672 185,206 163,943 164,104
Long-term debt - - 585 585
Notes payable 1,427 1,427 275 275
Advances from FHLB - - 1,576 1,576
Off-balance-sheet financial
instruments:
Commitments to extend credit 37,771 37,771 25,273 25,273
Stand-by letters of credit 1,352 1,352 279 279
13. SEGMENTS
The Company has two reportable segments: the Bank and CTBM. The
Bank offers a full range of commercial banking services to
individual and corporate customers in metropolitan Atlanta. CTBM
provides mortgage-related services to customers in metropolitan
Atlanta. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies.
There are no intracompany transactions between the reportable
segments. The Company evaluates performance based on income
before income taxes. The Company's reportable segments are
managed separately because each business offers different
products.
Unallocated
Items and
1998 Bank CTBM Eliminations (Net) Total
Net Interest Income $ 9,264,006 $ 22,675 $ (78,143) $ 9,208,538
Noninterest Income 5,092,662 2,975,010 4,362 8,072,034
Noninterest Expense 11,982,102 2,526,285 128,070 14,636,457
Income before income taxes 2,199,566 471,400 (201,851) 2,469,115
Segment Assets 205,663,392 1,701,511 (538,039) 206,826,864
1997
Net Interest Income $ 9,382,827 $ 35,199 $ (96,159) $ 9,321,867
Noninterest Income 5,052,535 1,436,394 17,069 6,505,998
Noninterest Expense 13,331,799 1,368,528 374,538 15,074,865
Income before income taxes 802,563 103,065 (453,628) 452,000
Segment Assets 184,547,131 1,221,249 (23,829) 185,744,551
1996
Net Interest Income $ 9,599,151 $ - $ (84,094) $ 9,515,057
Noninterest Income 5,207,218 359,622 - 5,566,840
Noninterest Expense 13,029,818 365,901 80,436 13,476,155
Income before income taxes 1,571,550 6,279 (177,087) 1,400,742
Segment Assets 196,703,786 354,882 363,623 197,422,291
14. SHAREHOLDERS' EQUITY
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, 1998, the
Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, 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:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
Consolidated 20,632 15% 11,176 8% N/A N/A
Bank 20,182 15% 11,056 8% 13,820 10%
Tier I Capital (to Risk Weighted Assets):
Consolidated 18,513 13% 5,588 4% N/A N/A
Bank 18,063 13% 5,528 4% 8,292 6%
Tier 1 Capital (to Average Assets):
Consolidated 18,513 9% 7,847 4% N/A N/A
Bank 18,063 9% 7,832 4% 9,790 5%
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Consolidated 17,727 13% 11,086 8% N/A N/A
Citizens Trust Bank 11,707 12% 7,598 8% 9,497 10%
First Southern Bank 6,417 15% 3,484 8% 4,355 10%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated 16,100 12% 5,543 4% N/A N/A
Citizens Trust Bank 10,527 11% 3,799 4% 5,698 6%
First Southern Bank 5,884 14% 1,742 4% 2,613 6%
Tier 1 Capital (to Average Assets)
Consolidated 16,100 8% 7,680 4% N/A N/A
Citizens Trust Bank 10,527 8% 5,434 4% 6,793 5%
First Southern Bank 5,884 10% 2,287 4% 2,859 5%
Dividend Limitation
The amount of dividends paid by the Bank to the Company 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 1999 is
approximately $799,000.
15. 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:
1998 1997 1996
Professional services - legal $ 405,480 $ 285,354 $ 335,545
Professional services - other 507,742 316,774 256,103
Stationery and supplies 242,457 300,057 347,085
Advertising 233,528 161,703 177,837
Data processing 659,980 366,867 309,996
Postage 358,897 186,310 192,254
Telephone 407,339 358,646 283,212
Other losses 357,359 247,000 481,220
Merger related expenses - 403,714 -
Provision for losses on
foreclosed real estate 227,042 - -
16.Condensed Financial Information Of Citizens Bancshares Corporation
(Parent Only)
December 31,
1998 1997
Balance Sheets
Assets:
Cash $ 57,836 $ 30,162
Investment in bank 18,664,546 17,224,749
Investment in mortgage services subsidiary 890,303 489,417
Other assets 70,112 39,671
$ 19,682,797 $ 17,783,999
Liabilities and Stockholders' Equity:
Note Payable $ 1,035,000 $ 275,000
Other liabilities 118,537 99,672
Long-term debt - 585,000
Total liabilities 1,153,537 959,672
Stockholders' equity 18,529,260 16,824,327
$ 19,682,797 $ 17,783,999
For the Years Ended December 31,
1998 1997 1996
Statements of Income and Comprehensive Income
Dividends from the Bank $ 100,500 $ 405,000 $ 431,484
Other revenue 4,361 6,256 -
Total revenue 104,861 411,256 431,484
Merger related expenses 255,889
Interest expense 78,143 79,848 84,095
Other expense 128,070 124,148 80,436
Total expenses 206,213 459,885 164,531
(Loss) income before income tax benefit
and equity in undistributed
earnings of the subsidiaries (101,352) (48,629) 266,953
Income tax benefit 70,112 39,671 39,675
(Loss) income before equity in undistributed
earnings of the subsidiaries (31,240) (8,958) 306,628
Equity in undistributed earnings
of the subsidiaries 1,797,536 326,061 638,393
Net income 1,766,296 317,103 945,021
Other comprehensive income(loss) (56,894) 284,578 (59,310)
Comprehensive income $ 1,709,402 $ 601,681 $ 885,711
Years Ended December 31,
1998 1997 1996
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 1,766,296 $ 317,103 $ 945,021
Adjustments to reconcile net income to
net cash used in operating activities:
Amortization - 40,566 5,598
Equity in earnings of the subsidiaries (1,898,036) (731,061) (1,069,877)
Change in other assets (30,482) 15,699 (52,325)
Change in deferrals - - (10,419)
Change in other liabilities 18,865 82,680 1,355
Net cash used in operating activities (143,357) (275,013) (180,647)
Cash flows from investing activities:
Investment in subsidiaries (100,000) (100,000) (300,000)
Dividends from 100% owned subsidiaries 100,500 405,000 431,484
Net cash provided by investing activities 500 305,000 131,484
Cash flows from financing activities:
Payment on long-term debt (585,000) (180,000) (135,000)
Dividends paid (26,117) (149,887)
Proceeds from notes payable 760,000 320,000
Principal payments on note payable - (125,000)
Sale of treasury stock - - 50,000
Purchase of treasury stock - - (12,788)
Sale of common stock - 261,000 26,460
Purchase and retirements of common stock (4,469) - -
Net cash provided by (used in) financing
activities 170,531 (70,117) 98,785
Net change in cash 27,674 (40,130) 49,622
Cash:
Beginning of year 30,162 70,292 20,670
End of year $ 57,836 $ 30,162 $ 70,292
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 78,143 $ 88,125 $ 88,390
Income taxes $ 908,546 $ 145,030 $ 577,453
Noncash investing activity:
Change in Bank's unrealized gain (loss) on
investment securities available for sale,
net of tax $ (56,894) $ 284,578 $ (59,310)
Noncash financing activity
Retirement of treasury stock $ 10,913 - -
EXHIBIT 21
List of subsidiaries of the Company
Name of Subsidiaries State of Incorporation
Citizens Trust Bank Georgia
Citizens Trust Bank Mortgage Services, Inc. Georgia
[ARTICLE] 9
[CIK]
[NAME]
[MULTIPLIER] 1,000
[CURRENCY]
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-1-1998
[PERIOD-END] DEC-31-1998
[CASH] 13,081
[INT-BEARING-DEPOSITS] 11,125
[FED-FUNDS-SOLD] 553
[INVESTMENTS-HELD-FOR-SALE] 36,175
[INVESTMENTS-CARRYING] 14,314
[INVESTMENTS-MARKET] 14,516
[LOANS] 118,063
[ALLOWANCE] 1,702
[TOTAL-ASSETS] 206,827
[DEPOSITS] 184,672
[SHORT-TERM] 1,427
[LIABILITIES-OTHER] 2,198
[LONG-TERM] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 2,164
[OTHER-SE] 16,365
[TOTAL-LIABILITIES-AND-EQUITY] 206,827
[INTEREST-LOAN] 11,391
[INTEREST-INVEST] 2,339
[INTEREST-OTHER] 667
[INTEREST-TOTAL] 14,398
[INTEREST-DEPOSIT] 5,081
[INTEREST-EXPENSE] 5,189
[INTEREST-INCOME-NET] 9,209
[LOAN-LOSSES] 175
[SECURITIES-GAINS] 381
[EXPENSE-OTHER] 14,636
[INCOME-PRETAX] 2,469
[INCOME-PRE-EXTRAORDINARY] 2,469
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1,766
[EPS-PRIMARY] .82
[EPS-DILUTED] .82
[YIELD-ACTUAL] 8.64
[LOANS-NON] 1,683
[LOANS-PAST] 470
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 1,245
[ALLOWANCE-OPEN] 1,752
[CHARGE-OFFS] 445
[RECOVERIES] 221
[ALLOWANCE-CLOSE] 1,703
[ALLOWANCE-DOMESTIC] 1,703
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
