<PAGE> 1
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, 1997
Commission file number 0-18209
CITIZENS BANCSHARES,INC.
------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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:
</TABLE>
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. [X]
On February 23, 1998, 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
$415,248,300.
Documents Incorporated by Reference
-----------------------------------
Portions of Annual Report to Shareholders for the Year ended December
31, 1997 (incorporated into Parts I, II and IV of this Form 10-K).
Portions of Citizens Bancshares, Inc.'s Proxy Statement to be filed on
or before April 30, 1998 (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. Citizens
acquired ValueNet, an internet service provider, during 1997. Citizens 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 66.9% of total revenue in 1997, 72.0%
in 1996 and 70.6% in 1995. Interest on securities is also a significant source
of revenue, accounting for 25.0% of revenues in 1997, 21.4% in 1996 and 22.6% in
1995. Total cash and cash equivalents of $32,162,000 at year-end 1997 and
increased $4,795,000 from year-end 1996. 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.
Competition-
The primary market area for Citizens is eastern Ohio and consists of all of
Columbiana County, all of Carroll County, portions of Stark, Mahoning and
Belmont 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, FNB and Express employ
approximately 375 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
<PAGE> 4
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. Citizens is also a member of the Federal
Reserve and is subject to their supervision and regulation. 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
$107 million 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 1997 Annual Report to
Shareholders (Exhibit 13), portions of which are incorporated in this Form 10-K
by reference.
4
<PAGE> 5
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 22 of the
Corporation's 1997 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 23 of the Corporation's 1997 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>
1997
----------------------------------------------
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 $ 6,006 $ 50 $ (2) $ 6,054
U.S. Government agencies and corporations 55,993 935 (6) 56,922
Obligations of states and political subdivisions 100 100
Corporate and other securities 5,000 185 5,185
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 221,447 1,045 (413) 222,079
Agency collateralized mortgage obligations 16,980 37 (157) 16,860
Other 4,832 26 4,858
-------- -------- -------- --------
Total debt securities available for sale 310,358 2,278 (578) 312,058
Marketable equity securities 16,274 3,397 19,671
-------- -------- -------- --------
Total securities available for sale $326,632 $ 5,675 $ (578) $331,729
======== ======== ======== ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 35,624 $ 138 $ (3) $ 35,759
U.S. Government agencies and corporations 100 (2) 98
Obligations of states and political subdivisions 21,669 417 22,086
Other 5 5
-------- -------- -------- --------
Total securities held to maturity $ 57,398 $ 555 $ (5) $ 57,948
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
II. INVESTMENT PORTFOLIO (Continued)
--------------------------------
<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>
7
<PAGE> 8
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>
8
<PAGE> 9
II. INVESTMENT PORTFOLIO (Continued)
--------------------------------
(dollars in thousands)
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, 1997. 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 $19,671 have been
excluded from this schedule.
MATURITY OR NEXT RATE ADJUSTMENT DATE
<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 IELD
------ ----- ------ ----- ------ ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 750 5.63% $ 2,745 5.55% $ 2,559 6.79%
U.S. Government agencies
and corporations 499 5.26 4,272 6.62 $ 52,151 7.33%
Obligations of states and 100 7.00
political subdivisions
Other securities $ 5,185 9.87%
-------- -------- -------- -------- --------
Total investment securities 750 3,244 6,831 52,251 5,185
Mortgage-backed securities 7,177 6.43 69,521 7.09 32,993 6.62 50,872 6.82 83,234 7.19
-------- -------- -------- -------- --------
Total debt securities
available for sale $ 7,927 6.36% $ 72,765 7.02% $ 39,824 6.63% $103,123 7.08% $ 88,419 7.34%
======== ======== ======== ======== ========
</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, 1997. 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
<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 $ 3,391 6.72% $ 8.503 6.07% $ 23,730 5.96%
U.S. Government agencies
and corporations 100 6.60
Obligations of states and
political subdivisions 915 9.69 983 8.86 15,025 7.35 $ 4,395 7.77% $ 351 8.70%
Other securities 5 5.50
-------- -------- -------- -------- --------
Total investment securities $ 4,306 7.35% $ 9,486 6.36% $ 38,860 6.50% $ 4,395 7.77% $ 351 8.70%
======== ======== ======== ======== ========
</TABLE>
9
<PAGE> 10
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, 1997.
III. LOAN PORTFOLIO
--------------
A. TYPES OF LOANS - Total loans on the consolidated balance sheets are
comprised of the following classifications at December 31.
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $285,940 $254,304 $232,506 $193,310 $159,347
Real estate mortgage 297,603 280,779 281,060 280,278 274,210
Construction 5,329 4,704 6,202 6,494 7,160
Consumer 57,084 48,269 51,098 50,414 53,267
Real estate mortgage loans
held for sale 6,335 7,191 3,908 584 9,154
-------- -------- -------- -------- --------
Total Loans $652,291 $595,247 $574,774 $531,080 $503,138
======== ======== ======== ======== ========
</TABLE>
B. Maturities and Sensitivities of Loans to Changes in Interest Rates - The
following is a schedule of maturities by fixed and variable rates as of
December 31, 1997:
<TABLE>
<CAPTION>
DUE IN DUE IN DUE AFTER
1 YEAR 1 YR - 5 YRS 5 YEARS TOTAL
------ ------------ ------- -----
<S> <C> <C> <C> <C>
Fixed rate commercial,
financial and agricultural $ 3,375 $ 12,189 $ 16,354 $ 31,918
Fixed rate construction 1,760 1 3,568 5,329
--------- --------- --------- ---------
Total $ 5,135 $ 12,190 $ 19,922 $ 37,247
======== ========= ========= =========
Variable rate commercial,
financial and agricultural $27,511 $110,798 $115,713 $254,022
Variable rate construction
------- -------- -------- --------
Total $27,511 $110,798 $115,713 $254,022
======= ======== ======== ========
</TABLE>
10
<PAGE> 11
III. LOAN PORTFOLIO (Continued)
--------------------------
C. Risk Elements
-------------
1) Nonaccrual, Past Due and Restructured Loans at December 31.
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on
a nonaccrual basis $1,197 $1,158 $2,593 $2,992 $3,152
(b) Accruing loans which are
contractually past due 90
days or more as to interest
or principal payments 1,333 674 549 2,152 1,298
(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) 211 418 825 317
------ ------ ------ ------ ------
Total $2,741 $2,250 $3,967 $5,144 $4,767
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1997
----
<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 $148
Less:
Interest income actually recorded on nonaccrual
loans and included in interest income for the period 31
----
Interest income not recognized during the period $117
====
</TABLE>
11
<PAGE> 12
III. LOAN PORTFOLIO (Continued)
---------------------------
(dollars in thousands)
Information regarding impaired loans at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C> <C>
Balance of impaired loans at December 31, $ 2,287 $ 3,116 $ 4,610
Less portion for which no allowance for loan
losses is allocated (799) (386) (1,608)
------- ------- -------
Portion of impaired loan balance for which an
allowance for credit losses is allocated $ 1,488 $ 2,730 $ 3,002
======= ======= =======
Portion of allowance for loan losses allocated
to the impaired loan balance at December 31, $ 189 $ 416 $ 864
======= ======= =======
Average investment in impaired loans during
the year $ 2,602 $ 3,801 $ 4,532
======= ======= =======
Interest income recognized on impaired loans
including interest income recognized on cash
basis during the year $ 203 $ 327 $ 258
======= ======= =======
Interest income recognized on impaired loan on
cash basis during the year $ 194 $ 239 $ 241
======= ======= =======
<FN>
- ---------------------
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, 1997, there were
approximately $1,612,000 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, 1997, 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 15 of the 1997 Annual
Report to Shareholders incorporated herein by reference. Citizens
provides financing to a group of related enterprises involved in
purchasing pools of one-to-four family residential, home equity and
other consumer loans. Such loans totaled approximately $73,543,000 at
December 31, 1997. 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.
</TABLE>
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, 1997, there were no
other interest bearing assets that would be required to be disclosed
under Item III.C.1. or 2. 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:
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
LOANS
- -----
Average loans outstanding
during period (1) $ 620,363 $ 580,616 $ 543,285 $ 510,219 $ 487,152
========= ========= ========= ========= =========
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Balance at the beginning of
the period $ 11,350 $ 10,895 $ 10,393 $ 9,728 $ 7,889
Loans charged-off:
Commercial and
agricultural loans (746) (588) (1,325) (1,609) (2,134)
Real estate mortgage loans (172) (668) (549) (346) (197)
Consumer loans (1,035) (1,188) (878) (966) (647)
--------- --------- --------- --------- ---------
Total loans charged-off (1,953) (2,444) (2,752) (2,921) (2,978)
--------- --------- --------- --------- ---------
Recoveries:
Commercial and agricultural
loans 648 866 706 829 856
Real estate-mortgage loans 133 70 214 101 62
Consumer loans 364 349 310 291 298
Loans secured by leases 28
--------- --------- --------- --------- ---------
Total loan recoveries 1,145 1,285 1,230 1,221 1,244
--------- --------- --------- --------- ---------
Net loans charged-off (808) (1,159) (1,522) (1,700) (1,734)
Provision charged to
operating expense 1,646 1,614 2,024 2,365 3,573
--------- --------- --------- --------- ---------
Balance at the end of
the period $ 12,188 $ 11,350 $ 10,895 $ 10,393 $ 9,728
========= ========= ========= ========= =========
Ratio of net charge-offs to average
loans outstanding for the period .13% .20% .28% .33% .36%
<FN>
- ----------------------------
(1) Net of unearned income.
</TABLE>
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, 1997
Commercial, financial and agricultural $ 898 43.8%
Real estate mortgage 489 45.6
Real estate construction .8
Consumer 974 8.8
Unallocated 9,827
Real estate mortgage loans
held for sale 1.0
------- -----
Total $12,188 100.0%
======= =====
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%
======= =====
</TABLE>
14
<PAGE> 15
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
-------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
------- -----
<S> <C> <C>
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%
======= =====
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%
======= =====
</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,
------------------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 65,603 $ 63,951 $ 61,487
Interest-bearing
demand deposits 85,223 88,963 92,377 2.31% 2.23% 2.27%
Savings deposits 229,457 243,635 254,011 3.08 3.17 3.42
Time deposits 347,999 310,252 274,138 5.60 5.51 5.37
-------- -------- --------
Total $728,282 $706,801 $682,013
======== ======== ========
</TABLE>
15
<PAGE> 16
V. DEPOSITS (Continued)
---------------------
(dollars in thousands)
The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Three months or less $43,155
Three through six months 6,713
Six through twelve months 5,553
Over twelve months 17,796
-------
Total $73,217
=======
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
---------------------------
The information required by this section is set forth under the
heading "Selected Financial Data" on page 20 of the Corporation's
1997 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,
------------
1997 1996 1995
-------- -------- --------
Total securities sold under agree-
ment to repurchase and Federal
<S> <C> <C> <C>
funds purchased at period-end $ 74,664 $ 87,939 $ 20,536
Weighted average interest
rate at period-end 5.76% 6.08% 5.12%
Maximum outstanding at any
month-end during the year $140,857 $ 87,939 $ 39,526
Average amount outstanding 102,861 43,952 31,254
Weighted average rates during
the year 5.47% 5.22% 5.52%
</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.
Location Principal Use
-------- -------------
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
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
East Palestine Office Branch Office
76 East Main Street
East Palestine, Ohio
17
<PAGE> 18
Location Principal Use
-------- -------------
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
Rawlings Building Commercial Loan Department
110 East Main Street
Salineville, Ohio
Thompson Building Programming and Audit
60 East Main Street Department Offices
Salineville, Ohio
18
<PAGE> 19
Location Principal Use
-------- -------------
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
New Garden Office Branch Office
7346 State Route 9
Hanoverton, Ohio
New Waterford Office Branch Office
3761 Silliman Street
New Waterford, Ohio
19
<PAGE> 20
Location Principal Use
-------- -------------
Boardman Office Branch Office
80 Boardman-Poland Road
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
Barnsville Office Branch Office
124 East Main Street
Barnsville, Ohio 43713
Martins Ferry Office Branch Office
22 South Fourth Street
Martins Ferry, Ohio 43935
St. Clairsville Office Branch Office
142 West Main Street
St. Clairsville, Ohio 43950
Citizens also leases six offices located in Alliance, Canton, Wintersville, East
Liverpool, Boardman (2) 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 no 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 1997.
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 27 of the
Corporation's 1997 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 page 20
of the Corporation's 1997 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 21
through 27 of the Corporation's 1997 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 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
ASSET LIABILITY MANAGEMENT
Consistent with its definition of interest-rate risk, the Corporation
measures interest-rate risk from the perspectives of earnings at risk and value
at risk. The appropriate use of these measures to manage interest-rate risk must
take into consideration the purposes of the loan and investment portfolios, the
history of interest-rate risk measurement, and the strengths and weaknesses of
each measure.
The primary purpose of both the loan and investment portfolios is the
generation of income, but if credit risk is the principal focus of risk analysis
in the loan portfolio, interest-rate risk is the principal focus in the
investment portfolio. This is so for two reasons. First, credit risk can be
minimized more effectively in the investment portfolio. Second, because of the
greater liquidity of the investment portfolio, it is the vehicle of choice for
managing interest-rate risk in the entire balance sheet. The Corporation is not
subject to any significant degree to foreign currency exchange or commodity
price risk.
The management of the interest-rate-risk position of the Corporation begins
with a thorough evaluation of the balance sheet using simulation analysis of net
interest income and net income over a two-year period. The Corporation also
calculates the effect of an instantaneous change in market interest rates on the
economic value of equity or net portfolio value. Once these analysis are
complete, management reviews the results, with an emphasis on the income-
simulation results for purposes of managing interest-rate risk.
Measurement and identification of current and potential interest-rate-risk
exposures is conducted quarterly, with reporting and monitoring also occurring
quarterly.
The Corporation's ALCO committee is comprised of the Chief Executive
Officer, Chief Financial Officer, Chief Lending Officer, Chief Retail Funds
Acquisition Officer and Chief Accounting Officer. The Chief Executive Officer
serves as chairman of the ALCO, which meets quarterly.
In addition to developing the balance-sheet management policy for adoption
by the Board of Directors and keeping it current through recommending to the
Board any revisions that may be necessary, the committee is responsible for
adopting procedures necessary for or helpful to the prudent achievement of the
purposes of this policy, for formulating specific strategies in compliance with
this policy, and for monitoring the performance of the corporation in managing
interest-rate and liquidity risk.
The ALCO reviews interest-rate scenarios quarterly and revises them as
necessary in order to stress test earning and the economic value of equity
appropriately, given the current rate environment. Consistent with supervisory
guidance, except in low or high-rate environments declining and rising rate
scenarios of at least 200 basis points will be used in addition to a
floating-rate scenario for purposes of simulating the income statement and
assessing the effect of an interest- rate shock on the economic value of equity
or net portfolio value. For purposes of the Corporation's policy, low-and
high-rate environments exist when the 30-year treasury bond is below 7.0% or
above 9.0% and federal funds are below 4.0% or above 7.0%, respectively.
22
<PAGE> 23
Item 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued
----------------------------------------------------------------------
Rate scenarios could involve parallel or nonparallel shifts in the yield
curve, depending on historical, current and expected conditions, as well as the
need to capture any material effects of explicit or embedded options.
In simulating net interest income and net income, rate changes are modeled
to occur in even monthly increments over 12 months, and then held constant for
an additional 12 months. The volatility of net interest income and net income is
measured over a 24-month period by reference to the levels of such income in the
flat-rate scenario.
In shocking the balance sheet to estimate the effect of rate changes on the
market value of equity, changes in interest rates are instantaneous and
sustained.
In general, the Corporation attempts to maintain a balance sheet that
provides the best return possible consistent with acceptable exposure to credit
and interest-rate risk and substantial enough cash flows and reinvestment
opportunities to enable the corporation to remain profitable in all rate
environments.
There are various strategies the Corporation pursues in the management of
its interest-rate risk throughout a rate cycle. The ALCO is generally authorized
to manage interest-rate risk through the implementation of 'natural' hedging
strategies through the management of cash flows and maturities of assets and
liabilities.
When confronted with the risk of rising interest rates, the Corporation
will typically (1) shorten investment maturities, (2) lengthen funds maturities,
(3) restrict fixed-rate lending and (4) limit credit lines. When confronted with
the risk of falling rates, appropriate strategies include (1) replenished credit
lines, (2) shortened funds maturities, (3) lengthened investment maturities, (4)
expanded fixed-rate lending and (5) investment purchases.
Interest-rate swaps, caps and floors may be employed, only if authorized by
the Board of Directors in an addendum to its existing policy. If so authorized,
they may be implemented by the Chief Investment Officer, but only at the
direction of the ALCO and only when more cost-effective than balance-sheet
strategies. There were no interest-rate swaps, caps or floors in effect at
December 31, 1997 or any period presented.
Net portfolio value represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of liabilities. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 2% increases and decreases in market interest
rates. The calculation of net portfolio value is a static snapshot at a point in
time, and therefore does not consider factors such as management intervention or
circumstances such as shifts in the yield curve during an interest-rate cycle.
Value at risk analysis is most relevant and useful in assessing the exposure of
the FDIC to banks with minimal or negative capital and earnings.
23
<PAGE> 24
Item 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued
----------------------------------------------------------------------
(dollars in thousands)
TABLE 1. PROJECTED CHANGE IN NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
CHANGE
IN RATES $ AMOUNT $ CHANGE % CHANGE
- -------- -------- -------- --------
<S> <C> <C> <C>
+200 BP $ 87,499 $(13,745) (13.6)%
BASE 101,244 --- ---
- -200 BP 92,353 (8,891) (8.8)%
</TABLE>
The projected volatility in net portfolio value falls well within the
Board of Directors guidelines for + or - 30%.
TABLE 2. PROJECTED NET INTEREST INCOME VOLATILITY
<TABLE>
<CAPTION>
CHANGE NET INTEREST
IN RATES INCOME $ CHANGE % CHANGE
- -------- ------ -------- --------
1998
- ----
<S> <C> <C> <C>
- -200 BP $44,657 $1,166 2.68%
FLAT 43,491 --- ---
+200 BP 42.369 (1,122) (2.58)%
1999
- ----
- -200 BP 45,178 1.056 2.39%
FLAT 44,122 --- ---
+200 BP 42,038 (2,084) (4.72)%
</TABLE>
The projected volatility in net interest income falls well within the
Board of Directors guidelines for + or - 10% change within a 24 month guideline.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
---------------------------------------------
The information set forth under the headings listed below on pages 2 through 19
of the Corporation's 1997 Annual Report to Shareholders is incorporated herein
by reference (Exhibit 13).
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity - Years Ended
December 31, 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and
1995
24
<PAGE> 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - continued
-------------------------------------------------------
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 for its Annual Meeting of Shareholders, which will be
filed with the Commission on or before April 30, 1998, 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", of the Corporation's Proxy Statement to be filed on or
before April 30, 1998.
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" of the Corporation's Proxy Statement
to be filed on or before April 30, 1998.
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" of the Corporation's Proxy Statement to be filed
on or before April 30, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
Set forth under the heading "Transactions with Bancshares" of the Corporation's
Proxy Statement to be filed on or before April 30, 1998.
25
<PAGE> 26
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 2 through 5 of the Corporation's
1997 Annual Report to Shareholders (Exhibit 13) are incorporated herein
by reference under Item 8 of this Form 10-K:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes of Shareholders' Equity - Years
Ended December 31, 1997
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995
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 28 of this Form 10-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
26
<PAGE> 27
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, Vice President, Comptroller
Date:
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 23rd day of
February, 1998.
/s/ James C. McBane
- ----------------------------------------
James C. McBane, Chairman
/s/ Marty E, Adams
- ----------------------------------------
Marty E. Adams, Vice Chairman
President, Chief Executive Officer
/s/ Keith Burgett
- ----------------------------------------
Keith Burgett, Director
/s/ Willard L. Davis
- ----------------------------------------
Willard L. Davis, Director
<TABLE>
<S> <C>
- ----------------------------------------- /s/ Elden L. Surbey
Fred H. Johnson, Director ---------------------------------
Elden L. Surbey, Director
/s/ Fred H. Johnson III /s/ Kenneth E. McConnell
- ---------------------------------------- ----------------------------------
Fred H. Johnson, III, Director Kenneth E. McConnell, Director
/s/ Glenn F. Thorne /s/ Gerald P. Mastroianni
- ---------------------------------------- -----------------------------------
Glenn F. Thorne, Director Gerard P. Mastroianni, Director
</TABLE>
27
<PAGE> 28
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,
(incorporated by reference in Exhibit 3 (1) to the Form 10K of
Citizens Bancshares, Inc. for the year ended December 31, 1996).
(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) 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).
28
<PAGE> 29
EXHIBIT INDEX - Continued
- -------------------------
(8) 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).
(9) 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.).
(10) 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).
(11) 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).
(12) Purchase and Assumption Agreement between The Metropolitan
Savings Bank of Ohio and The Citizens Banking Company
(incorporated by reference in Exhibit 10 (12) to the Form 10-Q of
Citizens Bancshares, Inc. for the quarter ended June 30, 1997).
(13) Affiliation Agreement by and among Citizens Bancshares, Inc., The
Citizens Banking Company and UniBank (incorporated by reference
in Exhibit 10 (13) to the Form 10-Q of Citizens Bancshares, Inc.
for the quarter ended September 30, 1997).
(14) Purchase Agreement between The Citizens Banking Company and
ValueNet, Inc. (Incorporated by reference in Exhibit 10 (14) to
the Form 10-Q of Citizens Bancshares, Inc. for the quarter ended
September 30, 1997).
(15) Affiliation Agreement by and among Citizens Bancshares, Inc., The
Citizens Banking Company and UniBank (incorporated by reference
in Exhibit 2 (1) to the Form S-4 Registration Statement No.
333-42911 of Citizens Bancshares, Inc.).
(16) Stock Option Agreement by and between Citizens Bancshares, Inc.
and Century Financial Corporation (incorporated by reference in
Exhibit (a) to the schedule 13D of Citizens Bancshares, Inc.
filed with the Commission on November 26, 1997).
29
<PAGE> 30
EXHIBIT INDEX - Continued
- --------------------------
(17) Agreement and Plan of Merger by and between Citizens Bancshares,
Inc. and Century Financial Corporation (incorporated by reference
in Exhibit 2 to the Form 8-K of Citizens Bancshares, Inc. filed
with the Commission on January 2, 1998).
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, 1997.
EXHIBIT 21 Subsidiaries of the Registrant
EXHIBIT 23 Consents of Experts and Counsel
EXHIBIT 27 Financial Data Schedule
30
<PAGE> 1
F I N A N C I A L H I G H L I G H T S
CITIZENS BANCSHARES, INC. (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR: Increase/
1997 1996 (Decrease)
----------- ----------- -------------------------
<S> <C> <C> <C> <C>
Net income $16,756 $14,706 $2,050 13.9%
Dividends on common stock 6,605 4,876 1,729 35.5
Average shares outstanding - basic 5,883 5,885
PER COMMON SHARE:
Basic net income $2.85 $2.50 $.35 14.0%
Diluted net income 2.84 2.50 .34 13.6
Dividends declared 1.12 .83 .29 34.9
Book value at year-end 17.51 15.21 2.30 15.1
Market price at year-end 73.25 33.25 40.00 120.3
AT YEAR-END:
Total assets $1,117,478 $947,930 $169,548 17.9%
Deposits 795,178 709,592 85,586 12.1
Net loans 640,103 583,897 56,206 9.6
Securities available for sale 331,729 240,375 91,354 38.0
Securities held to maturity 57,398 65,230 (7,832) (12.0)
Shareholders' equity 103,277 89,712 13,565 15.1
AVERAGE FOR THE YEAR:
Total assets $1,022,653 $897,331 $125,322 14.0%
Deposits 727,782 706,801 20,981 3.0
Net loans 608,464 569,222 39,242 6.9
Shareholders' equity 94,500 83,757 10,743 12.8
PERFORMANCE RATIOS:
Return on average assets 1.64% 1.64%
Return on average equity 17.73 17.56
Operating efficiency ratio 46.60 49.19
Net interest margin (FTE) 4.49 5.05
Average loans as a percent
of average deposits 85.24 82.15
Shareholders' equity to assets
at year-end 9.24 9.46
</TABLE>
1
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
CITIZENS BANCSHARES, INC. DECEMBER 31,
(Dollars in thousands, except per share data)
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,787 $ 25,467
Federal funds sold 375 1,900
----------- -----------
Total cash and cash equivalents 32,162 27,367
Interest-bearing deposits with financial institutions 218 364
Securities available for sale at fair value 331,729 240,375
Securities held to maturity (Estimated fair value
$57,948 and $65,454, respectively) 57,398 65,230
Total loans 652,291 595,247
Less allowance for loan losses (12,188) (11,350)
----------- -----------
Net loans 640,103 583,897
Premises and equipment, net 15,953 15,316
Accrued interest receivable and other assets 39,915 15,381
----------- -----------
Total assets $ 1,117,478 $ 947,930
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing deposits $ 69,156 $ 67,817
Interest-bearing deposits 726,022 641,775
----------- -----------
Total deposits 795,178 709,592
Securities sold under repurchase agreements
and federal funds purchased 74,664 87,939
Federal Home Loan Bank advances 136,765 49,923
Accrued interest payable and other liabilities 7,594 10,764
----------- -----------
Total liabilities 1,014,201 858,218
----------- -----------
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value; authorized
200,000 shares; none issued
Common stock, no par value; 12,000,000 shares authorized;
5,899,790 shares issued 17,327 16,514
Retained earnings 82,967 72,818
Treasury stock, 2,250 shares at cost (5) (5)
ESOP obligations and unearned shares (325) (413)
Unrealized gain on securities available for sale 3,313 798
----------- -----------
Total shareholders' equity 103,277 89,712
----------- -----------
Total liabilities and shareholders' equity $ 1,117,478 $ 947,930
=========== ===========
</TABLE>
See notes to the consolidated financial statements
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANCSHARES, INC. YEARS ENDED DECEMBER 31,
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 59,495 $ 57,166 $ 53,164
Securities
Taxable 21,151 15,826 15,896
Nontaxable 1,100 1,173 1,090
Federal funds sold and other 171 391 674
-------- -------- --------
Total interest income 81,917 74,556 70,824
-------- -------- --------
INTEREST EXPENSE
Deposits 28,478 26,810 25,519
Federal funds and repurchase agreements 5,625 2,295 1,726
Federal Home Loan Bank advances and other 5,189 2,918 3,939
-------- -------- --------
Total interest expense 39,292 32,023 31,184
-------- -------- --------
NET INTEREST INCOME 42,625 42,533 39,640
PROVISION FOR LOAN LOSSES 1,646 1,614 2,024
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 40,979 40,919 37,616
-------- -------- --------
OTHER INCOME
Service charges and fees on deposits 2,534 2,239 2,026
Securities gains (losses) (22) 67
Other income 4,458 2,609 2,400
-------- -------- --------
Total other income 6,992 4,826 4,493
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 12,808 11,029 11,076
Occupancy and equipment expense 3,527 3,660 3,438
Merger, integration, and restructuring
expense 200 838 711
SAIF recapitalization expense 667
Other operating expense 6,725 7,534 8,354
-------- -------- --------
Total other expenses 23,260 23,728 23,579
-------- -------- --------
INCOME BEFORE INCOME TAXES 24,711 22,017 18,530
INCOME TAXES 7,955 7,311 5,967
-------- -------- --------
NET INCOME $ 16,756 $ 14,706 $ 12,563
======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 2.85 $ 2.50 $ 2.13
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 2.84 $ 2.50 $ 2.13
======== ======== ========
</TABLE>
See notes to the consolidated financial statements
3
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CITIZENS BANCSHARES, INC. FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(Dollars in thousands, except per share data)
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, 1995 $ 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 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 (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
Net income 16,756 16,756
Cash dividends declared
($1.12 per share) (6,605) (6,605)
Cash paid for fractional shares (2) (2)
Unrealized gain on securities
available for sale 2,515 2,515
Change in employee stock
ownership plan obligation
and release of shares 70 88 158
Exercise of stock options 743 743
-------- -------- --- ----- ------ --------
BALANCES AT DECEMBER 31, 1997 $ 17,327 $ 82,967 $(5) $(325) $3,313 $103,277
======== ======== === ===== ====== ========
</TABLE>
See notes to the consolidated financial statements
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOW
CITIZENS BANCSHARES, INC. YEARS ENDED DECEMBER 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 16,756 $ 14,706 $ 12,563
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,085 1,923 1,737
Securities amortization and accretion, net 1,366 801 604
Securities (gains) losses 22 (67)
Provision for loan losses 1,646 1,614 2,024
Change in net deferred loan fees (313) (245) 543
Premises and equipment gain (141) (40)
Increase in cash surrender value of life insurance contracts (715)
Deferred income tax benefit 35 (307) (564)
Net change in loans held for sale 856 (3,283) 1,564
Change in other assets and liabilities (2,360) (1,735) (1,466)
--------- --------- ---------
Net cash provided by operating activities 19,215 13,496 16,898
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits with
financial institutions 146 324 (419)
Securities held to maturity:
Proceeds from maturities and payments 34,121 36,126 51,160
Purchases (26,276) (41,902) (56,270)
Securities available for sale:
Proceeds from maturities and payments 71,301 76,529 15,662
Proceeds from sales 5,699 35,103
Purchases (160,163) (122,417) (17,395)
Sales of student loans and commercial participations 2,000 4,362 12,053
Net increase in loans (35,141) (21,348) (59,195)
Purchases of premises and equipment (2,229) (3,641) (2,587)
Purchases of life insurance contracts (20,000) (500)
Sales of premises and equipment 511 277
Sales of other real estate 199 91 1,757
--------- --------- ---------
Net cash used by investing activities (135,531) (66,677) (19,854)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 21,419 11,928 25,664
Net change in federal funds and repurchase agreements (13,275) 67,403 (8,438)
Net change in short-term FHLB advances 64,710 (18,500) 7,700
Proceeds from long-term FHLB advances 44,655 7,650 14,750
Repayment of long-term FHLB advances (22,523) (23,907) (23,532)
Repayment of notes payable (1,974)
Cash dividends paid (6,251) (4,927) (1,945)
Purchases of branch deposits, net 32,937
Redemption of minority interest in subsidiary (561) (25) (25)
--------- --------- ---------
Net cash provided by financing activities 121,111 39,622 12,200
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 4,795 (13,559) 9,244
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 27,367 40,926 31,682
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,162 $ 27,367 $ 40,926
========= ========= =========
</TABLE>
See notes to the consolidated financial statements
5
<PAGE> 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC.
DECEMBER 31, 1997
(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, Belmont 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 which are
particularly subject to change 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 value of stock options
granted, 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 and
its subsidiary, ValueNet, 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 one financial institution in 1995 and another in 1996. The two
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, 1997, 1996 and 1995, the Corporation paid interest of $38,655, $31,941 and
$31,154, respectively, and income taxes of $8,718, $7,834 and $6,802,
respectively. There were no material non-cash transactions.
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. SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," was adopted by the Corporation in
1997. This statement supersedes SFAS No. 122 relative to loan servicing rights,
but only marginally modifies the accounting and disclosure requirements
described by SFAS No. 122. SFAS No. 125 also impacts the accounting treatment
for certain other transfers of assets and liabilities and did not materially
affect the Corporation's 1997 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.
6
<PAGE> 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC.
DECEMBER 31, 1997
(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.
A loan is impaired when it is probable that all principal and interest
amounts will not be collected according to the loan contract. Allowances for
loan losses on impaired loans are 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.
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.
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, Belmont and Carroll and in the West Virginia county of Hancock. At
December 31, 1997, residential real estate mortgage loans totaled 45.6% of loans
and were secured primarily by 1-4 family residences. Also at year-end 1997,
11.3% 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. These assets are
reviewed for impairment when events indicate their carrying amounts may not be
recoverable.
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,
1997 and 1996 totaled $151 and $214, 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 $7,220 and $1,492 at December 31,
1997 and 1996, 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 in acquisitions.
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 - Basic and diluted earnings per share are
computed under a new accounting standard effective in the quarter ended December
31, 1997. All prior amounts have been restated to be comparable. Basic earnings
per share is based on net income divided by the following weighted average
number of shares outstanding during the periods: 5,882,867 in 1997, 5,884,548 in
1996 and 5,892,325 in 1995. Diluted earnings per share reflects the dilutive
effect of additional common shares issuable under stock options using the
treasury stock method. The weighted average number of shares used for
determining diluted earnings per share were 5,902,261 in 1997, 5,894,034 in 1996
and 5,894,810 in 1995. Diluted earnings per share was lower than basic earnings
per share by $.01 in 1997. There was no difference between basic and diluted
earnings per share in 1996 and 1995.
The Corporation entered into one merger transaction in 1996 and 1995, both 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 1996 and 1995 consolidated
financial statements have been reclassified to conform to the 1997 presentation.
7
<PAGE> 8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(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>
1997
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 6,006 $ 50 $ (2) $ 6,054
U.S. Government agencies
and corporations 55,993 935 (6) 56,922
Corporate and other securities 5,000 185 5,185
Obligations of states and
political subdivisions 100 100
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 221,447 1,045 (413) 222,079
Agency collateralized mortgage
obligations 16,980 37 (157) 16,860
Other 4,832 26 4,858
-------- -------- -------- --------
Total debt securities available for sale 310,358 2,278 (578) 312,058
Marketable equity securities 16,274 3,397 19,671
-------- -------- -------- --------
Total securities available for sale $326,632 $ 5,675 $ (578) $331,729
======== ======== ======== ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 35,624 $ 138 $ (3) $ 35,759
U.S. Government agencies
and corporations 100 (2) 98
Obligations of states and
political subdivisions 21,669 417 22,086
Other 5 5
-------- -------- -------- --------
Total securities held to maturity $ 57,398 $ 555 $ (5) $ 57,948
======== ======== ======== ========
<CAPTION>
1996
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
VALUE
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
Corporate and other securities
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>
The amortized cost and estimated market value of debt securities at December
31, 1997, 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 $ 3,987 $ 3,994
Due after one year through five years 6,790 6,831
Due after five years through ten years 51,322 52,251
Due after ten years 5,000 5,185
Mortgage-backed securities 243,259 243,797
--------- ----------
Total debt securities available for sale $ 310,358 $ 312,058
========= =========
DEBT SECURITIES HELD TO MATURITY:
Due in one year or less $ 9,032 $ 9,059
Due after one year through five years 43,620 44,008
Due after five years through ten years 4,395 4,514
Due after ten years 351 367
--------- ----------
Total debt securities held to maturity $ 57,398 $ 57,948
========= =========
</TABLE>
8
<PAGE> 9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
NOTE 2 - SECURITIES - CONTINUED (Dollars in thousands, except per share data)
Proceeds from the sales of securities and the gross realized gains and losses
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Proceeds from sales of securities available for sale $ 0 $ 5,699 $35,103
Gross realized gains on sales 0 8 302
Gross realized losses on sales 0 30 235
</TABLE>
Securities with a carrying value of $192,491 and $169,280 were pledged to
secure public deposits and for other purposes as required or permitted by law at
December 31, 1997 and 1996, respectively.
NOTE 3 - LOANS
The loan portfolio at December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Commercial, financial and agricultural $164,388 $140,977
Residential real estate 297,603 280,779
Commercial real estate 121,552 113,327
Construction 5,329 4,704
Consumer 57,084 48,269
Real estate mortgage loans held for sale 6,335 7,191
-------- --------
Total loans $652,291 $595,247
======== ========
</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, 1996 $14,773
New loans 2,815
Repayments (3,333)
Other changes 147
-------
Aggregate balance - December 31, 1997 $14,402
=======
</TABLE>
Other changes represent 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 1997, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 11,350 $ 10,895 $ 10,393
Provision for loan losses 1,646 1,614 2,024
Recoveries 1,145 1,285 1,230
Loans charged-off (1,953) (2,444) (2,752)
-------- -------- --------
Balance at end of year $ 12,188 $ 11,350 $ 10,895
======== ======== ========
</TABLE>
Information regarding impaired loans at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Balance of impaired loans at December 31 $ 2,287 $ 3,116
Less portion for which no allowance for loan
losses is allocated (799) (386)
------- -------
Portion of impaired loan balance for which an allowance
for credit losses is allocated $ 1,488 $ 2,730
======= =======
Portion of allowance for loan losses allocated to the
impaired loan balance at December 31 $ 189 $ 416
======= =======
</TABLE>
9
<PAGE> 10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(Dollars in thousands, except per share data)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES - CONTINUED
- ----------------------------------------------
Information regarding impaired loans is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Average investment in impaired loans during the year $2,602 $3,801 $4,532
====== ====== ======
Interest income recognized on impaired loans including
interest income recognized on cash basis during the year $ 203 $ 327 $ 258
====== ====== ======
Interest income recognized on impaired loans on cash basis
during the year $ 194 $ 239 $ 241
====== ====== ======
</TABLE>
Nonperforming loans are summarized below:
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Nonaccrual loans $1,197 $ 1,158
Loans past due more than 90 days
and still accruing interest 1,333 674
------ -------
Total nonperforming loans $2,530 $ 1,832
====== =======
</TABLE>
Interest income for the years ended December 31, 1997, 1996 and 1995 would have
increased by approximately $117, $113 and $292, 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>
1997 1996
-------- --------
<S> <C> <C>
Land, buildings and improvements $ 14,761 $ 14,684
Equipment, furniture and fixtures 12,879 12,026
Construction in process 1,024 21
-------- --------
Total premises and equipment 28,664 26,731
Less accumulated depreciation
and amortization (12,711) (11,415)
-------- --------
Premises and equipment, net $ 15,953 $ 15,316
======== ========
</TABLE>
Depreciation and amortization of premises and equipment totaled $1,688, $1,579
and $1,462 in 1997, 1996 and 1995, 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>
1998 $ 429
1999 260
2000 222
2001 197
2002 162
Thereafter 1,001
------
Total $2,271
======
</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>
1997 1996
-------- --------
<S> <C> <C>
Interest-bearing demand $ 94,757 $ 87,757
Savings 226,913 231,299
Time
In denominations under $100,000 331,135 268,118
In denominations of $100,000 or more 73,217 54,601
-------- --------
Total interest-bearing deposits $726,022 $641,775
======== ========
</TABLE>
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $246,245
1999 113,345
2000 26,119
2001 7,294
2002 and thereafter 11,349
--------
$404,352
========
</TABLE>
10
<PAGE> 11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(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 exact same securities are returned
to the Corporation at the maturity of the agreements. The following table
summarizes certain information relative to these borrowings at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Outstanding at period-end $ 74,664 $ 87,939
Weighted average interest rate at period-end 5.76% 6.08%
Maximum amount outstanding as of any month-end $140,857 $ 87,939
Average amount outstanding 102,861 43,952
Approximate weighted average interest rate
during the year 5.47% 5.22%
</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 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Variable rate advances:
Revolving overnight advances 6.25% $ 28,000
LIBOR based, 1-5 year maturity 5.90 29,000 $16,000
Prime rate based, 1 year maturity 6.04 13,305 9,200
Fixed rate advances, with monthly interest payments:
Advances due in 1997 10,950
Advances due in 1998 5.88 42,960 2,000
Advances due in 1999 6.15 23,500 1,500
Fixed rate advances, with monthly principal and interest payments:
Advance due October 1, 1997 7,899
Advance due November 1, 1997 2,374
-------- -----
Total Federal Home Loan Bank advances $136,765 $49,923
======== =======
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by
Citizens and FNB (totaling $10,683) and by 100% of Citizens' and FNB `s
qualified mortgage loan portfolio (totaling approximately $278,557). Based on
the carrying amount of FHLB stock owned by Citizens and FNB, total FHLB advances
are limited to approximately $213,666.
The aggregate minimum future annual principal payments on borrowings are
$85,215 in 1998, $43,900 in 1999 and $7,650 in 2000.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current tax expense $ 7,920 $ 7,618 $ 6,531
Deferred tax expense (benefit) 35 (307) (564)
------- ------- -------
Total provision for income taxes $ 7,955 $ 7,311 $ 5,967
======= ======= =======
</TABLE>
The sources of gross deferred tax assets and liabilities at December 31,
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax reserve $ 3,873 $ 3,466 $ 3,182
Other 747 751 609
------- ------- -------
4,620 4,217 3,791
------- ------- -------
Items giving rise to deferred tax liabilities:
Depreciation (917) (871) (767)
Unrealized gain on securities available for sale (1,784) (429) (453)
FHLB stock dividends (595) (378) (225)
Other (495) (320) (458)
------- ------- -------
(3,791) (1,998) (1,903)
------- ------- -------
Net deferred tax asset $ 829 $ 2,219 $ 1,888
======= ======= =======
</TABLE>
11
<PAGE> 12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(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>
TAX Tax Tax
1997 RATE 1996 Rate 1995 Rate
---- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax expense based upon the federal
statutory rate on income before income taxes $ 8,640 35.0% $ 7,706 35.0% $ 6,485 35.0%
Tax exempt income (763) (3.1) (556) (2.5) (467) (2.5)
Other 78 .3 161 .7 (51) (.3)
------- ----- ------ ----- -------- -----
$ 7,955 32.2% $7,311 33.2% $ 5,967 32.2%
======= ===== ====== ===== ======= =====
</TABLE>
Tax expense (benefit) attributable to securities gains and losses totaled
$0, $(8) and $23 in 1997,1996 and 1995, respectively.
NOTE 10 - EMPLOYEE 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 $900, $697 and
$716 in 1997, 1996 and 1995, respectively.
PENSION PLAN - The Corporation maintains a defined benefit plan covering
substantially all employees. 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.
The pension expense for 1997, 1996 and 1995 is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned $ 287 $ 347 $ 229
Interest cost on projected benefit obligation 130 136 115
Return on plan assets (688) (257) (407)
Amortization of net experience loss 459 99 294
Amortization of unrecognized prior service cost (35) (35) (35)
(35)
Amortization of remaining transition obligation 2 2 2
----- ----- -----
Net pension expense $ 155 $ 292 $ 198
===== ===== =====
</TABLE>
The following table shows the funded status of the pension plan and the
amount included in the consolidated balance sheets at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
Actuarial present value of benefit obligations: 1997 1996
---- ----
<S> <C> <C>
Vested benefits $ 2,007 $ 1,537
Non-vested benefits 108 46
------- -------
Accumulated benefit obligation 2,115 1,583
Effect of anticipated future service
and salary levels 472 318
------- -------
Projected benefit obligation 2,587 1,901
Market value of assets 3,622 2,714
------- -------
Plan assets in excess of
projected benefit obligation 1,035 813
Unrecognized prior service cost (443) (478)
Unrecognized net (gain) loss (519) (411)
Unrecognized net transition obligation 19 21
------- -------
Accrued pension liability $ 92 $ (55)
======= =======
Actuarial assumptions:
Discount rate 6.50% 7.25%
Long term rate of return 7.00 7.00
Rate of increase in compensation levels 4.00 4.00
</TABLE>
At December 31, 1997, approximately 72% of the pension plan's assets are
mutual equity funds, common stocks, and limited partnerships; with 21% comprised
of U.S. Treasury and Agency securities and 7% cash and cash equivalents.
POSTRETIREMENT HEALTH INSURANCE BENEFITS - The Corporation continues to
pay health insurance premiums for certain employees after retirement. The
Corporation accrues the cost of retirees' health and other postretirement
benefits during the working career of active employees. The expense and
liability under this plan are not material in any period presented.
12
<PAGE> 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(Dollars in thousands, except per share data)
NOTE 10 - EMPLOYEE BENEFITS - CONTINUED
STOCK OPTION PLAN - The Corporation maintains a non-statutory stock option
and stock appreciation rights plan that 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.
Vesting is established at the time of grant. SFAS No.123, "Accounting for
Stock-Based Compensation," 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 Corporation's 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 1997, 1996 and 1995, respectively: risk-free interest rates of
6.21%, 5.57% and 7.00%; dividend yields of 3.00%; volatility factors of the
expected market price of the Company's common stock of 26.2%, 16.4% and 11.2%;
and a weighted average expected life of the options of 5 years in 1997 and 9
years for other periods. The Corporation's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income as reported $16,756 $ 14,706 $12,563
Pro forma net income 16,650 14,619 12,513
Pro forma earnings per share
Basic 2.83 2.49 2.12
Diluted 2.83 2.48 2.12
</TABLE>
A summary of the Corporation's stock options activity and related information
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ -----------------------------------
AVERAGE Average
OPTIONS EXERCISE PRICE SARS Options Exercise Price SARS
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 67,972 $23.69 53,799 60,285 $23.00 50,606
Granted 10,575 32.50 4,169 7,883 29.00 3,241
Forfeited (1,650) 30.17 (413) (196) 25.03 (48)
Exercised (37,500) 23.00 (37,500) 0 0
------- ------- ------ ------
Outstanding at the end of year 39,397 26.44 20,055 67,972 23.69 53,799
======= ======= ====== ======
Exercisable at end of year NONE NONE None
None
Weighted average fair value of
options granted during the year $8.26 $6.56
</TABLE>
Compensation expense related to stock appreciation rights was $1,793,
$222, and $100 in 1997, 1996 and 1995, respectively.
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 $160 in 1997, $150 in 1996 and
$123 in 1995 and is included in salaries and employee benefits. At December 31,
1997, there were 13,794 unreleased new shares with an estimated fair value of
$1,010.
The ESOP shares at December 31 were as follows:
<TABLE>
<CAPTION>
Old Shares 1997 1996
------ ------
<S> <C> <C>
Allocated shares 31,610 27,811
Unallocated shares 1,138 4,937
------ ------
Total old shares 32,748 32,748
====== ======
New Shares 1997 1996
------ ------
Shares allocated and
committed to be released 2,430 138
Unreleased shares 13,794 16,086
------ ------
Total new shares 16,224 16,224
====== ======
</TABLE>
13
<PAGE> 14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(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 1997 1996 REMAINING RATE
---- --------- ----- ---- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1989 12,498 $ 8 $ 12 0 83% of prime
1990 11,250 9 $ 12 25 1 prime + .44%
1992 9,000 11 25 37 2 prime + .125%
1995 10,500 24 157 189 5 prime + .125%
1996 5,724 30 131 150 7 prime + .125%
---- -----
$325 $ 413
==== =====
</TABLE>
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 $63,257 in variable rate commitments and $2,162 in
fixed rate commitments at year-end 1997. The fixed rate commitments have an
interest rate range of 6.375% to 8.00%. 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%. 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
$10,417 of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve requirements at December 31, 1997. 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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OTHER INCOME
Gain on sale of loans $ 739 $ 473 $ 125
Increase in cash surrender value of life insurance 715
Other 3,004 2,136 2,275
------ ------ ------
Total other income $4,458 $2,609 $2,400
====== ====== ======
OTHER OPERATING EXPENSE
Professional services $ 732 $ 857 $ 822
Printing and supplies 701 774 796
State franchise taxes 1,076 1,117 898
FDIC insurance 143 233 946
Amortization of intangible assets 291 344 480
Other 3,782 4,209 4,412
------ ------ ------
Total other operating expense $6,725 $7,534 $8,354
====== ====== ======
</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, 1997 and 1996. Items which are
not financial instruments are not included.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------------ ------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNTS FAIR VALUE Amounts Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and equivalents $ 32,162 $ 32,162 $ 27,367 $ 27,367
Interest-bearing deposits 218 218 364 364
Securities available for sale 331,729 331,729 240,375 240,375
Securities held to maturity 57,398 57,948 65,230 65,454
Loans, net of the allowance
for loan losses 640,103 658,651 583,897 585,276
Accrued interest receivable 7,692 7,692 6,720 6,720
Demand and savings deposits (390,826) (390,826) (386,873) (386,873)
Time deposits (404,352) (406,293) (322,719) (324,044)
Securities sold under repurchase
agreements and federal
funds purchased (74,664) (74,973) (87,939) (87,939)
Federal Home Loan Bank advances (136,765) (136,930) (49,923) (49,918)
Accrued interest payable (2,119) (2,119) (1,492) (1,492)
</TABLE>
14
<PAGE> 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(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, 1997 and 1996,
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, 1997 and 1996, 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, 1997 or 1996, 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,
1997 and 1996 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 value of a trained work force,
customer goodwill, and similar items.
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED PARENT COMPANY BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Cash and due from banks $ 2,245 $ 355
Interest-bearing balances with banks 2,941 16
-------- --------
Total cash and cash equivalents 5,186 371
Securities 13,107 3,888
Investment in bank subsidiaries 70,839 75,062
Investment in non-bank subsidiaries 1,578 1,392
Other assets 15,255 11,500
-------- --------
Total assets $105,965 $ 92,213
======== ========
LIABILITIES $ 2,688 $ 2,501
SHAREHOLDERS' EQUITY 103,277 89,712
-------- --------
Total liabilities and shareholders' equity $105,965 $ 92,213
======== ========
</TABLE>
CONDENSED PARENT COMPANY INCOME STATEMENT
<TABLE>
<CAPTION>
INCOME 1997 1996 1995
------ ---- ---- ----
<S> <C> <C> <C>
Dividends from bank subsidiaries $ 22,494 $ 14,765 $ 2,860
Other interest and dividend income 790 356 103
-------- -------- --------
Total income 23,284 15,121 2,963
OPERATING EXPENSES 2,240 898 402
-------- -------- --------
INCOME BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 21,044 14,223 2,561
INCOME TAX BENEFIT 538 95 113
-------- -------- --------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES 21,582 14,318 2,674
EQUITY IN UNDISTRIBUTED NET
INCOME (LOSS) OF SUBSIDIARIES (4,826) 388 9,889
-------- -------- --------
NET INCOME $ 16,756 $ 14,706 $ 12,563
======== ======== ========
</TABLE>
15
<PAGE> 16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(Dollars in thousands, except per share data)
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS - CONTINUED
CONDENSED PARENT COMPANY STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income $ 16,756 $ 14,706 $ 12,563
Adjustments to reconcile net income
to net cash from operating activities
Equity in undistributed
net income of subsidiaries 4,826 (388) (9,889)
Amortization 68 56 56
Change in other assets and
liabilities (4,030) (9,406) 1,081
-------- -------- --------
Net cash provided by operating activities 17,620 4,968 3,811
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity (1,541) (1,493)
Maturities of securities held to maturity 1,531 1,355 1,400
Sale of securities available for sale 34
Purchase of securities available for sale (6,551) (1,836) (1,297)
Net loan payments 7 282 13
-------- -------- --------
Net cash (used) provided by
investing activities (6,554) (1,658) 116
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders (6,251) (4,927) (1,945)
-------- -------- --------
Net cash used by financing activities (6,251) (4,927) (1,945)
-------- -------- --------
NET CHANGE IN CASH AND
CASH EQUIVALENTS 4,815 (1,617) 1,982
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 371 1,988 6
-------- -------- --------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 5,186 $ 371 $ 1,988
======== ======== ========
</TABLE>
NOTE 16 - ACQUISITIONS
On September 12, 1997, the Corporation entered into an affiliation agreement
with UniBank, Steubenville, Ohio, whereby UniBank will affiliate with the
Corporation. Under the terms of the agreement, 13.25 shares of the Corporation's
common stock will be exchanged for each share of UniBank common stock
outstanding in a tax-free transaction. Approximately 994,000 of the
Corporation's shares are expected to be issued in the transaction, 945,000 to
non-affiliates and 49,000 shares to the Corporation for the 3,675 shares of
UniBank it owns as of December 31, 1997. Completion of the transaction is
subject to approval by UniBank's shareholders and various regulators.
On December 3, 1997, the Corporation entered into an agreement and plan of
merger with Century Financial Corporation ("Century"), Rochester, Pennsylvania.
Under the agreement, Century and its wholly-owned subsidiary, Century National
Bank, will affiliate with the Corporation. It is anticipated that Century
National Bank will operate as a subsidiary of the Corporation for approximately
six months and then be merged into Citizens. Under the terms of the agreement,
0.425 shares of the Corporation's common stock will be exchanged for each share
of Century common stock outstanding in a tax-free exchange, subject to certain
adjustments based on changes in the market value of the Corporation's stock.
Approximately 2,235,000 of the Corporation's shares are expected to be issued in
the transaction. Completion of the transaction is subject to approval by the
Corporation's and Century's shareholders and various regulators.
The above transactions are expected to be accounted for using the pooling of
interests method. The following unaudited pro forma condensed combined financial
statements have been prepared to reflect the transactions had they occurred in
the earliest period presented. They are not necessarily indicative of the
financial condition or results of operations that would have occurred had the
transactions actually been effective at the beginning of the periods indicated.
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
December 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
CORPORATION UNIBANK CENTURY COMBINED
----------- ------- ------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 31,787 $ 9,817 $ 12,439 $ 54,043
Federal funds sold and interest-bearing deposits 593 13,148 12,880 26,621
Securities available for sale 331,729 63,866 67,647 463,242
Securities held to maturity 57,398 57,398
Net loans 640,103 120,263 349,204 1,109,570
Premises and equipment 15,953 3,279 11,562 30,794
Other assets 39,915 5,767 4,800 50,482
---------- ---------- ---------- ----------
Total assets $1,117,478 $ 216,140 $ 458,532 $1,792,150
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 795,178 $ 192,209 $ 392,926 $1,380,313
Borrowings 211,429 4,524 24,000 239,953
Other liabilities 7,594 1,598 4,898 14,090
Shareholders' equity 103,277 17,809 36,708 157,794
Total liabilities and shareholders' equity $1,117,478 $ 216,140 $ 458,532 $1,792,150
========== ========== ========== ==========
</TABLE>
16
<PAGE> 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS BANCSHARES, INC. DECEMBER 31, 1997
(Dollars in thousands, except per share data)
NOTE 16 - ACQUISITIONS - CONTINUED
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
Year ended December 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
CORPORATION UNIBANK CENTURY COMBINED
----------- ------- ------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 59,495 $ 10,076 $ 29,617 $ 99,188
Securities, federal funds sold and other 22,422 5,033 5,025 32,480
-------- -------- -------- --------
Total interest income 81,917 15,109 34,642 131,668
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 28,478 6,489 16,286 51,253
Federal funds and repurchase agreements 5,625 182 399 6,206
Federal Home Loan Bank advances and other 5,189 561 5,750
-------- -------- -------- --------
Total interest expense 39,292 6,671 17,246 63,209
-------- -------- -------- --------
NET INTEREST INCOME 42,625 8,438 17,396 68,459
Provision for loan losses 1,646 619 2,070 4,335
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 40,979 7,819 15,326 64,124
-------- -------- -------- --------
Other income 6,992 841 3,159 10,992
Other expenses 23,260 6,575 13,395 43,230
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 24,711 2,085 5,090 31,886
Income taxes 7,955 643 868 9,466
-------- -------- -------- --------
NET INCOME $ 16,756 $ 1,442 $ 4,222 $ 22,420
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 2.85 $ 19.23 $ 0.83 $ 2.50
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 2.84 $ 19.23 $ 0.82 $ 2.48
======== ======== ======== ========
</TABLE>
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
Year ended December 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
CORPORATION UNIBANK CENTURY COMBINED
----------- ------- ------- ---------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans, including fees $ 57,166 $ 8,557 $ 24,933 $ 90,656
Securities, federal funds sold and other 17,390 4,305 5,631 27,326
-------- -------- -------- --------
Total interest income 74,556 12,862 30,564 117,982
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 26,810 5,294 13,054 45,158
Federal funds and repurchase agreements 2,295 234 494 3,023
Federal Home Loan Bank advances and other 2,918 318 3,236
-------- -------- -------- --------
Total interest expense 32,023 5,528 13,866 51,417
-------- -------- -------- --------
NET INTEREST INCOME 42,533 7,334 16,698 66,565
Provision for loan losses 1,614 40 625 2,279
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 40,919 7,294 16,073 64,286
-------- -------- -------- --------
Other income 4,826 1,193 2,716 8,735
Other expenses 23,728 5,396 12,613 41,737
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 22,017 3,091 6,176 31,284
Income taxes 7,311 973 1,270 9,554
-------- -------- -------- --------
NET INCOME $ 14,706 $ 2,118 $ 4,906 $ 21,730
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 2.50 $ 28.24 $ 0.97 $ 2.41
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 2.50 $ 28.24 $ 0.96 $ 2.41
======== ======== ======== ========
</TABLE>
17
<PAGE> 18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
NOTE 16 - ACQUISITIONS - CONTINUED
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
Year ended December 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
CORPORATION UNIBANK CENTURY COMBINED
----------- ------- ------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 53,164 $ 8,157 $ 21,806 $ 83,127
Securities, federal funds sold and other 17,660 4,125 5,879 27,664
-------- -------- -------- --------
Total interest income 70,824 12,282 27,685 110,791
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 25,519 4,660 12,234 42,413
Federal funds and repurchase agreements 1,726 154 148 2,028
Federal Home Loan Bank advances and other 3,939 243 4,182
-------- -------- -------- --------
Total interest expense 31,184 4,814 12,625 48,623
-------- -------- -------- --------
NET INTEREST INCOME 39,640 7,468 15,060 62,168
Provision for loan losses 2,024 240 240 2,504
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 37,616 7,228 14,820 59,664
-------- -------- -------- --------
Other income 4,493 464 2,574 7,531
Other expenses 23,579 4,853 11,740 40,172
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 18,530 2,839 5,654 27,023
Income taxes 5,967 876 1,386 8,229
-------- -------- -------- --------
Net income $ 12,563 $ 1,963 $ 4,268 $ 18,794
======== ======== ======== ========
Basic earnings per common share $ 2.13 $ 26.18 $ 0.84 $ 2.08
======== ======== ======== ========
Diluted earnings per common share $ 2.13 $ 26.18 $ 0.84 $ 2.08
======== ======== ======== ========
</TABLE>
On November 21, 1997, Citizens acquired the Martins Ferry, St. Clairsville
and Barnsville, Ohio branches of Metropolitan Savings Bank of Ohio, an affiliate
of F.N.B. Corporation, Hermitage, Pennsylvania. In the transaction, Citizens
acquired $25.2 million of loans and approximately $1 million of other assets,
and assumed $64.2 million of deposit liabilities. Citizens paid a premium of
$5.8 million in the transaction, which is reflected in other assets in the
consolidated balance sheet and is being amortized on an accelerated basis over
15 years.
The Corporation also entered into merger transactions on October 11, 1996
with The Navarre Deposit Bank Company, Navarre, Ohio, and on December 31, 1995
with The Western Reserve Bank of Ohio, Lowellville, Ohio. Each transaction was
accounted for as a pooling of interests. Details of the transactions follow:
<TABLE>
<CAPTION>
Western
Navarre Reserve
------- -------
<S> <C> <C>
Affiliate common shares outstanding 280,000 160,000
Exchange ratio 1.8106 2.625
Corporation common shares issued 506,918 419,847
</TABLE>
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, 1997, approximately $3,039 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, 1997, the Corporation, Citizens and FNB meet all
capital adequacy requirements to which they are subject.
18
<PAGE> 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
NOTE 17 - DIVIDEND RESTRICTION AND REGULATORY MATTERS - CONTINUED
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, 1997 and 1996, 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, 1997 December 31, 1996
------------------------ -----------------------
AMOUNT PERCENT Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital
Actual $ 93,587 14.21% $ 88,753 16.23%
Required 26,353 4.00 21,876 4.00
Total risk-based capital
Actual 101,871 15.46 95,645 17.49
Required 52,705 8.00 43,753 8.00
Risk adjusted assets 658,815 546,908
Leverage ratio
Actual 93,587 9.21 88,753 9.91
Required 50,782 5.00 44,799 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>
1997
Interest income $ 21,282 $ 20,705 $ 20,643 $ 19,287
Net interest income 10,887 10,582 10,684 10,472
Provision for loan losses 414 407 407 418
Net income 3,873 4,441 4,333 4,109
Earnings per common share - basic .66 .75 .74 .70
Earnings per common share - diluted .66 .75 .73 .70
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 - basic .64 .57 .68 .61
Earnings per common share - diluted .64 .57 .68 .61
</TABLE>
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, 1997 and 1996 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, 1997. 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 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, 1997 and 1996 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Columbus, Ohio Crowe, Chizek and Company LLP
January 16, 1998
19
<PAGE> 20
SELECTED FINANCIAL DATA
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
<TABLE>
<CAPTION>
FOR THE YEAR: 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest income $ 81,917 $ 74,556 $ 70,824 $ 64,648 $ 61,846
Interest expense 39,292 32,023 31,184 26,420 26,639
----------- ----------- ----------- ----------- -----------
Net interest income 42,625 42,533 39,640 38,228 35,207
Provision for loan losses 1,646 1,614 2,024 2,365 3,573
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 40,979 40,919 37,616 35,863 31,634
Other income 6,992 4,826 4,493 3,687 4,780
Other expenses 23,260 23,728 23,579 24,221 23,578
----------- ----------- ----------- ----------- -----------
Income before income taxes 24,711 22,017 18,530 15,329 12,836
Income taxes 7,955 7,311 5,967 4,827 3,875
----------- ----------- ----------- ----------- -----------
Net income $ 16,756 $ 14,706 $ 12,563 $ 10,502 $ 8,961
=========== =========== =========== =========== ===========
Cash dividends declared $ 6,605 $ 4,876 $ 2,972 $ 1,708 $ 1,014
=========== =========== =========== =========== ===========
PER SHARE DATA: (1)
Basic net income $ 2.85 $ 2.50 $ 2.13 $ 1.78 $ 1.52
Diluted net income 2.84 2.50 2.13 1.78 1.52
Cash dividends declared 1.12 .83 .50 .29 .17
Book value at year-end 17.51 15.21 13.58 11.19 10.53
Weighted average shares
outstanding basic (1) 5,882,867 5,884,548 5,892,325 5,897,540 5,898,842
Shares outstanding at
year-end (1) 5,897,540 5,897,540 5,897,540 5,897,540 5,897,540
BALANCE SHEET DATA:
Total assets $ 1,117,478 $ 947,930 $ 890,969 $ 861,947 $ 844,527
Securities available for sale 331,729 240,375 206,988 109,115 142,045
Securities held to maturity 57,398 65,230 53,706 173,291 152,158
Loans, net of unearned income 652,291 595,247 574,774 531,080 503,138
Allowance for loan losses 12,188 11,350 10,895 10,393 9,728
Deposits 795,178 709,592 697,664 671,999 689,385
Federal Home Loan Bank
advances 136,765 49,923 84,680 85,762 57,198
Total shareholders'
equity at year-end 103,277 89,712 80,111 66,013 62,129
AVERAGE BALANCES:
Total assets $ 1,022,653 $ 897,331 $ 866,627 $ 848,055 $ 798,395
Total earning assets 968,138 859,488 831,063 812,179 760,661
Deposits 727,782 706,801 682,013 681,916 682,074
Net loans 608,464 569,222 532,051 500,343 477,760
Shareholders' equity 94,500 83,757 74,154 64,393 57,033
SIGNIFICANT RATIOS:
Return on average assets 1.64% 1.64% 1.45% 1.24% 1.12%
Return on average
shareholders' equity 17.73 17.56 16.94 16.31 15.71
Average shareholders' equity
to average assets 9.24 9.33 8.56 7.59 7.14
Average loans as a percent
of average deposits 85.24 82.15 79.66 74.89 71.38
Shareholders' equity as a
percent of year-end assets 9.24 9.46 8.99 7.66 7.36
Allowance for loan losses
as a percent of loans 1.87 1.91 1.90 1.96 1.93
Net charge-offs as a percent
of average loans .13 .20 .28 .33 .36
Dividends declared as a
percent of net income 39.42 33.16 23.66 16.26 11.32
Net interest margin, fully
taxable equivalent 4.49 5.05 4.85 4.79 4.69
Nonperforming loans to
total loans .39 .31 .55 .97 .97
Nonperforming assets to
total assets .24 .22 .38 .82 1.01
Allowance for loan losses
to nonperforming loans 481.74 619.54 346.75 202.04 200.20
Noninterest expense as a
percent of average assets 2.27 2.64 2.72 2.86 2.95
Operating efficiency ratio 46.60 49.19 52.66 56.58 59.20
<FN>
(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.
</TABLE>
SELECTED FINANCIAL DATA
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
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 2.
FORWARD-LOOKING STATEMENTS
From time to time, the Corporation may publish forward-looking statements
relating to such matters as anticipated operating results, prospects for new
lines of business, technological developments, economic trends (including
interest rates), reorganization transactions and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements, and the purpose of this paragraph is to secure the
use of the safe harbor provisions. While the Corporation believes that the
assumptions underlying the forward-looking statements contained herein and in
other public documents are reasonable, any of the assumptions could prove to be
inaccurate, and accordingly, actual results and experience could differ
materially from the anticipated results or other expectations expressed by the
Corporation in its forward-looking statements. Factors that could cause actual
results or experience to differ from results discussed in the forward-looking
statements include, but are not limited to: economic conditions; volatility and
direction of market interest rates; capital investment in and operating results
of recent non-banking business ventures of the Corporation; governmental
legislation and regulation; material unforeseen changes in the financial
condition or results of operations of the Corporation's customers; customer
reaction to and unforeseen complications with respect to the Corporation's
product redesign initiative; and other risks identified, from time-to-time in
the Corporation's other public documents on file with the Securities and
Exchange Commission.
OVERVIEW
The Corporation has achieved another year of record earnings. Net income
for 1997 was $16,756 , an increase of $2,050, or 13.9 % over the 1996 earnings
of $14,706. Basic earnings per share for 1997 were $2.85, with diluted earnings
per share being $2.84, representing increases of 14.0% and 13.6%, respectively,
over the $2.50 basic and diluted earnings in 1996. In 1995, net income was
$12,563 or $2.13 per share. The Corporation has reported annual increases in net
income every year since the holding company was formed in 1982. Net income per
share has increased at a compound annual growth rate of 13.3% over the last five
years.
Dividends declared in 1997 totaled $1.12 per share. This represented an
increase of 34.9% over 1996, when dividends declared were $ .83 per share and
continues the Corporation's history of increased cash dividends for each of the
sixteen years since the holding company was formed in 1982. Cash dividends for
1995 were $.50 per share. The compound annual growth rate for the Corporation's
per share dividend declaration for the last five years is 45.8%.
The Corporation's return on average total equity in 1997 was 17.73%, as
compared to 17.56% in 1996 and 16.94% in 1995, for a five year average of
16.85%. At December 31, 1997, the ratio of equity to assets was 9.24%, compared
to 9.46% at year-end 1996 and 8.99% at year-end 1995. The Corporation's return
on average assets was 1.64% in 1997, compared to 1.64% in 1996 and 1.45% in
1995, and has averaged 1.42% over the last five years. The steady annual growth
in earnings has been attributable to increases in earning assets, primarily
loans and securities.
The principal sources of revenue for the Corporation are interest and fees
on loans, which accounted for 66.9% of total revenues in 1997, 72.0% in 1996 and
70.6% in 1995. Interest on investment and mortgage-backed securities is also a
significant source of revenue, accounting for 25.0% of revenues in 1996, 21.4%
in 1996 and 22.5% in 1995.
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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net interest income $ 42,625 $ 42,533 $ 39,640
Taxable equivalent adjustments
to net interest income 891 856 708
-------- -------- --------
Net interest income, fully taxable
equivalent $ 43,516 $ 43,389 $ 40,348
======== ======== ========
Net interest margin 4.40% 4.95% 4.77%
Taxable equivalent adjustment .09 .10 .09
-------- -------- --------
Net interest margin, fully taxable equivalent 4.49% 5.05% 4.85%
======== ======== ========
</TABLE>
21
<PAGE> 21
FINANCIAL REVIEW
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
NET INTEREST INCOME - CONTINUED
In 1997, FTE net interest income provided 86.2% of the Corporation's net
revenues, compared with 90.0% in 1996 and 90.0% in 1995. The increase of $127 in
FTE net interest income in 1997 was primarily attributable to an increase in
average interest-earning assets of 12.6% or $108,650. During 1997, the growth in
average interest-earning assets was primarily in securities and loans, which
increased $72,789 and $39,242, respectively. The growth in FTE net interest
income in 1996 over 1995 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 decreased 56 basis
points in 1997 to 4.49%. The principal factors contributing to the decrease were
lower yielding loans and an increase in the cost of interest bearing liabilites.
An increase over 1996 levels in average noninterest-bearing demand deposits and
average shareholders' equity of 2.6% and 12.8%, 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 increase during 1997. During 1998, 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 24 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.
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
------------------------------- --------------------------- --------------------------
AVERAGE Average Average
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 342 $ 24 7.02% $ 481 $ 28 5.82% $ 373 $ 18 4.83%
Federal funds sold and other 2,600 147 5.65 6,347 363 5.72 11,457 656 5.73
Securities
Taxable 322,304 21,151 6.56 247,979 15,826 6.38 253,199 15,896 6.28
Tax exempt 22,529 1,100 4.88 24,065 1,173 4.87 22,749 1,090 4.79
Loans 620,363 59,495 9.59 580,616 57,166 9.85 543,285 53,164 9.79
-------- ------- -------- -------- -------- ------- ----
Total interest-earning
assets 968,138 81,917 8.46 859,488 74,556 8.67 831,063 70,824 8.52
------- -------- -------- -------
NONEARNING ASSETS:
Cash and due from banks 23,438 21,768 20,249
Premises and equipment, net 15,519 14,493 13,313
Other nonearning assets 27,457 12,976 13,236
Allowance for loan losses (11,899) (11,394) (11,234)
---------- -------- --------
Total assets $1,022,653 $897,331 $866,627
========== ======== ========
INTEREST-BEARING LIABILITIES:
Demand deposits $ 85,223 1,965 2.31 $ 88,963 1,984 2.23 $ 92,377 2,094 2.27
Savings deposits 229,457 7,065 3.08 243,635 7,734 3.17 254,011 8,699 3.42
Time deposits 347,499 19,448 5.60 310,252 17,092 5.51 274,138 14,726 5.37
Federal funds and
repurchase agreements 102,861 5,625 5.47 43,952 2,295 5.22 31,254 1,726 5.52
Borrowings 90,336 5,189 5.74 54,218 2,918 5.38 70,685 3,939 5.57
-------- ------- -------- -------- -------- ------- ----
Total interest-bearing
liabilities 855,376 39,292 4.59 741,020 32,023 4.32 722,465 31,184 4.32
------- -------- -------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 65,603 63,951 61,487
Other liabilities 7,174 8,603 8,521
Shareholders' equity 94,500 83,757 74,154
---------- -------- --------
Total liabilities and
equity $1,022,653 $897,331 $866,627
========== ======== ========
NET INTEREST INCOME $42,625 $42,533 $39,640
======= ======= =======
NET INTEREST INCOME TO EARNING ASSETS 4.40% 4.95% 4.77%
</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.
<PAGE> 22
FINANCIAL REVIEW
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
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>
1997 1996
---------------------------- -------------------------------
CHANGE FROM 1996 IN INTEREST Change from 1995 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 $ (9) $ 5 $ (4) $ 6 $ 4 $ 10
Federal funds sold (212) (4) (216) (292) (1) (293)
Securities:
Taxable 4,866 459 5,325 (331) 261 (70)
Tax exempt (75) 2 (73) 64 19 83
Loans (net) 3,840 (1,511) 2,329 3,674 328 4,002
------ ------- ------- ------- ------- --------
Total interest income 8,410 (1,049) 7,361 3,121 611 3,732
------ ------- ------- ------- ------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing
demand deposits (85) 66 (19) (77) (33) (110)
Savings deposits (441) (228) (669) (346) (619) (965)
Time deposits 2,081 275 2,356 1,981 385 2,366
------ ------- ------- ------- ------- --------
Total deposits 1,555 113 1,668 1,558 (267) 1,291
Federal funds and
repurchase agreements 3,217 113 3,330 668 (99) 569
Borrowings 2,063 208 2,271 (890) (131) (1,021)
------ ------- ------- ------- ------- --------
Total interest expense 6,835 434 7,269 1,336 (497) 839
------ ------- ------- ------- ------- --------
Net interest income $1,575 $(1,483) $ 92 $ 1,785 $ 1,108 $ 2,893
====== ======= ======= ======= ======= ========
</TABLE>
OTHER INCOME
Other income totaled $6,992 in 1997, a 44.9% increase over 1996. The 1996
total of $4,826 represented an increase of $333 or 7.4% from 1995. This increase
was primarily the result of other income which totaled $4,458 in 1997, compared
to $2,609 in 1996 and $2,400 in 1995. Included in other income were fees
associated with credit products which totaled $750 for 1997. Also, Citizens
purchased Bank Owned Life Insurance during the second quarter of 1997 to offset
costs of selected employee benefits. The income from Bank Owned Life Insurance
totaled $715 for 1997. Additionally, service charges and fees on deposit
accounts totaled $2,534 in 1997, compared to $2,239 in 1996 and $2,026 in 1995.
Gain on the sale of loans totaled $739 in 1997, $473 in 1996, and $125 in
1995.
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 46.6%
for 1997, improved by 259 basis points from 49.19% in 1996, and compares
favorably to 58.54%, the average efficiency ratio for the first three quarters
of 1997 for U.S. bank holding companies with total assets of $1 - $3 billion.
The efficiency ratio was 52.66% in 1995.
Other expenses were $23,260 in 1997, compared to $23,728 in 1996 and
$23,579 in 1995. During 1997, 1996 and 1995, respectively, the Corporation
incurred $200, $838 and $711 in merger, integration and restructuring expenses.
These costs were primarily professional fees, early retirement expense, other
personnel related costs and the write-off of certain fixed assets in the
duplicate facilities resulting from acquisitions. Salaries and employee benefits
expense increased in 1997 due to normal merit increases, additional staff from
acquired companies and purchased branch facilities and the effect on stock
appreciation rights expense of the price increase of the Corporation's common
stock. Salaries and employee benefits were level in 1996 and 1995.
Additionally, in 1996 the legislation to 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 decreased to $.064 per $100 of deposits beginning January 1, 1997, from
$.23 per $100 of deposits previously assessed. This saved the Corporation
approximately $200 in deposit insurance premiums in 1997.
23
<PAGE> 23
FINANCIAL REVIEW
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
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
32.2%, 33.2% and 32.2% in 1997, 1996 and 1995, 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%.
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, 1997. 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 1998 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) $ 238,607 $ 49,025 $ 153,332 $210,130 $ 1,197 $ 652,291
Securities (b) 12,232 77,492 83,444 196,288 19,671 389,127
Federal funds sold 375 375
Interest-bearing deposits 168 50 218
---------- ---------- ---------- -------- -------- -----------
Rate sensitive assets (RSA) $ 251,382 $ 126,567 $ 236,776 $406,418 $ 20,868 $ 1,042,011
========== ========== ========== ======== ======== ===========
LIABILITIES
Interest-bearing demand deposits $94,757 $ 94,757
Interest-bearing savings deposits 226,913 226,913
Interest-bearing time deposits 122,157 $ 124,088 $ 156,025 $ 2,082 404,352
Securities sold under
repurchase agreements and
federal funds purchased 38,284 4,100 32,280 74,664
Federal Home Loan Bank advances 70,305 42,960 23,500 136,765
---------- ---------- ---------- -------- -----------
Rate sensitive liabilities (RSL) $552,416 $ 171,148 $ 211,805 $2,082 $ 937,451
========== ========== ========== ======== ===========
Gap (c) $ (301,034) $ (44,581) $ 24,971 $404,336 $ 20,868 $ 104,560
Cumulative Gap (301,034) (345,615) (320,644) 83,692 104,560
RSA/RSL 45.5% 74.0% 111.8% NM NM
Cumulative Gap/RSA (d) (28.9) (33.2) (30.8) 8.0%
</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 and held to maturity.
(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 $1,042,011.
NM - Not Meaningful
Total interest-earning assets exceeded interest-bearing liabilities by
$104,560 at December 31, 1997. 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 $345,615. 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.
24
<PAGE> 24
FINANCIAL REVIEW
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
LOAN PORTFOLIO
The Corporation's loan portfolio is its largest and most profitable
component of average earning assets, totaling 64.1% of average earning assets.
The Corporation continued to emphasize increasing its loan portfolio in 1997.
Average total loans increased by $39,747 or 6.85% in 1997, following a 6.9% or
$37,331 increase in 1996. The Corporation's loan-to-deposit ratio at December
31,1997 was 80.5%. This ratio compares to 82.3% at December 31, 1996. 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, 1997, increased by $57,044 or 9.6% over the
total at December 31, 1996. The Corporation experienced growth in 1997 in
providing financing to a group of related enterprises involved in purchasing
pools of one-to-four family residential, home equity and other consumer loans.
Such loans totaled approximately $72,626 at December 31, 1997, compared to
$65,464 at December 31, 1996. 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 $31,636 or 12.4% during
1997. Residential real estate loans increased by $16,824 or 6.0%. Consumer loans
increased by $8,815 or 18.3%. The Corporation's loan portfolio contains no loans
to foreign borrowers. Over the past four years, total loans have increased
$149,153, 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
45.6% of the Corporation's loan portfolio at December 31, 1997, 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 1997, $24,594 of loans were originated to be
sold in the secondary market. This compares to approximately $21,275 of new loan
volume originated for sale in the secondary market in 1996. While this activity
generates some processing fee income, 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 $1,646 in 1997, compared to $1,614 and
$2,024 in 1996 and 1995, 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 1997 were $808, which represents .13% of average loans. This compares
to net losses of .20% of average loans in 1996. The provision for loan losses to
net losses was 203.7% in 1997.
The allowance for loan losses at December 31, 1997 was $12,188, an
increase of $838 since year-end 1996. The allowance was 1.87% of total loans at
year-end 1997, compared to 1.91% at year-end 1996. The allowance for loan losses
as a percent of nonperforming loans decreased to 481.7% at December 31, 1997,
from 619.5% at year-end 1996.
NONPERFORMING ASSETS
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
$2,681 at year-end 1997, compared to $2,046 at year-end 1996, an increase of
$635 or 31.0%.
SECURITIES
The Corporation's securities portfolio, including securities available for
sale plus securities held to maturity, increased from $305,605 at December 31,
1996 to $389,127 at December 31, 1997. The largest portion of the portfolio at
year-end 1997 was invested in GNMA, FHLMC and FNMA mortgage-backed securities
which totaled $222,079 and comprise 57.1% of the carrying value of total
investments.
In 1997 and 1996 management implemented growth strategies by 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 1995 these types of growth strategies were not used by the Corporation
because management determined that there were unacceptable 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 1997. Core
deposits, representing the Corporation's largest, most stable and generally
least costly source of funds, totaled $ 721,961 at December 31, 1997, an
increase of $66,970, or 10.2%, from year-end 1996. At December 31, 1997, core
deposits represented 112.8% of loans, compared to 112.2% at December 31, 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, 1997 cash and cash
equivalents totaled $32,162, an increase of $4,795 or 17.5% from December 31,
1996. Additionally, the Corporation has secondary sources of liquidity in
investment and mortgage-backed securities available for sale totaling $331,729
at year-end 1997 compared to $240,375 at year-end 1996, as well as maturities
and repayments of loans and investment securities held to maturity.
25
<PAGE> 25
FINANCIAL REVIEW
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
LIQUIDITY AND FUNDING - CONTINUED
Securities sold under repurchase agreements and federal funds purchased at
December 31, 1997 of $74,664 decreased $13,275 or 15.1% from year-end 1996. At
December 31, 1997 $38,784 repurchase agreements were with in market bank
customers and $35,880 were collateralized by securities held by a broker where
the exact same securities are returned to the Corporation at the maturities of
the agreements.
Federal Home Loan Bank ("FHLB") advances increased to $136,765 at December
31, 1997, from $49,923 at year-end 1996, an increase of $86,842. Management
views FHLB advances as a stable secondary funding source. Management implemented
securities growth strategies in 1997 and 1996 totaling approximately $45,400 and
$46,600, respectively as described above. These low cost borrowings were used as
the primary funding source for the growth strategies.
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 Flow on page 5 of
this report, the most significant transactions which affected the Corporation's
level of cash and cash equivalents, cash flows and liquidity during 1997 were
the purchase of securities available for sale of $160,163, the receipt of
proceeds from maturities and payments on securities available for sale of
$71,301, the net increase in short-term FHLB advances of $64,710, and the
proceeds from long-term FHLB advances of $44,655.
CAPITAL RESOURCES
1997 1996
---- ----
Common shareholders' equity $103,277 $89,712
Book value per share 17.51 15.21
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 leverage capital ratio was 9.21% at December
31, 1997, as compared to 9.91% at December 31, 1996. This decrease is due to the
rate of asset growth exceeding capital growth and the additional intangible
asset resulting from the November 1997 branch acquisition. The leverage capital
ratio is computed by dividing Tier 1 capital by year-end assets, net of certain
intangible assets. Total shareholders' equity increased $13,565 or 15.1% in
1997. For 1996, total shareholders' equity increased $9,601 or 12.0%.
Shareholders' equity was 9.24% of total assets at December 31, 1997, as compared
to 9.46% at year-end 1996.
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 $10,151, $9,830
and $9,591 were added to retained earnings in 1997, 1996 and 1995, respectively.
Dividends declared to common shareholders were $1.12, $.83 and $.50 per share in
1997, 1996 and 1995, 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.
At year-end 1997, a $3,313 component of shareholders' equity 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.
GENERAL
During the second quarter of 1997, the Corporation began to offer
comprehensive trust services, including personal trust, estate administration,
IRA and employee benefit accounts, and investment services through our
wholly-owned subsidiary, First National Bank of Chester. The Trust Department
personnel are operating from the Citizens office in Boardman, Ohio.
On August 1, 1997, Citizens acquired ValueNet, Inc. ("ValueNet"). ValueNet
provides local Internet access and electronic mail service to over 1,000
customers throughout Columbiana, Mahoning, and Trumbull counties. The all-cash
acquisition, while not material to the financial statements, is the first step
of Citizens' plan to offer Internet banking, scheduled to be released during the
first quarter of 1998. Management believes that by purchasing an Internet
service provider, the Corporation has the advantage of an already established
customer base for our Internet banking product.
On September 12, 1997, the Corporation signed a Definitive Agreement ("the
Agreement") calling for UniBank, Steubenville, Ohio, to affiliate with the
Corporation. Under the terms of the Agreement, 13.25 shares of the Corporation's
common stock will be exchanged for each share of UniBank common stock
outstanding in a tax-free exchange. UniBank has assets of $216 million and
deposits of $192 million. UniBank operates twelve banking locations in Jefferson
and Columbiana counties which will become branches of The Citizens Banking
Company ("Citizens"). Citizens will have the number one deposit market share in
Jefferson County upon the completion of the transaction. Since UniBank and
Citizens operate in some of the same markets, opportunities to consolidate
branches exist, while continuing to provide convenient customer service. The
transaction, which is subject to regulatory and UniBank shareholder approval, is
expected to close early March of 1998.
On November 21, 1997, Citizens acquired the Belmont County Branches of
Metropolitan Savings Bank of Ohio, an affiliate of F.N.B. Corporation,
Hermitage, Pennsylvania. The branch offices are located in Martins Ferry, St.
Clairsville, and Barnesville. Citizens acquired approximately $65 million in
deposits and $25 million in loans for a 9% premium on the deposits. The value of
the transaction was approximately $5.8 million.
On December 3, 1997, The Corporation announced the signing of a Definitive
Agreement with Century Financial Corporation ("Century"). Century has assets of
$459 million, loans of $349 million, and deposits of $393 million. Based in
Rochester, Pennsylvania, Century operates 13 banking offices, 12 of which are in
Beaver County, and 1 in Butler County.
Initially, Century will operate as a wholly-owned subsidiary of the
Corporation. Future plans call for Century to then operate as a division of
Citizens. Assuming approval by the appropriate regulatory authorities, and
approval by the shareholders of Century and the Corporation, the transaction is
expected to be completed during July of 1998
26
<PAGE> 26
FINANCIAL REVIEW
DECEMBER 31, 1997
(Dollars in thousands, except per share data)
CITIZENS BANCSHARES, INC.
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 is immaterial.
SFAS No. 128, "Earnings Per Share," was adopted in 1997 and requires dual
presentation of basic earnings per share (EPS) and diluted EPS for entities with
complex capital structures. Basic EPS is computed by dividing income available
to common shareholders by the weighted average common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in earnings such as stock options, warrants or other common stock
equivalents. All prior period EPS data were restated to conform with the new
presentation; however, such restatement did not materially alter EPS data
previously reported.
SFAS No. 129, "Disclosures of Information about Capital Structure,"
become effective for the Corporation in 1997. SFAS No. 129 consolidated existing
accounting guidance relating to disclosure about a company's capital structure.
SFAS No. 129 did not affect the Corporation's disclosures.
Two additional pronouncements become effective for the Corporation in
1998. SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," each
require selected disclosures in the Corporation's 1998 financial statements.
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.
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 1997 and 1996, 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 1997 and 1996.
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. See Note 17 to the
Consolidated Financial Statements for a discussion of dividend restrictions.
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>
1996 1997
------------------------------------------ -------------------------------------------
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 $29.25 $32.50 $31.00 $33.25 $39.75 $55.75 $55.00 $76.00
Low 27.88 28.25 28.75 30.50 32.50 36.25 51.50 52.25
Dividends .19 .19 .20 .25 .27 .27 .27 .31
Number of shareholders
at year-end 2,219 3,474
</TABLE>
27
<PAGE> 1
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
------------------------------
<TABLE>
<CAPTION>
State of Name Under Which
Subsidiary Incorporation Subsidiary Does Business
- ---------- ------------- ------------------------
<S> <C> <C>
The Citizens Banking Company Ohio The Citizens Banking Company
* ValueNet, Inc. Ohio ValueNet, Inc.
Freedom Financial Life Arizona Freedom Financial Life Insurance
Insurance Company Company
First National Bank United States First National Bank of Chester
of Chester
Freedom Express, Inc. Ohio Freedom Express, Inc.
</TABLE>
<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 16, 1998 on the consolidated
balance sheets of the Company as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the three years ended December 31, 1997.
/s/ CROWE, CHIZEK and COMPANY LLP
----------------------------------
CROWE, CHIZEK and COMPANY LLP
Columbus, Ohio
February 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000855876
<NAME> CITIZENS BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,787
<INT-BEARING-DEPOSITS> 218
<FED-FUNDS-SOLD> 375
<TRADING-ASSETS> 0
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<TOTAL-ASSETS> 1,117,478
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<LONG-TERM> 51,550
0
0
<COMMON> 17,327
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<INTEREST-OTHER> 171
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<INTEREST-DEPOSIT> 28,478
<INTEREST-EXPENSE> 39,292
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<SECURITIES-GAINS> 0
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<INCOME-PRETAX> 24,711
<INCOME-PRE-EXTRAORDINARY> 24,711
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<CHANGES> 0
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<EPS-PRIMARY> 2.85
<EPS-DILUTED> 2.84
<YIELD-ACTUAL> 8.46
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<ALLOWANCE-DOMESTIC> 2,361
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,827
</TABLE>
