<PAGE> 1
Page 1 of _________
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
Commission File Number 0-18209
CITIZENS BANCSHARES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1372535
- - ---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 East Main Street, Salineville, Ohio 43945
- - -------------------------------------- -----
(Address of principal executive offices)
Registrant's telephone number, 330/679-2328
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
____ ____
On July 19, 1996 there were 5,390,622 shares of Common Stock, without par
value, of Citizens Bancshares, Inc., outstanding.
<PAGE> 2
CITIZENS BANCSHARES, INC.
-------------------------
FORM 10-Q
---------
QUARTER ENDED June 30, 1996
Part I - Financial Information
ITEM 1 FINANCIAL STATEMENTS
Interim Financial Information required by Rule 10-01 of Regulation S-X is
included in this Form 10-Q as referenced below:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Financial Statements
- - --------------------
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity 5
Condensed Consolidated Statements of
Cash Flows 6
Notes to the Consolidated Financial
Statements 7 - 14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15 - 18
</TABLE>
2
<PAGE> 3
CITIZENS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, December 31,
(In thousands of dollar, except per share amounts ) 1996 1995
--------- ------------------
<S> <C> <C>
ASSETS
Cash and due from banks.................................................... $ 21,357 $ 20,600
Federal funds sold......................................................... 11,500 15,220
--------- ---------
Total cash and cash equivalents....................................... 32,857 35,820
Interest-bearing deposits with financial institutions...................... 1,189 688
Investment and mortgage-backed securities available
for sale (Note 2)........................................................ 214,481 183,725
Investment and mortgage-backed securities held
to maturity (estimated market value of $47,058 at
June 30 and $53,757 at December 31 (Note 2).............................. 47,130 53,207
Total loans (Note 3)....................................................... 528,354 528,656
Less allowance for loan losses (Note 4).................................. (10,621) (10,283)
--------- ---------
Net loans............................................................. 517,733 518,373
Premises and equipment, net................................................ 12,468 11,887
Intangible assets.......................................................... 1,667 1,556
Accrued interest receivable and other assets............................... 13,416 8,832
--------- ---------
Total assets.......................................................... $840,941 $814,088
========= =========
LIABILITIES
Deposits
Noninterest-bearing deposits............................................... $ 58,456 $ 60,683
Interest-bearing deposits.................................................. 576,699 567,829
--------- ---------
Total deposits........................................................ 635,155 628,512
Securities sold under repurchase agreements and
federal funds purchased.................................................. 32,361 20,056
Federal Home Loan Bank advances............................................ 88,881 84,680
Accrued interest payable and other liabilities............................. 7,360 6,270
Obligation under employee stock ownership plan............................. 287 331
--------- ---------
Total liabilities..................................................... 764,044 739,849
--------- ---------
MINORITY INTEREST IN SUBSIDIARY................................................. 1,188 1,213
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value; authorized
200,000 shares; none issued
Common stock, no par value; 12,000,000 shares
authorized; 5,392,872 shares issued...................................... 13,703 13,703
Retained earnings.......................................................... 63,795 58,817
Less treasury stock, 2,250 shares at cost.................................. (5) (5)
ESOP obligations and unearned shares....................................... (287) (331)
Unrealized gain (loss) on securities available for sale.................... (1,497) 842
--------- ---------
Total shareholders' equity............................................ 75,709 73,026
--------- ---------
Total liabilities and shareholders' equity............................ $840,941 $814,088
========= =========
</TABLE>
See notes to the consolidated financial statements
3
<PAGE> 4
CITIZENS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the six months
(in thousands of dollars, except per share amounts) ended June 30, ended June 30,
1996 1995 1996 1995
---------------------------- ----------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees............................................... $13,540 $12,227 $26,447 $23,984
Investment and mortgage-backed securities
Taxable........................................................... 3,466 3,674 6,769 7,393
Nontaxable........................................................ 211 185 423 373
Federal funds sold.................................................. 84 133 227 191
Other............................................................... 13 4 18 5
---------- --------- --------- ---------
Total interest income........................................... 17,314 16,223 33,884 31,946
---------- --------- --------- ---------
INTEREST EXPENSE
Deposits............................................................ 6,069 5,685 12,116 10,895
Federal Home Loan Bank advances..................................... 686 966 1,508 1,914
Federal funds and repurchase agreements............................. 245 433 547 883
Other borrowings.................................................... 55
---------- --------- --------- ---------
Total interest expense.......................................... 7,000 7,084 14,171 13,747
---------- --------- --------- ---------
NET INTEREST INCOME.................................................... 10,314 9,139 19,713 18,199
PROVISION FOR LOAN LOSSES (NOTE 4)..................................... 436 536 790 1,069
---------- --------- --------- ---------
INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........................................... 9,878 8,603 18,923 17,130
---------- --------- --------- ---------
OTHER INCOME
Service charges and fees on deposits................................ 507 444 922 897
Other income........................................................ 642 627 1,198 1,233
Investment gains (Note 2).......................................... 7 42 7 36
---------- --------- --------- ---------
Total other income.............................................. 1,156 1,113 2,127 2,166
---------- --------- --------- ---------
OTHER EXPENSE
Salaries and employee benefits...................................... 2,463 2,425 4,947 4,892
Occupancy expense................................................... 327 311 716 651
Equipment expense................................................... 535 449 975 831
Merger, integration and restructuring expense....................... 400 400
Other operating expense............................................. 1,635 2,077 3,323 4,082
---------- --------- --------- ---------
Total other expense............................................. 5,360 5,262 10,361 10,456
---------- --------- --------- ---------
INCOME BEFORE INCOME TAXES............................................ 5,674 4,454 10,689 8,840
INCOME TAXES.......................................................... 1,899 1,476 3,547 2,932
---------- --------- --------- ---------
NET INCOME............................................................ $ 3,775 $ 2,978 $ 7,142 $ 5,908
========== ========= ========= =========
EARNINGS PER COMMON SHARE............................................. $ .70 $ .55 $ 1.32 $ 1.09
========== ========= ========= =========
</TABLE>
See notes to the consolidated financial statements
4
<PAGE> 5
CITIZENS BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------
1996 1995
(In thousands of dollars) ---- ----
<S> <C> <C>
Balances at January 1 $73,026 $60,610
Net income 7,142 5,908
Change in employee stock ownership plan obligation 44 (250)
Cash paid for fractional shares (8) (8)
Cash dividends declared ($.40 per share in 1996 and
$.11 in 1995) (2,156) (594)
Change in unrealized gain (loss) on securities
available for sale (2,339) 2,867
------- -------
Balances at June 30 $75,709 $68,533
------- -------
</TABLE>
5
<PAGE> 6
CITIZENS BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
1996 1995
---- -----
(In thousands of dollars)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES................................................ $ 9,017 $15,054
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of other real estate........................................................... 193 302
Investment and mortgage-backed securities available for sale:
Proceeds from sales................................................................ 34 18,379
Proceeds from paydowns............................................................. 15,136 3,003
Proceeds from maturities, redemptions.............................................. 6,468 4,040
Purchases.......................................................................... (55,938) (8,421)
Investment and mortgage-backed securities held to maturity:
Proceeds from paydowns............................................................. 6,991
Proceeds from maturities........................................................... 27,336 13,282
Purchases.......................................................................... (21,678) (24,233)
Net decrease (increase) in loans................................................... (6,404) (24,359)
Proceeds from commercial and student loans sold.................................... 4,362 1,299
Net change in interest-bearing deposits
with financial institutions...................................................... (501) (82)
Purchases of premises and equipment................................................ (1,502) (1,044)
-------- ---------
Net cash from investing activities............................................. (32,494) (10,843)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid.................................................................. (2,602) (594)
Dissenting and fractional shares paid................................................ (8) (8)
Net increase in deposit accounts..................................................... 6,643 1,310
Repayment of other borrowings........................................................ (1,974)
Net increase in repurchase agreements................................................ 12,305 2,196
Net change in short-term FHLB advances and federal funds purchased................... 18,000 (6,550)
Proceeds from long-term FHLB advances................................................ 2,250 6,250
Repayment of long-term FHLB advances................................................. (16,049) (7,083)
Redemption of minority interest in subsidiary........................................ (25) (25)
-------- ---------
Net cash from financing activities............................................... 20,514 (6,478)
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................................. (2,963) (2,267)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................................... 35,820 28,553
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................................. $32,857 $26,286
======== =========
</TABLE>
See notes to the consolidated financial statements
6
<PAGE> 7
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Citizens
Bancshares, Inc., ("Bancshares") and its wholly-owned subsidiaries, The
Citizens Banking Company ("Citizens"), Freedom Financial Life Insurance Company
("Insurance Company"), Freedom Express, Inc. and First National Bank of Chester
("FNB"). All significant inter-company transactions have been eliminated in
consolidation. Bancshares' consolidated financial statements have been restated
for prior periods due to the December 31, 1995 merger of Western Reserve Bank
of Ohio, Lowellville, Ohio, ("Western Reserve") into Citizens. The transaction
resulted in the exchange of 2.625 common shares of Bancshares for each of
Western Reserve's 160,000 outstanding shares of common stock, with cash paid in
lieu of fractional shares. The transaction was accounted for as a pooling of
interests.
These interim consolidated financial statements are prepared without audit and
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of Bancshares at June 30,
1996 and its results of operations and cash flows for the periods presented.
All such adjustments are of a normal recurring nature. The consolidated
financial statements do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances and should be read in conjunction
with the 1995 consolidated financial statements and notes thereto of Bancshares
included in its Annual Report to Shareholders for the year ended December 31,
1995.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
For the six months ended June 30, 1996 and 1995, Bancshares paid interest in
the amount of $14,263,000 and $13,701,000 respectively, and taxes in the amount
of $3,984,000 and $2,007,000, respectively.
Bancshares' non-cash transactions resulting from transfers from loans to other
real estate owned were $12,000 for the six months ended June 30, 1996 and
$93,000 for the comparable period in 1995.
Earnings per share are calculated on the basis of the weighted average number
of shares outstanding after considering the Bancshares common shares issued in
the merger discussed above. The weighted average number of shares used in the
computation for 1996 was 5,390,195 after adjusting for new Employee Stock
Option Plan unallocated shares and options and 5,390,622 for 1995.
Bancshares' Board of Directors declared a three-for-two stock split payable
January 12, 1996 to shareholders of record December 31, 1995. All share and per
share data have been retroactively adjusted to reflect the stock split and the
Western Reserve merger accounted for as a pooling of interests.
In 1996, Bancshares is also adopting SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, use of a fair
value based method to account for plans such as Bancshares' stock option plan.
If the fair value accounting treatment encouraged by SFAS No. 123 is not
adopted, entities must disclose the pro forma effect on net income and earnings
per share had such accounting treatment been adopted. Bancshares elected to
disclose the pro forma effect of the fair value accounting for stock options
granted in 1995 and thereafter, and will include appropriate disclosures in the
1996 annual financial statements.
7
<PAGE> 8
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized costs, unrealized gains and losses and estimated fair values are
as follows at June 30, 1996.
<TABLE>
<CAPTION>
(In thousands of dollars)
JUNE 30, 1996
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 37,003 $ 2 $ (32) $ 36,973
U.S. Government agencies
and corporations 15,991 3 (305) 15,689
Corporate and other securities 142 (1) 141
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 132,318 260 (2,296) 130,282
Agency collateralized mortgage obligations 14,224 (422) 13,802
Other 6,774 (25) 6,749
--------- ------ --------- ---------
Total debt securities available for sale 206,452 265 (3,081) 203,636
Marketable equity securities 10,328 517 10,845
--------- ------ --------- ---------
Total investment and mortgage-backed
securities available for sale $216,780 $782 $(3,081) $214,481
========= ====== ========= =========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $29,228 $120 $(23) $29,325
U.S. Government agencies and corporations 100 (6) 94
Obligations of states and political
subdivisions 17,797 46 (209) 17,634
Other 5 5
--------- ------ ----- ---------
Total investment and mortgage-backed
securities held to maturity $47,130 $166 $(238) $47,058
========= ====== ===== =========
</TABLE>
8
<PAGE> 9
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES - CONTINUED
The amortized costs, unrealized gains and losses and estimated fair values are
as follows at December 31:
<TABLE>
<CAPTION>
(In thousands of dollars)
1995
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 8,902 $ 72 $ (1) $ 8,973
U.S. Government agencies
and corporations 13,568 63 (5) 13,626
Corporate and other securities 444 (7) 437
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 135,323 1,031 (319) 136,035
Agency collateralized mortgage obligations 10,463 9 (166) 10,306
Other 7,605 8 (10) 7,603
--------- ------ -------- ---------
Total debt securities available for sale 176,305 1,183 (508) 176,980
Marketable equity securities 6,125 620 6,745
--------- ------ ------- ---------
Total investment and mortgage-backed
securities available for sale $ 182,430 $1,803 $ (508) $ 183,725
========= ====== ------- ---------
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 35,300 $ 422 $ (1) $ 35,721
U.S. Government agencies and corporations 100 (2) 98
Obligations of states and political
subdivisions 17,280 183 (84) 17,379
Other 527 32 559
--------- ------ ------- ---------
Total investment and mortgage-backed
securities held to maturity $ 53,207 $ 637 $ (87) $ 53,757
========= ====== ======= =========
</TABLE>
9
<PAGE> 10
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES - CONTINUED
The amortized cost and estimated market value of debt securities at June 30,
1996 by contractual maturity are shown below. Expected maturities will likely
differ from contractual maturities because some issuers have the right to call
or repay obligations at any time with or without penalty.
<TABLE>
<CAPTION>
(In thousands of dollars)
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
DEBT SECURITIES AVAILABLE FOR SALE:
Due in one year or less $ 30,985 $ 30,987
Due after one year through five years 10,639 10,569
Due after five years through ten years 11,512 11,246
Mortgage-backed securities 153,316 150,834
-------- ---------
Total debt securities available for sale $206,452 $203,636
======== =========
DEBT SECURITIES HELD TO MATURITY:
Due in one year or less $ 22,840 $ 22,880
Due after one year through five years 12,185 12,246
Due after five years through ten years 11,308 11,148
Due after ten years 797 784
--------- ---------
Total debt securities held to maturity $ 47,130 $ 47,058
========= =========
</TABLE>
For the six month and three month period ended June 1996, securities available
for sale with an amortized cost of $27,000 were sold with gross gains of
$7,000. Securities available for sale with an amortized cost of $18,384,000
and $15,542,000 were sold for the six month period and three month period ended
June 30, 1995. These securities had related gross realized losses of $116,000
and gross realized gains of $152,000.
10
<PAGE> 11
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 - LOANS
The loan portfolio at June 30, 1996 and December 31, 1995 was as follows:
<TABLE>
<CAPTION>
(thousands of dollars) JUNE 30, December 31,
1996 1995
---- ------
<S> <C> <C>
Commercial, financial and agricultural $222,417 $222,552
Real estate mortgage 250,411 251,223
Construction loans 3,307 4,864
Consumer loans 42,681 46,109
Real estate mortgage loans held for sale 9,538 3,908
----------- -----------
Total loans $528,354 $528,656
=========== ===========
Nonaccrual and past due loans
(In thousands of dollars) JUNE 30, December 31,
1996 1995
----- -----
Loans accounted for on a nonaccrual basis $1,978 $2,289
Loans past due more than 90 days and
still accruing interest 971 464
-------- --------
$2,949 $2,753
======== ========
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the six months
ended June 30, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
1996 1995
------- ------
<S> <C> <C>
Balance at January 1 $10,283 $ 9,861
Provision for loan losses 790 1,069
Recoveries 609 463
Loans charged-off (1,061) (1,116)
------- -------
Balance at June 30 $10,621 $10,277
======= =======
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(In thousands of dollarS) JUNE 30, June 30,
1996 1995
---- ----
<S> <C> <C>
Average investment in impaired loans $4,047 $4,556
Interest income recognized on impaired loans 171 111
Interest income received on impaired loans 122 55
</TABLE>
11
<PAGE> 12
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES - CONTINUED
<TABLE>
<CAPTION>
(In thousands of dollars) JUNE 30, December 31,
1996 1995
---- -----
<S> <C> <C>
Balance of impaired loans $4,019 $ 4,364
Specific allocation associated with
impaired loans $ 582 $ 764
</TABLE>
The balance of impaired loans includes certain delinquent and nonaccrual loans
previously disclosed in Note 3 in the aggregate amount of $1,560,000 and
$1,827,000 at June 30, 1996 and December 31, 1995 respectively.
NOTE 5 - EMPLOYEE STOCK OWNERSHIP PLAN AND RELATED OBLIGATION
Bancshares sponsors an Employee Stock Ownership Plan ("ESOP") for substantially
all employees. Corporate contributions to the plan are discretionary and are
determined by the Board of Directors on an annual basis. The ESOP has a
$500,000 loan commitment from a financial institution for the purpose of
purchasing additional shares. Bancshares guarantees payment of the portion of
the loan up to the book value of the common shares. Principal is payable in
eight annual installments on each loan advance and interest is payable
quarterly. The loans are collateralized by the shares of Bancshares common
shares that the proceeds were used to purchase. Shares are released from
collateral and allocated to active employees as principal is repaid. Shares
acquired prior to January 1, 1993 (old shares) are considered outstanding for
computing earnings per share and dividends on those shares are recorded as a
reduction of retained earnings. The annual expense recorded for old shares
consists of the Corporation's contribution and related expenses.
The ESOP shares were as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
June 30, 1996
-------------
Old Shares New Shares
<S> <C> <C>
Allocated shares 22,852 69
Unallocated shares 9,896 10,431
------- ------
Total ESOP shares 32,748 10,500
======= ======
</TABLE>
<TABLE>
<CAPTION>
Loan Balance Principal
Shares Price Per June 30, Reductions Interest
Year Purchased share 1996 Remaining rate
- - ---- --------- ----------- ---- --------- ----
<S> <C> <C> <C> <C> <C>
1989 12,498 $8 $25 2 83% of prime
1990 11,250 9 37 3 prime + .44%
1992 9,000 11 50 4 prime + .125%
1995 10,500 24 175 6 prime + .125%
-----
$287
=====
</TABLE>
Share and per share information in the above tables have been adjusted to give
effect to the three-for-two stock split.
12
<PAGE> 13
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Bancshares, through its subsidiary banks, grants residential, consumer and
commercial loans to customers located primarily in the eastern Ohio counties of
Columbiana, Jefferson, Stark, Mahoning and Carroll and in the West Virginia
county of Hancock.
Real estate mortgage loans, including construction loans and loans held for
sale, totaled $254,698,000 of loans at June 30, 1996, and are secured primarily
by 1 - 4 family residences. Commercial real estate loans classified under the
commercial, financial and agricultural line, comprised 18.31% of loans at June
30, 1996, and represent borrowings secured by commercial buildings and real
estate primarily in the Citizens and FNB market areas.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Citizens and FNB are parties to financial instruments which involve off-balance
sheet risk. These instruments are entered into in the normal course of business
to meet the financing needs of their customers. These financial instruments
include commitments to make loans. There were $66,917,000 in such commitments
at June 30, 1996.
The exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to make loans and lines and letters
of credit is represented by the contractual amount of those instruments.
Citizens and FNB follow the same credit policy to make such commitments as is
followed for those loans recorded in the financial statements. In management's
opinion, these commitments represent normal banking transactions and no
material losses are expected to result therefrom. Collateral obtained upon
exercise of the commitments is determined using management's credit evaluation
of the borrower and may include real estate and/or business assets.
The subsidiary banks of Bancshares are involved in various legal actions
arising in the ordinary course of business. In the opinion of management, the
outcome of these matters will not have a material effect on Bancshares.
Bancshares' subsidiary banks were required to have approximately $7,173,000 of
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve requirements at June 30, 1996. These balances do not earn interest.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Bancshares' Federal Home Loan Bank advances at June 30, 1996 were:
<TABLE>
<CAPTION>
(in thousands of dollars)
MATURITY OR FIRST
Amount Rate Repricing date
- - ------ ---- --------------
<S> <C> <C>
$67,300 5.56% 1996
18,081 5.04 1997
2,000 5.96 1998
1,500 5.45 1999
- - -------
$88,881
=======
</TABLE>
13
<PAGE> 14
CITIZENS BANCSHARES, INC.
--------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 - ACQUISITIONS
On December 31, 1995, Western Reserve Bank of Ohio, Lowellville, Ohio became
affiliated with Bancshares. The transaction resulted in the exchange of 2.625
of Bancshares common shares for each of Western Reserve's 160,000 shares of
common stock outstanding, other than fractional shares which were paid in cash.
On April 4, 1996, Bancshares, Citizens, and The Navarre Deposit Bank Company
("Navarre") entered into a plan and agreement of merger which provides for
Bancshares to issue common stock of Bancshares having an aggregate value of
$15,646,000, which equals $55.8786 for each of the 280,000 outstanding common
shares of Navarre. The transaction is structured as a tax-free exchange of
stock and will be accounted for using the pooling-of-interests method of
accounting. The exchange ratio at which Navarre common stock will be exchanged
for Bancshares common shares will be based on the average of the Bancshares'
closing prices for the twenty trading days immediately preceding the tenth
trading day prior to the consummation of the merger as quoted on the Nasdaq
National Market. In no event will the exchange ratio be greater than 2.10 or
less than 1.70. The Bancshares common shares to be issued to the Navarre
shareholders will be registered with the Securities and Exchange Commission.
The merger is expected to be consummated during the fourth quarter 1996 and is
subject to approvals by various regulatory authorities and by the shareholders
of Navarre.
14
<PAGE> 15
CITIZENS BANCSHARES, INC.
-------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The purpose of this discussion is to focus on information concerning the
consolidated financial condition of Bancshares at June 30, 1996, compared to
December 31, 1995, and the results of operations for the quarter and six months
ended June 30, 1996, as compared to the same period in 1995, which is not
otherwise apparent from the financial statements. This discussion should be
read in conjunction with the interim consolidated financial statements and the
footnotes thereto included elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1996, was $7,142,000, compared to
$5,908,000 for the same period in 1995. Bancshares' 20.9% increase in net
income for the six months ended June 30, 1996 compared to the same period in
1995, was due primarily to a 8.3% increase in net interest income, a 26.1%
decrease in the provision for loan losses and a .9% decrease in other expense.
Interest income for the six months ended June 30, 1996 was $33,884,000 and
increased $1,938,000 or 6.1% compared to the same six month period in 1995.
Interest income on loans for the six months and quarter ended June 30, 1996
included nonrecurring pretax income of $650,000 which was the amount of
purchased loan discount recognized on a loan which paid off early.
The provision for loan losses of $790,000 for the six months ended June 30,
1996 decreased $279,000 from the comparable period in 1995, primarily as a
result of the lower level of nonperforming loans.
Other expenses for the six months ended June 30, 1996 were $10,361,000 and
decreased $95,000 or .9% from the comparable period in 1995. During the second
quarter of 1996, Bancshares incurred $400,000 merger, integration and
restructuring expenses. These costs are primarily related to the planned
acquisition of Navarre and represent merger costs, personnel related costs and
costs related to the write-off of certain fixed assets. Without the
restructuring charges, other expenses for the six months ended June 30, 1996
were $9,961,000 and decreased $495,000 or 4.7%. The Federal Deposit Insurance
Corporation (FDIC) implemented a plan that reduced deposit insurance for most
banks, including Citizens and FNB. This plan took effect in the second quarter
of 1995 and significantly reduced FDIC premiums paid by Citizens and FNB.
Banchshares' FDIC premiums for the six months ended June 30, 1996 totalled
$153,000, a decrease of $468,000 from the $621,000 incurred for the comparable
period in 1995.
Return on average shareholders' equity for the first six months of 1996 was
19.18% as compared to 18.43% for the same period in 1995. Return on average
assets for the first six months of 1996 increased to 1.80% as compared to 1.53%
for the same period in 1995. Earnings per share for the six months ended June
30, 1996 were $1.32 as compared to $1.09 or the same period in June 30, 1995,
representing an increase of 21.1%.
Net income for the quarter ended June 30, 1996 was $3,775,000 compared to
$2,978,000 for the same period in 1995. Bancshares' 26.8% increase in net
income for the second quarter of 1996 compared to the same period in 1995, was
primarily due to a 12.9% increase in net interest income and a 18.7% reduction
in provision for loan losses. Earnings per share for the quarter ended June 30,
1996 were $.70, representing an increase of 27.3% compared to $.55 for the
quarter ended June 30, 1995.
The provision for loan losses of $436,000 for the quarter ended June 30, 1996
decreased $100,000 from the comparable period in 1995, primarily as a result of
a positive trend in the level of nonperforming loans. At June 30, 1996
nonperforming loans were .56% of total loans as compared to .92% at June 30,
1995. Additionally, the allowance for loan losses as a percentage of total
loans increased at June 30, 1996 to 2.01% from 1.95% at December 31, 1995.
15
<PAGE> 16
CITIZENS BANCSHARES, INC.
-------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED).
NET INTEREST INCOME
(in thousands of dollars)
<TABLE>
<CAPTION>
SIX MONTHS ENDED Six months ended
JUNE 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Net interest income $19,713 $18,199
Taxable equivalent adjustment 331 311
------- -------
Net interest income taxable $20,044 $18,510
equivalent ======= =======
Net interest margin 5.08% 4.89%
Taxable equivalent adjustment .09 .08
---- ----
Net interest margin taxable 5.17% 4.97%
equivalent ==== ====
</TABLE>
The net interest margin was calculated without annualizing the $650,000
discount recognized with the receipt of a prepayment of a loan that was
previously purchased at a discount. Average gross earning assets increased
$4,636,000 during the first half of 1996, while the average rate earned on
these assets increased from 8.59% at December 31, 1995 to 8.80% at June 30,
1996.
CHANGES IN FINANCIAL CONDITION
Total assets of $840,941,000 at June 30, 1996 increased $26,853,000 or 3.3%
compared to year-end 1995. Total deposits and repurchase agreements at June 30,
1996 of $635,155,000 and $32,361,000, increased $6,643,000, and $12,305,000,
respectively from December 31, 1995. These lower cost sources of funds were
used to purchase investment and mortgage-backed securities available for sale
and were invested in federal funds sold due to the nature of the yield curve.
Net loans totaled $517,733,000 at June 30, 1996, representing a decrease of
$640,000 or .1% since year-end 1995.
In May 1995, the Financial Accounting Standards Board issued its Statement on
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights," which requires companies that engage in mortgage banking activities to
recognize, as separate assets, rights to service mortgage loans for others.
This Statement was adopted by Bancshares in 1996, and was applied prospectively
to rights arising from loans sold by Bancshares after adoption of the
Statement. The impact of this pronouncement on Bancshares' financial
statements is not material for any period presented.
16
<PAGE> 17
CITIZENS BANCSHARES, INC.
-------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED).
NONPERFORMING ASSETS
Nonperforming loans as a percentage of total loans were .56% at June 30, 1996
as compared to .52% at December 31, 1995. The allowance for loan losses as a
percentage of total loans increased at June 30, 1996 to 2.01% from 1.95% at
December 31, 1995. Nonperforming loans as a percentage of the allowance for
loan losses increased to 27.77% at June 30, 1996, from 26.77% at December 31,
1995.
Other real estate totaled $237,000 at June 30, 1996, and December 31, 1995.
Bancshares continues to analyze the adequacy of its allowance for loan losses
as a percentage of total loans on a quarterly basis. Annualized net charge-offs
constituted .17% of average loans in the first two quarters of 1996 as compared
to .30% for the year ended December 31, 1995. This combined with the improved
levels of nonperforming loans and the stabilization of loan growth during 1996,
contributed to the decision to reduce the provision for loan losses.
LIQUIDITY
Bancshares' liquidity position remained strong during the second quarter of
1996. Core deposits, representing Bancshares' largest most stable and generally
least costly source of funds, totaled $588,382,000 and were 111.4% of total
loans at June 30, 1996. The core deposit levels at June 30, 1996 approximated
the levels at year-end 1995.
Cash and cash equivalents, interest-bearing time deposits and securities
available for sale are Bancshares' most liquid assets. At June 30, 1996, these
assets totaled $248,527,000, an increase of $28,294,000 or 12.8% from December
31, 1995.
Management believes that Bancshares' liquidity position is strong based on its
high level of cash, cash equivalents, core deposits, the stability of its other
funding sources and its capital base.
CAPITAL RESOURCES
Shareholders' equity totaled $75,709,000 at June 30, 1996, compared to
$73,026,000 at December 31, 1995. The ratio of shareholders' equity to assets
was 9.00% at June 30, 1996 and 8.97% at December 31, 1995, respectively.
<TABLE>
<CAPTION>
JUNE 30, 1996 December 31, 1995
--------------------- -------------------
AMOUNT PERCENT Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital
Actual $76,963,000 15.86% $72,170,000 14.93%
Required 19,417,000 4.00 19,334,000 4.00
Total risk-based capital
Actual $83,031,000 17.11% $78,212,000 16.18%
Required 38,833,000 8.00 38,667,000 8.00
</TABLE>
17
<PAGE> 18
CITIZENS BANCSHARES, INC.
-------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED).
The following table summarizes Bancshares' consolidated leverage capital ratio
and required amounts at June 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
JUNE 30, 1996 December 31, 1995
Leverage Ratio AMOUNT PERCENT Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Actual $76,963,000 9.05% $72,170,000 8.77%
Minimum required 25,504,000 3.00 24,694,000 3.00
Maximum required 42,507,000 5.00 41,157,000 5.00
</TABLE>
The unrealized loss on securities available for sale, net of tax effect, was
$1,497,000 at June 30, 1996, compared to an unrealized gain of $842,000 at
December 31, 1995. The change of $2,339,000 is primarily attributable to the
changing interest rate environment.
GENERAL
Several significant projects were completed in 1996, including the conversion
of the former Western Reserve Bank of Ohio ("Western Reserve") customer files
to the Citizens Banking Company's computer system. This consolidation allows us
to provide consistent customer reporting throughout Bancshares and yields
significant cost savings. We also completed the consolidation of the Boardman
offices of Citizens and Western Reserve.
On April 4, 1996, Bancshares announced the signing of a definitive agreement to
acquire The Navarre Deposit Bank Company. Navarre has assets of approximately
$80 million and is located in southwestern Stark County with offices in Navarre
(2), Brewster and Richville. Navarre will be merged into Citizens at the time
of acquisition which is expected to occur in the fourth quarter 1996. The
transaction, which is subject to approval by Navarre's shareholders and various
regulatory agencies, calls for an all-stock exchange and has an aggregate value
of $15,646,000.
The acquisition of Navarre increases our Stark County presence and gives us
added exposure in an area of expanding economic activity. The Navarre
acquisition complements Citizens' existing loan production office in Canton,
Ohio, which opened in December, 1995. The transaction is expected to close in
the last quarter of 1996.
Bancshares received national attention in June 1996 as USBanker magazine
published its ranking of the top-performing 200 mid-sized banks in the United
States. Bancshares is ranked 9th. Criteria used to determine ranking included
ratio of loans to deposits, measurement of capital, asset quality and
profitability.
18
<PAGE> 19
Signatures
Pursuant to the requirements 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, Inc.
Date: July 19, 1996 ______________________
------------- Marty E. Adams
President & Chief Executive Officer
Date: July 19, 1996 ______________________
------------- William L. White III
Senior Vice President
Chief Financial Officer
19
<PAGE> 20
CITIZENS BANCSHARES, INC.
-------------------------
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- - ----------------------------
There is no pending litigation, other than routine litigation
incidental to the business of Bancshares and its affiliates, or of a
material nature involving or naming Bancshares or any of its
affiliates as a defendant. Further, there are no material legal
proceedings in which any director, executive officer, principal
shareholder or affiliate of Bancshares is a party or has a material
interest which is adverse to Bancshares or any of its affiliates.
None of the routine litigation in which Bancshares or any of its
affiliates are involved is expected to have a material adverse impact
upon the financial position or results of operations of Bancshares or
any of its affiliates.
ITEM 2. CHANGES IN SECURITIES.
- - --------------------------------
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- - ------------------------------------------
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- - --------------------------------------------------------------
Not Applicable.
20
<PAGE> 21
CITIZENS BANCSHARES, INC.
-------------------------
PART II - OTHER INFORMATION - CONTINUED
ITEM 5. OTHER INFORMATION.
- - --------------------------
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- - -------------------------------------------
(a) The following Exhibits are included in this Form 10-Q or are
incorporated by reference as noted in the following index:
21
<PAGE> 22
CITIZENS BANCSHARES, INC.
-------------------------
PART II - OTHER INFORMATION - CONTINUED
EXHIBIT INDEX
-------------
EXHIBIT 3 Articles of Incorporation, By laws
(1) Registrant's Third Amended Articles of Incorporation,
(incorporated by reference in Exhibit 3 (1) to the Form 10-Q of
Citizens Bancshares, Inc. for the quarter ended June 30, 1993).
(2) Registrant's Regulations, as amended (incorporated by reference in
Exhibit 3 (2) to the Form S-4 Registration Statement No. 0-18209
of Citizens Bancshares, Inc.).
EXHIBIT 10 Material Contracts
(1) The Citizens Bancshares Inc. Profit-Sharing Plan and Trust
(formerly known as the CBC Salineville Profit Sharing Plan and
Trust) (incorporated by reference in Exhibit 10 (2) to the Form
S-4 Registration Statement No. 0-18209 of Citizens Bancshares,
Inc.).
(2) Citizens Bancshares, Inc. Employee Stock Ownership Plan
(incorporated by reference in Exhibit 10 (3) to the Form S-4
Registration Statement No. 0-18209 of Citizens Bancshares, Inc.).
(3) Form of Indemnification Agreement between Citizens Bancshares,
Inc. and Individual Directors, Officers or Representatives
(incorporated by reference in Exhibit 10 (4) to the Form 10-K of
Citizens Bancshares, for the fiscal year ended December 31, 1989).
(4) Employment Agreement by and among Citizens Bancshares, Inc., The
Citizens Banking Company and Marty E. Adams (incorporated by
reference in Exhibit 10 (5) to the Form 10-K of Citizens
Bancshares, Inc. for the fiscal year ended December 31, 1992).
(5) Amendment to Executive Employment Agreement by and among Citizens
Bancshares, Inc., The Citizens Banking Company and Marty E. Adams.
(incorporated by reference in Exhibit 10 (8) to the Form 10-K of
Citizens Bancshares, Inc. for the fiscal year ended December 31,
1993).
(6) Agreement by and among Citizens Bancshares, Inc., The Citizens
Banking Company and Frank J. Koch. (incorporated by reference in
Exhibit 10 (9) to the Form 10-K of Citizens Bancshares, Inc. for
the fiscal year ended December 31, 1993).
22
<PAGE> 23
CITIZENS BANCSHARES, INC.
-------------------------
PART II - OTHER INFORMATION
EXHIBIT INDEX (CONTINUED)
-------------------------
(7) Affiliation Agreement by and among Citizens Bancshares, Inc.,
The Citizens Banking Company, Unity Bancorp, Inc., and the
New Waterford Bank (incorporated by reference in Exhibit 3
(1) to the Form S-4 Registration Statement No. 33-80210 of
Citizens Bancshares, Inc.).
(8) Agreement of Merger by and between Citizens Bancshares, Inc.
and Unity Bancorp, Inc. (incorporated by reference in Exhibit
10 (10) to the Form 10-K of Citizens Bancshares, Inc. for the
fiscal year ended December 31, 1994).
(9) Citizens Bancshares, Inc. Non-Statutory Stock Option and
Stock Appreciation Rights Plan.(incorporated by reference in
Exhibit 10 (11) to the Form 10-Q of Citizens Bancshares, Inc.
for the quarter ended June 30, 1995).
(10) The Employee Retirement Plan for Citizens Bancshares, Inc.
(incorporated by reference in Exhibit 10 (12) to the Form
10-Q of Citizens Bancshares, Inc. for the quarter ended June
30, 1995).
(11) Affiliation Agreement by and among Citizens Bancshares, Inc.,
The Citizens Banking Company, Western Reserve Bank of Ohio
(incorporated by reference in Exhibit 2 (1) to the Form S-4
Registration Statement No.33-99036 of Citizens Bancshares,
Inc.).
(12) Agreement of Merger by and among Citizens Bancshares, Inc.,
The Citizens Banking Company and Western Reserve Bank of Ohio
(incorporated by reference in Exhibit 10 (12) to the Form
10-K of Citizens Bancshares, Inc. for the fiscal year ended
December 31, 1995).
(13) Plan and Agreement of Merger by and among Citizens
Bancshares, Inc., The Citizens Banking Company and the
Navarre Deposit Bank Company (incorporated by reference in
Exhibit 10 (13) to the Form 10-Q of Citizens Bancshares, Inc.
for the quarter ended March 31, 1996).
EXHIBIT 11 Statement regarding Computation of Per Share Earnings
(included in Note 1 to the Consolidated Financial
Statements).
EXHIBIT 27 Financial Data Schedule
REPORTS ON FORM 8-K
-------------------
(b) A Form 8-K was filed April 23, 1996.
23
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000855876
<NAME> CITIZENS BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,357
<INT-BEARING-DEPOSITS> 1,189
<FED-FUNDS-SOLD> 11,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 214,481
<INVESTMENTS-CARRYING> 47,130
<INVESTMENTS-MARKET> 47,058
<LOANS> 528,354
<ALLOWANCE> 10,621
<TOTAL-ASSETS> 840,941
<DEPOSITS> 635,155
<SHORT-TERM> 50,500
<LIABILITIES-OTHER> 7,647
<LONG-TERM> 70,742
<COMMON> 13,703
0
0
<OTHER-SE> 62,006
<TOTAL-LIABILITIES-AND-EQUITY> 840,941
<INTEREST-LOAN> 26,447
<INTEREST-INVEST> 7,192
<INTEREST-OTHER> 245
<INTEREST-TOTAL> 33,884
<INTEREST-DEPOSIT> 12,116
<INTEREST-EXPENSE> 14,171
<INTEREST-INCOME-NET> 19,713
<LOAN-LOSSES> 790
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 10,361
<INCOME-PRETAX> 10,689
<INCOME-PRE-EXTRAORDINARY> 10,689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,142
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 8.88
<LOANS-NON> 1,978
<LOANS-PAST> 971
<LOANS-TROUBLED> 929
<LOANS-PROBLEM> 2,459
<ALLOWANCE-OPEN> 10,283
<CHARGE-OFFS> 1,061
<RECOVERIES> 609
<ALLOWANCE-CLOSE> 10,621
<ALLOWANCE-DOMESTIC> 582
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10,039
</TABLE>
