SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from _________ to __________
Commission File No: 0 - 14535
CITIZENS BANCSHARES CORPORATION
(Name of small business issuer in its charter)
Georgia 58-1631302
(State of Incorporation) (IRS Employer Identification No.)
175 John Wesley Dobbs Avenue, N.E., Atlanta, Georgia 30303
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (404) 659 - 5959
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the 90 days. Yes X No .
State the number of shares outstanding for each of the issuer's
classes of common equity as of the latest practicable date:
2,230,065 shares of Common Stock, $1.00 par value and 90,000
shares of Non-Voting Common Stock, $1.00 par value outstanding on
October 31, 1999.
Part I. Financial Information:
Citizens Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited-amounts in thousands)
<TABLE>
ASSETS September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 10,367 $ 13,081
Federal funds sold 304 553
Interest bearing deposits with banks 7,026 11,125
Investment securities:
Held to maturity 7,580 14,314
Available for sale 45,608 36,175
Other investments 1,004 1,271
------- -------
Total investments 54,192 51,760
Loans, net of unearned income 126,104 118,063
Less allowance for loan losses (1,691) (1,703)
------- -------
Loans, net 124,413 116,360
Loans held for sale 406
Premises and equipment, net 7,237 5,957
Cash value of life insurance 4,815 4,030
Other assets 5,987 3,555
------- -------
Total assets $ 214,341 $ 206,827
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 47,873 $ 49,612
Interest-bearing 132,282 135,060
------- -------
Total deposits 180,155 184,672
Other borrowed funds 12,723 1,428
Accrued expenses and other liabilities 2,616 2,198
------- -------
Total liabilities 195,494 188,298
Stockholders' equity:
Common stock-$1 par value; authorized
5,000,000 shares; 2,230,065 and 2,164,065
shares issued and outstanding at
September 30, 1999 and December 31, 1998 2,230 2,164
Common stock-$1 par value; authorized
5,000,000 shares; 90,000 shares issued
and outstanding at September 30, 1999 90 -
Additional paid-in capital 7,500 6,174
Treasury stock, 103,000 shares at cost at September 30, 1999 (1,032) -
Retained earnings 10,672 9,606
Accumulated other comprehensive income (613) 585
------- -------
Total stockholders' equity 18,847 18,529
------- -------
Total liabilities and stockholders' equity $ 214,341 $ 206,827
======= =======
</TABLE>
See accompanying notes to these consolidated financial statements.
Citizens Bancshares Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Unaudited-amounts in thousands, except per share amounts)
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
----------------------- -----------------------
INTEREST INCOME:
<S> <C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, including fees $ 3,076 $ 2,888 $ 8,931 $ 8,585
Investment securities:
Taxable 707 469 2,071 1,431
Tax-exempt 113 110 338 234
Interest bearing deposits 24 119 221 420
Federal funds sold 1 17 7 99
----- ----- ------ ------
Total interest income 3,921 3,603 11,568 10,769
INTEREST EXPENSE:
Deposits 1,302 1,260 3,852 3,737
Other borrowed funds 75 23 154 69
----- ----- ----- -----
Total interest expense 1,377 1,283 4,006 3,806
Net interest income 2,544 2,320 7,562 6,963
Provision for loan losses 75 75 212 125
----- ----- ----- -----
Net interest income after provision for
loan losses 2,469 2,245 7,350 6,838
----- ----- ----- -----
NONINTEREST INCOME:
Service charges on deposit accounts 936 1,046 2,741 3,030
Commission and fees 908 758 2,682 2,128
Other operating income 241 205 852 705
----- ----- ----- -----
Total noninterest income 2,085 2,009 6,275 5,863
NONINTEREST EXPENSE:
Salaries and employee benefits 2,007 1,773 5,750 5,392
Net occupancy and equipment 545 666 1,753 1,962
Other operating expenses 1,361 1,196 4,123 3,433
----- ----- ------ ------
Total other expense 3,913 3,635 11,626 10,787
Income before income taxes 641 619 1,999 1,914
Income tax expense 200 169 609 515
----- ----- ------ ------
Net income $ 441 $ 450 $ 1,390 $ 1,399
Other comprehensive income (loss), net of taxes (253) 201 (1,198) 202
----- ----- ------ ------
Comprehensive income (loss) $ 188 $ 651 $ 192 $ 1,601
===== ===== ====== ======
Net income per common share, basic and diluted $ 0.20 $ 0.21 $ 0.64 $ 0.65
===== ===== ====== ======
Weighted average outstanding shares, basic and diluted 2,160 2,164 2,160 2,164
===== ===== ====== ======
<CAPTION>
See accompanying notes to these consolidated financial statements.
Citizens Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited-amounts in thousands)
</TABLE>
<TABLE>
Nine Months
Ended September 30,
1999 1998
------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income $ 1,390 $ 1,399
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 212 125
Depreciation and amortization 823 867
Amortization (accretion), net 25 54
Gain on investments (7) (12)
Loss on sale of assets 20 228
Net change in loans held for sale 406 -
Increase in other assets (2,596) (761)
Increase (decrease) in accrued expense
and other liabilities 418 (519)
------ ------
Net cash provided by operating activities 691 1,381
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 6,727 7,488
Proceeds from maturities of investment securities
available for sale 5,626 11,185
Purchases of investment securities held to maturity - (789)
Purchases of investment securities available for sale (16,251) (22,296)
Net decrease in other investments 267 729
Net (increase) decrease in loans (8,265) 2,218
Increase in cash surrender value (785) (345)
Purchases of premises and equipment (2,103) (1,122)
Net change in interest bearing deposit 4,099 (12,296)
Net change in federal funds sold 249 3,419
Proceeds from sale of real estate
acquired through foreclosure 127 831
------- -------
Net cash used in investing activities (10,309) (10,978)
Cash flows from financing activities:
Net change in noninterest bearing deposits (1,739) 1,697
Net change in interest bearing deposits (2,778) 8,344
Borrowings from line of credit 1,496 1,203
Principal payment on debt (200) (585)
Net change in FHLB advances 10,000 (1,576)
Sale of common stock 1,482 -
Purchase of treasury stock (1,032) -
Dividends paid (325) -
------- -------
Net cash provided by financing activities 6,904 9,083
------- -------
Net change in cash and due from banks (2,714) (514)
Cash and due from banks at beginning of period 13,081 10,637
------- -------
Cash and due from banks at end of period $ 10,367 $ 10,123
======= =======
Supplemental disclosures of cash paid during the period for:
Interest $ 3,599 $ 4,010
======= =======
Income taxes $ 565 $ 695
======= =======
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure $ - $ 118
======= =======
See accompanying notes to these consolidated financial statements.
</TABLE>
CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Citizens Bancshares Corporation and subsidiaries (the "Company")
is a holding company that provides a full range of commercial
banking and mortgage brokerage services to individual and
corporate customers in metropolitan Atlanta through its wholly
owned subsidiaries, Citizens Trust Bank (the "Bank") and Citizens
Trust Bank Mortgage Services, Inc. ("Mortgage Services"). The
Bank operates under a state charter and serves its customers in
metropolitan Atlanta through ten full-service branches.
Effective January 30, 1998, the Company consummated its merger
with First Southern Bancshares, Inc. and subsidiaries.
The accompanying consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on
Form 10-QSB. Accordingly, certain disclosures required by
generally accepted accounting principles are not included herein.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts in the consolidated financial statements.
Actual results could differ significantly from those estimates.
Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term
are the allowance for loan losses and valuation allowances
associated with the recognition of deferred tax assets. These
interim statements should be read in conjunction with the
financial statements and notes thereto included in the company's
latest Annual Report on Form 10-KSB.
The consolidated financial statements of Citizens Bancshares
Corporation and Subsidiaries (the "Company") as of September 30,
1999 and for the three and nine months ended September 30,1999 and
1998 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of the financial position and
results of operations and cash flows for the three and nine months
period have been included. All adjustments are of a normal recurring
nature. All significant intercompany accounts and transactions
have been eliminated in consolidation.
ACCOUNTING POLICIES
Reference is made to the accounting policies of the Company
described in the notes to the consolidated financial statements
contained in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998. The Company has followed those
policies in preparing this report.
BRANCH OPENING
On August 27, 1999, the Company opened its eleven branch. The
branch, a supermarket branch, is located on Old National Highway,
Atlanta, Georgia. Also, during the three months period ended
September 30, 1999, the Company received final approval to start
construction of a new branch to be located on Cascade Highway in
Atlanta, Georgia.
COMMON STOCK
The par value of the Company's voting and non-voting common stock
is $1, and 5,000,000 shares are authorized for each class of
stock.
On September 15, 1999, the Company entered into a Stock Purchase
Agreement with Fannie Mae. The Agreement allowed Fannie Mae to
purchase 66,000 shares of the Company's voting common stock and
90,000 shares of the Company's non-voting common stock. On
September 15, 1999, Fannie Mae consummated the Agreement by
purchasing 66,000 shares of voting common stock and 90,000 shares
of non-voting common stock at a price of $9.50 per share for an
aggregate purchase price of $1,482,000. When combined with
shares already owned, Fannie Mae's investment in the Company
represents less than 10% of the Company's total stockholders'
equity.
The amount of dividends paid by the Bank to the Company is
limited by various banking regulatory agencies. The Georgia
Department of Banking and Finance requires prior approval for a
bank to pay dividends in excess of 50% of its prior year's
earnings. The amount of dividends available from the Bank to the
Company without prior approval from the regulators is
approximately $799,000.
On March 15, 1999, the Company paid a cash dividends of
approximately $325,000 or $0.15 per share to shareholders on
record as of December 15, 1998.
STOCK REPURCHASE PROGRAM
On August 21, 1999, The Company's Board of Directors authorized
the repurchase of up to 108,203 shares, approximately 5% of
outstanding shares, of the Company's common stock. The
purchases will be made from time to time at fair market value in
the open market and are expected to be completed over the next 12
months, depending on market conditions and other factors. As of
September 30, 1999, the Company has repurchased 103,000 shares of
its common stock at an average cost of approximately $10.02.
NET INCOME PER SHARE
Basic net income per common share (EPS) is computed based on net
income divided by the weighted average number of common share
equivalents outstanding. Diluted EPS is computed based on net
income divided by the weighted average number of common and
potential common shares. The only potential common shares are
those related to stock options; however, such options were
antidilutive, so diluted EPS is the same as basic EPS.
IMPACT OF NEW ACCOUNTING STANDARD
In June 1999, FASB issued Statement of Financial Accounting
Standards No. 137, 'Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133' (Statement 137). Statement 137 defers for one
year the effective date of FASB Statement of Financial Accounting
Standards No. 133, 'Accounting for Derivatives Instruments and
Hedging Activities' (Statement 133). Statement 133 requires all
derivatives to be recorded on the balance sheet at fair value and
establishes 'special accounting' for the following three
different types of hedges: hedges of changes in the fair value of
assets, liabilities or firm commitments (referred to as fair
value hedges); hedges of the variable cash flows of forecasted
transactions (cash flow hedges); and hedges of foreign currency
exposures of net investments in foreign operations. As amended,
Statement 133 is effective for quarters in fiscal years beginning
after June 15, 2000. The Company is currently evaluating the
impact of Statement 133 on its financial position and results of
operations.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the
1999 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
Citizens Bancshares Corporation (the "Company") is a holding
company that wholly owns two subsidiaries, Citizens Trust Bank
(the "Bank") and Citizens Trust Bank Mortgage Services, Inc.
("Mortgage Services"). The Company, through the Bank and
Mortgage Services, provides a full range of commercial banking
and mortgage brokerage services to individuals and corporate
customers in its primary market area, metropolitan Atlanta. The
Bank is a member of the Federal Reserve System and operates under
a state charter. The Company serves its customers through eleven
full-service bank branches and its mortgage subsidiary.
The following discussion is of the Company's financial condition
as of September 30, 1999 and the changes in the financial
condition and results of operations for the three and nine month
periods ended September 30, 1999 and 1998.
FINANCIAL CONDITION
Citizens Bancshares Corporation's total assets at September 30,
1999, were $214,341,000 - an increase of 9.41% over a year ago.
For the nine month period, total assets increased 3.63%. This
increase is a result of internal growth in almost all categories
of assets, particularly earning assets such as loans and
investment securities during the period.
For the nine months, the Company's interest bearing deposits and
federal funds sold deceased $4,348,000 or 37.23%. These
decreases are offset by a $2,432,000 or 4.70% increase in
investment securities and a $8,041,000 or 6.81% increase in
loans, net of unearned interest. For the third quarter, loans,
net of unearned interest grew by $6,472,000 or 5.41% for the
three month period.
For the first nine months of 1999, premises and equipment, net of
depreciation increased $1,280,000 or 21.49%. This increase is
primarily due to the purchased of the Company's West Peachtree
Street branch building, which was leased from the Federal Deposit
Insurance Corporation. Also, during the third quarter the
Company opened a new branch location, its eleventh, in one of the
nation's largest supermarket chains.
INVESTMENT SECURITIES
The Company invests a portion of its assets in U.S. treasury
bills and notes, U.S. government sponsored agency securities,
mortgage backed bonds, as well as, some equity securities. Other
investments includes Federal Home Loan Bank stock and Federal
Reserve Bank stock. At September 30, 1999 and December 31, 1998,
the Company's investment securities portfolio represented
approximately 25.28% and 25.02% of total assets, respectively.
IMPAIRED LOANS
Management considers a loan to be impaired when, based on current
information and events, it is probable that all amounts due
according to the contractual terms of the loan will not be
collected. Impaired loans are measured based on the present
value of expected future cash flows, discounted at the loan's
effective interest rate, or at the loan's observable market
price, or the fair value of the collateral if the loan is
collateral dependent.
Loans are generally placed on nonaccrual status when the full and
timely collection of principal or interest becomes uncertain or
the loan becomes contractually in default for 90 days or more in
either principal or interest unless the loan is well
collateralized and in the process of collection. When a loan is
placed on nonaccrual status, current period accrued and
uncollected interest is charged to interest income on loans
unless management feels the accrued interest is recoverable
through the liquidation of collateral. Interest income, if any,
on impaired loans is recognized on the cash basis.
At September 30, 1999, the recorded investment in loans that are
considered to be impaired was approximately $1,892,000, a
decrease of $1,506,000 from $3,398,000 at December 31, 1998. The
related allowance for loan losses for each of these loans was
approximately $433,000 and $568,000, respectively. For the nine
months ended September 30, 1999, the Company recognized
approximately $65,000 in interest income on these impaired loans
on an accrual basis.
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans, real estate
acquired through foreclosure and repossessed assets.
Nonperforming loans consist of loans that are past due with
respect to principal or interest more than 90 days or have been
placed on nonaccrual status.
With the exception of the loans included within nonperforming
assets in the table below, management is not aware of any loans
classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed
which (1) represent or result from trends or uncertainties which
management reasonably expects will materially impact future
operating results, liquidity, or capital resources, or (2)
represent any information on material credits which management is
aware that causes management to have serious doubts as to the
abilities of such borrowers to comply with the loan repayment
terms.
Nonperforming loans decreased approximately $637,000 to
$1,516,000 at September 30, 1999 from $2,153,000 at December 31,
1998. Nonperforming assets represented 1.20% of loans, net of
unearned income and real estate acquired through foreclosure at
September 30, 1999 as compared to 1.95% at December 31, 1998.
The table below presents a summary of the Company's nonperforming
assets at September 30, 1999 and December 31, 1998.
1999 1998
(Amounts in thousands, except
financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans $ 1,394 $ 1,683
Past-due loans 122 470
----- -----
Nonperforming loans 1,516 2,153
Real estate acquired through foreclosure - 147
----- -----
Total nonperforming assets $ 1,516 $ 2,300
===== =====
Ratios:
Nonperforming loans to loans, net of
unearned income 1.20% 1.82%
===== =====
Nonperforming assets to loans (net of unearned
income) and real estate acquired through
foreclosure 1.20% 1.95%
===== =====
Nonperforming assets to total assets 0.71% 1.11%
===== =====
Allowance for loan losses to
nonperforming loans 111.54% 79.10%
======= ======
Allowance for loan losses to
nonperforming assets 111.54% 74.10%
======= ======
Interest income on nonaccrual loans, which would have been
reported for the nine months ended September 30, 1999, totaled
approximately $29,000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation
of the loan portfolio under current economic conditions,
historical loan loss experience, adequacy of collateral, and such
other factors which, in management's judgment, deserve
recognition in estimating loan losses. The Company's process for
determining an appropriate allowance for loan losses includes
management's judgement and use of estimates. A general reserve
of .5% is applied to the portion of the loan portfolio that is
non-criticized. A specific reserve is applied to all criticized
loans using a percentage formula related to the degree of
impairment based on the standard industry and regulatory grading
systems as follows: 2.5% for loans graded "Special Mention", 15%
for loans graded "Substandard", 50% for loans graded "Doubtful",
and 100% for loans graded "Loss".
The aggregate of these reserves plus specific allowances as
needed is compared to the actual reserve to determine the
adequacy of the allowance for credit losses. The adequacy of the
allowance for loan losses is reviewed on a monthly basis by
management and the Board of Directors. This assessment is made
in the context of historical losses as well as existing economic
conditions, performance trends within specific portfolio segments
and individual concentrations of credit.
Additions to the allowance for loan losses are made by monthly
charges to the provision for loan losses. The level of the
provision for loan losses is established annually based on
historical net charge-offs, projected growth of the loan
portfolio and economic conditions.
Loans are charged against the allowance when, in the opinion of
management, such loans are deemed to be uncollectible and
subsequent recoveries are added to the allowance.
Management believes the allowance for loan losses is adequate.
While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary
based on changes in economic conditions, particularly in the
metropolitan Atlanta area. In addition, regulatory agencies, as
an integral part of their examination process, periodically
review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based
on their judgments about information available to them at the
time of their examination.
A substantial portion of the Company's loan portfolio is secured
by real estate in the metropolitan Atlanta market. Accordingly,
the ultimate collectibility of a substantial portion of the
Company's loan portfolio is susceptible to changes in market
conditions in the metropolitan Atlanta area. The Company's loans
to area churches was approximately $33.4 million at September 30,
1999 compared to $36.7 million at December 31, 1998 which is
generally secured by real estate. The accounting loss the
Company would incur if any party to the financial instrument
failed completely to perform according to the terms of the
contract and the collateral proved to be of no value is equal to
the outstanding balance of the financial instrument.
The following table summarizes loans, changes in the allowance
for loans losses arising from loans charged off, recoveries on
loans previously charged off by loan category, and additions to
the allowance which have been charged to operating expense as of
and for the nine month period ended and year ended September 30, 1999
and December 31, 1998, respectively.
1999 1998
(Amounts in thousands, except
financial ratios)
Loans, net of unearned income $126,104 $118,063
======= =======
Average loans, net of unearned income
and the allowance for loan losses $118,306 $118,484
======= =======
Allowance for loans losses at the
beginning of year $ 1,703 $ 1,752
Loans charged off:
Commercial, financial, and agricultural 80 145
Real estate - loan 154 85
Installment loans to individuals 204 215
------ ------
Total loans charged off 438 445
------ ------
Recoveries of loans previously charged off:
Commercial, financial, and agricultural - 21
Real estate - loan 115 69
Installment loans to individuals 99 131
------ ------
Total loans recovered 214 221
------ ------
Net loans charged off 224 224
Additions to allowance for loan losses
charged to operating expense 212 175
------ ------
Allowance for loan losses at period end $ 1,691 $ 1,703
====== ======
Ratio of net loans charged off to average
loans, net of unearned income and the
allowance for loan losses 0.19% 0.19%
======= =======
Allowance for loan losses to loans, net of
unearned income
1.34% 1.44%
======= =======
DEPOSITS
Total deposits deceased $4,517,000 or 2.45% for the nine months
period. Noninterest bearing deposits decreased $1,739,000 or
3.51%, while interest-bearing deposits decreased $2,778,000 or
2.06%. The decreases are primarily due to interest sensitive
customers shifting their funds out of the Bank as they look for
higher yields in a low interest rate environment. Also, the
Company maintains the operating accounts for several large public
sector customers, which fluctuates on a month to month basis.
OTHER BORROWED FUNDS
On September 30, 1999, the Company borrowed $10,000,000 at 5.07%
from the Federal Home Loan Bank of Atlanta as part of its Year
2000 liquidity strategy. The advance has a "Bermudan-Style" call
feature that allows the advance to be called after an initial
lockout period. The advance matures in ten years and has an
initial lockout period of six months. Thereafter, the advance
can be called quarterly on the coupon payment dates. Due to the
current interest rate environment, management believes that
Federal Home Loan Bank of Atlanta will call the advance after its
lockout period of six months.
RESULTS OF OPERATIONS
Net Interest Income:
Net interest income represents the excess of income received on
interest-earning assets and interest paid on interest-bearing
liabilities. Net interest income for the nine month period
increased $599,000 to $7,562,000 compared to $6,963,000 for the
same period in 1998. For the third quarter of 1999, net interest
income increased $224,000 or 9.66% compared to the same period
last year. The combination of reducing nonaccrual loans by
$637,000 from September 30, 1998 and higher volume in the investment
portfolio and commercial loans which pay a higher yield than fed funds
sold and interest bearing deposits with banks contributed to these results.
Also, lower rates paid on interest bearing deposits helped to increase
the Company's net interest margin to 5.76% for the third quarter ended
1999 compared to 5.58% in the third quarter of 1998.
Noninterest income:
Noninterest income increased approximately $412,000 to $6,275,000
or 7.03% for the nine month period ended September 30, 1999 as
compared to the same period in 1998. For the three month period
ended September 30, 1999, noninterest income increased $76,000 or
3.78% compared to the same period in 1998. The increase in
noninterest income is primarily due to an increase in commission
and fees on mortgage loans of approximately $554,000 or 26.03%
for the nine month period ended September 30, 1999, as a result
of increase volume in loan closings.
Noninterest expense:
Noninterest expense increased approximately $839,000 or 7.78%
during the nine month period as compared to the same period in
1998. The increase is attributable to a combination of data
processing cost, professional services and costs associated with
the increased mortgage loan volume. Data processing costs
increased approximately $278,000 due to growth in the Company's
deposit base, new product offerings, and having the information
systems area outsource. Through the second quarter of 1998, the
Company's data processing operations was handled in-house.
Noninterest expense for the three months ended September 30, 1999
showed an increased of 7.65% or 278,000 compared to the same
period in 1998 for similar reasons. However, the Company
experienced slightly higher than anticipated expenses for the
three months period related to marketing the opening of a new
branch and the implementation of check imaging technologies that
is expected to yield operating efficiencies in the future.
Net income:
The Company had net income of approximately $1,390,000 or $0.64
per share during the nine months ended September 30, 1999 as
compared to $1,399,000 or $0.65 per share in 1998. The slight
decrease in net income as compared to 1998 is attributable to an
increase in net interest income and noninterest income of
approximately $512,000 and $412,000, respectively, which is
partially offset by an increase in noninterest expense of
$839,000 and an increase in the provision for loan losses of
$87,000. The Company had net income of approximately $441,000 or
$0.20 per share during the third quarter of 1999 as compared to
$450,000 or $0.21 per share during the same period in 1998. The
decrease is due to an increase in noninterest expense of $278,000
and an increase in tax expense of $31,000 which is partially
offset by an increase in net interest income of $224,000 and an
increase in noninterest income of $76,000.
LIQUIDITY
Liquidity is a bank's ability to meet deposit withdrawals, while
also, providing for the credit needs of customers. In the normal
course of business, the Company's cash flow is generated from
interest and fees on loans and other interest-earning assets. The
Company continues to meet liquidity needs primarily through
interest bearing deposits and managing the maturities of
investment securities. At September 30, 1999, approximately 8%
of the investment portfolio will mature within the next year, 52%
after one year but before five years. In addition, interest
bearing deposits in other banks averaged approximately $6.2
million during the nine month period ended September 30, 1999.
The Company is a member of the Federal Home Loan Bank of Atlanta,
the Federal Reserve System and maintains relationships with
several correspondent banks and, thus, could obtain funds on
short notice. Company management closely monitors and maintains
appropriate levels of interest-earning assets and interest-
bearing liabilities so that maturities of assets are such that
adequate funds are provided to meet customer withdrawals and loan
demand.
CAPITAL RESOURCES
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and
ratios of total and Tier 1 capital to risk weighted assets, and
Tier 1 capital to average assets. As of September 30, 1999, the
Company's total and Tier 1 capital to risk weighted assets and
Tier 1 to average assets were 14%, 13% and 10% respectively.
Management believes, as of September 30, 1999, that the Company
meets all capital adequacy requirements to which it is subject.
YEAR 2000 PROCESSING RISK
The Board and management consider the Year 2000 ("Y2K") computer
processing risk to be a very serious risk for the banking and
financial services industry in particular and for all businesses
which depend on computer hardware and software to perform the
critical functions of their businesses. Y2K computer processing
risk is defined as the risk associated with computer hardware or
software that fails to process data or to operate in the manner
for it was designed as a result of century date changes. This
risk encompasses hardware and software owned, leased, licensed or
otherwise used by the Company or by vendors upon which the
Company depends for mission-critical functions or by customers
with which the Company have a material relationship. In 1997,
the Board established a Y2K Policy and Y2K Compliance Committee.
The Committee is headed by senior management, meets monthly and
regularly reports to the Audit and Compliance Committee of the
Board and to the full Board.
The Company and Bank do not use proprietary computer hardware or
software. Therefore, they depend upon outsource data processing
services and third party software. Management has identified all
mission critical hardware and software applications and is
following the general guidelines promulgated by the FDIC to
assure that all mission critical applications will be renovated
with testing in progress or contingency plans in the process of
implementation. To date, the Company has completed its
awareness, assessment, renovation and testing steps. The Company
has completed the century date testing and validation of its core
business systems.
The Bank's core processing, which maintains all customer record
keeping and financial management information systems, is handled
by Alltel Information Services (Alltel), an international company
which provides application software and outsourcing services to
financial services, mortgage, telecommunication and health care
industries, serving more that 1,100 companies in 45 countries.
Alltel has completed its awareness, assessment, renovation and
testing steps.
Management has reviewed 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 has requested 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 have 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 cost approximately $360,000 in 1998. As of September
1999, the Company has spent approximately $60,000 related to Y2K
cost in 1999 and expects any additional Y2K costs, if any, to be
minimal.
As part of its normal business practices, the Company maintains
contingency plans in the event of emergency situations, some of
which could arise from Y2K related problems. The Company has
formulated a detailed Y2K contingency plan, which assesses
several possible scenarios to which the Company may be required
to react. However, the Company believes that it is not possible
to know with complete certainty all Y2K problems that could
affect the Company.
The most reasonable likely worse case Y2K scenario would be one
in which electrical service or phone service is disrupted for an
extended period of time. As noted above, the Company's computer
hardware and software, its commercial customer risk and its third
party vendors/supplier risk is progressing as planned. However,
the Company cannot accurately predict how many failures related
to the Y2K problem will occur with its suppliers, customers or
other third parties or the severity, duration or financial
consequences of such failures. As a result, it is possible the
Company could suffer the following consequences:
- A number of operational inconveniences and inefficiencies
for the Company, its service providers or its customers that may
divert the Company's time and attention and financial and human
resources from its ordinary business activities.
- System malfunctions that may require significant efforts by
the Company, its service providers or its customers to prevent or
alleviate material business disruptions.
Even if the Company does not incur significant costs in
connection with responding to Y2K issues, there can be no
assurance that the failure or delay of the Company's customers,
vendors or other third parties in addressing these issues or the
costs involved in such process will not have a material adverse
effect on the Company's business, financial condition and results
of operations.
The foregoing are forward-looking statements reflecting
management's current assessments and estimates with respect to
the Company's Y2K compliance efforts and the impact of Y2K issues
on the Company's business and operations. Various factors could
cause actual plans and results to differ materially from those
contemplated by such assessments, estimates and forward-looking
statements, many of which are beyond the control of the Company.
Some of these factors include, but are not limited to,
representations by the Company's vendors and customers,
technological advances, economic considerations and consumer
perceptions. The Y2K compliance program is an ongoing process
involving continual evaluation and may be subject to change in
response to new developments.
The Company has also been subject to regulatory review of its
overall Year 2000 plan and will continue to be monitored by its
regulators for its progress.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal
proceedings to which the Company or its subsidiary is a
party or to which any of their property is subject.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On September 22, 1999, the Company filed a report on
Form 8-K related to common stock sold to Fannie Mae.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITIZENS BANCSHARES CORPORATION
Date: November 10, 1999 By: /s/ James E. Young
James E. Young
President and Chief Executive Officer
Date: November 10, 1999 By: /s/ Willard C. Lewis
Willard C. Lewis
Senior Executive Vice President and
Chief Operating Officer
Date: November 10, 1999 By: /s/ Samuel J. Cox
Samuel J. Cox
Senior Vice President and Chief
Financial Officer
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