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Exhibit Index on
Page
Page 1 of pages
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 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
including area code ------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
-------------------------------------
(Title of class)
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 reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendments to this Form 10-K. [ ]
On March 12, 1997, there were 5,897,540 shares of Common Stock, without
par value, of Citizens Bancshares, Inc., outstanding. As of the same date, the
aggregate market value (based on the average of bid and asked prices) of
Citizens Bancshares, Inc.'s Common Stock held by non-affiliates was
$221,157,750.
Documents Incorporated by Reference
-----------------------------------
Portions of Annual Report to Shareholders for the Year ended December
31, 1996 (incorporated into Parts I, II and IV of this Form 10-K).
Portions of Citizens Bancshares, Inc.'s Proxy Statement dated February
14, 1997 (incorporated into Parts II and III of this Form 10-K).
<PAGE> 2
Item 1. BUSINESS
- -----------------
(a) General Development of Business
-------------------------------
Citizens Bancshares, Inc. ("the Corporation") is a bank holding company
organized in 1982 under the laws of the State of Ohio and registered with the
Board of Governors of the Federal Reserve Board pursuant to the Bank Holding
Company Act of 1956, as amended. The Corporation has two wholly-owned subsidiary
banks, a wholly-owned reinsurance company subsidiary and a wholly-owned courier
company subsidiary.
THE CITIZENS BANKING COMPANY ("Citizens"), owned by the Corporation since 1982,
was organized and chartered under the laws of the State of Ohio in 1902.
Citizens is an insured bank under the Federal Deposit Insurance Act. This
subsidiary accounts for approximately 96% of the Corporation's consolidated
assets.
FIRST NATIONAL BANK OF CHESTER ("FNB"), owned by the Corporation since January
1, 1990, was organized and chartered as a national banking association under the
laws of the United States on December 29, 1969 and formally opened for business
on January 2, 1970. FNB is an insured bank under the Federal Deposit Insurance
Act. This subsidiary accounts for approximately 4% of the Corporation's
consolidated assets.
FREEDOM FINANCIAL LIFE INSURANCE COMPANY ("Freedom"), owned by the Corporation
since August 1985, was organized and chartered under the laws of the State of
Arizona in 1985. Freedom is a reinsurance company providing credit life and
accident and health insurance coverage to Citizens' and FNB's loan customers.
This subsidiary accounts for less than 1% of the Corporation's consolidated
assets.
FREEDOM EXPRESS, INC. ("Express"), owned by the Corporation since 1994, was
chartered under the laws of the State of Ohio in 1984. Express is a courier
company formed to transport papers and documents between and among the states of
Ohio, Pennsylvania and West Virginia. This subsidiary accounts for less than 1%
of the Corporation's consolidated assets.
(b) Industry Segment Information
----------------------------
The Corporation is a bank holding company engaged in the business of commercial
and retail banking, which accounts for substantially all of its revenue,
operating income and assets. Reference is made to the statistical information
regarding the Corporation included elsewhere herein and to Item 8 of this Form
10-K for financial information about the Corporation's banking business.
(c) Business
--------
The Corporation's business is primarily incident to its two subsidiary banks.
Its principal products and services involve collecting customer deposits, making
loans and purchasing investments.
Interest and fees on loans accounted for 72.0% of total revenue in 1996, 70.6%
in 1995 and 70.0% in 1994. Interest on securities is also a significant source
of revenue, accounting for 21.4% of revenues in 1996, 22.6% in 1995 and 24.0% in
1994, respectively. Total cash and cash equivalents of $27,367,000 at year-end
1996 decreased $13,559,000 from year-end 1995. Citizens' loan portfolio does not
include any foreign-based loans, loans to lesser developed countries, or loans
to the corporation or its other subsidiaries.
2
<PAGE> 3
The Corporation's business is not seasonal nor is it dependent upon a single or
small group of customers. In the opinion of management, the Corporation does not
have exposure to material costs associated with environmental hazardous waste
clean-up.
The acquisition of The Navarre Deposit Bank Company in 1996 was accounted for as
a pooling of interests. All prior periods have been restated to reflect the
merger.
Competition-
The primary market area for Citizens is eastern Ohio and consists of all of
Columbiana County, all of Carroll County, portions of Stark and Mahoning
counties and the northern 75% of Jefferson County. A secondary market area is
the southern portion of Jefferson County, the panhandle of West Virginia north
of Follansbee, and a small portion of Pennsylvania south of Beaver and west of
Darlington to the Ohio border.
FNB's primary market area is Hancock County, West Virginia, with overlap into
the East Liverpool, Ohio market.
Citizens competes not only with other locally owned commercial banks and savings
institutions, but with larger regional financial institutions in offering
consumer and commercial financial service products.
FNB primarily competes with locally owned commercial banks, credit unions and
savings institutions.
Employees-
The Corporation has no employees; however, Citizens and FNB employ approximately
355 full-time equivalents. The Corporation and its subsidiary banks are not
parties to any collective bargaining agreements. Management considers its
relationship with its employees to be good.
Financial Information about Foreign and Domestic Operations and Export Sales-
The Corporation and its subsidiaries do not have any banking offices located in
a foreign country and with the exception of a $5,000 State of Israel bond, has
no foreign assets, liabilities or related income and expense for the years
presented in the financial statements incorporated by reference herein.
Supervision and Regulation-
Management is not aware of any current recommendations by regulatory authorities
which, if they were to be implemented, would have a material effect on the
Corporation.
The Corporation is a bank holding company under the Bank Holding Company Act of
1956, as amended, which restricts the activities of the Corporation and the
acquisition by the Corporation of voting stock or assets of any bank, savings
association or other company. The Corporation is also subject to the reporting
requirements of, and examination and regulation by, the Board of Governors of
the Federal Reserve Bank on transactions with affiliates, including any loans or
extensions of credit to the bank holding company or any of its subsidiaries,
investments in the stock or other securities thereof and the taking of such
stock or securities as collateral for loans to any borrower; the issuance of
guarantees, acceptances or letters of credit on behalf of the bank holding
company and its subsidiaries; purchases or sales of securities or other assets;
and the payment of money or furnishing of services to the bank holding company
and other subsidiaries. Banks and bank holding companies are prohibited from
engaging in certain tie-in arrangements in connection with extensions of credit
or provision of property or services.
3
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Bank holding companies are also restricted in acquiring shares or substantially
all of the assets of any bank located outside the state in which the operations
of the holding company's banking subsidiaries are principally conducted. Such an
acquisition must be specifically authorized by statute of the state of the bank
whose shares or assets are to be acquired. Ohio laws permit interstate banking
on a reciprocal basis. Bank holding companies and banks located in Ohio may
acquire or organize bank holding companies and banks in other states;
conversely, bank holding companies and banks in such states may acquire or
organize bank holding companies or acquire or charter banks in Ohio if the other
state enacts effective reciprocal legislation granting Ohio bank holding
companies and banks the same or greater authority.
Banks-
As an Ohio chartered bank, Citizens is supervised and regulated by the Ohio
Division of Financial Institutions. As a national bank, FNB is supervised and
regulated by the Comptroller of the Currency. The deposits of Citizens and FNB
are insured primarily by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC") and both entities are subject to the applicable
provisions of the Federal Deposit Insurance Act. Approximately $131,900,000 of
Citizens' deposits are insured by the Savings Association Insurance Fund of the
FDIC. A subsidiary of a bank holding company can be liable for reimbursing the
FDIC if the FDIC incurs or anticipates a loss because of a default of another
FDIC insured subsidiary of the bank holding company or FDIC assistance provided
to such subsidiary is in danger of default.
Various requirements and restrictions under the laws of the United States and
the State of Ohio affect the operations of Citizens and FNB, including
requirements to maintain reserves against deposits, restrictions on the nature
and amount of loans which may be made and the interest rate which may be charged
thereon, restrictions relating to investments and other activities, limitations
based on capital and surplus, limitations on payment of dividends and
limitations on branching.
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies and for state member banks. The risk-based capital guidelines
include both a definition of capital and a framework for calculating risk
weighted assets by assigning assets and off-balance sheet items to broad risk
categories. FNB is subject to similar capital requirements adopted by the
Comptroller of the Currency, and Citizens is subject to similar capital
requirements adopted by the FDIC and the Ohio Division of Financial
Institutions.
The Corporation and its subsidiaries currently satisfy all regulatory capital
requirements. Failure to meet the capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC.
CERTAIN STATISTICAL INFORMATION REGARDING THE CORPORATION
---------------------------------------------------------
The following schedules present, for the periods indicated, certain
financial and statistical information relative to the Corporation as required
under the Securities and Exchange Commission's Industry Guide 3,
"Statistical Disclosure By Bank Holding Companies," or a specific reference as
to the location of the required disclosures in the Corporation's 1996 Annual
Report to Shareholders (Exhibit 13), portions of which are incorporated in this
Form 10-K by reference.
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I. A. and B. AVERAGE BALANCE SHEET AND RELATED ANALYSIS OF NET INTEREST
----------------------------------------------------------
EARNINGS:
---------
The information set forth under the heading "Financial Review --
Average Balance Sheets and Related Yields and Rates" on page 30 of the
Corporation's 1996 Annual Report to Shareholders is incorporated herein by
reference.
C. INTEREST RATES AND INTEREST DIFFERENTIAL RATE VOLUME ANALYSIS OF
----------------------------------------------------------------
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE:
------------------------------------------------
The information set forth on page 31 of the Corporation's 1996 Annual
Report to Shareholders is incorporated herein by reference.
5
<PAGE> 6
II. INVESTMENT PORTFOLIO
--------------------
A. The amortized costs, unrealized gains and losses and estimated fair values
are as follows at December 31:
<TABLE>
<CAPTION>
1996
-------------------------------------------------
GROSS GROSS ESTIMATED
(dollars in thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 11,001 $ 80 $ (9) $ 11,072
U.S. Government agencies and corporations 27,279 379 (77) 27,581
Obligations of states and political subdivisions 100 100
Corporate and other securities 14 14
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 164,027 838 (641) 164,224
Agency collateralized mortgage obligations 19,200 (269) 18,931
Other 6,076 7 (7) 6,076
-------- ------- -------- --------
Total debt securities available for sale 227,697 1,304 (1,003) 227,998
Marketable equity securities 11,452 943 (18) 12,377
-------- ------- -------- --------
Total securities available for sale $239,149 $ 2,247 $ (1,021) $240,375
======== ======= ======== ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 42,342 $ 132 $ (13) $ 42,461
U.S. Government agencies and corporations 100 (2) 98
Obligations of states and political subdivisions 22,783 189 (82) 22,890
Other 5 5
-------- ------- -------- --------
Total securities held to maturity $ 65,230 $ 321 $ (97) $ 65,454
======== ======= ======== ========
</TABLE>
6
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II. INVESTMENT PORTFOLIO (Continued)
--------------------------------
<TABLE>
<CAPTION>
1995
------------------------------------------------
GROSS GROSS ESTIMATED
(dollars in thousands) 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 30,657 202 (73) 30,786
Corporate and other securities 444 (7) 437
Obligations of states and political subdivisions 5,931 148 (60) 6,019
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 199,325 1,470 (636) 200,159
Marketable equity securities 6,209 620 6,829
-------- ------- ------- --------
Total securities available for sale $205,534 $ 2,090 $ (636) $206,988
======== ======= ======= ========
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 17,779 183 (102) 17,860
Other 527 32 559
-------- ------- ------- --------
Total securities held to maturity $ 53,706 $ 637 $ (105) $ 54,238
======== ======= ======= ========
</TABLE>
7
<PAGE> 8
II. INVESTMENT PORTFOLIO (Continued)
-------------------------------
<TABLE>
<CAPTION>
1994
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(dollars in thousands) COST GAINS LOSSES VALUE
-------- ----- -------- --------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 14,923 $ (392) $ 14,531
U.S. Government agencies and corporations 6,065 (191) 5,874
Obligations of states and political subdivisions 10,282 $ 30 (597) 9,715
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 60,713 8 (3,612) 57,109
Agency collateralized mortgage obligations 16,638 (973) 15,665
Other 291 291
-------- ----- -------- --------
Total debt securities available for sale 108,912 38 (5,765) 103,185
Marketable equity securities 5,876 54 5,930
-------- ----- -------- --------
Total securities available for sale $114,788 $ 92 $ (5,765) $109,115
======== ===== ======== ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 20,277 $ 2 $ (315) $ 19,964
U.S. Government agencies and corporations 19,813 5 (944) 18,874
Obligations of states and political subdivisions 12,939 32 (747) 12,224
Corporate and other securities 2,848 (47) 2,801
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 116,859 8 (7,654) 109,213
Other 555 555
-------- ----- -------- --------
Total securities held to maturity $173,291 $ 47 $ (9,707) $163,631
======== ===== ======== ========
</TABLE>
8
<PAGE> 9
II. INVESTMENT PORTFOLIO (Continued)
--------------------------------
B. The following is a schedule of maturities or next rate adjustment date
of securities available for sale and the related weighted average yield
as of December 31, 1996. This schedule is prepared using estimated fair
value except for the yields which are calculated using the amortized
cost of the related securities. Equity securities of $12,377,000 have
been excluded from this schedule.
MATURITY OR NEXT RATE ADJUSTMENT DATE
(dollars in thousands)
<TABLE>
<CAPTION>
0-3 MONTHS 3 MOS -1 YR 1-5 YRS 5-10 YRS OVER 10 YRS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 5,516 5.84% $ 5,556 6.11%
U.S. Government agencies
and corporations 3,231 6.32 $23,856 7.36% $ 494 7.50%
Obligations of states and
political subdivisions 100 7.00
Other securities 14 4.13
------- ------- ------ -------
Total investment securities 5,516 5.84 8,801 6.18 23,956 7.36 494 7.50
Mortgage-backed securities $11,501 6.06% 58,739 6.71 37,222 6.32 11,482 6.47 70,287 7.13
------- ------- ------- ------ -------
Total securities available
for sale $11,501 6.06% $64,255 6.64% $46,023 6.29% $35,438 7.07% $70,781 7.13%
======= ======= ======= ======= =======
</TABLE>
The following is a schedule of maturities or next rate adjustment date of each
category of securities held to maturity and the related weighted average yield
as of December 31, 1996. This schedule is prepared with the amortized cost of a
security maturing or being placed within the time bracket at the next interest
rate adjustment without regard to principal repayment.
MATURITY OR NEXT RATE ADJUSTMENT DATE
(dollars in thousands)
<TABLE>
<CAPTION>
0-3 MONTHS 3 MOS-1YR 1-5 YRS 5-10 YRS OVER 10 YRS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $19,380 5.06% $12,474 6.70% $10,488 6.69%
U.S. Government agencies
and corporations $ 100 6.40%
Obligations of states and
political subdivisions 201 8.63 671 8.41 9,646 7.51 11,680 7.46 $585 8.60%
Other securities 5 5.50
------- ------- ------- ------- ----
Total investment securities $19,581 5.10% $13,145 6.79% $20,139 7.08% $11,780 7.45% $585 8.60%
======= ======= ======= ======= ====
</TABLE>
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II. INVESTMENT PORTFOLIO (Continued)
--------------------------------
The weighted average yield is based on the effective yield for all
bonds. The yields on the tax exempt portfolio have been adjusted for a
tax equivalency rate of 35%. Mortgage-backed securities have been
classified at their final stated maturity date, except for variable
rate securities which are classified at their next rate adjustment
date.
C. Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies and corporations of the U.S. Government,
there were no investments in securities of any one issuer which
exceeded 10% of consolidated shareholders' equity of the Corporation at
December 31, 1996.
III. LOAN PORTFOLIO
--------------
A. TYPES OF LOANS - Total loans on the consolidated balance sheet are
comprised of the following classifications at December 31.
<TABLE>
<CAPTION>
(dollars in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $254,304 $232,506 $193,310 $159,347 $162,605
Real estate mortgage 280,779 281,060 280,278 274,210 245,727
Construction 4,704 6,202 6,494 7,160 5,233
Consumer 48,269 51,098 50,414 53,267 55,701
Real estate mortgage loans
held for sale 7,191 3,908 584 9,154 5,700
-------- -------- -------- -------- --------
Total Loans $595,247 $574,774 $531,080 $503,138 $474,966
======== ======== ======== ======== ========
</TABLE>
B. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES - The
following is a schedule of maturities and sensitivities of loans to changes
in interest rates, excluding $1,158,000 in nonaccrual loans as of December
31, 1996:
MATURING OR NEXT RATE ADJUSTMENT DATE - - - -
<TABLE>
<CAPTION>
3 MONTHS AFTER
THROUGH ONE THROUGH FIVE
(dollars in thousands) 0-3 MONTHS ONE YEAR FIVE YEARS YEARS TOTAL
---------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Fixed rate $ 12,681 $ 7,072 $ 41,368 $203,744 $264,865
Variable rate 194,650 25,419 109,155 329,224
-------- ------- -------- -------- --------
Total $207,331 $32,491 $150,523 $203,744 $594,089
======== ======= ======== ======== ========
</TABLE>
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III. LOAN PORTFOLIO (Continued)
--------------------------
C. Risk Elements
-------------
1) Nonaccrual, Past Due and Restructured Loans at December 31.
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on
a nonaccrual basis $1,158 $2,593 $2,992 $3,152 $4,340
(b) Accruing loans which are
contractually past due 90
days or more as to interest
or principal payments 674 549 2,152 1,298 1,278
(C) Loans which are "troubled
debt restructurings" as
defined in Statement of
Financial Accounting
Standards No. 15 (exclusive
of loans in (a) or (b) above) 418 825 317
------ ------ ------ ------ ------
Total $2,250 $3,967 $5,144 $4,767 $5,618
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands)
1996
----
<S> <C>
Gross interest income that would have been
recorded on nonaccrual loans in the
period if the loans had been current, in accordance
with their original terms and had been
outstanding throughout the period or since
origination, if held for part of the period $146
Less:
Interest income actually recorded on nonaccrual
loans and included in net income for the period 33
----
Interest income not recognized during the period $113
====
</TABLE>
11
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III. LOAN PORTFOLIO (Continued)
-------------------------
(dollars in thousands)
Information regarding impaired loans at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance of impaired loans at December 31, $ 3,116 $ 4,610
Less portion for which no allowance for loan losses
is allocated (386) (1,608)
------- -------
Portion of impaired loan balance for which an allowance
for credit losses is allocated $ 2,730 $ 3,002
======= =======
Portion of allowance for loan losses allocated to the
impaired loan balance at December 31, $ 416 $ 864
======= =======
Average investment in impaired loans during the year $ 3,801 $ 4,532
======= =======
Interest income recognized on impaired loans including
interest income recognized on cash basis during the year $ 327 $ 258
======= =======
Interest income recognized on impaired loan on cash basis
during the year $ 239 $ 241
======= =======
</TABLE>
1) The policy for placing loans on nonaccrual status is to cease accruing
interest on loans when management believes that the collection of interest
is doubtful, or when loans are past due as to principal and interest ninety
days or more, except that in certain circumstances interest accruals are
continued on loans deemed by management to be fully collectible. In such
cases, the loans are individually evaluated in order to determine whether
to continue income recognition after ninety days beyond the due dates. When
loans are charged-off, any interest accrued in the current fiscal year is
charged against interest income.
2) Potential Problem Loans - As of December 31, 1996, there were approximately
$2,060,000 of loans representing the remaining balances of loans classified
as substandard for regulatory purposes that have not been disclosed in Item
III C. These loans and their potential loss exposure have been considered
in management's analysis of the adequacy of the allowance for loan losses.
These loans do not represent trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity, or capital resources.
3) Foreign Outstandings - There were no foreign outstandings for any year
presented.
4) Loan Concentrations - As of December 31, 1996, there were no concentrations
of loans greater than 10% of total loans which were not otherwise disclosed
as a category of loans pursuant to Item III.A. above. Also refer to Note 1
to the Consolidated Financial Statements regarding concentration of credit
risk on page 17 of the 1996 Annual Report to Shareholders incorporated
herein by reference. Citizens provided financing to enterprises involved in
purchasing pools of one-to-four family residential, home equity and other
consumer loans. Such loans totaled approximately $65,464,000 at December
31, 1996. The source of repayment for these loans is the underlying pools
of residential mortgage and consumer debt which represent diverse loan
types and geographic distribution.
12
<PAGE> 13
III. LOAN PORTFOLIO (Continued)
--------------------------
5) No material amount of loans classified during Citizens' and FNB's most
recent regulatory examinations as loss, substandard, doubtful or special
mention have been excluded from the amounts discussed as nonaccrual, past
due ninety days or more, restructured or potential problem loans.
D. OTHER INTEREST BEARING ASSETS - As of December 31, 1996, there were no
other interest bearing assets that would be required to be disclosed under
Item III.C.1. if such assets were loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
A. The following schedule presents an analysis of the allowance for loan
losses, average loan data and related ratios for the years ended December
31:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LOANS
- -----
Average loans outstanding
during period (1) $ 580,616 $ 543,285 $ 510,219 $ 487,152 $ 467,300
========= ========= ========= ========= =========
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Balance at the beginning of
the period $ 10,895 $ 10,393 $ 9,728 $ 7,889 $ 5,782
Loans charged-off:
Commercial and
agricultural loans (588) (1,325) (1,609) (2,134) (2,162)
Real estate-mortgage loans (668) (549) (346) (197) (797)
Consumer loans (1,188) (878) (966) (647) (1,177)
Loans secured by leases (254)
--------- --------- --------- --------- ---------
Total loans charged-off (2,444) (2,752) (2,921) (2,978) (4,390)
--------- --------- --------- --------- ---------
Recoveries:
Commercial and agricultural
loans 866 706 829 856 1,076
Real estate-mortgage loans 70 214 101 62 43
Consumer loans 349 310 291 298 297
Loans secured by leases 28 17
--------- --------- --------- --------- ---------
Total loan recoveries 1,285 1,230 1,221 1,244 1,433
--------- --------- --------- --------- ---------
Net loans charged-off (1,159) (1,522) (1,700) (1,734) (2,957)
--------- --------- --------- --------- ---------
Provision charged to
operating expense 1,614 2,024 2,365 3,573 5,064
--------- --------- --------- --------- ---------
Balance at the end of
the period $ 11,350 $ 10,895 $ 10,393 $ 9,728 $ 7,889
========= ========= ========= ========= =========
Ratio of net charge-offs to average
loans outstanding for the period .20% .28% .33% .36% .63%
</TABLE>
- ----------------------
(1) Net of unearned income.
13
<PAGE> 14
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
-------------------------------------------
The allowance for loan losses balance and the provision charged to
expense are determined by management based upon periodic reviews of the
loan portfolio, prior loan loss experience, economic conditions and
various other circumstances which are subject to change over time. In
making this judgment, management reviews selected large loans,
delinquent loans, nonaccrual loans and problem loans. The
collectibility of these loans is evaluated after considering the
current financial position of the borrower, the estimated market value
of the collateral and guarantees, and the priority of the Corporation's
lien position. Subjective judgments as to the probability of loss and
the amount of such loss are formed on these loans, as well as other
loans in the aggregate.
B. The following schedule is a breakdown of the allowance for loan
losses allocated by type of loan and related percentages.
<TABLE>
<CAPTION>
Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
--------- -------------
(dollars in thousands)
<S> <C> <C>
December 31, 1996
Commercial, financial and agricultural $ 1,119 42.7%
Real estate - mortgage 789 47.2
Real estate - construction .8
Consumer 636 8.1
Unallocated 8,806
Real estate mortgage loans
held for sale 1.2
------- -----
Total $11,350 100.0%
======= =====
December 31, 1995
Commercial, financial and agricultural $ 2,088 40.5%
Real estate - mortgage 546 48.9
Real estate - construction 1.0
Consumer 669 8.9
Unallocated 7,592
Real estate mortgage loans
held for sale .7
------- -----
Total $10,895 100.0%
======= =====
December 31, 1994
Commercial, financial and agricultural $ 2,926 36.4%
Real estate - mortgage 908 52.8
Real estate - construction 58 1.2
Consumer 589 9.5
Unallocated 5,912
Real estate mortgage loans
held for sale .1
------- ------
Total $10,393 100.0%
======= ======
</TABLE>
14
<PAGE> 15
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
-------------------------------------------
<TABLE>
<CAPTION>
(dollars in thousands) Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
--------- -----------
<S> <C> <C>
December 31, 1993
Commercial, financial and agricultural $3,812 31.7%
Real estate - mortgage 937 54.5
Real estate - construction 1.4
Consumer 893 10.6
Unallocated 4,086
Real estate mortgage loans
held for sale 1.8
------ -----
Total $9,728 100.0%
====== =====
December 31, 1992
Commercial, financial and agricultural $4,016 34.2%
Real estate - mortgage 403 51.8
Real estate - construction 1.1
Consumer 632 11.7
Unallocated 2,838
Real estate mortgage loans
held for sale 1.2
------ -----
Total $7,889 100.0%
====== =====
</TABLE>
While management's periodic analysis of the adequacy of the allowance for loan
losses may allocate portions of the allowance for specific problem loan
situations, the entire allowance is available for any loan charge-offs that
occur.
V. DEPOSITS
--------
The following is a schedule of average deposit amounts and average rates paid on
each category for the period indicated:
<TABLE>
<CAPTION>
AVERAGE AMOUNTS OUTSTANDING AVERAGE RATE PAID
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------------- -----------------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Noninterest-bearing
demand deposits $ 63,951 $ 61,487 $ 58,434
Interest-bearing
demand deposits 88,963 92,377 83,970 2.23% 2.27% 2.39%
Savings deposits 243,635 254,011 303,210 3.17 3.42 3.22
Time deposits 310,252 274,138 236,302 5.51 5.37 4.36
-------- -------- --------
Total $706,801 $682,013 $681,916
======== ======== ========
</TABLE>
15
<PAGE> 16
V. DEPOSITS (Continued)
---------------------
The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 1996:
<TABLE>
<CAPTION>
(dollars in thousands)
DECEMBER 31, 1996
-----------------
<S> <C>
Three months or less $30,569
Three through six months 6,912
Six through twelve months 7,427
Over twelve months 9,693
-------
Total $54,601
=======
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
---------------------------
The information required by this section is set forth under the
heading "Selected Financial Data" on pages 28 and 29 of the
Corporation's 1996 Annual Report to Shareholders and is
incorporated herein by reference.
VII. SHORT-TERM BORROWINGS
---------------------
The following table sets forth certain information relative to the
securities sold under agreements to repurchase and Federal funds
purchased. Generally, repurchase agreements are sold to local
government entities and businesses and have maturity terms of
overnight to 30 days. Federal funds purchased generally have
overnight terms.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(dollars in thousands)
Total securities sold under agree-
ment to repurchase and Federal
funds purchased at period-end $87,939 $20,536 $28,974
Weighted average interest
rate at period-end 6.08% 5.12% 4.99%
Maximum outstanding at any
month-end during the year $87,939 $39,526 $28,974
Average amount outstanding 43,952 31,254 32,125
Weighted average rates during
the year 5.22% 5.52% 3.87%
</TABLE>
16
<PAGE> 17
Item 2. PROPERTIES
The Corporation does not own any properties. Citizens owns the properties listed
below. All properties owned by Citizens are free from any major encumbrances.
<TABLE>
<CAPTION>
Location Principal Use
-------- -------------
<S> <C>
Salineville Office Branch Office
50 East Main Street
Salineville, Ohio
Richmond Office Branch Office
Main Street
Richmond, Ohio
Bergholz Office Branch Office
256 Second Street
Bergholz, Ohio
Wellsville 39 Office Storage Facility
41985 State Route 39
Wellsville, Ohio
Island Creek Office Branch Office
State Route 213
Steubenville, Ohio
Wellsville Downtown Office Branch Office
1210 Main Street
Wellsville, Ohio
Carrollton Downtown Office Branch Office
111 Second Street, S.W.
Carrollton, Ohio
Carrollton Trump Office Branch Office
1045 Trump Road
Carrollton, Ohio
East Palestine Office Branch Office
187 North Market Street
East Palestine, Ohio
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Location Principal Use
-------- -------------
<S> <C>
East Palestine Office Branch Office
76 East Main Street
East Palestine, Ohio
Washingtonville Office Branch Office
795 West Main Street
Washingtonville, Ohio
Salem West Office Branch Office
193 South Lincoln Avenue
Salem, Ohio
Salem East Office Branch Office
2525 Southeast Boulevard
Salem, Ohio
Steubenville Office Branch Office
127 South Fourth Street
Steubenville, Ohio
Lisbon North Office Branch Office
7470 SR 45
Lisbon, Ohio
Lisbon Firestone Office Branch Office
24 North Park Avenue
Lisbon, Ohio
Kaiser Building Storage Facility
10 East Main Street
Salineville, Ohio
Central Office Data Processing
70 East Main Street
Salineville, Ohio
Baker Building Legal Department
66 East Main Street
Salineville, Ohio
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Location Principal Use
-------- -------------
<S> <C>
Rawlings Building Loan Servicing Center
110 East Main Street
Salineville, Ohio
Thompson Building Programming and Audit
60 East Main Street Department Offices
Salineville, Ohio
Johnson Building Administrative
10 East Main Street
Salineville, Ohio
Hart Building Storage Facility
23 East Main Street
Salineville, Ohio
Leetonia Office Branch Office
243 Main Street
Leetonia, Ohio
Alliance Office (Downtown) Branch Office
101 East Main Street
Alliance, Ohio
Minerva Office Branch Office
622 East Lincolnway
Minerva, Ohio
Alliance (Carnation Mall) Office ATM Office
2490 West State Street
Alliance, Ohio
Sebring Office Branch Office
146 East Ohio Avenue
Sebring, Ohio
Columbiana Office Branch Office
104 South Main Street
Columbiana, Ohio
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Location Principal Use
-------- -------------
<S> <C>
New Garden Office Branch Office
7346 State Route 9
Hanoverton, Ohio
New Waterford Office Branch Office
3761 Silliman Street
New Waterford, Ohio
Boardman Office Branch Office
80 Boardman-Poland Road
Boardman, Ohio
Boardman Office Closed Branch Office
7295 Market Street
Boardman, Ohio
Lowellville Office Branch Office
102 East Water Street
Lowellville, Ohio
Navarre Office Branch Office
15 North Main Street
Navarre, Ohio
Plains Office Branch Office
5150 Erie Avenue , SW
Navarre, Ohio
Brewster Office Branch Office
301 Wabash Avenue
Brewster, Ohio
Richville Office Branch Office
6248 Navarre Road, SW
Canton, Ohio
</TABLE>
Citizens also leases six offices located in Alliance, Canton, Wintersville, East
Liverpool, Boardman and Struthers, Ohio.
FNB owns its one branch located at 253 Carolina Avenue, Chester, West Virginia.
In the opinion of management, the properties owned or leased by Citizens and FNB
are suitable and adequate for the continuing operations of the Corporation and
its subsidiaries.
20
<PAGE> 21
Item 3. LEGAL PROCEEDINGS.
------------------
There is no pending litigation, other than routine litigation incidental to the
business of the Corporation and its affiliates, or of a material nature
involving or naming the Corporation or any of its affiliates as a defendant.
Further, there are not material legal proceedings in which any director,
executive officer, principal shareholder or affiliate of the Corporation is a
party or has a material interest which is adverse to the Corporation or any of
its affiliates. None of the routine litigation in which the Corporation or any
of its affiliates are involved is expected to have a material adverse impact
upon the financial position or results of operations of the Corporation or any
of its affiliates.
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY-HOLDERS.
---------------------------------------------------
No matters were submitted to a vote of the Corporation's security- holders
during the fourth quarter of 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS.
--------
The information set forth under the heading "Common Stock" on page 35 of the
Corporation's 1996 Annual Report to Shareholders is incorporated herein by
reference (Exhibit 13).
Item 6. SELECTED FINANCIAL DATA.
------------------------
The information set forth under the heading "Selected Financial Data" on pages
28 and 29 of the Corporation's 1996 Annual Report to Shareholders is
incorporated herein by reference (Exhibit 13).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATION.
---------------------
The information set forth under the heading "Financial Review" on pages 29
through 35 of the Corporation's 1996 Annual Report to Shareholders is
incorporated herein by reference (Exhibit 13). Management is not aware of any
known trends, events or uncertainties that will have or that are reasonably
likely to have a material effect on the liquidity, capital resources or
operations of the Corporation. Management is not aware of any current
recommendations by the Corporation's, Citizens' or FNB's regulatory authorities
which, if they were to be implemented, would have such an effect.
Any loans classified for regulatory purposes as loss, doubtful, substandard or
special mention and not disclosed under Item III of Industry Guide 3 on pages
10, 11 and 12 of this Form 10-K do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources. Any such loans also do not
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
21
<PAGE> 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
The information set forth under the headings listed below on pages 12 through 28
of the Corporation's 1996 Annual Report to Shareholders is incorporated herein
by reference (Exhibit 13).
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Three Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity - Three Years
Ended December 31, 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994
Notes to the Consolidated Financial Statements
Report of Independent Auditors
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
There has been no change in accountants for the applicable reporting period and
there were no disagreements with accountants on accounting and financial
disclosure.
PART III
Information relating to the following items is included in the Corporation's
definitive Proxy Statement, dated February 14, 1997, for its Annual Meeting of
Shareholders to be held on March 27, 1997 filed with the Commission, the
following portions of which are incorporated herein by reference:
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
Set forth under the headings "Election of Directors", "Identification of
Executive Officers", and "Section 16 Late Filings" on pages 1-2, 6 and 15,
respectively, of the Corporation's Proxy Statement.
Item 11. EXECUTIVE COMPENSATION.
-----------------------
Set forth under the headings "Bancshares Personnel and Compensation Committee
and Citizens Personnel and Compensation Committee Report on Executive
Compensation", "Summary Compensation Table", "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements", "Compensation
Pursuant to Plans", "Pension Plan Table", "Option/SAR Grants in 1996",
"Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-end
Option/SAR Values" and "Performance Graph" on page 3, 4, 7, 8, 9-11, 11, 12-13,
13 and 14 respectively, of the Corporation's Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
Set forth under the heading "Security Ownership of Directors, Executive Officers
and Certain Beneficial Owners" on pages 5 and 6 of the Corporation's Proxy
Statement.
22
<PAGE> 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
Set forth under the heading "Transactions with Bancshares" on page 9 of the
Corporation's Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
--------------------------------------------------------
FORM 10-K.
----------
(a) The following documents are filed as part of this report:
1. Financial Statements - The following consolidated financial statements
of the Corporation contained on pages 12 through 28 of the
Corporation's 1996 Annual Report to Shareholders (Exhibit 13) are
incorporated herein by reference under Item 8 of this Form 10-K:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Changes of Shareholders' Equity - Three
Years Ended December 31, 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994
Notes to the Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules are omitted as they are not required or
not applicable, or the required information is included in the
Financial Statements.
3. Exhibits -- Reference is made to the Exhibit Index which is found on
page 25 of this Form 10-K.
23
<PAGE> 24
SIGNATURES
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.
By: s/Marty E. Adams
-----------------------------
Marty E. Adams
President and Chief Executive Officer
And By: s/William L. White III
-----------------------------
William L. White III
Senior Vice President, Chief Financial Officer
And By: s/Paula Meiler
-----------------------------
Paula Meiler, Comptroller
Date: March 7, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in their indicated capacities and as of this 7th day of
March 1997.
s/James C. McBane
- --------------------------------
James C. McBane, Chairman
s/Marty E. Adams
- --------------------------------
Marty E. Adams, Director
President, Chief Executive Officer
s/Keith Burgett
- --------------------------------
Keith Burgett, Director
s/Willard L. Davis
- --------------------------------
Willard L. Davis, Director
- --------------------------------
Fred H. Johnson, Director
s/Fred H. Johnson, III
- -------------------------------- ----------------------------
Fred H. Johnson, III, Director Kenneth E. McConnell, Director
- -------------------------------- ----------------------------
Glenn F. Thorne, Director Gerard P. Mastroianni, Director
24
<PAGE> 25
EXHIBIT INDEX
- -------------
The following Exhibits are included in this Form 10-K or are incorporated by
reference as noted in the following table:
EXHIBIT 3 Articles of Incorporation and by-laws
(1) Registrant's Fourth Amended Articles of
Incorporation.
(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, Inc. 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.)
(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.
25
<PAGE> 26
EXHIBIT INDEX - Continued
- -------------------------
(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 13 The Corporation's Annual Report to Shareholders for the
Fiscal Year Ended December 31, 1996.
EXHIBIT 21 Subsidiaries of the Registrant
EXHIBIT 23 Consents of Experts and Counsel
EXHIBIT 27 Financial Data Schedule
26
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE
OF
AMENDED ARTICLES OF INCORPORATION
OF
CITIZENS BANCSHARES, INC.
Marty E. Adams, who is President, and Fred H. Johnson III, who is
Secretary, of the above-named Ohio corporation for profit with its principal
location at Salineville, Ohio, do hereby certify that a meeting of the
shareholders was duly called and held on the 28th day of March, 1996, at which
meeting a quorum of the shareholders was present in person or by proxy, and by
the affirmative vote of the holders of shares entitling them to exercise 71.7%
of the voting power of the Corporation, the Fourth Amended Articles of
Incorporation attached hereto and made a part hereof were adopted to supersede
and take the place of the existing Articles and all amendments thereto.
IN WITNESS WHEREOF, the above-named officers, acting for and on behalf
of the Corporation, have subscribed their names this 28th day of
March, 1996.
/s/ Marty E. Adams
-----------------------------
Marty E. Adams, President
/s/ Fred H. Johnson III, Secretary
------------------------------
Fred H. Johnson III, Secretary
<PAGE> 2
FOURTH AMENDED ARTICLES OF INCORPORATION
OF
CITIZENS BANCSHARES, INC.
FIRST: The name of the Corporation shall be Citizens
Bancshares, Inc.
SECOND: The place in the State of Ohio where the principal office of the
Corporation will be located is in Salineville, Columbiana County, or such other
location as the Board of Directors may from time to time determine.
THIRD: The purpose for which the Corporation is formed is to engage in
any lawful act or activity for which corporations may be formed under Sections
1701.01 to 1701.98, inclusive, of the Revised Code of Ohio, as now in effect or
hereafter amended.
FOURTH: The total number of shares of all classes which the Corporation
shall have authority to issue is six million two hundred thousand (12,200,000),
divided into two classes as follows: 200,000 Serial preferred Shares, par value
$10.00 (Ten Dollars) per share (hereinafter called the "Serial Shares"), and
12,000,000 Common Shares, without par value (hereinafter called the "Common
Shares").
No holder of any class of shares of the Corporation shall, as such
holder, have any preemptive or preferential right to purchase or subscribe to
any shares of any class of stock of the Corporation, whether now or hereafter
authorized, whether unissued or in the treasury, or to purchase any obligations
convertible into shares of any class of stock of the Corporation, which at any
time may be proposed to be issued by the Corporation or subjected to rights or
options to purchase granted by the Corporation.
The shares of such classes shall have the following express terms:
DIVISION A
EXPRESS TERMS OF THE SERIAL SHARES
SECTION 1. The Serial Shares may be issued from time to time in one or
more series. All shares of Serial Shares shall be of equal rank and shall be
identical, except in respect of the matters that may be fixed by the Board of
Directors as hereinafter provided, and each share of each series shall be
identical with all other shares of such series, except as to the date from which
dividends are cumulative. Subject to the provisions of Sections 2 to 7, both
inclusive, of this division, which provisions shall apply to all Serial Shares,
the Board of Directors hereby is authorized to cause such shares to be issued in
one or more series
<PAGE> 3
and with respect to each such series prior to the issuance thereof to fix:
(a) The designation of the series, which may be by
distinguishing number, letter, or title.
(b) The number of shares of the series, which number the Board
of Directors may (except where otherwise provided in the creation of the
series) increase or decrease (but not below the number of shares thereof
then outstanding).
(c) The annual dividend rate of the series.
(d) The dates at which dividends, if declared, shall be payable,
and the dates from which dividends shall be cumulative.
(e) The redemption rights and price or prices, if any, for
shares of the series.
(f) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(g) The amounts payable on shares of the series in the event of
any voluntary liquidation, dissolution, or winding up of the affairs of
the Corporation.
(h) Whether the shares of the series shall be convertible into
Common Shares, and, if so, the conversion price or prices, any
adjustments thereof, and all other terms and conditions upon which
conversion may be made.
(i) Restrictions (in addition to those set forth in Sections
5(b) and 5(c) of this Division) on the issuance of shares of the same
series or of any other class or series.
The Board of Directors is authorized to adopt from time to time
amendments to the Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) to (i), both inclusive, of this
Section 1.
SECTION 2. The holders of Serial Shares of each series, in preference to
the holders of Common Shares and of any other class of shares ranking junior to
the Serial Shares, shall be entitled to receive out of any funds legally
available and when and as declared by the Board of Directors dividends in cash
at the rate for such series fixed in accordance with the provisions of Section 1
of this Division and no more, payable quarterly on the dates fixed for such
2
<PAGE> 4
series. Such dividends shall be cumulative, in the case of shares of each
particular series, from and after the date or dates fixed with respect to such
series. No dividends may be paid upon or declared or set apart for any of the
Serial Shares for any quarterly dividend period unless at the same time a like
proportionate dividend for the same quarterly dividend period, ratably in
proportion to the respective annual dividend rates fixed therefor, shall be paid
upon or declared or set apart for all Serial Shares of all series then issued
and outstanding and entitled to receive such dividend.
SECTION 3. In no event so long as any Serial Shares shall be outstanding
shall any dividends, except a dividend payable in Common Shares or other shares
ranking junior to the Serial Shares, be paid or declared or any distribution be
made except as aforesaid on the Common Shares or any other shares ranking junior
to the Serial Shares, nor shall any Common Shares or any other shares ranking
junior to the Serial Shares be purchased, retired, or otherwise acquired by the
Corporation (except out of the proceeds of the sale of Common Shares or other
shares ranking junior to the Serial Shares received by the Corporation
subsequent to March 11, 1985):
(a) Unless all accrued and unpaid dividends on Serial Shares,
including the full dividends for the current quarterly dividend period,
shall have been declared and paid or a sum sufficient for payment
thereof set apart; and
(b) Unless there shall be no arrearages with respect to the
redemption of Serial Shares of any series from any sinking fund provided
for shares of such series in accordance with Section 1 of this Division.
SECTION 4. (a) The holders of Serial Shares of any series shall, in case
of liquidation, dissolution, or winding up of the affairs of the Corporation, be
entitled to receive in full out of the assets of the Corporation, including its
capital, before any amount shall be paid or distributed among the holders of the
Common Shares or any other shares ranking junior to the Serial Shares, the
amounts fixed with respect to shares of such series in accordance with Section 1
of this Division, plus an amount equal to all dividends accrued and unpaid
thereon to the date of payment of the amount due pursuant to such liquidation,
dissolution, or winding up of the affairs of the Corporation. In case the net
assets of the Corporation legally available therefor are insufficient to permit
the payment upon all outstanding Serial Shares of the full preferential amount
to which they are respectively entitled, then such net assets shall be
distributed ratably upon outstanding Serial Shares in proportion to the full
preferential amount to which each such share is entitled.
3
<PAGE> 5
After payment to holders of Serial Shares of the full preferential
amounts as aforesaid, holders of Serial Shares as such shall have no right or
claim to any of the remaining assets of the Corporation.
(b) The merger or consolidation of the Corporation into or with any
other corporation, or the merger of any other corporation into it, or the sale,
lease or conveyance of all or substantially all the property or business of the
Corporation, shall not be deemed to be a dissolution, liquidation, or winding up
for the purposes of this Section 4.
SECTION 5. (a) the holders of Serial Shares shall be entitled to one
vote for each share of such stock upon all matters presented to the
shareholders; and, except as otherwise provided herein or required by law, the
holders of Serial Shares and the holders of Common Shares shall vote together as
one class on all matters.
If, and so often as, the Corporation shall be in default in the payment
of six (6) full quarterly dividends (whether or not consecutive) on any series
of Serial Shares at the time outstanding, whether or not earned or declared, the
holders of Serial Shares of all series, voting separately as a class and in
addition to all other rights to vote for directors, shall be entitled to elect,
as herein provided, two (2) members of the Board of Directors of the
Corporation; provided, however, that the holders of Serial Shares shall not have
or exercise such special class voting rights except at meetings of the
shareholders for the election of directors at which the holders of not less than
one-third of the outstanding Serial Shares of all series then outstanding are
present in person or by proxy; and provided further that the special class
voting rights provided for herein when the same shall have become vested shall
remain so vested until all accrued and unpaid dividends on the Serial Shares of
all series then outstanding shall have been paid, whereupon the holders of
Serial Shares shall be divested of their special class voting rights in respect
of subsequent elections of directors, subject to the revesting of such special
class voting rights in the event hereinabove specified in this paragraph.
In the event of default entitling the holders of Serial Shares to elect
two (2) directors as above specified, a special meeting of the shareholders for
the purpose of electing such directors shall be called by the Secretary of the
Corporation upon written request of, or may be called by, the holders of record
of at least ten percent (10%) of the Serial Shares of all series at the time
outstanding, and notice thereof shall be given in the same manner as that
required for the annual meeting of shareholders; provided, however, that the
Corporation shall not be required to call such special meeting if the annual
meeting of shareholders shall be held within one hundred twenty (120) days after
the date of receipt of
4
<PAGE> 6
the foregoing written request from the holders of Serial Shares. holders of
Serial Shares shall be entitled to elect directors, the holders of one-third of
the then outstanding Serial Shares of all series, present in person or by proxy,
shall be sufficient to constitute a quorum, and the vote of the holders of a
majority of such shares so present at any such meeting at which there shall be
such a quorum shall be sufficient to elect the members of the Board of Directors
which the holders of Serial Shares are entitled to elect as hereinabove
provided. The two directors who may be elected by the holders of Serial Shares
pursuant to the foregoing provisions shall be in addition to any other directors
then in office or proposed to be elected otherwise than pursuant to such
provisions, and nothing in such provisions shall prevent any change otherwise
permitted in the total number of directors of the Corporation or require the
resignation of any director elected otherwise than pursuant to such provisions.
Notwithstanding any classification of the other directors of the Corporation,
the two directors elected by the holders of Serial Shares shall be elected
annually for terms expiring at the next succeeding annual meeting of
shareholders.
(b) The affirmative vote of the holders of at least two-thirds of the
Serial Shares at the time outstanding, given in person or by proxy at a meeting
called for the purpose at which the holders of Serial Shares shall vote
separately as a class, shall be necessary to effect any one or more of the
following (but so far as the holders of Serial Shares are concerned, such action
may be effected with such vote):
(i) Any amendment, alteration, or repeal of any of the
provisions of the Articles of Incorporation or of the Regulations of the
Corporation which affects adversely the voting powers, rights or
preferences of the holders of Serial Shares; provided, however, that,
for the purpose of this clause (i) only, neither the amendment of the
Articles of Incorporation so as to authorize or create, or to increase
the authorized or outstanding amount of, Serial Shares or of any shares
of any class ranking on a parity with or junior to the Serial Shares,
nor the amendment of the provisions of the Regulations so as to increase
the number of directors of the Corporation shall be deemed to affect
adversely the voting powers, rights or preferences of the holders of
Serial Shares; and provided further, that if such amendment, alteration,
or repeal affects adversely the rights or preferences of one or more but
not all series of Serial Shares at the time outstanding, only the
affirmative vote of the holders of at least two-thirds of the number of
shares at the time outstanding of the series so affected shall be
required;
5
<PAGE> 7
(ii) The authorization or creation of, or the increase in the
authorized amount of, any shares of any class, or any security
convertible into shares of any class, ranking prior to the Serial
Shares; or
(iii) The purchase or redemption (for sinking fund purposes of
otherwise) of less than all of the Serial Shares then outstanding except
in accordance with a stock purchase offer made to all holders of record
of Serial Shares, unless all dividends upon all Serial Shares then
outstanding for all previous quarterly dividend periods shall have been
declared and paid or funds therefor set apart and all accrued sinking
fund obligations applicable thereto shall have been complied with.
(c) The affirmative vote of the holders of at least a majority of the
shares of Serial Shares at the time outstanding, given in person or by proxy at
a meeting called for the purpose at which the holders of Serial Shares shall
vote separately as a class, shall be necessary to effect any one or more of the
following (but so far as the holders of Serial Shares are concerned, such action
may be effected with such vote):
(i) The sale, lease or conveyance by the Corporation of all or
substantially all of its property or business, or its consolidation with
or merger into any other corporation unless the corporation resulting
from such consolidation or merger will have after such consolidation or
merger no class of shares either authorized or outstanding ranking prior
to or on a parity with the Serial Shares except the same number of
shares ranking prior to or on a parity with the Serial Shares and having
the same rights and preferences as the shares of the Corporation
authorized and outstanding immediately preceding such consolidation or
merger, and each holder of Serial Shares immediately preceding such
consolidation or merger shall receive the same number of shares, with
the same rights and preferences, of the resulting corporation; or
(ii) The authorization of any shares ranking on a parity with
the Serial Shares or an increase in the authorized number of Serial
Shares.
SECTION 6. For the purpose of this Division A, whenever reference is
made to shares "ranking prior to the Serial Shares" or "on a parity with the
Serial Shares," such reference shall mean and include all shares of the
Corporation in respect of which the rights of the holders thereof as to the
payment of dividends or as to distributions in the event of a voluntary or
involuntary liquidation, dissolution, or winding up of the affairs of the
Corporation are given preference over, or rank on an equality with
6
<PAGE> 8
(as the case may be) the rights of holders of Serial Shares; and whenever
reference is made to shares "ranking junior to the Serial Shares," such
reference shall mean and include all shares of the Corporation in respect of
which the rights of the holders thereof as to the payment of dividends and as to
distributions in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation are junior and
subordinate to the rights of the holders of Serial Shares.
DIVISION B
EXPRESS TERMS OF THE COMMON SHARES
The Common Shares shall be subject to the express terms of the Serial
Shares and any series thereof. Each Common Share shall be equal to every other
share of Common Share. The holders of Common Shares shall be entitled to one
vote for each share of such stock upon all matters presented to the
shareholders.
FIFTH: Without derogation from any other power to purchase shares of the
Corporation, the Corporation may, by action of its Board of Directors and to the
extent not prohibited by law, purchase outstanding shares of any class of this
Corporation's stock.
SIXTH: No Person shall make a Control Share Acquisition without the
prior authorization of the Corporation's shareholders.
SECTION 1. PROCEDURE. In order to obtain authorization of a Control
Share Acquisition by the Corporation's shareholders, a Person shall deliver a
notice (the "Notice") to the Corporation at its principal place of business that
sets forth all of the following information:
A. The identity of the Person who is giving the Notice;
B. A statement that the Notice is given pursuant to this Article
SIXTH;
C. The number and class of shares of the Corporation owned,
directly or indirectly, by the Person who gives the Notice;
D. The range of voting power under which the proposed Control
Share Acquisition would, if consummated, fall;
E. A description in reasonable detail of the terms of the
proposed Control Share Acquisition; and
7
<PAGE> 9
F. Reasonable evidence that the proposed Control Share
Acquisition, if consummated, would not be contrary to law and that the
Person who is giving the Notice has the financial capacity to make the
proposed Control Share Acquisition.
SECTION 2. CALL OF SPECIAL MEETING OF SHAREHOLDERS. The Board of
Directors of the Corporation shall, within ten days after receipt of such Notice
by the Corporation, call a special meeting of shareholders to be held not later
than fifty (50) days after receipt of the Notice by the Corporation, unless the
Person who delivered the Notice agrees to a later date, to consider the proposed
Control Share Acquisition; provided that the Board of Directors has no
obligation to call such meeting if they make a determination within ten days
after receipt of the Notice (i) that the Notice was not given in good faith,
(ii) that the proposed Control Share Acquisition would not be in the best
interests of the Corporation and its shareholders, or (iii) that the proposed
Control Share Acquisition could not be consummated for financial or legal
reasons. Notwithstanding anything to the contrary contained in clause (ii) of
the immediately preceding sentence, the Board of Directors shall not determine
not to call such special meeting of shareholders for the reason stated in such
clause (ii) if the Control Share Acquisition described in the Notice is for any
and all shares of the Corporation at a price higher than 175% of the book value
of the Common Shares as of the close of the immediately preceding fiscal year.
The Board of Directors may adjourn such meeting if, prior to such meeting, the
Corporation has received a Notice from any other Person and the Board of
Directors has determined that the Control Share Acquisition proposed by such
other Person or a merger, consolidation or sale of assets of the Corporation
should be presented to shareholders at an adjourned meeting or at a special
meeting held at a later date.
For purposes of making a determination that a special meeting of
shareholders should not be called pursuant to this Section 3, no such
determination shall be deemed void or voidable with respect to the Corporation
merely because one or more of its directors or officers who participated in
making such determination may be deemed to be other than disinterested, if in
any such case the material facts of the relationship giving rise to a basis for
self-interest are known to the directors and the directors, in good faith
reasonably justified by the facts, make such determination by the affirmative
vote of a majority of the disinterested directors, even though the disinterested
directors constitute less than a quorum. For purposes of this paragraph,
"disinterested directors" shall mean directors whose material contacts with the
Corporation are limited principally to activities as a director or shareholder.
Persons who have substantial, recurring business or professional contacts with
the Corporation shall not be deemed to be "disinterested directors" for purposes
of this provision. A director shall not be deemed to be other than a
"disinterested
8
<PAGE> 10
director" merely because he would no longer be a director if the proposed
Control Share Acquisition were approved and consummated.
SECTION 3. NOTICE OF SPECIAL MEETING. The Corporation shall give notice
of such special meeting to all shareholders of record as of the record date set
for such meeting as promptly as practicable. Such notice shall include or be
accompanied by a copy of the Notice and by a statement of the Corporation,
authorized by the Board of Directors, of its position or recommendation, or that
it is taking no position or making no recommendation, with respect to the
proposed Control Share Acquisition.
SECTION 4. REQUIREMENTS FOR APPROVAL. The Person who delivered the
Notice may make the proposed Control Share Acquisition if both of the following
occur: (i) the shareholders of the Corporation authorize such acquisition at the
special meeting called by the Board of Directors at which a quorum is present
and held for that purpose by an affirmative vote of a majority of the shares
entitled to vote in the election of directors ("Voting Shares") represented at
such meeting in person or by proxy and by a majority of the portion of such
Voting Shares represented at such meeting in person or by proxy excluding the
votes of Interested Shares; and (ii) such acquisition is consummated, in
accordance with the terms so authorized, not later than 360 days following
shareholder authorization of the Control Share Acquisition.
SECTION 5. VIOLATIONS OF RESTRICTION. Shares issued or transferred to
any Person in violation of this Article SIXTH shall be valid only with respect
to such amount of shares as does not result in a violation of this Article
SIXTH, and such issuance or transfer shall be null and void with respect to the
remainder of such shares, any such remainder of shares being hereinafter called
"Excess Shares." If the last clause of the foregoing sentence is determined to
be invalid by virtue of any legal decision, statute, rule or regulation, the
Person who holds Excess Shares shall be conclusively deemed to have acted as an
agent on behalf of the Corporation in acquiring the Excess Shares and to hold
such Excess Shares on behalf of the Corporation. As the equivalent of treasury
securities for such purposes, the Excess Shares shall not be entitled to any
voting rights, shall not be considered to be outstanding for quorum or voting
purposes, and shall not be entitled to receive dividends, interest or any other
distribution with respect to the Excess Shares. Any person who receives
dividends, interest or any other distribution in respect to Excess Shares shall
hold the same as agent for the Corporation and, following a permitted transfer,
for the transferee thereof. Notwithstanding the foregoing, any holder of Excess
Shares may transfer the same (together with any distributions thereon) to any
person who, following such transfer, would not own shares in violation of this
Article SIXTH. Upon such permitted transfer, the Corporation shall pay or
distribute to the transferee any
9
<PAGE> 11
distributions on the Excess Shares not previously paid or
distributed.
SECTION 6. DEFINITIONS. As used in this Article SIXTH:
A. "Person" includes, without limitation, an individual, a
corporation (whether nonprofit or for profit), a partnership, an
unincorporated society or association, and two or more persons having a
joint or common interest.
B. (1) "Control Share Acquisition" means the acquisition,
directly or indirectly, by any Person, of shares of the Corporation
that, when added to all other shares of the Corporation in respect of
which such Person may exercise or direct the exercise of voting power as
provided in this Section 6B. (1), would entitle such Person, immediately
after such acquisition, directly or indirectly, to exercise or direct
the exercise of the voting power of the Corporation in the election of
directors within any of the following ranges of such voting power:
(a) One-fifth or more but less than one-third of such voting
power;
(b) One-third or more but less than a majority of such voting
power;
(c) A majority or more of such voting power.
A bank, broker, nominee, trustee, or other person who acquires
shares in the ordinary course of business for the benefit of others in
good faith and not for the purpose of circumventing this Article SIXTH
shall, however, be deemed to have voting power only of shares in
respect of which such person would be able to exercise or direct the
exercise of votes without further instruction from others at a meeting
of shareholders called under this Article SIXTH. For purposes of this
Article SIXTH, the acquisition of securities immediately convertible
into shares of the Corporation with voting power in the election of
directors shall be treated as an acquisition of such shares.
(2) The acquisition of any shares of the Corporation does not
constitute a Control Share Acquisition for the purpose of this Article
SIXTH if the acquisition is consummated in any of the following
circumstances:
10
<PAGE> 12
(a) By underwriters in good faith and not for the purpose of
circumventing this Article SIXTH in connection with an offering of the
securities of the Corporation to the public;
(b) By bequest or inheritance, by operation of law upon the
death of any individual, or by any other transfer without valuable
consideration, including a gift, that is made in good faith and not for
the purpose of circumventing this Article SIXTH;
(c) Pursuant to the satisfaction of a pledge or other security
interest created in good faith and not for the purpose of circumventing
this Article SIXTH;
(d) Pursuant to a merger or consolidation adopted, or a
combination or majority share acquisition authorized, by shareholder
vote in compliance with the provisions of Section 1701.78 or Section
1701.83 of the Ohio Revised Code if the Corporation is the surviving or
new corporation in the merger of consolidation or is the acquiring
corporation in the combination or majority share acquisition and if the
vote of the shareholders of the surviving, new, or acquiring corporation
is required by the provisions of Section 1701.78 or 1701.83 of the Ohio
Revised Code;
(e) Prior to March 11, 1985;
(f) Pursuant to a contract existing prior to March 11, 1985.
The acquisition by any Person of shares of the Corporation in a manner described
under this Section 6B. (2) shall be deemed to be a Control Share Acquisition
authorized pursuant to this Article SIXTH within the range of voting power under
Section 6B. (1) (a), (b) or (c) of this Article SIXTH that such Person is
entitled to exercise after such acquisition, provided that, in the case of an
acquisition in a manner described under Section 6B.(2)(b) or (c), the transferor
of shares to such Person had previously obtained any authorization of
shareholders required under this Article SIXTH in connection with such
transferor's acquisition of shares of the Corporation.
11
<PAGE> 13
(3) The acquisition of shares of the Corporation in good faith
and not for the purpose of circumventing this Article SIXTH the
acquisition of which (a) had previously been authorized by shareholders
in compliance with this Article or (b) would have constituted a Control
Share Acquisition but for Section 6B.(2), does not constitute a Control
Share Acquisition for the purpose of this Article SIXTH unless such
acquisition entitles any Person, directly or indirectly, to exercise or
direct the exercise of voting power of the Corporation in the election
of directors in excess of the range of such voting power authorized
pursuant to this Article SIXTH, or deemed to be so authorized under
Section 6B. (2).
C. "Interested Shares" means Voting Shares with respect to which
any of the following persons may exercise or direct the exercise of the
voting power:
(1) any Person whose Notice prompted the calling of the meeting
of shareholders;
(2) any officer of the Corporation elected or appointed by the
directors of the Corporation; and
(3) any employee of the Corporation who is also a director of
the Corporation.
SECTION 7. PROXIES. No proxy appointed for or in connection with the
shareholder authorization of a Control Share Acquisition pursuant to this
Article SIXTH is valid if it provides that it is irrevocable. No such proxy is
valid unless it is sought, appointed, and received both:
A. in accordance with all applicable requirements of law; and
B. separate and apart from the sale or purchase, contract or
tender for sale or purchase, or request or invitation for tender
for sale or purchase, of shares of the Corporation.
SECTION 8. REVOCABILITY OF PROXIES. Proxies appointed for or in
connection with the shareholder authorization of a Control Share Acquisition
pursuant to this Article SIXTH shall be revocable at all times prior to the
obtaining of such shareholder authorization, whether or not coupled with an
interest.
SECTION 9. AMENDMENTS. Notwithstanding any other provisions
of these Articles of Incorporation or the Regulations of the
Corporation, as the same may be in effect from time to time, or any
provision of law that might otherwise permit a lesser vote of the
12
<PAGE> 14
directors or the holders of any particular class or series of shares required by
law, the Articles of Incorporation or the Regulations of the Corporation, as the
same may be in effect from time to time, the affirmative vote of at least
seventy-five percent (75%) of the Voting Shares shall be required to alter,
amend or repeal this Article SIXTH or adopt any provisions in the Articles of
Incorporation or the Regulations of the Corporation, as the same may be in
effect form time to time, which are inconsistent with the provisions of this
Article SIXTH.
SECTION 10. LEGEND ON SHARE CERTIFICATES. Each certificate representing
shares of the Corporation's capital stock shall contain the following legend:
"Transfer of the shares represented by this Certificate
is subject to the provisions of Article SIXTH of the
Corporation's Articles of Incorporation as the same may be in
effect from time to time. Upon written request delivered to
the Secretary of the Corporation at its principal place of
business, the Corporation will mail to the holder of this
Certificate a copy of such provisions without charge within
five days after receipt of written request therefor. By
accepting this certificate the holder hereof acknowledges that
it is accepting the same subject to the provisions of said
Article SIXTH as the same may be in effect from time to time
and covenants with the Corporation and each shareholder
thereof from time to time to comply with the provisions of
said Article SIXTH as the same may be in effect from time to
time."
SEVENTH: The provisions of Section 1701.831 of the Ohio Revised Code, as
amended from time to time, or any successor provision or provisions to said
section shall not apply to this Corporation.
EIGHTH: Except as otherwise provided in Articles FOURTH and SIXTH, the
affirmative vote of two-thirds of the Voting Shares shall be required to (i)
adopt any agreement for the merger or consolidation of the Corporation with or
into any other corporation or (ii) authorize the sale, lease, exchange, transfer
or other disposition of all or substantially all of the assets of the
Corporation.
NINTH: Except to the extent that Articles FOURTH and SIXTH otherwise
provide with respect to certain matters therein set forth, the Corporation
reserves the right to amend, alter, change or repeal any provision contained in
these Articles of Incorporation and to add new provisions, in the manner now or
hereafter prescribed by statute, upon the affirmative vote of a majority of the
outstanding shares of the Corporation, voting as a class; and all rights,
privileges and preferences of whatsoever
13
<PAGE> 15
nature conferred upon shareholders, directors and officers pursuant to these
Articles of Incorporation in their present form or as hereafter amended are
granted subject to this reservation. Notwithstanding the foregoing, the adoption
of any amendment, alteration, change or repeal to these Articles of
Incorporation as the same may be in effect from time to time which is
inconsistent with or would have the effect of amending, altering, changing or
repealing the provisions of the Sections 7, 9 or 10 of the Regulations of the
Corporation as the same may be in effect from time to time shall require the
same affirmative vote of shareholders as would be required under such
Regulations to adopt any amendment, alteration, change or repeal or said
Sections 7, 9 or 10 or to adopt any provisions inconsistent therewith.
14
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
CITIZENS BANCSHARES, INC. (Dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
Increase/
FOR THE YEAR: 1996 1995 (Decrease)
---------- ---------- ------------------
<S> <C> <C> <C> <C>
Net income $ 14,706 $ 12,563 $ 2,143 17.1%
Dividends on common stock 4,876 2,972 1,904 64.1
Average shares outstanding 5,898 5,898
PER COMMON SHARE:
Net income $ 2.49 $ 2.13 $ .36 16.9%
Dividends declared .83 .50 .33 66.0
Book value at year-end 15.21 13.58 1.63 12.0
AT YEAR-END:
Total assets $ 947,930 $ 890,969 $ 56,961 6.4%
Deposits 709,592 697,664 11,928 1.7
Net loans 583,897 563,879 20,018 3.6
Securities available for sale 240,375 206,988 33,387 16.1
Securities held to maturity 65,230 53,706 11,524 21.5
Shareholders' equity 89,712 80,111 9,601 12.0
AVERAGE FOR THE YEAR:
Total assets $ 897,331 $ 866,627 $ 30,704 3.5%
Deposits 706,801 682,013 24,788 3.6
Net loans 569,222 532,051 37,171 7.0
Shareholders' equity 83,757 74,154 9,603 13.0
PERFORMANCE RATIOS:
Return on average assets 1.64% 1.45%
Return on average equity 17.56 16.94
Average loans as a percent
of average deposits 82.15 79.66
Shareholders' equity to assets
at year-end 9.46 8.99
</TABLE>
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
CITIZENS BANCSHARES, INC. DECEMBER 31,
(Dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
1996 1995
ASSETS --------- ---------
<S> <C> <C>
Cash and due from banks $ 25,467 $ 24,366
Federal funds sold 1,900 16,560
--------- ---------
Total cash and cash equivalents 27,367 40,926
Interest-bearing deposits with financial institutions 364 688
Securities available for sale at fair value (Notes 2 and 8) 240,375 206,988
Securities held to maturity (Estimated fair value
$65,454 and $54,238, respectively) (Note 2) 65,230 53,706
Total loans (Notes 3 and 8) 595,247 574,774
Less allowance for loan losses (Note 4) (11,350) (10,895)
--------- ---------
Net loans 583,897 563,879
Premises and equipment, net (Note 5) 15,316 13,665
Accrued interest receivable and other assets 15,381 11,117
--------- ---------
Total assets $ 947,930 $ 890,969
========= =========
LIABILITIES
Deposits
Noninterest-bearing deposits $ 67,817 $ 66,363
Interest-bearing deposits (Note 6) 641,775 631,301
--------- ---------
Total deposits 709,592 697,664
Securities sold under repurchase agreements
and Federal funds purchased (Note 7) 87,939 20,536
Federal Home Loan Bank advances (Note 8) 49,923 84,680
Accrued interest payable and other liabilities 9,163 6,434
Obligations under employee stock ownership plan (Note 11) 413 331
--------- ---------
Total liabilities 857,030 809,645
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12)
MINORITY INTEREST IN SUBSIDIARY (Note 1) 1,188 1,213
SHAREHOLDERS' EQUITY (NOTE 17)
Serial preferred stock, $10.00 par value; authorized
200,000 shares; none issued
Common stock, no par value; 12,000,000 shares authorized;
5,899,790 shares issued 16,514 16,503
Retained earnings 72,818 62,997
Treasury stock, 2,250 shares at cost (5) (5)
ESOP obligations and unearned shares (Note 11) (413) (331)
Unrealized gain on securities available for sale 798 947
--------- ---------
Total shareholders' equity 89,712 80,111
--------- ---------
Total liabilities and shareholders' equity $ 947,930 $ 890,969
========= =========
</TABLE>
See notes to the consolidated financial statements
12
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANCSHARES, INC. YEARS ENDED DECEMBER 31,
(Dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
INTEREST INCOME ------- ------- -------
<S> <C> <C> <C>
Loans, including fees $57,166 $53,164 $47,852
Securities
Taxable 15,826 15,896 15,324
Nontaxable 1,173 1,090 1,107
Federal funds sold and other 391 674 365
------- ------- -------
Total interest income 74,556 70,824 64,648
------- ------- -------
INTEREST EXPENSE
Deposits 26,810 25,519 22,083
Federal funds and repurchase agreements 2,295 1,726 1,242
Federal Home Loan Bank advances and other 2,918 3,939 3,095
------- ------- -------
Total interest expense 32,023 31,184 26,420
------- ------- -------
NET INTEREST INCOME 42,533 39,640 38,228
PROVISION FOR LOAN LOSSES (Note 4) 1,614 2,024 2,365
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 40,919 37,616 35,863
------- ------- -------
OTHER INCOME
Service charges and fees on deposits 2,239 2,026 2,002
Securities gains (losses) (22) 67 (222)
Other income (Note 13) 2,609 2,400 1,907
------- ------- -------
Total other income 4,826 4,493 3,687
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits
(Notes 10 and 11) 11,029 11,076 11,005
Occupancy and equipment expense 3,660 3,438 3,436
Merger, integration, and restructuring
expense (Note 1) 838 711 514
SAIF recapitalization expense 667
Other operating expense (Note 13) 7,534 8,354 9,266
------- ------- -------
Total other expenses 23,728 23,579 24,221
------- ------- -------
INCOME BEFORE INCOME TAXES 22,017 18,530 15,329
INCOME TAXES (Note 9) 7,311 5,967 4,827
------- ------- -------
NET INCOME $14,706 $12,563 $10,502
======= ======= =======
EARNINGS PER COMMON SHARE (Note 1) $ 2.49 $ 2.13 $ 1.78
======= ======= =======
</TABLE>
See notes to the consolidated financial statements
13
<PAGE> 4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CITIZENS BANCSHARES, INC. FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
ESOP UNREALIZED
OBLIGATIONS GAIN (LOSS)
AND ON SECURITIES
COMMON RETAINED TREASURY UNEARNED AVAILABLE
STOCK EARNINGS STOCK SHARES FOR SALE TOTAL
------- -------- -------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1994
As previously reported $13,697 $41,465 $ (5) $ (188) $1,203 $56,172
Restate capital structure for
pooling of interests (Note 16) 1,400 4,557 5,957
------- -------- -------- ---------- ------------ -------
BALANCES AT JANUARY 1, 1994
As restated 15,097 46,022 (5) (188) 1,203 62,129
Net income 10,502 10,502
Cash dividends declared
($.29 per share) (1,708) (1,708)
Stock split by pooled affiliate 1,400 (1,400)
Cash paid for fractional shares (2) (2)
Unrealized loss on securities
available for sale (Note 1) (4,946) (4,946)
Change in employee stock
ownership plan obligation 38 38
------- -------- -------- ---------- ------------ -------
BALANCES AT DECEMBER 31, 1994 16,497 53,414 (5) (150) (3,743) 66,013
Net income 12,563 12,563
Cash dividends declared
($.50 per share) (2,972) (2,972)
Cash paid for fractional shares (8) (8)
Unrealized gain on securities
available for sale (Note 1) 4,690 4,690
Change in employee stock
ownership plan obligation
and release of shares 6 (181) (175)
------- -------- -------- ---------- ------------ -------
BALANCES AT DECEMBER 31, 1995 16,503 62,997 (5) (331) 947 80,111
Net income 14,706 14,706
Cash dividends declared
($.83 per share) (4,876) (4,876)
Cash paid for fractional shares (9) (9)
Unrealized loss on securities
available for sale (Note 1) (149) (149)
Change in employee stock
ownership plan obligation
and release of shares 11 (82) (71)
------- -------- -------- ---------- ------------ -------
BALANCES AT DECEMBER 31, 1996 $16,514 $72,818 $ (5) $ (413) $ 798 $89,712
======= ======== ======== ========== ============ =======
</TABLE>
See notes to the consolidated financial statements
14
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOW
CITIZENS BANCSHARES, INC. YEARS ENDED DECEMBER 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES -------- -------- --------
<S> <C> <C> <C>
Net income $ 14,706 $ 12,563 $ 10,502
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,923 1,737 1,514
Securities amortization and accretion, net 801 604 1,429
Securities (gains) losses 22 (67) 222
Provision for loan losses 1,614 2,024 2,365
Change in net deferred loan fees (245) 543 174
Deferred income tax benefit (307) (564) (890)
Net change in loans held for sale (3,283) 1,564 1,541
Change in other assets and liabilities (2,235) (1,506) 2,051
-------- -------- --------
Net cash provided by operating activities 12,996 16,898 18,908
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits with
financial institutions 324 (419) (18)
Securities held to maturity:
Proceeds from maturities and payments 36,126 51,160 56,380
Purchases (41,902) (56,270) (82,872)
Securities available for sale:
Proceeds from maturities and payments 76,529 15,662 25,446
Proceeds from sales 5,699 35,103 26,233
Purchases (122,417) (17,395) (22,539)
Sales of student loans and commercial participations 4,362 12,053 10,826
Net increase in loans (21,348) (59,195) (41,978)
Purchases of premises and equipment (3,641) (2,587) (1,708)
Sales of premises and equipment 277 370
Sales of other real estate 91 1,757 1,961
-------- -------- --------
Net cash used by investing activities (66,177) (19,854) (27,899)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 11,928 25,664 (17,385)
Net change in Federal funds and repurchase agreements 67,403 (8,438) 11,540
Net change in short-term FHLB advances (18,500) 7,700 1,297
Proceeds from long-term FHLB advances 7,650 14,750 34,858
Repayment of long-term FHLB advances (23,907) (23,532) (7,591)
Repayment of notes payable (1,974)
Settlement with broker for security purchase (10,000)
Cash dividends paid (4,927) (1,945) (1,211)
Redemption of minority interest in subsidiary (25) (25) (26)
-------- -------- --------
Net cash provided by financing activities 39,622 12,200 11,482
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (13,559) 9,244 2,491
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 40,926 31,682 29,191
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,367 $ 40,926 $ 31,682
======== ======== ========
</TABLE>
See notes to the consolidated financial statements
15
<PAGE> 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Citizens Bancshares, Inc. ("the Corporation"), a two-bank holding company,
provides a broad range of banking and financial services. Its principal banking
subsidiary, The Citizens Banking Company ("Citizens"), operates primarily in the
eastern Ohio counties of Columbiana, Jefferson, Mahoning, Stark and Carroll. Its
other banking subsidiary, First National Bank of Chester ("FNB"), operates
primarily in Hancock County, West Virginia. The banks' primary services include
accepting demand, savings and time deposits and granting commercial, industrial,
real estate and consumer loans. The Corporation's other subsidiaries do not
comprise a significant portion of its operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates and are
subject to change in the short term. Areas involving the use of management's
estimates and assumptions include the allowance for loan losses, fair values of
certain securities, the determination and carrying value of impaired loans, the
carrying value of other real estate, the post-retirement benefit obligation, the
value of stock options granted, the accrued liability for incurred but
unreported medical claims, the actuarial present value of pension benefit
obligations, net periodic pension expense and prepaid pension costs recognized
in the Corporation's financial statements.
The following is a summary of the significant accounting policies followed
by the Corporation in the preparation of the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Corporation and its wholly owned subsidiaries, Citizens,
Freedom Financial Life Insurance Company, Freedom Express, Inc. and FNB. All
significant intercompany transactions have been eliminated in the consolidation.
As discussed in Note 16, the Corporation affiliated with two financial
institutions in 1994 and one financial institution each in 1995 and 1996. The
acquired banks were merged into Citizens.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash
equivalents include cash and short-term deposits with financial institutions and
Federal funds sold. Generally, Federal funds are sold for one-day periods. The
Corporation reports net cash flows for interest-bearing deposits with other
financial institutions, customer loan transactions, deposit transactions,
repurchase agreements, and short-term borrowings. For the years ended December
31, 1996, 1995 and 1994, the Corporation paid interest of $31,941, $31,154 and
$26,287, respectively, and income taxes of $7,834, $6,802 and $5,140,
respectively.
Details of non-cash transactions of the Corporation are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Acquisition of other real estate
for loan settlements $ 12 $ 235 $ 445
Transfer of securities from held to maturity
to available for sale 130,540 4,311
Transfer of securities from available for sale
to held to maturity 6,089 5,934
</TABLE>
SECURITIES - The Corporation classifies its debt and equity securities as
held to maturity, trading or available for sale. Securities classified as
available for sale are carried at fair value. Net unrealized gains and losses
are reflected as a separate component of shareholders' equity, net of tax
effects. Securities classified as available for sale are those that management
intends to sell or that would be sold for liquidity, investment management or
similar reasons, even if there is not a present intention to make such a sale.
Equity securities that have a readily determinable fair value are also
classified as available for sale. Securities classified as held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of discounts
using the interest method. Securities classified as held to maturity are those
that management has the positive intent and ability to hold to maturity. Trading
securities are acquired for sale in the near term and are carried at fair value,
with unrealized holding gains and losses reflected in earnings. The Corporation
held no trading securities during any period presented. Amortization of premiums
and accretion of discounts are recorded in interest income using the interest
method over the period to maturity, which is sometimes estimated. Realized gains
and losses on securities sales are determined using the specific identification
method.
LOANS HELD FOR SALE - Citizens originates certain residential mortgage
loans for sale in the secondary mortgage loan market. In addition, Citizens
periodically identifies other loans which will be sold. These loans are
classified as loans held for sale and carried at the lower of cost or estimated
market value in the aggregate. To mitigate interest rate risk, Citizens may
obtain fixed commitments at the time loans are originated or identified for
sale. In January 1996, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) 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. The servicing asset
is amortized in proportion to, and over the period of, estimated net servicing
revenues. Impairment of mortgage servicing rights is periodically assessed based
on the estimated fair value of those rights. SFAS No. 122 was applied
prospectively to servicing rights arising from loans sold by the Corporation
after January 1, 1996, and did not materially impact the Corporation's financial
statements.
INTEREST AND FEES ON LOANS - Interest income on loans is accrued over the
term of the loans based on the amount of principal outstanding. The accrual of
interest is discontinued on a loan when management believes that the collection
of interest is doubtful.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment to the related loan's yield.
The Corporation is amortizing these amounts over the contractual life of the
related loans.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses represents the
amount which management estimates is adequate to provide for losses in its loan
portfolio. The allowance for loan losses is reduced by charging-off loans deemed
uncollectible by management. After a loan is charged-off, collection efforts
continue and future recoveries may occur. When loans are charged-off, any
interest accrued in the current fiscal year is charged against interest income.
Increases to the allowance for loan losses consist of provisions for loan losses
charged to expense and recoveries of previous charge-offs.
16
<PAGE> 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The allowance for loan losses and the annual provision for loan losses
charged to expense are determined by management based upon criteria such as past
loan loss experience, economic conditions, changes in the mix and volume of the
loan portfolio and various other circumstances which are subject to change over
time. Management periodically reviews selected large loans, impaired loans,
nonaccrual loans, other problem loans and delinquent loans. The collectibility
of these loans is evaluated, after considering the current financial position
and repayment ability of the borrowers, estimated collateral values and the
Corporation's collateral position versus other creditors and any guarantees.
Management forms judgments, which are necessarily subjective, as to the
probability of loss and the amount of such loss on these loans, as well as other
loans by aggregate types. Management then determines what is considered to be an
adequate balance in the allowance for loan losses and the corresponding
provision for loan losses.
In 1995, the Corporation adopted the provisions of SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures." A
loan is impaired when it is probable that all principal and interest amounts
will not be collected according to the loan contract. SFAS No. 114 specifies
that allowances for loan losses on impaired loans be determined using the
present value of estimated future cash flows of the loan, discounted using the
loan's effective interest rate. Allowances for loan losses for impaired loans
that are collateral dependent are generally determined based on the estimated
fair value of the underlying collateral. Changes in the carrying value of loans
due to changes in estimates of future payments or the passage of time are
reported as increases or decreases in the provision for loan losses. SFAS No.
118 allows a creditor to use existing methods for income recognition on an
impaired loan. The impact to the Corporation of adopting these pronouncements
was not material.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include loans secured by one-to-four family residences, residential
construction loans, automobile, home equity and second mortgage loans.
Commercial loans and mortgage loans secured by other properties are evaluated
individually for impairment. When analysis of borrower operating results and
financial condition indicates that underlying cash flows of the borrower's
business are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Often this is associated with a delay or shortfall in
payments of 30 days or more. Loans are generally moved to nonaccrual status when
90 days or more past due. These loans are often also considered impaired.
Impaired loans, or portions thereof, are charged-off when deemed uncollectible.
The nature of disclosures for impaired loans is considered generally comparable
to or more inclusive than prior nonaccrual and renegotiated loans and
nonperforming and past due asset disclosures.
CONCENTRATIONS OF CREDIT RISK - The Corporation, through its subsidiary
banks, grants residential, consumer and commercial loans to customers located
primarily in the eastern Ohio counties of Columbiana, Jefferson, Mahoning, Stark
and Carroll and in the West Virginia county of Hancock. At December 31, 1996,
residential real estate mortgage loans totaled 47.2% of loans and were secured
primarily by 1-4 family residences. Also at year-end 1996, 11.0% of total loans
were to a group of related enterprises involved in purchasing pools of
one-to-four family residential, home equity and other consumer loans. The
primary repayment source for the latter is the underlying pools of consumer and
mortgage debt that represent diverse loan types and geographic distribution.
The Corporation, through its banking subsidiaries, makes commitments to
extend credit in the normal course of business which are not reflected in the
financial statements. A summary of these commitments is discussed in Note 12.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation and
amortization are computed principally by the straight-line method based upon the
estimated useful life of the asset. Expenditures for maintenance and repairs are
charged to operations as incurred. Expenditures for additions and major
improvements are capitalized. The adjusted cost of the specific assets sold or
disposed of is used to compute gains or losses on disposal.
OTHER REAL ESTATE OWNED - Other real estate owned is comprised of
properties acquired through foreclosure proceedings or acceptance of deeds in
lieu of foreclosure. These properties are carried in other assets at the lower
of cost or fair value, less estimated selling costs. Any reduction from carrying
value of the related loan to fair value at the time of acquisition is accounted
for as a loan loss. Any subsequent reduction in fair value is reflected in a
valuation allowance account through a charge to income. Expenses to carry other
real estate are charged to operations as incurred. Other real estate at December
31, 1996 and 1995 totaled $214 and $237, respectively.
INTANGIBLE ASSETS - Intangible assets arising from the Corporation's
business acquisitions, net of accumulated amortization, are included in other
assets in the consolidated balance sheets and totaled $1,492 and $1,556 at
December 31, 1996 and 1995, respectively.
MINORITY INTEREST IN SUBSIDIARY - Preferred stock of Citizens held by the
State of Ohio, Department of Commerce was issued in connection with the 1985
state-assisted purchase of certain assets and liabilities of the Jefferson
Building and Savings Company. The stock requires either the payment of annual
dividends of $100 per share or redemption of two percent of outstanding shares
annually, at Citizens' option. Additional redemptions are required when
Citizens' return on year-end assets exceeds 1.5%. Shares outstanding totaled
118.8 and 121.3 at December 31, 1996 and 1995, respectively.
MERGER, INTEGRATION AND RESTRUCTURING EXPENSE - Included in other operating
expense is a charge for merger, integration and restructuring expenses, which
primarily represents professional fees, early retirement, other personnel
related costs and the write-off of certain fixed assets in the elimination of
duplicate facilities.
INCOME TAXES - Deferred tax assets and liabilities are recorded at
currently enacted income tax rates based on the differences between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as "temporary differences."
EARNINGS AND DIVIDENDS PER SHARE - Earnings per share are calculated on the
basis of the weighted average number of shares outstanding. The weighted average
number of shares used in the computation was 5,897,540 for 1996, 1995 and 1994.
The Corporation entered into one merger transaction in 1996 and 1995 and
two in 1994, all of which were accounted for as poolings of interests (see Note
16). The Corporation's 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 mergers and
the stock split.
RECLASSIFICATION - Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the 1996 presentation.
17
<PAGE> 8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 2 - SECURITIES
The amortized costs, unrealized gains and losses and estimated fair values
are as follows at December 31:
<TABLE>
<CAPTION>
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 $ 11,001 $ 80 $ (9) $ 11,072
U.S. Government agencies
and corporations 27,279 379 (77) 27,581
Obligations of states and
political subdivisions 100 100
Corporate and other securities 14 14
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 164,027 838 (641) 164,224
Agency collateralized mortgage
obligations 19,200 (269) 18,931
Other 6,076 7 (7) 6,076
--------- ---------- ---------- ---------
Total debt securities available for sale 227,697 1,304 (1,003) 227,998
Marketable equity securities 11,452 943 (18) 12,377
--------- ---------- ---------- ---------
Total securities available for sale $ 239,149 $ 2,247 $ (1,021) $ 240,375
========= ========== ========== =========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 42,342 $ 132 $ (13) $ 42,461
U.S. Government agencies
and corporations 100 (2) 98
Obligations of states and
political subdivisions 22,783 189 (82) 22,890
Other 5 5
--------- ---------- ---------- ---------
Total securities held to maturity $ 65,230 $ 321 $ (97) $ 65,454
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
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 30,657 202 (73) 30,786
Corporate and other securities 444 (7) 437
Obligations of states and
political subdivision 5,931 148 (60) 6,019
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 199,325 1,470 (636) 200,159
Marketable equity securities 6,209 620 6,829
--------- ---------- ---------- ---------
Total securities available for sale $ 205,534 $ 2,090 $ (636) $ 206,988
========= ========== ========== =========
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 17,779 183 (102) 17,860
Other 527 32 559
--------- ---------- ---------- ---------
Total securities held to maturity $ 53,706 $ 637 $ (105) $ 54,238
========= ========== ========== =========
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will likely differ from contractual maturities because some issuers have the
right to call or prepay obligations with or without penalty.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
DEBT SECURITIES AVAILABLE FOR SALE:
Due in one year or less $ 5,506 $ 5,516
Due after one year through five years 8,758 8,801
Due after five years through ten years 23,630 23,956
Due after ten years 500 494
Mortgage-backed securities 189,303 189,231
---------- ----------
Total debt securities available for sale $ 227,697 $ 227,998
========== ==========
DEBT SECURITIES HELD TO MATURITY:
Due in one year or less $ 32,726 $ 32,778
Due after one year through five years 20,139 20,256
Due after five years through ten years 11,780 11,832
Due after ten years 585 588
---------- ----------
Total debt securities held to maturity $ 65,230 $ 65,454
========== ==========
</TABLE>
18
<PAGE> 9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 2 - SECURITIES - CONTINUED
Proceeds from the sales of securities and the gross realized gains and
losses for the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales of securities available for sale $5,699 $35,103 $26,233
Gross realized gains on sales 8 302 152
Gross realized losses on sales 30 235 374
</TABLE>
To provide additional flexibility to meet liquidity and asset-liability
management needs, the Corporation reclassified securities with an amortized cost
of $130,207 from held to maturity to available for sale on December 31, 1995, as
allowed by the SFAS No. 115 implementation guide issued by the Financial
Accounting Standards Board in November 1995. The related unrealized gain of $333
is reflected net of tax as an increase to shareholders' equity. In addition,
securities with an amortized cost of $5,934 were transferred from available for
sale to held to maturity at December 31, 1995. All of these securities were
owned by Western Reserve Bank of Ohio prior to its merger with Citizens
(discussed in Note 16), and consisted of obligations of states and political
subdivisions with no significant differences between fair value and amortized
cost. Securities with an amortized cost of $6,089 were transferred from
available for sale to held to maturity in 1996. All of these securities were
owned by The Navarre Deposit Bank Company prior to its merger with Citizens
(discussed in Note 16), and were transferred to conform the combined entity with
the Corporation's existing interest rate risk position.
Securities with a carrying value of $169,280 and $98,615 were pledged to
secure public deposits and for other purposes as required or permitted by law at
December 31, 1996 and 1995, respectively.
NOTE 3 - LOANS
The loan portfolio at December 31, was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Commercial, financial and agricultural $ 140,977 $ 136,354
Residential real estate 280,779 281,060
Commercial real estate 113,327 96,152
Construction 4,704 6,202
Consumer 48,269 51,098
Real estate mortgage loans held for sale 7,191 3,908
--------- ---------
Total loans $ 595,247 $ 574,774
========= =========
</TABLE>
The Corporation has granted loans to executive officers and directors of
the Corporation and to their associates. Loans to such borrowers, their
immediate families, and entities in which they own more than a 10% voting
interest are summarized below:
<TABLE>
<S> <C>
Aggregate balance - December 31, 1995 $10,678
New loans 1,201
Repayments (1,076)
Other changes 3,970
-------
Aggregate balance - December 31, 1996 $14,773
=======
</TABLE>
Other changes represent regulatory reporting requirements of reflecting
total available lines of credit in lieu of lines of credit drawn, to the
executive officers and directors and to their associates and loans applicable to
one reporting period that are excludable from the other reporting period.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses during 1996, 1995 and 1994 was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $10,895 $10,393 $ 9,728
Provision for loan losses 1,614 2,024 2,365
Recoveries 1,285 1,230 1,221
Loans charged-off (2,444) (2,752) (2,921)
------- ------- -------
Balance at end of year $11,350 $10,895 $10,393
======= ======= =======
Information regarding impaired loans at December 31 is as follows:
1996 1995
------- -------
Balance of impaired loans at December 31 $ 3,116 $ 4,610
Less portion for which no allowance for loan
losses is allocated (386) (1,608)
------- -------
Portion of impaired loan balance for which an allowance
for credit losses is allocated $ 2,730 $ 3,002
======= =======
Portion of allowance for loan losses allocated to the
impaired loan balance at December 31 $ 416 $ 864
======= =======
</TABLE>
19
<PAGE> 10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES - CONTINUED
Information regarding impaired loans is summarized below:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Average investment in impaired loans during the year $ 3,801 $ 4,532
======= =======
Interest income recognized on impaired loans including
interest income recognized on cash basis during the year $ 327 $ 258
======= =======
Interest income recognized on impaired loans on cash basis
during the year $ 239 $ 241
======= =======
Nonperforming loans, all of which are included in impaired loans above, are
summarized below:
1996 1995
------- -------
Nonaccrual loans $ 1,158 $ 2,593
Loans past due more than 90 days
and still accruing interest 674 549
------- -------
Total nonperforming loans $ 1,832 $ 3,142
======= =======
</TABLE>
Interest income for the years ended December 31, 1996, 1995 and 1994 would have
increased by approximately $113, $292 and $223, respectively, if nonaccrual
loans had earned interest at their respective full contract rates.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Land, buildings and improvements $14,684 $12,073
Equipment, furniture and fixtures 12,026 11,992
Construction in process 21 732
------- -------
Total premises and equipment 26,731 24,797
Less accumulated depreciation
and amortization (11,415) (11,132)
------- -------
Premises and equipment, net $15,316 $13,665
======= =======
</TABLE>
Depreciation and amortization of premises and equipment totaled $1,579, $1,462
and $1,338 in 1996, 1995 and 1994, respectively.
Future minimum rental obligations under noncancelable operating leases having
initial or remaining terms of one year or more are as follows:
<TABLE>
<S> <C> <C>
1997 $223
1998 186
1999 87
2000 52
2001 27
Thereafter 6
----
Total $581
====
</TABLE>
NOTE 6 - INTEREST-BEARING DEPOSITS
Total interest-bearing deposits as presented on the balance sheet are comprised
of the following classifications at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Interest-bearing demand $ 87,757 $ 88,660
Savings 231,299 250,828
Time
In denominations under $100,000 268,118 250,406
In denominations of $100,000 or more 54,601 41,407
-------- --------
Total interest-bearing deposits $641,775 $631,301
======== ========
</TABLE>
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C> <C>
1997 $217,200
1998 67,494
1999 14,475
2000 17,477
2001 and thereafter 6,073
--------
$322,719
========
</TABLE>
20
<PAGE> 11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND FEDERAL FUNDS
PURCHASED
Citizens and FNB have retail repurchase agreements with customers in their
respective local market areas, as well as Federal funds purchased from other
banks. These borrowings are collateralized with securities owned by the banks
and held in their safekeeping accounts at independent correspondent banks.
Citizens also has repurchase agreements with brokerage firms which are in
possession of the underlying securities. The following table summarizes certain
information relative to these borrowings at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Outstanding at period-end $87,939 $20,536
Weighted average interest rate at period-end 6.08% 5.12%
Maximum amount outstanding as of any month-end $87,939 $39,526
Average amount outstanding 43,952 31,254
Approximate weighted average interest rate
during the year 5.22% 5.52%
</TABLE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances are comprised of the following at
December 31:
<TABLE>
<CAPTION>
CURRENT BALANCE
INTEREST ---------------
RATE 1996 1995
---- ---- ----
<S> <C> <C> <C>
Variable rate advances:
Revolving overnight advances $22,000
LIBOR based, 1-5 year maturity 5.56% $16,000 23,700
Prime rate based, 1 year maturity 5.76 9,200 6,300
Fixed rate advances, with monthly interest payments:
Advances due in 1996 13,000
Advances due in 1997 5.51 10,950 6,700
Advances due in 1998 5.45 2,000 2,000
Advances due in 1999 5.96 1,500
Fixed rate advances, with monthly principal and interest payments:
Advance due October 1, 1997 4.80 7,899 8,442
Advance due November 1, 1997 4.55 2,374 2,538
------- -------
Total Federal Home Loan Bank advances $49,923 $84,680
======= =======
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by
Citizens and FNB (totaling $7,759) and by 100% of Citizens' and FNB's qualified
mortgage loan portfolio (totaling approximately $265,407). Based on the carrying
amount of FHLB stock owned by Citizens and FNB, total FHLB advances are limited
to approximately $155,200.
The aggregate minimum future annual principal payments on borrowings are
$26,023 in 1997, $2,000 in 1998 and $21,900 in 1999.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current tax expense $ 7,618 $ 6,531 $ 5,717
Deferred tax benefit (307) (564) (890)
------- ------- -------
Total provision for income taxes $ 7,311 $ 5,967 $ 4,827
======= ======= =======
</TABLE>
The sources of gross deferred tax assets and liabilities at December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax reserve $ 3,466 $ 3,182 $ 2,520
Unrealized loss on securities available for sale 1,982
Other 751 609 475
------- ------- -------
4,217 3,791 4,977
------- ------- -------
Items giving rise to deferred tax liabilities:
Depreciation (871) (767) (751)
Unrealized gain on securities available for sale (429) (453)
Other (698) (683) (467)
------- ------- -------
(1,998) (1,903) (1,218)
------- ------- -------
Net deferred tax asset $ 2,219 $ 1,888 $ 3,759
======= ======= =======
</TABLE>
21
<PAGE> 12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 9 - INCOME TAXES - CONTINUED
The Corporation has sufficient taxes paid in current and prior years to
warrant recording the full deferred tax asset without a valuation allowance.
Total Federal income tax expense differs from the expected amounts computed
by applying the statutory Federal tax rate of 35% to income before taxes. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income tax expense based upon the Federal
statutory rate on income before income taxes $ 7,698 $ 6,300 $ 5,212
Tax exempt income (556) (467) (436)
Other 169 134 51
------- ------- -------
$ 7,311 $ 5,967 $ 4,827
======= ======= =======
</TABLE>
Tax expense (benefit) attributable to securities gains and losses
totaled $(8), $23 and $(78) in 1996, 1995 and 1994, respectively.
NOTE 10 - PENSION PLAN AND OTHER BENEFITS
PROFIT SHARING PLAN - The Corporation has a defined contribution profit
sharing plan in which the Corporation's employees, other than employees of FNB
and Freedom Express, Inc., participate. The plan covers employees who have
completed one thousand hours of service during the plan year. Participants are
fully vested after seven years of service. Amounts to be contributed to the plan
are annually determined by the Board of Directors and totaled $697, $716 and
$592 in 1996, 1995 and 1994, respectively.
PENSION PLAN - In December 1994, the Corporation's Board of Directors
approved merging the Corporation's defined benefit plan with the separate plans
maintained for former employees of The Firestone Bank ("Firestone") and The New
Waterford Bank ("New Waterford"). The Board also approved, effective January 1,
1995, expanded participation in the plan to include all employees of the
Corporation and its subsidiaries who have satisfied the plan's eligibility
requirements. Employees are eligible for participation in the plan after
completing 1,000 hours of service and become fully vested in accrued benefits
after five years of service. Former employees of The Firestone Bank and The New
Waterford Bank received vesting credit for prior employment at Firestone and New
Waterford.
The pension expense for 1996, 1995 and 1994 is presented below. All
information represents combined data from the three merged plans referred to
above.
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Service cost benefits earned $ 347 $ 229 $ 294
Interest cost on projected benefit obligation 136 115 119
(Return) loss on plan assets (257) (407) 31
Amortization of net experience loss 99 294 (147)
Amortization of unrecognized prior service cost (35) (35) (10)
Amortization of remaining transition obligation 2 2
----- ----- -----
Net pension expense $ 292 $ 198 $ 287
===== ===== =====
</TABLE>
The following table shows the funded status of the pension plan and the
amount included in the consolidated balance sheets at December 31, 1996 and
1995. All information represents combined data from the three merged plans.
<TABLE>
<CAPTION>
Actuarial present value of benefit obligations: 1996 1995
------- -------
<S> <C> <C>
Vested benefits $ 1,537 $ 1,787
Non-vested benefits 46 58
------- -------
Accumulated benefit obligation 1,583 1,845
Effect of anticipated future service
and salary levels 318 346
------- -------
Projected benefit obligation 1,901 2,191
Market value of assets 2,714 2,422
------- -------
Plan assets in excess of
projected benefit obligation 813 231
Unrecognized prior service cost (478) (513)
Unrecognized net (gain) loss (411) 62
Unrecognized net transition obligation 21 23
------- -------
Accrued pension liability $ (55) $ (197)
======= =======
Actuarial assumptions:
Discount rate 7.25% 6.50%
Long term rate of return 7.00 6.50
Rate of increase in compensation levels 4.00 4.00
</TABLE>
Approximately 60% of the pension plan's assets are mutual equity funds and
common stocks, with the remainder comprised of U.S. Treasury and Agency
securities and certificates of deposit.
POSTRETIREMENT HEALTH INSURANCE BENEFITS - Effective January 1, 1993, the
Corporation adopted SFAS No.106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This pronouncement requires employers to accrue
the cost of retiree health and other postretirement benefits during the working
career of active employees. The expense, liability and contributions under SFAS
No. 106 are not material in any period presented.
22
<PAGE> 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 10 - PENSION PLAN AND OTHER BENEFITS - CONTINUED
STOCK OPTION PLAN - The Citizens Bancshares, Inc. 1995 Non-Statutory Stock
Option and Stock Appreciation Rights Plan was approved by shareholders on March
30, 1995. The plan enables a committee of the Board of Directors to grant stock
options and/or stock appreciation rights ("SARS") to officers of the Corporation
and its subsidiaries. A total of 450,000 options on common shares and 675,000
stock appreciation rights are available to be granted pursuant to the plan,
after giving effect to the stock split discussed in Note 1. Stock options and
stock appreciation rights may be granted at a price not less than the fair
market value of the Corporation's common shares at the date of grant for terms
up to, but not exceeding ten years from the date of grant. In October 1995, the
Financial Accounting Standards Board issued SFAS No.123, "Accounting for
Stock-Based Compensation," which encourages the use of a fair value-based method
to account for stock-based compensation plans such as the Corporation's stock
option plan. As allowed by SFAS No. 123, however, the Corporation has elected to
continue to follow prior standards in accounting for its employee stock options.
Under these standards, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
If compensation expense is not recorded, pro forma information regarding
net income and earnings per share is required by SFAS No. 123, and has been
determined as if the Corporation had accounted for its stock options under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using an option pricing model with the following
assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.57%
and 7.00%; dividend yields of 3.00%; volatility factors of the expected market
price of the Company's common stock of 16.4% and 11.2%; and a weighted average
expected life of the options of 9 years. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' three-year vesting period. The Corporation's pro forma information
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Income as reported $ 14,706 $ 12,563
Pro forma net income 14,619 12,513
Pro forma earnings per share
Primary 2.48 2.12
Diluted 2.48 2.12
</TABLE>
A summary of the Corporation's stock options activity and related information
follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
AVERAGE Average
OPTIONS EXERCISE PRICE SARS Options Exercise Price SARS
------- -------------- ---- ------- -------------- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 60,285 $23.00 50,606
Granted 7,883 29.00 3,241 60,585 $23.00 50,681
Forfeited (196) (48) (300) 23.00 (75)
------ ------ ------ ------
Outstanding at the end of year 67,972 23.69 53,799 60,285 23.00 50,606
====== ====== ====== ======
Exercisable at end of year NONE NONE None None
Weighted average fair value of
options granted during the year $ 6.56 $ 5.78
</TABLE>
No options or SARS are exercisable at December 31, 1996. Compensation
expense related to stock appreciation rights was $222 and $100 in 1996 and 1995,
respectively. Dilution of earnings per share related to the stock options is
less than 3% and has therefore not been reflected in the computation of earnings
per share.
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN AND RELATED OBLIGATION
The Corporation 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.
Acquisitions of the Corporation's common shares by the ESOP have been funded
through borrowings with unrelated financial institutions with the common shares
purchased serving as collateral for the related loans. Principal on each loan is
payable in eight annual installments and interest is payable quarterly. Each
participant may choose to receive distributions in stock or cash. Shares
acquired after December 31, 1992 (new shares) are accounted for in accordance
with Statement of Position ("SOP") 93-6, "Employer's Accounting for Employee
Stock Ownership Plans." Under SOP 93-6, shares pledged as collateral are
reported as a reduction of shareholders' equity (unearned ESOP shares) in the
consolidated balance sheet. As shares are committed to be released from
collateral, the Corporation records compensation expense equal to the fair value
of the shares. Dividends on allocated new shares are recorded as a reduction of
retained earnings, while dividends on unallocated new shares are recorded as a
reduction of debt. 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. Expense for all ESOP shares totaled $150 in 1996, $123 in 1995 and $75
in 1994 and is included in salaries and employee benefits. At December 31, 1996,
there were 16,086 unreleased new shares with an estimated fair value of $523.
The ESOP shares at December 31 were as follows:
<TABLE>
<CAPTION>
Old Shares 1996 1995
------ ------
<S> <C> <C>
Allocated shares 27,811 22,852
Unallocated shares 4,937 9,896
------ ------
Total old shares 32,748 32,748
====== ======
New Shares 1996 1995
------ ------
<S> <C> <C>
Shares allocated and
committed to be released 138 69
Unreleased shares 16,086 10,431
------ ------
Total new shares 16,224 10,500
====== ======
</TABLE>
23
<PAGE> 14
NOTES TO THE CONSOLIDATED BALANCE SHEETS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN AND RELATED OBLIGATION - CONTINUED
<TABLE>
<CAPTION>
Loan Balance
December 31, Principal
Shares Price per ------------------------ Reductions Interest
Year Purchased share 1996 1995 Remaining Rate
---- --------- ----- ---- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C>
1989 12,498 $ 8 $ 12 $ 25 1 83% of prime
1990 11,250 9 25 37 2 prime + .44%
1992 9,000 11 37 50 3 prime + .125%
1995 10,500 24 189 219 6 prime + .125%
1996 5,724 30 150 0 8 prime + .125%
----- -----
$413 $331
===== =====
</TABLE>
Share and per share information in the above tables have been adjusted to
give effect to the three-for-two stock split, declared in 1995.
NOTE 12 - 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 customers. These financial
instruments include commitments to make loans, primarily in the form of approved
lines of credit. There were $45,459 in variable rate commitments and $3,237 in
fixed rate commitments at year-end 1996. The fixed rate commitments have an
interest rate range of 6.50% to 8.75%. There were $47,543 in variable rate
commitments and $3,786 in fixed rate commitments at year-end 1995. The fixed
rate commitments have an interest rate range of 6.125% to 9.375%. All fixed rate
mortgage real estate commitments expire after sixty days. Since many expire
without being used, these amounts do not necessarily represent future cash
commitments.
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 evaluations of the
borrower and may include real estate and/or business assets.
The subsidiary banks of the Corporation 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 the
Corporation.
The Corporation's subsidiary banks were required to have approximately
$8,410 of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve requirements at December 31, 1996. These balances do not earn
interest.
NOTE 13 - OTHER INCOME AND OTHER OPERATING EXPENSE
The following is a summary of other income and other operating expense for
the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
OTHER INCOME
Gain on sale of loans $ 473 $ 125 $ 109
Mortgage servicing income 264 273 227
Other 1,872 2,002 1,571
------ ------ ------
Total other income $2,609 $2,400 $1,907
====== ====== ======
OTHER OPERATING EXPENSE
Professional services $ 857 $ 822 $ 970
Printing and supplies 774 796 653
State franchise taxes 1,117 898 834
FDIC insurance 233 946 1,618
Amortization of intangible assets 344 480 508
Other 4,209 4,412 4,683
------ ------ ------
Total other operating expense $7,534 $8,354 $9,266
====== ====== ======
</TABLE>
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair
values of financial instruments at December 31, 1996 and 1995. Items which are
not financial instruments are not included.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and equivalents $ 27,367 $ 27,367 $ 40,926 $ 40,926
Interest-bearing deposits 364 364 688 688
Securities available for sale 240,375 240,375 206,988 206,988
Securities held to maturity 65,230 65,454 53,706 54,238
Loans, net of the allowance
for loan losses 583,897 585,276 563,879 577,484
Accrued interest receivable 6,720 6,720 6,023 6,023
Demand and savings deposits (386,873) (386,873) (405,851) (405,851)
Time deposits (322,719) (324,044) (291,813) (294,053)
Securities sold under repurchase
agreements and Federal
funds purchased (87,939) (87,939) (20,536) (20,536)
Federal Home Loan Bank advances (49,923) (49,918) (84,680) (84,590)
ESOP obligation (413) (413) (331) (331)
Accrued interest payable (1,492) (1,492) (1,410) (1,410)
</TABLE>
24
<PAGE> 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
For purposes of the above disclosures of estimated fair value, the
following assumptions were used: the estimated fair value for cash and cash
equivalents was considered to approximate cost; the estimated fair value for
securities was based on quoted market values for the individual securities or
for equivalent securities; carrying value is considered to approximate fair
value for loans that contractually reprice at intervals of less than six months;
the estimated fair value for other loans was based on estimates of the rate the
Corporation would charge for similar loans at December 31, 1996 and 1995,
respectively, applied over estimated payment periods; the estimated fair value
for demand and savings deposits and securities sold under repurchase agreements
was based on their carrying value; the estimated fair value for certificates of
deposit and borrowings was based on estimates of the rate the Corporation would
pay on such obligations at December 31, 1996 and 1995, respectively, applied for
the time period until maturity; and the estimated fair value of commitments was
not material.
While these estimates of fair values are based on management's judgment of
appropriate factors, there is no assurance that, if the Corporation had disposed
of such items at December 31, 1996 or 1995, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1996 and 1995 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Corporation that are not
defined as financial instruments were not included in the above disclosures,
such as property and equipment. Also, non-financial instruments typically not
recognized in financial statements (but which may have value) were not included
in the above disclosures. These include, among other items, the estimated
earning power of core deposit accounts, the earning potential of loan servicing
rights, the value of a trained work force, customer goodwill, and similar items.
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED PARENT COMPANY BALANCE SHEET
December 31,
----------------------
ASSETS 1996 1995
-------- --------
<S> <C> <C>
Cash and due from banks $ 355 $ 1,860
Interest-bearing balances with banks 16 128
-------- --------
Total cash and cash equivalents 371 1,988
Investment securities available for sale 3,507 1,388
Investment securities held to maturity 381 241
Investment in bank subsidiaries 75,062 77,133
Investment in non-bank subsidiaries 1,392 1,253
Loans 20 90
Less allowance for loan losses (19) (29)
-------- --------
Net loans 1 61
Other assets 11,499 197
-------- --------
Total assets $ 92,213 $ 82,261
======== ========
LIABILITIES
Other liabilities $ 2,088 $ 1,819
Obligations under employee
stock ownership plan 413 331
-------- --------
Total liabilities 2,501 2,150
SHAREHOLDERS' EQUITY
Total shareholders' equity before obligation
under employee stock ownership plan
and securities adjustment 89,327 79,495
Unrealized gain on securities available for sale 798 947
ESOP obligations and unearned shares (413) (331)
-------- --------
Total shareholders' equity 89,712 80,111
-------- --------
Total liabilities and shareholders' equity $ 92,213 $ 82,261
======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED PARENT COMPANY INCOME STATEMENT
INCOME 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Dividends from bank subsidiaries $14,765 $ 2,860 $ 2,361
Other interest and dividend income 356 103 174
------- ------- -------
Total income 15,121 2,963 2,535
EXPENSES
Other expenses 898 402 287
------- ------- -------
INCOME BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 14,223 2,561 2,248
INCOME TAX BENEFIT 95 113 43
------- ------- -------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES 14,318 2,674 2,291
EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 388 9,889 8,211
------- ------- -------
NET INCOME $14,706 $12,563 $10,502
======= ======= =======
</TABLE>
25
<PAGE> 16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS-CONTINUED
<TABLE>
<CAPTION>
CONDENSED PARENT COMPANY STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income $ 14,706 $ 12,563 $ 10,502
Adjustments to reconcile net income
to net cash from operating activities
Equity in undistributed
net income of subsidiaries (388) (9,889) (8,211)
Amortization 56 56 41
Change in other assets and
liabilities (9,406) 1,081 (1,042)
-------- -------- --------
Net cash provided by operating activities 4,968 3,811 1,290
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity (1,493)
Maturities of securities held to maturity 1,355 1,400 1,457
Sale of securities available for sale 34
Purchase of securities available for sale
(1,836) (1,297) (1,613)
Net loan payments 282 13 48
-------- -------- --------
Net cash (used) provided by investing activities (1,658) 116 (108)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders (4,927) (1,945) (1,211)
-------- -------- --------
Net cash used by financing activities (4,927) (1,945) (1,211)
-------- -------- --------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (1,617) 1,982 (29)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 1,988 6 35
-------- -------- --------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 371 $ 1,988 $ 6
======== ======== ========
</TABLE>
NOTE 16 - ACQUISITIONS
Effective October 11, 1996, The Navarre Deposit Bank Company, Navarre, Ohio
("Navarre"), affiliated with the Corporation by merging into Citizens. The
transaction was affected through the exchange of 1.8106 common shares of the
Corporation for each of Navarre's 280,000 outstanding common shares (total of
506,918 shares), with cash paid in lieu of fractional shares. Navarre had assets
of approximately $80,000 with four offices in southwestern Stark County, and
will be operated as branches of Citizens. The transaction was accounted for as a
pooling of interests. The following is a summary of the separate results of
operations of the Corporation and Navarre for the nine months ended September
30, 1996 and for the years ended December 31, 1995 and 1994, respectively;
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30, 1996 Dec. 31, Dec. 31,
(UNAUDITED) 1995 1994
----------- ------- -------
<S> <C> <C> <C>
Net interest income
Corporation $29,434 $36,825 $35,494
Navarre 2,330 2,815 2,734
------- ------- -------
Combined $31,764 $39,640 $38,228
======= ======= =======
Net income
Corporation $10,478 $11,850 $ 9,786
Navarre 471 713 716
------- ------- -------
Combined $10,949 $12,563 $10,502
======= ======= =======
</TABLE>
The Corporation also entered into a merger transaction on December 31, 1995
with The Western Reserve Bank of Ohio, Lowellville, Ohio ("Western Reserve"), on
December 16, 1994 with Unity Bancorp, Inc. ("Unity") and its subsidiary, The New
Waterford Bank, New Waterford, Ohio ("New Waterford"), and on February 4, 1994
with The Firestone Bank, Lisbon, Ohio ("Firestone"). Each transaction was
accounted for as a pooling of interests, with cash paid in lieu of fractional
shares. Details of the transactions follow:
<TABLE>
<CAPTION>
Western
Reserve Unity Firestone
-------- ------- ---------
<S> <C> <C> <C>
Affiliate common shares outstanding 160,000 133,473 249,876
Exchange ratio 2.625 1.635 1.425
Corporation common shares issued 419,709 217,890 355,953
</TABLE>
26
<PAGE> 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NOTE 17 - DIVIDEND RESTRICTION AND REGULATORY MATTERS
Dividends paid by Citizens and FNB are the primary source of funds
available to the Corporation for payment of dividends to shareholders and for
other working capital needs. Citizens and FNB are subject to certain
restrictions on the amount of dividends they may declare without prior
regulatory approval. At December 31, 1996, approximately $15,921 of the
subsidiary banks' retained earnings were available for payment of dividends to
the Corporation under those guidelines.
The Corporation and its bank subsidiaries are subject to various regulatory
capital requirements. Failure to meet minimum capital requirements can initiate
certain actions by regulators that, if undertaken, could have a direct material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
entities must meet specific guidelines that involve quantitative measures of
their assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The entities' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors. The Corporation is required to
maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets ("leverage ratio"). Management
believes that, at December 31, 1996, the Corporation, Citizens and FNB meet all
capital adequacy requirements to which they are subject.
The following table summarizes the Corporation's actual consolidated total
and Tier 1 risk-based capital amounts and ratios, and leverage capital amounts
and ratios as of December 31, 1996 and 1995, as well as regulatory minimums.
Citizens and FNB also exceed all regulatory capital requirements and are
therefore not presented separately below.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 December 31, 1995
-------------------------- ---------------------------
AMOUNT PERCENT Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital
Actual $ 88,753 16.23% $79,151 15.32%
Required 21,876 4.00 20,779 4.00
Total risk-based capital
Actual 95,645 17.49 85,647 16.56
Required 43,753 8.00 41,557 8.00
Risk adjusted assets 546,908 519,473
Leverage ratio
Actual 88,753 9.91 79,151 8.80
Minimum required 26,879 3.00 27,000 3.00
Maximum required 44,799 5.00 45,001 5.00
</TABLE>
The minimum requirements to be well capitalized are total capital to risk
weighted assets 10%, Tier 1 capital to risk weighted assets 6% and Tier 1
capital to average assets (leverage ratio) 5%. The Corporation and its bank
subsidiaries are all categorized as well capitalized.
NOTE 18 - QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of consolidated quarterly financial data:
<TABLE>
<CAPTION>
QUARTER ENDED
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
<S> <C> <C> <C> <C>
1996
Interest income $19,243 $18,534 $18,778 $18,001
Net interest income 10,769 10,445 11,141 10,178
Provision for loan losses 370 388 469 387
Net income 3,757 3,373 3,978 3,598
Earnings per common share .64 .57 .67 .61
1995
Interest income $18,308 $18,006 $17,526 $16,984
Net interest income 10,138 9,934 9,824 9,744
Provision for loan losses 456 457 557 554
Net income 3,016 3,340 3,136 3,071
Earnings per common share .51 .57 .53 .52
</TABLE>
27
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Citizens Bancshares, Inc.
Salineville, Ohio
We have audited the accompanying consolidated balance sheets of CITIZENS
BANCSHARES, INC. as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 or 1994 financial statements of the
Navarre Deposit Bank Company, which statements were included to reflect its
merger into Citizens, accounted for as a pooling of interests as discussed in
Note 16. Such financial statements reflect total assets of $76,881,000 as of
December 31, 1995 and net income of $713,000 and $716,000 for the years ended
December 31, 1995 and 1994, respectively. Those statements were audited by other
auditors, whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for Navarre, is based solely on the report of
the other auditors.
We conducted our audits 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 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 consolidated financial position of
CITIZENS BANCSHARES, INC. as of December 31, 1996 and 1995 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Corporation changed
its method of accounting for impaired loans in 1995 to comply with new
accounting guidance.
/s/ Crowe, Chizek and Company LLP
Columbus, Ohio Crowe, Chizek and Company LLP
January 17, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
FOR THE YEAR: 1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 74,556 $ 70,824 $ 64,648 $ 61,846 $ 64,113
Interest expense 32,023 31,184 26,420 26,639 30,885
----------- ---------- ---------- ---------- ----------
Net interest income 42,533 39,640 38,228 35,207 33,228
Provision for loan losses 1,614 2,024 2,365 3,573 5,064
----------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 40,919 37,616 35,863 31,634 28,164
Other income 4,826 4,493 3,687 4,780 4,495
Other expenses 23,728 23,579 24,221 23,578 23,666
----------- ---------- ---------- ---------- ----------
Income before income taxes 22,017 18,530 15,329 12,836 8,993
Income taxes 7,311 5,967 4,827 3,875 2,574
----------- ---------- ---------- ---------- ----------
Net income $ 14,706 $ 12,563 $ 10,502 $ 8,961 $ 6,419
=========== ========== ========== ========== ==========
Cash dividends declared $ 4,876 $ 2,972 $ 1,708 $ 1,014 $ 853
=========== ========== ========== ========== ==========
PER SHARE DATA:(1)
Net income $ 2.49 $ 2.13 $ 1.78 $ 1.52 $ 1.09
Cash dividends declared .83 .50 .29 .17 .14
Book value at year-end 15.21 13.58 11.19 10.53 8.97
Weighted average shares
outstanding (1) 5,897,540 5,897,540 5,897,540 5,898,842 5,897,308
Shares outstanding at
year-end (1) 5,897,540 5,897,540 5,897,540 5,897,540 5,900,023
BALANCE SHEET DATA:
Total assets $ 947,930 $ 890,969 $ 861,947 $ 844,527 $ 780,020
Securities available for sale 240,375 206,988 109,115 142,045
Securities held to maturity 65,230 53,706 173,291 152,158 247,082
Loans, net of unearned income 595,247 574,774 531,080 503,138 474,966
Allowance for loan losses 11,350 10,895 10,393 9,728 7,889
Deposits 709,592 697,664 671,999 689,385 673,400
Federal Home Loan Bank
advances 49,923 84,680 85,762 57,198 31,612
Total shareholders'
equity at year-end 89,712 80,111 66,013 62,129 52,942
AVERAGE BALANCES:
Total assets $ 897,331 $ 866,627 $ 848,055 $ 798,395 $ 749,711
Total earning assets 859,488 831,063 812,179 760,661 709,135
Deposits 706,801 682,013 681,916 682,074 665,928
Net loans 569,222 532,051 500,343 477,760 461,080
Shareholders' equity 83,757 74,154 64,393 57,033 49,987
SIGNIFICANT RATIOS:
Return on average assets 1.64% 1.45% 1.24% 1.12% .86%
Return on average
shareholders' equity 17.56 16.94 16.31 15.71 12.84
Average shareholders' equity
to average assets 9.33 8.56 7.59 7.14 6.67
Average loans as a percent
of average deposits 82.15 79.66 74.89 71.38 70.51
</TABLE>
28
<PAGE> 19
FINANCIAL REVIEW
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
SELECTED FINANCIAL DATA - CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Shareholders' equity as a
percent of year-end assets 9.46% 8.99% 7.66% 7.36% 6.79%
Allowance for loan losses
as a percent of loans 1.91 1.90 1.96 1.93 1.66
Net charge-offs as a percent
of average loans .20 .28 .33 .36 .63
Dividends declared as a
percent of net income 33.16 23.66 16.26 11.32 13.29
Net interest margin, fully
taxable equivalent 5.05 4.85 4.79 4.69 4.75
Nonperforming loans to
total loans .31 .55 .97 .97 1.18
Nonperforming assets to
total assets .22 .38 .82 1.01 1.27
Allowance for loan losses
to nonperforming loans 619.54 346.75 202.04 200.20 140.54
Noninterest expense as a
percent of average assets 2.64 2.72 2.86 2.95 3.16
Operating efficiency ratio 49.19 52.66 56.58 59.20 63.32
</TABLE>
(1) Per share data has been restated to reflect the three-for-two stock
split declared in 1995, the two-for-one stock split declared in 1993 and all
acquisitions (see Note 16) accounted for as poolings of interests.
FINANCIAL REVIEW
This financial review presents management's discussion and analysis of
financial condition and results of operations and should be read in conjunction
with the consolidated financial statements and accompanying notes beginning on
page 12.
OVERVIEW
The Corporation has achieved another year of record earnings. Net income
for 1996 was $14,706 , an increase of $2,143, or 17.1 % over the 1995 earnings
of $12,563. Net income for 1996 included core earnings of $15,075, and net
nonrecurring after tax expenses discussed below of $369. Net income per share
for 1996 was $2.49, an increase of 16.9% over the $2.13 per share earned during
1995. The core earnings per common share for 1996 of $2.55 were reduced by $.06
per common share due to the net nonrecurring after tax items. The nonrecurring
items for the year ended December 31, 1996 were a $498 after tax loan discount
recognized as loan income upon prepayment, a $112 after tax other income FHLMC
remittance settlement, a $434 after tax one-time SAIF assessment and a $545
after tax restructuring charge related to an acquisition. In 1994, net income
was $10,502 or $1.78 per share. The Corporation has reported annual increases in
core earnings every year since the holding company was formed in 1982. Net
income has increased at a compound annual growth rate of 18.0% over the last
five years, and net income per share has increased at a compound annual growth
rate of 18.0% over that same period.
Dividends declared in 1996 totaled $.83 per share. This represented an
increase of 66.0% over 1995, when dividends declared were $ .50 per share and
continues the Corporation's record of increased cash dividends for each of the
fifteen years since the holding company was formed in 1982. Cash dividends for
1994 were $.29 per share. The compound annual growth rate for the Corporation's
per share dividend declaration for the last five years is 42.8%.
The Corporation's return on average total equity in 1996 was 17.56%, as
compared to 16.94% in 1995 and 16.31% in 1994, for a five year average of
15.87%. At December 31, 1996, the ratio of equity to assets was 9.46%, compared
to 8.99% at year-end 1995 and 7.66% at year-end 1994 and a five year average of
8.05%. The Corporation's return on average assets was 1.64% in 1996, compared to
1.45% in 1995 and 1.24% in 1994, and has averaged 1.26% over the last five
years. The steady annual growth in earnings has been attributable to increases
in earning assets, primarily loans.
The principal sources of revenue for the Corporation are interest and fees
on loans, which accounted for 72.0% of total revenues in 1996, 70.6% in 1995 and
70.0% in 1994. Interest on investment and mortgage-backed securities is also a
significant source of revenue, accounting for 21.4% of revenues in 1996, 22.5%
in 1995 and 24.0% in 1994.
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
earning assets, including securities and loans, exceeds interest paid on
interest-bearing liabilities, including deposits and other borrowed funds. Net
interest income is the principal source of a financial institution's earnings.
Interest rate fluctuations, as well as changes in the amount and type of earning
assets and interest-bearing liabilities, combine to affect net interest income.
Tax exempt securities and loans carry pre-tax yields lower than comparable
taxable assets. Therefore, it is more meaningful to analyze net interest income
on a fully taxable equivalent basis ("FTE"). The tax equivalent adjustment is
based on the Federal corporate income tax rate of 35%. The following table shows
the increases over the last three years in actual and FTE net interest income:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net interest income $ 42,533 $ 39,640 $ 38,228
Taxable equivalent adjustments
to net interest income 856 708 671
---------- ---------- ----------
Net interest income, fully taxable
equivalent $ 43,389 $ 40,348 $ 38,899
========== ========== ==========
Net interest margin 4.95% 4.77% 4.71%
Taxable equivalent adjustment .10 .09 .08
---------- ---------- ----------
Net interest margin, fully taxable equivalent 5.05% 4.85% 4.79%
========== ========== ==========
</TABLE>
29
<PAGE> 20
FINANCIAL REVIEW
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NET INTEREST INCOME - CONTINUED
In 1996, FTE net interest income provided 90.0% of the Corporation's net
revenues, compared with 90.0% in 1995 and 91.3% in 1994. The increase of $3,041
in FTE net interest income in 1996 was primarily attributable to an increase in
average interest-earning assets of 3.4% or $28,426. During 1996, the growth in
average interest-earning assets was primarily in loans, which increased $37,331.
The growth in FTE net interest income in 1995 over 1994 was attributable to
increased average interest-earning assets.
Net interest margin is calculated by dividing FTE net interest income by
average interest-earning assets. The net interest margin increased 20 basis
points in 1996 to 5.05%. The principal factors contributing to the increase were
higher yielding securities and loans and growth in average interest-earning
assets which exceeded the growth in interest-bearing liabilities. Additionally,
an increase over 1995 levels in average noninterest-bearing demand deposits and
average shareholders' equity of 4.0% and 12.9%, respectively, contributed
additional funds for investment at no cost to the Corporation.
The monetary policies of the Federal Reserve Board resulted in one short
term interest rate decrease during 1996. During 1997, the Corporation's net
interest margin is expected to contract. It is anticipated that the yield on
earning assets will decrease faster than the rates on liability costs. The
Corporation practices an asset and liability management policy more fully
explained on page 32 of this report which attempts to minimize negative impacts
on net interest income when such movements occur in the market.
To provide a more in-depth analysis of net interest income, the following
average balance sheets and net interest income analysis detail the contribution
of earning assets to overall net interest income and the impact of the cost of
funds.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
Years Ended December 31, 1996 1995
-------------------------------------- ----------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 481 $ 28 5.82% $ 373 $ 18 4.83%
Federal funds sold and other 6,347 363 5.72 11,457 656 5.73
Securities
Taxable 247,979 15,826 6.38 253,199 15,896 6.28
Tax exempt 24,065 1,173 4.87 22,749 1,090 4.79
Loans 580,616 57,166 9.85 543,285 53,164 9.79
--------- --------- -------- ----------
Total interest-earning
assets 859,488 74,556 8.67 831,063 70,824 8.52
--------- -------- ----------
NONEARNING ASSETS:
Cash and due from banks 21,768 20,249
Premises and equipment, net 14,493 13,313
Other nonearning assets 12,976 13,236
Allowance for loan losses (11,394) (11,234)
--------- ---------
Total assets $ 897,331 $ 866,627
========= =========
Interest-bearing liabilities:
Demand deposits $ 88,963 1,984 2.23 $ 92,377 2,094 2.27
Savings deposits 243,635 7,734 3.17 254,011 8,699 3.42
Time deposits 310,252 17,092 5.51 274,138 14,726 5.37
Federal funds and
repurchase agreements 43,952 2,295 5.22 31,254 1,726 5.52
Borrowings 54,218 2,918 5.38 70,685 3,939 5.57
-------- --------- -------- -------
Total interest-bearing
liabilities 741,020 32,023 4.32 722,465 31,184 4.32
--------- -------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 63,951 61,487
Other liabilities 7,409 7,303
Preferred stock 1,194 1,218
Shareholders' equity 83,757 74,154
--------- ---------
Total liabilities and equity $ 897,331 $ 866,627
========= =========
NET INTEREST INCOME $ 42,533 $ 39,640
========= =========
NET INTEREST INCOME TO EARNING ASSETS 4.95% 4.77%
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
Years Ended December 31, 1994
------------------------------------
Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 292 $ 14 4.79%
Federal funds sold and other 8,268 351 4.25
Securities
Taxable 270,766 15,324 5.66
Tax exempt 22,634 1,107 4.89
Loans 510,219 47,852 9.38
----------- --------
Total interest-earning
assets 812,179 64,648 7.96
--------
NONEARNING ASSETS:
Cash and due from banks 18,819
Premises and equipment, net 13,138
Other nonearning assets 14,282
Allowance for loan losses (10,363)
-----------
Total assets $ 848,055
===========
Interest-bearing liabilities:
Demand deposits $ 83,970 2,005 2.39
Savings deposits 303,210 9,778 3.22
Time deposits 236,302 10,300 4.36
Federal funds and
repurchase agreements 32,125 1,242 3.87
Borrowings 62,179 3,095 4.98
----------- ---------
Total interest-bearing
liabilities 717,786 26,420 3.68
---------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 58,434
Other liabilities 6,199
Preferred stock 1,243
Shareholders' equity 64,393
-----------
Total liabilities and equity $ 848,055
===========
Net interest income $ 38,228
=========
Net interest income to earning assets 4.71%
</TABLE>
- - For purposes of this schedule, nonaccrual loans are included in loans.
- - Net interest income is reported on a historical basis without
tax-equivalent adjustment.
- - Fees collected on loans are included in interest on loans.
30
<PAGE> 21
FINANCIAL REVIEW
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
NET INTEREST INCOME - CONTINUED
The following table presents the changes in the Corporation's interest
income and interest expense resulting from changes in interest rates and changes
in the volume of interest-earning assets and interest-bearing liabilities.
Changes attributable to both rate and volume which cannot be segregated have
been allocated in proportion to the changes due to rate and volume.
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------------
CHANGE FROM 1995 IN INTEREST Change from 1994 in Interest
INCOME OR EXPENSE DUE TO Income or Expense Due to
------------------------ ------------------------
VOLUME RATE TOTAL Volume Rate Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits 6 $ 4 $ 10 $ 4 $ 4
Federal funds sold (292) (1) (293) 159 $ 146 305
Securities:
Taxable (331) 261 (70) (1,018) 1,590 572
Tax exempt 64 19 83 6 (23) (17)
Loans (net) 3,674 328 4,002 3,156 2,156 5,312
------- ------- ------- ------- ------- -------
Total interest income 3,121 611 3,732 2,307 3,869 6,176
------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing
demand deposits (77) (33) (110) 189 (100) 89
Savings deposits (346) (619) (965) (1,665) 586 (1,079)
Time deposits 1,981 385 2,366 1,775 2,651 4,426
------- ------- ------- ------- ------- -------
Total deposits 1,558 (267) 1,291 299 3,137 3,436
Federal funds and
repurchase agreements 668 (99) 569 (39) 523 484
Borrowings (890) (131) (1,021) 450 394 844
------- ------- ------- ------- ------- -------
Total interest expense 1,336 (497) 839 710 4,054 4,764
------- ------- ------- ------- ------- -------
Net interest income $ 1,785 $ 1,108 $ 2,893 $ 1,597 $ (185) $ 1,412
======= ======= ======= ======= ======= =======
</TABLE>
OTHER INCOME
Other income totaled $4,826 in 1996, a 7.4% increase over 1995. The 1995
total of $4,493 represented an increase of $806 or 21.9% from 1994. This
increase was primarily the result of service charges and fees on deposit
accounts which totaled $2,239 in 1996, compared to $2,026 in 1995 and $2,002 in
1994.
The "other" component of this category totaled $2,609 in 1996, $2,400 in
1995, and $1,907 in 1994, as loan sale gains and mortgage loan servicing income
both increased in 1996.
OTHER EXPENSES
The Corporation's profitability levels have been achieved in large part due
to successful control over expense growth. Contributing factors include
efficient staffing, a comprehensive budgeting process and centralization of
various internal functions such as data processing.
One measure of this success is the operating efficiency ratio (operating
expenses divided by the sum of taxable equivalent net interest income and other
operating income excluding net securities transactions). This ratio, at 49.19%
for 1996, was well below our peers.
Other expenses were $23,728 in 1996, compared to $23,579 in 1995 and
$24,221 in 1994. During 1996, the Corporation incurred $838 in merger,
integration and restructuring expenses. These costs were primarily in
recognition of professional fees, early retirement, other personnel related
costs and the write-off of certain fixed assets in the elimination of duplicate
facilities. Without the pre-tax restructuring charges, and the pre-tax one-time
SAIF assessment discussed below, other expenses were $22,223 in 1996, a decline
of $645 from the comparable 1995 level.
Salaries and employee benefits decreased $47 in 1996 and increased by $71
in 1995.
Additionally, in 1996 the legislation that will recapitalize the Savings
Association Insurance Fund ("SAIF") resulted in a one-time pre-tax assessment of
$667. The after-tax impact of the assessment was $434 or $.07 per common share.
The Corporation's SAIF deposits were acquired with the Midland Buckeye Savings
and Loan Association acquisition. The Corporation's SAIF deposit insurance
premiums will drop to $.064 per $100 of deposits beginning January 1, 1997, from
$.23 per $100 of deposits currently being assessed. This will save the
Corporation approximately $200 in deposit insurance premiums per year.
The Corporation will continue its focus of controlling other expenses
during 1997. The Corporation has set a five year operating efficiency ratio
target of 39%.
31
<PAGE> 22
FINANCIAL REVIEW
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
INCOME TAXES
Income tax expense is comprised of Federal income tax and the West
Virginia income tax accrued by FNB. The Corporation's effective tax rate was
33.2%, 32.2% and 31.5% in 1996, 1995 and 1994, respectively. Tax exempt
investment and loan income are the primary reason that the effective tax rate is
less than the statutory tax rate of 35%. While the Corporation's nontaxable
interest income increased, decreases in other items caused the increase in the
1996 effective tax rate.
FINANCIAL CONDITION
ASSET AND LIABILITY MANAGEMENT
The asset and liability portfolios are managed to ensure adequate
liquidity and to control interest rate risk exposure. Management seeks to
minimize the risk of a reduction in net interest income that could result from
fluctuations in market interest rates. This process is carried out through
regular meetings of senior management representing the finance, lending,
investment and deposit gathering areas of the Corporation.
INTEREST RATE SENSITIVITY
There is no single interest rate risk measurement system that satisfies all
objectives. As a result, a combination of simulation modeling and asset and
liability repricing schedules are used to analyze and manage interest rate risk.
The repricing schedule below reflects the contractual maturity or repricing of
each of the Corporation's rate sensitive assets and liabilities held at December
31, 1996. While most assets and liabilities reprice either at maturity or in
accordance with their contractual terms, several balance sheet components
demonstrate characteristics that require adjustments to more accurately reflect
their repricing behavior. When using simulation modeling, assumptions based on
historical pricing relationships and anticipated market reactions are made to
certain core deposits to reflect the elasticity of the changes in their interest
rates relative to the changes in market interest rates. In addition, estimates
are made regarding early loan and security repayments. These adjustments provide
a more accurate picture of the Corporation's interest rate risk profile than the
repricing schedule.
Net interest income is evaluated under various balance sheet and interest
rate scenarios. The results of this analysis provide the information needed to
assess the proper balance sheet structure. As previously discussed, management
anticipates a reduction in the net interest margin percentage in 1997 as earning
asset yields are expected to decrease faster than rates of liability costs. The
Corporation has no off-balance sheet financial agreements (interest rate
derivatives).
The following table summarizes the Corporation's interest rate sensitive
assets and liabilities. Each item is presented at the earlier of its final
contractual maturity or next repricing date without regard to periodic repayment
terms or prepayment assumptions.
<TABLE>
<CAPTION>
MATURITY OR NEXT RATE ADJUSTMENT DATE
-------------------------------------
0-3 3-12 ONE THROUGH OVER FIVE NOT
MONTHS MONTHS FIVE YEARS YEARS CLASSIFIED TOTAL
--------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (a) $ 207,331 $ 32,491 $ 150,523 $203,744 $ 1,158 $595,247
Securities (b) 31,082 77,411 66,151 118,584 12,377 305,605
Federal funds sold 1,900 1,900
Interest-bearing deposits 314 50 364
--------- --------- --------- -------- -------- --------
Rate sensitive assets (RSA) $ 240,627 $ 109,952 $ 216,674 $322,328 $ 13,535 $903,116
========= ========= ========= ======== ======== ========
LIABILITIES
Interest-bearing demand deposits $ 87,757 $ 87,757
Interest-bearing savings deposits 231,299 231,299
Interest-bearing time deposits 91,030 $ 126,170 $ 104,241 $ 1,278 322,719
Securities sold under
repurchase agreements and
Federal funds purchased 87,939 87,939
Federal Home Loan Bank advances 19,750 21,773 8,400 49,923
--------- --------- --------- -------- --------
Rate sensitive liabilities (RSL) $ 517,775 $ 147,943 $ 112,641 $ 1,278 $779,637
========= ========= ========= ======== ========
Gap (c) $(277,148) $ (37,991) $ 104,033 $321,050 $ 13,535 $123,479
Cumulative Gap (277,148) (315,139) (211,106) 109,944 123,479
RSA/RSL 46.5% 74.3% 192.4% NM NM
Cumulative Gap/RSA (d) (30.7) (34.9) (23.4) 12.2
</TABLE>
(a) Expected maturities will likely differ from contractual maturities because
some borrowers and issuers have the right to call or prepay obligations
with or without call or prepayment penalties.
(b) Includes securities available for sale.
(c) Gap is defined as rate sensitive assets less rate sensitive liabilities and
may be expressed in dollars or as a percentage.
(d) Computation is based on total RSA of $903,116.
NM - Not Meaningful
Total interest-earning assets exceeded interest-bearing liabilities by
$123,479 at December 31, 1996. This difference was funded through
noninterest-bearing liabilities and shareholders' equity. The data presented
above is based on contractual maturities only and does not include assumptions
regarding early loan and security repayments. The above table shows that the
total liabilities maturing or repricing within one year exceed assets maturing
or repricing within one year by $315,139. However, repricing of certain
categories of assets and liabilities is subject to competitive and other
influences that are beyond the Corporation's control. As a result, certain
assets and liabilities indicated as maturing or repricing within a stated period
may, in fact, mature or reprice in other periods or at different volumes.
32
<PAGE> 23
FINANCIAL REVIEW
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
LOAN PORTFOLIO
The Corporation's loan portfolio is its largest and most profitable
component of average earning assets, totaling 67.6% of average earning assets.
The Corporation continued to emphasize increasing its loan portfolio in 1996.
Average total loans increased by $37,331 or 6.9% in 1996, following a 6.5% or
$33,066 increase in 1995. As a result of net loan increases, the Corporation's
loan-to-deposit ratio continued its upward trend in 1996, ending the year at
83.9%. This ratio compares to 82.4% at December 31, 1995. The expanding market
share of the subsidiary banks, as well as the Corporation's carefully planned
acquisition activity, have contributed greatly to the growth in the loan
portfolio.
Total loans at December 31, 1996, increased by $20,473 or 3.6% over the
total at December 31, 1995. The Corporation experienced growth in 1996 in
providing financing to enterprises involved in purchasing pools of one-to-four
family residential, home equity and other consumer loans. Such loans totaled
approximately $65,464 at December 31, 1996, compared to $53,851 at December 31,
1995. The source of repayment for these loans is the underlying pools of
consumer debt which represent diverse loan types and geographic distribution.
Commercial loans increased by $4,623 or 3.4% during 1996. Real estate loans,
including revolving home equity loans, decreased by $281 or .1% during 1996.
Construction loans decreased by $1,498 or 24.2% in 1996. Consumer loans declined
by $2,829 or 5.5%. The Corporation's loan portfolio contains no loans to foreign
borrowers. Over the past four years, total loans have increased $120,281, due to
internal growth and acquisitions. While loan growth has been substantial, the
Corporation imposes underwriting and credit standards which are designed to
maintain a quality loan portfolio.
Loans secured by real estate, which in total constituted approximately
47.2% of the Corporation's loan portfolio at December 31, 1996, consist of a
diverse portfolio of predominantly single family residential loans and loans for
commercial purposes where real estate is merely collateral, not the primary
source of repayment. The majority of these loans are secured by property located
within Ohio, where real estate values have remained relatively stable over the
past ten years. The Corporation also originates residential real estate loans to
be sold in the secondary market. In 1996, $21,275 of loans were originated to be
sold in the secondary market. This compares to approximately $11,163 of new loan
volume originated for sale in the secondary market in 1995. While this activity
generates considerable processing and servicing fee income for the Corporation,
it does not comprise a major line of business for the Corporation. In addition
to the loans reported, the Corporation also offers certain off-balance sheet
products such as letters of credit, revolving credit agreements, and other loan
commitments. These products are offered under the same credit standards as the
loans included in the loan portfolio and are included in the Corporation's
risk-based capital ratios.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount which represents management's
assessment of the losses inherent in the Corporation's loan portfolio. All
lending activity contains associated risks of loan losses, and the Corporation
recognizes these credit risks as a necessary element of its business activity.
To assist in identifying and managing potential loan losses, the Corporation
maintains a loan review function that continuously evaluates individual credit
relationships as well as overall loan portfolio conditions. One of the primary
objectives of this loan review function is to make recommendations to management
as to both specific loss reserves and overall portfolio loss reserves.
The provision for loan losses was $1,614 in 1996, compared to $2,024 and
$2,365 in 1995 and 1994, respectively. The decrease in the provision for loan
losses in 1996 was made possible due to a lower percentage of identified problem
loans from the loan review process as well as stable loan losses. Net loan
losses for 1996 were $1,159, which represents .20% of average loans. This
compares to net losses of .29% of average loans in 1995. The provision for loan
losses to net losses was 139.3% in 1996.
The allowance for loan losses at December 31, 1996 was $11,350, an increase
of $455 since year-end 1995. The allowance was 1.91% of total loans at year-end
1996, compared to 1.90% at year-end 1995. The allowance for loan losses as a
percent of nonperforming loans increased to 619.5% at December 31, 1996, from
346.8% at year-end 1995.
NONPERFORMING ASSETS
The Corporation's accounting and classification policies regarding
nonaccrual loans demonstrate the importance to the Corporation of timely
recognition of troubled loans. Nonperforming assets consist of nonaccrual loans,
90 days past due and still accruing interest, and other real estate owned which
has been obtained through foreclosure or deed in lieu of foreclosure.
Nonperforming assets totaled $2,046 at year-end 1996, compared to $3,379 at
year-end 1995, a decrease of $1,333 or 39.4%.
SECURITIES
The Corporation's securities portfolio, including securities available for
sale plus securities held to maturity, increased from $260,694 at December 31,
1995 to $305,605 at December 31, 1996. The largest portion of the portfolio at
year-end 1996 was invested in GNMA, FHLMC and FNMA mortgage-backed securities
which totaled $164,224 and comprise 53.7% of the carrying value of total
investments.
In 1996, 1993 and 1992, management implemented growth strategies utilizing
the financial markets. These strategies involved borrowing Federal Home Loan
Bank advances and repurchase agreements while interest rates were low and
investing the term portion of these funds in U.S. Government guaranteed
mortgage-backed securities and securities collateralized by one year adjustable
rate mortgages at a higher rate. These strategies leveraged the Corporation's
capital thereby enhancing its return on equity and earnings. During 1994 and
1995 these types of growth strategies were not used by the Corporation because
management determined that there was not acceptable interest rate risk and
interest rate spreads between the borrowings and planned investments. Management
will continue to review and plan for acceptable growth strategies in the future.
LIQUIDITY AND FUNDING
The Corporation's liquidity position remained strong during 1996. Core
deposits, representing the Corporation's largest, most stable and generally
least costly source of funds, totaled $ 654,991 at December 31, 1996, a decrease
of $1,266, or .2%, from year-end 1995. At December 31, 1996, core deposits
represented 112.2% of loans, compared to 116.4% at December 31, 1995. This
decline resulted from the loan growth experienced in 1996. Such deposits
generally represent a more stable alternative to more volatile money market
sources such as short-term borrowings and corporate certificates of deposits.
The Corporation has no brokered deposits.
Cash and cash equivalents (cash and due from banks and Federal funds sold)
are the Corporation's most liquid assets. At December 31, 1996, cash and cash
equivalents totaled $27,367, a decrease of $13,559 or 33.1% from December 31,
1995. Additionally, the Corporation has secondary sources of liquidity in
investment and mortgage-backed securities available for sale totaling $240,375
at year-end 1996 compared to $206,988 at year-end 1995, as well as maturities
and repayments of loans and investment securities held to maturity.
33
<PAGE> 24
FINANCIAL REVIEW
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
LIQUIDITY AND FUNDING - CONTINUED
Securities sold under repurchase agreements and Federal funds purchased at
December 31, 1996 of $87,939 increased $67,403 or 328.2% from year-end 1995.
Management implemented securities growth strategies in 1996 totaling
approximately $46,600 as described above. These low cost borrowings were used as
the primary funding source for the growth strategies. These repurchase
agreements are collateralized by securities held by a broker and the exact same
securities are returned to the Corporation at the maturities of the agreements.
Federal Home Loan Bank ("FHLB") advances decreased to $49,923 at December
31, 1996, from $84,680 at year-end 1995, a decrease of $34,757. Management views
FHLB advances as a stable secondary funding source.
Management believes that the Corporation's liquidity position is strong
based on its high level of cash, cash equivalents, core deposits, the stability
of its other funding sources and the support provided by its capital base.
As summarized in the Consolidated Statements of Cash Flows on page 15 of
this report, the most significant transactions which affected the Corporation's
level of cash and cash equivalents, cash flows and liquidity during 1996 were
the net increase in loans of $21,348; the receipt of proceeds from maturities
and payments on securities held to maturity of $36,126; the purchase of
securities held to maturity of $41,902; the receipt of proceeds from sales of
securities available for sale of $5,699 and the net increase in deposits of
$11,928.
<TABLE>
<CAPTION>
CAPITAL RESOURCES
1996 1995
------- -------
<S> <C> <C>
Common shareholders' equity $89,712 $80,111
Book value per share 15.21 13.53
</TABLE>
Tier 1 capital is shareholders' equity excluding the unrealized gain or
loss on investment securities available for sale, plus minority interest in
subsidiaries from Citizens' Series A Preferred Stock, less goodwill. Tier 2
capital includes Tier 1 capital plus the allowance for loan losses not to exceed
1.25% of risk weighted assets.
The capital leverage ratio was 9.91% at December 31, 1996, as compared to
8.80% at December 31, 1995. This improvement is due to capital growth exceeding
asset growth and the reduction of intangible assets during 1996. The capital
leverage ratio is computed by dividing Tier 1 capital by year-end assets, net of
certain intangible assets.
Total shareholders' equity increased $9,601 or 12.0% in 1996. For 1995,
total shareholders' equity increased $14,098 or 21.4%. Shareholders' equity was
9.46% of total assets at December 31, 1996, as compared to 8.99% at year-end
1995.
Management believes that the most effective method of increasing capital is
through retention of earnings after payment of dividends to shareholders.
Because of this, current earnings, net of dividends, totaling $9,830, $9,591 and
$8,794 were added to retained earnings in 1996, 1995 and 1994, respectively.
Dividends declared to common shareholders were $.83, $.50 and $.29 per share in
1996, 1995 and 1994, respectively. The dividends per share have been adjusted to
reflect the Corporation's three-for-two stock split declared in December 1995,
payable January 12, 1996.
Total common shares outstanding following the distribution of the split
shares and the completion of the Western Reserve and Navarre acquisitions total
approximately 5.9 million, which is expected to result in additional NASDAQ
market trading.
The Corporation adopted SFAS No. 115 on December 31, 1993. At year-end
1996, there was an increase of $798 in shareholders' equity. This represented
the unrealized gains on securities classified as available for sale, net of the
related tax effect. The level of shareholders' equity will be impacted in the
future by changes in the volume and market values of securities available for
sale.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," was issued by the Financial Accounting
Standards Board in 1996. It revises the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It is effective for some transactions in 1997 and others in
1998. The effect on the Corporation's financial statements has not yet been
determined.
EFFECTS OF INFLATION
The assets and liabilities of the Corporation are primarily monetary in
nature and are more directly affected by the fluctuation in interest rates than
inflation. Movement in interest rates is a result of the perceived changes in
inflation as well as monetary and fiscal policies. Interest rates and inflation
do not necessarily move with the same velocity or within the same time frame;
therefore, a direct relationship to the inflation rate cannot be shown. The
financial information presented in this report has been prepared in accordance
with generally accepted accounting principles, which require that the
Corporation measure financial position and operating results primarily in terms
of historical dollars.
34
<PAGE> 25
FINANCIAL REVIEW
CITIZENS BANCSHARES, INC. DECEMBER 31, 1996
(Dollars in thousands,
except per share data)
COMMON STOCK
The Corporation's common shares were listed on The NASDAQ National Market
System under the symbol "CICS" on June 1, 1993. Six brokerage firms currently
serve as market makers for the Corporation's Common Stock: Advest, Inc.;
Parker/Hunter, Incorporated; The Ohio Company; McDonald & Company; Sandler
O'Neill & Partners, L.P.; and Herzog, Heine, Geduld, Inc. For 1996 and 1995, the
high and low sales prices for the common stock, as reported by The NASDAQ
National Market System are presented. The chart also specifies the cash
dividends declared by the Corporation to its shareholders during 1996 and 1995.
While management expects to maintain its policy of paying regular cash dividends
in the future, no assurances can be given that any dividends will be declared,
or, if declared, the amount of any such dividends.
The prices and dividends set forth below have been restated to reflect the
three-for-two stock split declared during December 1995 distributed January 12,
1996.
<TABLE>
<CAPTION>
1995 1996
- ------------------------------------------------------------------- -----------------------------------------
Quarters Ended Mar. June Sept. Dec. MAR. JUNE SEPT. DEC.
31 30 30 31 31 30 30 31
------ ------ ------ ------ ------ ------ ------ ------
(dollars per share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $24.17 $24.00 $24.00 $29.67 $29.50 $29.50 $31.00 $33.25
Low 23.00 22.67 23.00 29.00 28.75 28.50 30.75 33.25
Dividends .01 .10 .02 .37 .19 .19 .20 .25
Number of shareholders
at year-end 2,103 2,219
</TABLE>
35
<PAGE> 1
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
------------------------------
State of Name Under Which
Subsidiary Incorporation Subsidiary Does Business
- ---------- ------------- ------------------------
The Citizens Banking Ohio The Citizens Banking
Company Company
Freedom Financial Life Arizona Freedom Financial Life
Insurance Company Insurance Company
First National Bank United States First National Bank of
Chester
Freedom Express, Inc. Ohio Freedom Express, Inc.
<PAGE> 1
EXHIBIT 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Prospectus constituting
part of the Registration Statement on Form S-8 (No. 333-18867) of Citizens
Bancshares, Inc. of our report dated January 17, 1997 on the consolidated
balance sheets of the Company as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the three years ended December 31, 1996, which report is incorporated
by reference in this Form 10-K.
/s/ CROWE, CHIZEK AND COMPANY LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
March 12, 1997
<PAGE> 2
EXHIBIT 23
----------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Citizens Bancshares, Inc.
Salineville, Ohio
We have audited the accompanying consolidated balance sheets of Citizens
Bancshares, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 or 1994 financial statements of The
Navarre Deposit Bank Company, which statements were included to reflect its
merger into Citizens, accounted for as a pooling of interests as discussed in
Note 16. Such financial statements reflect total assets of $76,881,000 as of
December 31, 1995 and net income of $713,000 and $716,000 for the years ended
December 31, 1995 and 1994, respectively. Those statements were audited by other
auditors, whose report has been furnished to us, and our opinion, insofar as it
related to the amounts included for Navarre, is based solely on the report of
the other auditors.
We conducted our audits 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 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 consolidated financial position of
Citizens Bancshares, Inc. as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Corporation changed its
method of accounting for impaired loans in 1995 to comply with the new
accounting guidance.
/s/ CROWE, CHIZEK AND COMPANY LLP
-----------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
January 17, 1997
<PAGE> 3
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Prospectus constituting part
of the Registration Statement on Form S-8 (No. 333-18867) of Citizens
Bancshares, Inc. of our report dated January 19, 1996 on the balance sheet of
The Navarre Deposit Bank Company as of December 31, 1995, and the related
statements of income, changes in shareholders' equity and cash flows for the two
years ended December 31, 1995, which report is incorporated in this Form 10-K.
/s/ ROBB, DIXON, FRANCIS, DAVIS
ONESON & COMPANY
----------------------------------
ROBB, DIXON, FRANCIS, DAVIS
ONESON & COMPANY
Granville, Ohio
March 12, 1997
<PAGE> 4
EXHIBIT 23
----------
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
The Navarre Deposit Bank Co.
Navarre, Ohio
We have audited the accompanying balance sheet of The Navarre Deposit
Bank Co. as of December 31, 1995 and the related statements of income, changes
in shareholder's equity and cash flows for the years ended December 31, 1995 and
1994. These financial statements are the responsibility of the Bank'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 audit to obtain
reasonable assurance about whether the financial statements are free from
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 statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Navarre Deposit
Bank Co. as of December 31, 1995 and the results of its operations and its cash
flows for the years ended December 31, 1995 and 1994, in conformity with
generally accepted accounting principles.
/s/ ROBB, DIXON, FRANCIS, DAVIS,
ONESON & COMPANY
---------------------------------------
ROBB, DIXON
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
January 19, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000855876
<NAME> CITIZENS BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,467
<INT-BEARING-DEPOSITS> 364
<FED-FUNDS-SOLD> 1,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 240,375
<INVESTMENTS-CARRYING> 65,230
<INVESTMENTS-MARKET> 65,454
<LOANS> 595,247
<ALLOWANCE> 11,350
<TOTAL-ASSETS> 947,930
<DEPOSITS> 709,592
<SHORT-TERM> 123,457
<LIABILITIES-OTHER> 10,351
<LONG-TERM> 14,818
<COMMON> 16,514
0
0
<OTHER-SE> 73,198
<TOTAL-LIABILITIES-AND-EQUITY> 947,930
<INTEREST-LOAN> 57,166
<INTEREST-INVEST> 16,999
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 74,556
<INTEREST-DEPOSIT> 26,810
<INTEREST-EXPENSE> 32,023
<INTEREST-INCOME-NET> 42,533
<LOAN-LOSSES> 1,614
<SECURITIES-GAINS> (22)
<EXPENSE-OTHER> 23,728
<INCOME-PRETAX> 22,017
<INCOME-PRE-EXTRAORDINARY> 22,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,706
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 2.49
<YIELD-ACTUAL> 4.95
<LOANS-NON> 1,158
<LOANS-PAST> 674
<LOANS-TROUBLED> 418
<LOANS-PROBLEM> 2,060
<ALLOWANCE-OPEN> 10,895
<CHARGE-OFFS> 2,444
<RECOVERIES> 1,285
<ALLOWANCE-CLOSE> 11,350
<ALLOWANCE-DOMESTIC> 2,544
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,806
</TABLE>
