<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) June 24, 1998
-------------
Citizens Bancshares, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
33-21296 34-1372535
- ------------------------ ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
10 East Main Street, Salineville, Ohio 43945
- -------------------------------------------------------------------------------
330/679-2328
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 5. Other Events.
- ---------------------
On May 12, 1998, Citizens Bancshares, Inc. ("Bancshares") completed the
acquisition, through merger ("Merger"), of all the assets and liabilities of
Century Financial Corporation ("Century") pursuant to the terms and conditions
of an Agreement and Plan of Merger dated December 3, 1997 by and between
Bancshares and Century. The transaction was accounted for as a pooling of
interests for accounting and financial reporting purposes.
Attached to this Current Report on Form 8-K as Exhibit 99 are the
Supplemental Financial Statements, the accompanying notes thereon and Related
Information of Bancshares, giving effect to the Merger.
Item 7. Financial Statements and Exhibits
- ------- ---------------------------------
Exhibit No. Exhibit
23(a) Consent of Crowe, Chizek and Company LLP
23(b) Consent of S.R. Snodgrass, A.C.
27 Restated Financial Data Schedules
99(a) Supplemental Financial Statements and Related Information of
Bancshares
99(b) Report of Independent Auditors
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Citizens Bancshares, Inc.
-------------------------
(Registrant)
Date: June 25, 1998 By: /s/ Marty E. Adams
----------------------
Marty E. Adams, President
and Chief Executive Officer
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
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 May 12, 1998 on the supplemental
consolidated balance sheets of the Citizens Bancshares, Inc. as of December 31,
1997 and 1996, and the related supplemental consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997, which report is included in this Form 8-K.
/s/ Crowe, Chizek and Company LLP
Columbus, Ohio
June 24, 1998
<PAGE> 1
Exhibit 23(b)
CONSENT OF INDEPENDENT AUDITORS
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 relating to the
consolidated financial statements of Century Financial Corporation as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, which report is included in this Form 8-K.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
June 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000855876
<NAME> CITIZENS BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1998 MAR-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 42,428 50,544 54,043 46,198 41,745
<INT-BEARING-DEPOSITS> 5,657 1,951 4,661 2,204 1,388
<FED-FUNDS-SOLD> 5,225 19,050 21,960 32,690 33,910
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 461,448 399,168 432,306 334,024 331,505
<INVESTMENTS-CARRYING> 60,815 90,052 87,207 88,371 74,851
<INVESTMENTS-MARKET> 61,449 89,913 88,018 88,627 75,478
<LOANS> 1,146,419 1,011,660 1,127,846 1,002,454 927,014
<ALLOWANCE> 18,373 15,774 18,276 15,629 14,856
<TOTAL-ASSETS> 1,785,680 1,626,144 1,791,023 1,543,029 1,441,695
<DEPOSITS> 1,401,966 1,257,868 1,380,313 1,232,344 1,179,399
<SHORT-TERM> 104,771 168,287 168,403 136,495 79,668
<LIABILITIES-OTHER> 15,316 13,844 14,090 16,324 12,520
<LONG-TERM> 106,050 43,813 71,550 18,405 42,673
0 0 0 0 0
0 0 0 0 0
<COMMON> 31,520 28,632 31,189 28,547 29,578
<OTHER-SE> 126,057 94,775 125,478 110,914 97,847
<TOTAL-LIABILITIES-AND-EQUITY> 1,785,680 1,626,144 1,791,023 1,543,029 127,425
<INTEREST-LOAN> 25,739 23,288 99,187 90,656 83,127
<INTEREST-INVEST> 8,155 6,841 30,806 25,312 25,975
<INTEREST-OTHER> 456 469 1,674 2,014 1,689
<INTEREST-TOTAL> 34,350 30,598 131,667 117,982 110,791
<INTEREST-DEPOSIT> 13,841 11,862 51,253 45,158 42,413
<INTEREST-EXPENSE> 16,998 14,083 63,209 51,417 48,623
<INTEREST-INCOME-NET> 17,352 16,515 68,458 66,565 62,168
<LOAN-LOSSES> 695 613 4,335 2,279 2,504
<SECURITIES-GAINS> 31 (4) 10 (21) (102)
<EXPENSE-OTHER> 14,075 9,631 43,228 41,737 40,172
<INCOME-PRETAX> 5,556 8,579 31,886 31,284 27,023
<INCOME-PRE-EXTRAORDINARY> 5,556 8,579 31,886 31,284 27,023
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 4,128 5,923 22,420 21,730 18,794
<EPS-PRIMARY> 0.23 0.34 1.27 1.23 1.06
<EPS-DILUTED> 0.23 0.33 1.26 1.22 1.06
<YIELD-ACTUAL> 4.14 4.47 4.33 4.76 4.67
<LOANS-NON> 4,861 4,590 5,203 2,138 3,718
<LOANS-PAST> 1,984 1,351 1,446 1,093 838
<LOANS-TROUBLED> 210 411 211 418 825
<LOANS-PROBLEM> 4,839 1,348 1,612 4,052 4,726
<ALLOWANCE-OPEN> 18,276 15,629 15,629 14,856 15,693
<CHARGE-OFFS> 846 765 2,978 3,072 4,742
<RECOVERIES> 248 297 1,566 1,401 1,300
<ALLOWANCE-CLOSE> 18,373 15,774 18,276 15,629 14,856
<ALLOWANCE-DOMESTIC> 6,833 6,394 7,357 5,952 6,163
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 11,540 9,380 10,919 9,677 8,693
</TABLE>
<PAGE> 1
Exhibit 99(a)
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL STATEMENTS AND RELATED INFORMATION
Effective May 12, 1998, Century Financial Corporation, Rochester, Pennsylvania,
merged into Citizens Bancshares, Inc. The transaction was affected through the
exchange of .7926 Bancshares common shares for each of Century's outstanding
common shares, with cash paid in lieu of fractional shares. The merger was
accounted for as a pooling of interests. Because the acquired business is
considered significant pursuant to Rule 11-01(b) of Regulation S-X, the
following information is presented, as restated for that merger, as well as
Bancshares' March 6, 1998 merger with Unibank, Steubenville, Ohio. The UniBank
merger was also accounted for as a pooling of interests, and was affected
through the exchange of 26.5 common shares of the Corporation for each of
Unibank's outstanding common shares, with cash paid in lieu of fractional
shares. The UniBank merger is not considered significant pursuant to Rule
11-01(b) of Regulation S-X.
The following supplemental financial statements and other information is
presented to reflect the merger with Century and UniBank.
SUPPLEMENTAL ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Supplemental Consolidated Balance Sheets............................................................. 2
Supplemental Consolidated Statements of Income....................................................... 3
Supplemental Consolidated Statements of Changes in Shareholders' Equity.............................. 4
Supplemental Consolidated Statements of Cash Flows................................................... 6
Notes to Supplemental Consolidated Financial Statements.............................................. 8
Report of Independent Auditors ...................................................................... 35
SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA......................................................... 36
SUPPLEMENTAL FINANCIAL REVIEW............................................................................. 37
SUPPLEMENTAL STATISTICAL DISCLOSURES ..................................................................... 53
SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Consolidated Balance Sheets............................................................. 64
Supplemental Consolidated Statements of Income....................................................... 65
Supplemental Consolidated Statements of Comprehensive Income......................................... 66
Supplemental Condensed Consolidated Statements of Changes in
Shareholders' Equity............................................................................... 66
Supplemental Condensed Consolidated Statements of Cash Flows......................................... 67
Notes to Supplemental Interim Consolidated Financial Statements...................................... 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................................. 73
</TABLE>
<PAGE> 2
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 54,043 $ 46,198
Federal funds sold 21,960 32,690
------------- --------------
Total cash and cash equivalents 76,003 78,888
Interest-bearing deposits with financial institutions 4,661 2,204
Securities available for sale at fair value 432,306 334,024
Securities held to maturity (Estimated fair value $ 88,018 and
$ 88,627) 87,207 88,371
Total loans 1,127,846 1,002,454
Less allowance for loan losses (18,276) (15,629)
------------- --------------
Net loans 1,109,570 986,825
Premises and equipment, net 30,794 28,098
Accrued interest receivable and other assets 50,482 24,619
------------- --------------
Total assets $ 1,791,023 $ 1,543,029
============= ==============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 134,217 $ 124,808
Interest-bearing deposits 1,246,096 1,107,536
------------- --------------
Total deposits 1,380,313 1,232,344
Securities sold under repurchase agreements and federal funds
purchased 79,188 93,977
Federal Home Loan Bank advances 160,765 60,923
Accrued interest payable and other liabilities 14,090 16,324
------------- --------------
Total liabilities 1,634,356 1,403,568
------------- --------------
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value; authorized 200,000 shares;
none issued
Common stock, no par value; 36,000,000 shares authorized;
17,738,935 and 17,712,862 shares issued 31,189 28,547
Retained earnings 122,106 110,606
Treasury stock, 17,626 and 20,740 shares at cost (222) (344)
ESOP obligations and unearned shares (325) (413)
Unrealized gain on securities available for sale 3,919 1,065
------------- --------------
Total shareholders' equity 156,667 139,461
------------- --------------
Total liabilities and shareholders' equity $ 1,791,023 $ 1,543,029
============= ==============
</TABLE>
See notes to supplemental consolidated financial statements.
2.
<PAGE> 3
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 99,187 $ 90,656 $ 83,127
Securities
Taxable 29,034 23,442 24,198
Nontaxable 1,772 1,870 1,777
Federal funds sold and other 1,674 2,014 1,689
----------- ----------- -----------
Total interest income 131,667 117,982 110,791
----------- ----------- -----------
INTEREST EXPENSE
Deposits 51,253 45,158 42,413
Federal funds and repurchase agreements 5,807 2,529 1,880
Federal Home Loan Bank advances and other 6,149 3,730 4,330
----------- ----------- -----------
Total interest expense 63,209 51,417 48,623
----------- ----------- -----------
NET INTEREST INCOME 68,458 66,565 62,168
PROVISION FOR LOAN LOSSES 4,335 2,279 2,504
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 64,123 64,286 59,664
----------- ----------- -----------
OTHER INCOME
Service charges and fees on deposits 4,622 4,232 3,977
Securities gains (losses) 10 (21) (102)
Other income 6,359 4,524 3,656
----------- ----------- -----------
Total other income 10,991 8,735 7,531
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 23,167 20,512 19,544
Occupancy and equipment expense 6,463 6,377 5,980
Merger, integration, and restructuring expense 200 838 711
SAIF recapitalization expense 667
Other operating expense 13,398 13,343 13,937
----------- ----------- -----------
Total other expenses 43,228 41,737 40,172
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 31,886 31,284 27,023
INCOME TAXES 9,466 9,554 8,229
----------- ----------- -----------
NET INCOME $ 22,420 $ 21,730 $ 18,794
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ 1.27 $ 1.23 $ 1.06
=========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 1.26 $ 1.22 $ 1.06
=========== =========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
3.
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
For the three years December 31, 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) ESOP Unrealized
Obligation Gain (Loss)
and On Securities
Common Retained Treasury Unearned Available
Stock Earnings Stock Shares For Sale Total
----- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995,
as previously reported $ 16,497 $ 53,414 $ (5) $ (150) $ (3,743) $ 66,013
Restate capital structure
for pooling of interests 12,948 29,662 - - (1,732) 40,878
---------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 1995,
as restated 29,445 83,076 (5) (150) (5,475) 106,891
Net income 18,794 18,794
Cash dividends declared
($.25 per share) (2,972) (2,972)
Cash paid for fractional
shares (8) (8)
Unrealized gain on securities
available for sale 7,285 7,285
Change in ESOP obligation
and release of shares 6 (181) (175)
Pre-merger transactions of
pooled affiliates:
Cash dividends declared (2,499) (2,499)
Other 127 (2) (16) 109
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 29,578 96,389 (21) (331) 1,810 127,425
Net income 21,730 21,730
Cash dividends declared
($.42 per share) (4,876) (4,876)
Cash paid for fractional
shares (9) (9)
Unrealized loss on
securities available for sale (745) (745)
Change in ESOP obligation
and release of shares 11 (82) (71)
Pre-merger acquisition of
pooled affiliate common
shares (1,127) (1,127)
Pre-merger transactions
of pooled affiliates:
Cash dividends declared (2,628) (2,628)
Other 85 (323) (238)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 $ 28,547 $ 110,606 $ (344) $ (413) $ 1,065 $ 139,461
</TABLE>
(Continued)
4.
<PAGE> 5
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (Continued)
For the three years December 31, 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) ESOP Unrealized
Obligation Gain (Loss)
and On Securities
Common Retained Treasury Unearned Available
Stock Earnings Stock Shares For Sale Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 28,547 $ 110,606 $ (344) $ (413) $ 1,065 $ 139,461
Net income 22,420 22,420
Cash dividends declared
($.56 per share) (6,605) (6,605)
Cash paid for fractional
shares (2) (2)
Unrealized gain on securities
available for sale 2,854 2,854
Change in ESOP obligation
and release of shares 70 88 158
Stock options exercised 743 743
Pre-merger transactions
of pooled affiliates:
Cash dividends declared (2,857) (2,857)
Stock dividend 1,416 (1,416) -
Other 413 (40) 122 495
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 $ 31,189 $ 122,106 $ (222) $ (325) $ 3,919 $ 156,667
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to supplemental consolidated financial statements.
5.
<PAGE> 6
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,420 $ 21,730 $ 18,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,812 2,417 5,502
Securities amortization and accretion, net 948 702 (1,350)
Securities (gains) losses (10) 21 102
Provision for loan losses 4,335 2,279 2,504
Change in net deferred loan fees (615) (298) 392
Premises and equipment gain (141) - (40)
Increase in cash surrender value of life insurance (801) (84) (55)
Deferred income tax expense (benefit) (596) (320) 215
Net change in loans held for sale 856 (3,283) 1,564
Change in other assets and liabilities (1,708) 374 (1,876)
------------ ----------- -----------
Net cash provided by operating activities 28,500 23,538 25,752
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits with financial
institutions (2,457) (780) 2,599
Securities held to maturity:
Proceeds from maturities and payments 59,723 49,888 78,052
Proceeds from sales - - 775
Purchases (58,444) (57,565) (75,637)
Securities available for sale:
Proceeds from maturities and payments 94,998 129,065 33,644
Proceeds from sales 391 8,480 41,932
Purchases (190,547) (147,127) (63,551)
Sales of student loans and commercial participations 2,000 4,362 12,053
Net increase in loans (92,093) (72,977) (90,196)
Purchases of premises and equipment (5,171) (6,264) (3,806)
Purchases of life insurance contracts (20,000) (500) (724)
Purchase of loans (11,989) (3,604) -
Sales of premises and equipment 511 - 277
Sales of other real estate 1,598 128 1,764
------------ ----------- -----------
Net cash used by investing activities (221,480) (96,894) (62,818)
------------ ----------- -----------
</TABLE>
(Continued)
6.
<PAGE> 7
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 49,717 52,946 65,438
Net change in federal funds and repurchase agreements (14,789) 69,516 (8,031)
Net change in short-term FHLB advances 57,710 (21,500) 17,230
Proceeds from long-term FHLB advances 64,655 8,450 14,750
Repayment of long-term FHLB advances (22,523) (23,907) (23,532)
Repayment of notes payable - - (1,974)
Cash dividends paid (9,054) (7,490) (4,342)
Pre-merger acquisition of pooled affiliate common stock - (1,127) -
Purchases of branch deposits, net 64,605 - -
Redemption of minority interest in subsidiary (561) (25) (25)
Proceeds from stock options exercised 447 79 127
Proceeds from employee stock option plan 22 - -
Proceeds from dividend reinvestment plan 217 205 107
Treasury stock purchase (351) (522) (125)
------------ ----------- -----------
Net cash provided by financing activities 190,095 76,625 59,623
------------ ----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS (2,885) 3,269 22,557
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 78,888 75,619 53,062
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 76,003 $ 78,888 $ 75,619
============ =========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
7.
<PAGE> 8
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective March 6, 1998, Citizens Bancshares, Inc. ("the Corporation") acquired
UniBank and effective May 12, 1998, the Corporation acquired Century Financial
Corporation and its subsidiary, Century National Bank, in transactions accounted
for as poolings of interests. The supplemental consolidated financial statements
give retroactive effect to the transactions and, as a result, the supplemental
consolidated balance sheets, statements of income and statements of cash flows
are presented as if the Corporation, UniBank and Century had been consolidated
for all periods presented. The supplemental consolidated statements of changes
in shareholders' equity reflect the accounts of the Corporation as if the common
stock issued in the acquisitions had been outstanding during all periods
presented. Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
the Corporation after financial statements covering the date of consummation of
the business combination are issued. The supplemental consolidated financial
statements, including the notes thereto, should be read in conjunction with the
historical consolidated financial statements of the Corporation included in its
December 31, 1997 Annual Report on Form 10-K.
The Corporation is a bank holding company that provides banking and financial
services. Its principal banking subsidiaries are The Citizens Banking Company
("Citizens"), which operates primarily in the eastern Ohio counties of
Columbiana, Jefferson, Mahoning, Stark, Belmont and Carroll; and, after the May
12, 1998 merger discussed above, Century National Bank, ("Century"), which
operates in the southwestern Pennsylvania counties of Beaver and Butler. 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
amounts of income 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 and the actuarial present value of pension benefit obligations.
(Continued)
8.
<PAGE> 9
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
The following is a summary of the significant accounting policies followed by
the Corporation in the preparation of the supplemental consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION: The supplemental consolidated financial statements
include the accounts of the Corporation and its wholly owned subsidiaries,
Citizens and its subsidiary, ValueNet, Century, Freedom Financial Life Insurance
Company, Freedom Express, Inc. and FNB. All significant intercompany
transactions have been eliminated in the consolidation. As discussed in Note 16,
the Corporation affiliated with two financial institutions in 1998, one in 1996
and another in 1995. The acquired banks, except Century, 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 $61,779, $51,112 and
$48,195, and income taxes of $10,619, $9,956 and $8,348. 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.
(Continued)
9.
<PAGE> 10
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 that will be sold. These loans are classified as loans
held for sale and carried at the lower of cost or estimated market value taken
together. 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.
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
(Continued)
10.
<PAGE> 11
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
what is considered 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 not all principal and interest
amounts will 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, in the southwestern Pennsylvania counties of Beaver and Butler and
in the West Virginia county of Hancock. At December 31, 1997, residential real
estate mortgage loans totaled 41.0% of loans and were secured primarily by 1-4
family residences. In addition, at year-end 1997, 6.5% 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
(Continued)
11.
<PAGE> 12
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 instead 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 $166 and $1,616.
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 $9,011 and $1,661 at December 31,
1997 and 1996.
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 equipment 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 are based on net income divided by the following weighted average
number of shares outstanding during the periods: 17,671,000 in 1997, 17,708,000
in 1996 and 17,783,000 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 17,778,000 in 1997, 17,768,000 in
1996 and 17,806,000 in 1995. Diluted earnings per share was lower than basic
earnings per share by $.01 in 1997 and 1996. There was no difference between
basic and diluted earnings per share in 1995.
The Corporation entered into two merger transactions in the first half of 1998
and one merger transaction in 1996 and 1995, all of which were accounted for as
poolings of interests (see Note 16). The Corporation's Board of Directors
declared a two-for-one stock split payable June 1, 1998 to shareholders of
record May 12, 1998 and 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.
(Continued)
12.
<PAGE> 13
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
RECLASSIFICATION: Certain amounts in the 1996 and 1995 consolidated financial
statements and pooled affiliates' financial statements have been reclassified to
conform to the Corporation's 1997 presentation.
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 $ 19,963 $ 124 $ (3) $ 20,084
U.S. Government agencies and corporations 82,934 1,164 (161) 83,937
Obligations of states and political
subdivisions 14,278 480 (36) 14,722
Corporate and other securities 27,870 328 (108) 28,090
Mortgage-backed securities 263,638 1,425 (596) 264,467
------------ ----------- ------------ ------------
Total debt securities available for sale 408,683 3,521 (904) 411,300
Marketable equity securities 17,610 3,397 (1) 21,006
------------ ----------- ------------ ------------
Total securities available for sale $ 426,293 $ 6,918 $ (905) $ 432,306
============ =========== ============ ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 38,618 $ 158 $ (8) $ 38,768
U.S. Government agencies and corporations 22,981 51 (13) 23,019
Obligations of states and political
subdivisions 22,013 428 22,441
Corporate and other securities 1,496 (24) 1,472
Mortgage-backed securities 2,099 219 2,318
------------ ----------- ----------- ------------
Total securities held to maturity $ 87,207 $ 856 $ (45) $ 88,018
============ =========== =========== ============
</TABLE>
(Continued)
13.
<PAGE> 14
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 27,193 $ 132 $ (45) $ 27,280
U.S. Government agencies and corporations 48,989 488 (296) 49,181
Obligations of states and political
subdivisions 14,929 483 (13) 15,399
Corporate and other securities 16,584 84 (232) 16,436
Mortgage-backed securities 212,329 1,112 (1,008) 212,433
------------ ----------- ----------- ------------
Total debt securities available for sale 320,024 2,299 (1,594) 320,729
Marketable equity securities 12,370 943 (18) 13,295
------------ ----------- ----------- ------------
Total securities available for sale $ 332,394 $ 3,242 $ (1,612) $ 334,024
============ =========== ========== ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 47,339 $ 134 $ (30) $ 47,443
U.S. Government agencies and corporations 13,459 (129) 13,330
Obligations of states and political
subdivisions 23,623 200 (82) 23,741
Corporate and other securities 1,498 (45) 1,453
Mortgage-backed securities 2,452 208 2,660
------------ ----------- ----------- ------------
Total securities held to maturity $ 88,371 $ 542 $ (286) $ 88,627
============ =========== =========== ============
</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 $ 24,328 $ 24,371
Due after one year through five years 48,855 49,149
Due after five years through ten years 60,932 62,028
Due after ten years 10,930 11,285
Mortgage-backed securities 263,638 264,467
------------ ------------
Total debt securities available for sale $ 408,683 $ 411,300
============ ============
</TABLE>
(Continued)
14.
<PAGE> 15
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
<S> <C> <C>
DEBT SECURITIES HELD TO MATURITY
Due in one year or less $ 17,390 $ 17,402
Due after one year through five years 61,716 62,175
Due after five years through ten years 5,406 5,502
Due after ten years 596 621
Mortgage-backed securities 2,099 2,318
------------ ------------
Total debt securities held to maturity $ 87,207 $ 88,018
============ ============
</TABLE>
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 $ 391 $ 8,480 $ 41,932
Gross realized gains on sales 10 11 319
Gross realized losses on sales 0 32 421
</TABLE>
In 1995, prior to the merger, Century sold two municipal securities that were,
at the time, classified as held to maturity. Proceeds from the sales of these
investment securities were $775 and a gain of $17 was recognized on these sales.
These sales resulted from Century determining, subsequent to purchase, that the
investment securities did not meet the criteria as established by policy.
Securities with a carrying value of $273,351 and $242,384 were pledged to secure
public deposits and for other purposes as required or permitted by law at
December 31, 1997 and 1996.
NOTE 3 - LOANS
The loan portfolio at December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 317,884 $ 275,602
Residential real estate 462,545 419,834
Commercial real estate 153,912 132,203
Construction 15,591 15,746
Consumer 171,579 151,878
Real estate mortgage loans held for sale 6,335 7,191
------------ ------------
Total loans $ 1,127,846 $ 1,002,454
============ ============
</TABLE>
(Continued)
15.
<PAGE> 16
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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> <C> <C>
Aggregate balance - December 31, 1996 $ 17,753
New loans 2,815
Repayments (4,177)
Other changes 147
-----------
Aggregate balance - December 31, 1997 $ 16,538
===========
</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 $ 15,629 $ 14,856 $ 15,693
Provision for loan losses 4,335 2,279 2,504
Recoveries 1,290 1,566 1,401
Loans charged-off (2,978) (3,072) (4,742)
----------- ----------- -----------
Balance at end of year $ 18,276 $ 15,629 $ 14,856
=========== =========== ===========
</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 $ 5,025 $ 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 loan
losses is allocated $ 4,226 $ 2,730
=========== ===========
Portion of allowance for loan losses allocated to the impaired loan
balance at December 31 $ 545 $ 416
=========== ===========
</TABLE>
(Continued)
16.
<PAGE> 17
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
Information regarding impaired loans is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average investment in impaired loans during the year $ 4,955 $ 3,801 $ 7,172
=========== =========== ===========
Interest income recognized on impaired loans including
interest income recognized on cash basis during the year $ 210 $ 327 $ 386
=========== =========== ===========
Interest income recognized on impaired loans on cash basis
during the year $ 201 $ 239 $ 369
=========== =========== ===========
</TABLE>
Nonperforming loans are summarized below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans $ 5,203 $ 2,138
Loans past due more than 90 days and still accruing interest 1,446 1,093
----------- -----------
Total nonperforming loans $ 6,649 $ 3,231
=========== ===========
</TABLE>
Interest income for the years ended December 31, 1997, 1996 and 1995 would have
increased by approximately $480, $171 and $343, 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 $ 30,319 $ 28,263
Equipment, furniture and fixtures 21,838 19,996
Construction in process 1,024 21
----------- -----------
Total premises and equipment 53,181 48,280
Less accumulated depreciation and amortization (22,387) (20,182)
----------- -----------
Premises and equipment, net $ 30,794 $ 28,098
=========== ===========
</TABLE>
Depreciation and amortization of premises and equipment totaled $3,207, $2,742
and $2,570 in 1997, 1996 and 1995.
(Continued)
17.
<PAGE> 18
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 $ 698
1999 528
2000 490
2001 450
2002 345
Thereafter 2,367
-----------
Total $ 4,878
===========
</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 $ 183,337 $ 169,023
Savings 354,267 359,701
Time
In denominations under $100,000 585,270 485,384
In denominations of $100,000 or more 123,222 93,428
------------ ------------
Total interest-bearing deposits $ 1,246,096 $ 1,107,536
============ ============
</TABLE>
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
1998 $ 467,459
1999 176,856
2000 38,945
2001 10,408
2002 and thereafter 14,824
------------
$ 708,492
============
</TABLE>
(Continued)
18.
<PAGE> 19
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(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 $ 79,188 $ 93,977
Weighted average interest rate at period-end 5.72% 5.99%
Maximum amount outstanding as of any month-end $ 146,941 $ 94,816
Average amount outstanding 107,405 49,680
Approximate weighted average interest rate during the year 5.41% 5.09%
</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 5.78 49,000 $ 16,000
Prime rate based, 1 year maturity 6.04 13,305 9,200
Repo Plus 30 day maturity 7,000
Fixed rate advances, with monthly interest payments:
Advances due in 1997 10,950
Advances due in 1998 5.81 46,960 6,000
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 $ 160,765 $ 60,923
============ ===========
</TABLE>
(Continued)
19.
<PAGE> 20
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
FHLB advances are collateralized by all shares of FHLB stock owned by subsidiary
banks (totaling $11,922) and by 100% of subsidiary banks' qualified mortgage
loan portfolio (totaling approximately $382,645). Based on the carrying amount
of FHLB stock owned by subsidiary banks, total FHLB advances are limited to
approximately $238,440.
The aggregate minimum future annual principal payments on borrowings are $89,215
in 1998, $43,900 in 1999, $7,650 in 2000 and $20,000 in 2002.
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 $ 10,062 $ 9,874 $ 8,014
Deferred tax expense (benefit) (596) (320) 215
------------ ----------- -----------
Total provision for income taxes $ 9,466 $ 9,554 $ 8,229
=========== =========== ===========
</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 $ 5,532 $ 4,434 $ 4,064
Other 1,266 1,118 889
----------- ----------- -----------
6,798 5,552 4,953
----------- ----------- -----------
Items giving rise to deferred tax liabilities:
Depreciation (995) (953) (827)
Unrealized gain on securities available for sale (2,095) (567) (899)
FHLB stock dividends (595) (378) (225)
Other (1,127) (736) (736)
----------- ----------- -----------
(4,812) (2,634) (2,687)
----------- ----------- -----------
Net deferred tax asset $ 1,986 $ 2,918 $ 2,266
=========== =========== ===========
</TABLE>
The Corporation has sufficient taxes paid in current and prior years to warrant
recording the full-deferred tax asset without a valuation allowance.
(Continued)
20.
<PAGE> 21
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 $ 11,160 35.0 % $ 10,950 35.0 % $ 9,458 35.0 %
Tax exempt income (1,790) (5.6) (1,471) (4.7) (1,190) (4.4)
Other 96 .3 75 .2 (39) (.1)
----------- ------ ----------- ------- ----------- ------
$ 9,466 29.7% $ 9,554 30.5% $ 8,229 30.5%
=========== ====== =========== ======= =========== ======
</TABLE>
Tax expense (benefit) attributable to securities gains and losses totaled $4,
$(7) and $(36) in 1997, 1996 and 1995.
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. Amounts to be contributed to the plan are
annually determined by the Board of Directors and totaled $1,376, $1,179 and
$1,102 in 1997, 1996 and 1995.
PENSION PLANS: The Corporation and Century maintain defined benefit pension
plans. The Corporation intends to merge the plans. The following discloses
information for each plan.
Citizens Pension Plan - Citizens 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. Pension expense is as follows:
<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)
Net amortization and deferral 426 66 261
-------- -------- ---------
Net pension expense $ 155 $ 292 $ 198
======== ======== =========
</TABLE>
(Continued)
21.
<PAGE> 22
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations
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
-------- ---------
Prepaid pension asset (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.
Century Pension Plan--Century sponsors a trustee, noncontributory defined
benefit pension plan covering substantially all employees and officers of
Century. The plan calls for benefits to be paid to eligible employees at
retirement based primarily on years of service and compensation rates near
retirement. Contributions are intended to provide not only benefits attributed
to service to date but also for those expected to be earned in the future.
Pension expense is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned $ 270 $ 247 $ 264
Interest cost on projected benefit obligation 375 341 298
Return on plan assets (1,219) (677) 78
Net amortization and deferral 708 228 (424)
-------- -------- ---------
Net pension expense $ 134 $ 139 $ 216
======== ======== =========
</TABLE>
(Continued)
22.
<PAGE> 23
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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>
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits $ 4,177 $ 3,287
Non-vested benefits 47 40
-------- ---------
Accumulated benefit obligation 4,224 3,327
Effect of anticipated future service and salary levels 1,796 1,744
-------- ---------
Projected benefit obligation 6,020 5,071
Market value of assets 7,221 6,111
-------- ---------
Plan assets in excess of projected benefit obligation 1,201 1,040
Unrecognized transition amount (233) (291)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (569) (266)
-------- ---------
Prepaid pension asset $ 399 $ 483
======== =========
Actuarial assumptions:
Discount rate 7.50 % 7.50%
Long term rate of return 7.50 7.50
Rate of increase in compensation levels 4.50 4.00
</TABLE>
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.
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 900,000 options on
common shares and 1,350,000 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
(Continued)
23.
<PAGE> 24
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 the Corporation for 1997, 1996 and 1995: 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. Century also maintained a stock option plan.
Assumptions for Century were a risk-free interest rate of 6.25% for all periods;
dividend yields of 3.30% for all periods; volatility factors of the expected
market price of common stock of 7.0% in 1997 and 16.0% for other periods; and a
weighted average expected life of the options of 9 years for all periods.
The Corporation's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income as reported $ 22,420 $ 21,730 $ 18,794
Pro forma net income 20,815 21,486 18,638
Pro forma earnings per share
Basic $ 1.18 $ 1.21 $ 1.05
Diluted 1.17 1.21 1.05
</TABLE>
A summary of the Corporation's stock options activity and related information
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- ---------------------------------------
Average Average
Exercise Exercise
Options Price SARS Options Price SARS
------- ----- ---- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 331,183 $ 10.93 107,598 274,698 $ 10.61 101,212
Granted 64,790 14.93 8,338 66,375 12.10 6,482
Forfeited (3,759) 14.63 (826) (8,661) 11.18 (96)
Exercised (117,536) 11.02 (75,000) (1,229) 9.54
----------- ------- ----------- ----------- -------- -----------
Outstanding at the end
of year 274,678 $ 11.71 40,110 331,183 $ 10.93 107,598
=========== ======= =========== =========== ======== ===========
Exercisable at end of year 156,624 None 145,306 None
</TABLE>
The weighted average fair value of options granted during 1997 and 1996 was
$5.27 and $2.27 per share under option, respectively. Compensation expense
related to stock appreciation rights was $1,793, $222, and $100 in 1997, 1996
and 1995.
(Continued)
24.
<PAGE> 25
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 before 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 27,588 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 63,220 55,622
Unallocated shares 2,276 9,874
----------- -----------
Total old shares 65,496 65,496
=========== ===========
New Shares 1997 1996
---- ----
Shares allocated and committed to be released 4,860 276
Unreleased shares 27,588 32,172
----------- -----------
Total new shares 32,448 32,448
=========== ===========
</TABLE>
(Continued)
25.
<PAGE> 26
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Loan Balance Principal
Shares Price Per December 31, Reductions Interest
Year Purchased Share 1997 1996 Remaining Rate
---- --------- ----- ---- ---- --------- ----
<S> <C> <C> <C> <C> <C>
1989 24,996 $ 4.00 $ 12 0 83% of prime
1990 22,500 4.50 $ 12 25 1 prime + .44%
1992 18,000 5.50 25 37 2 prime + .125%
1995 21,000 12.00 157 189 5 prime + .125%
1996 11,448 15.00 131 150 7 prime + .125%
--------- --------
$ 325 $ 413
========= ========
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Subsidiary banks are parties to financial instruments that 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 $104,761 in variable rate commitments and $11,409 in fixed rate
commitments at year-end 1997. There were $84,252 in variable rate commitments
and $10,670 in fixed rate commitments at year-end 1996. 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 case 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. Subsidiary
banks 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 $16,759
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.
(Continued)
26.
<PAGE> 27
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
NOTE 13 - OTHER INCOME AND OTHER OPERATING EXPENSE
The following is a summary of other income and other operating expense:
<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 801
Other 4,819 4,051 3,531
---------- ---------- ----------
Total other income $ 6,359 $ 4,524 $ 3,656
========== ========== ==========
OTHER OPERATING EXPENSE
Professional services $ 1,336 $ 1,106 $ 1,128
Printing and supplies 1,286 1,256 1,209
State franchise taxes 1,320 1,341 1,092
FDIC insurance 209 237 1,486
Amortization of intangible assets 500 363 510
Other 8,747 9,040 8,512
---------- ---------- ----------
Total other operating expense $ 13,398 $ 13,343 $ 13,937
========== ========== ==========
</TABLE>
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair values
of financial instruments at year-end 1997 and 1996. Items that 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 cash equivalents $ 76,003 $ 76,003 $ 78,888 $ 78,888
Interest-bearing deposits 4,661 4,661 2,204 2,204
Securities available for sale 432,306 432,306 334,024 334,024
Securities held to maturity 87,207 88,018 88,371 88,627
Loans, net of the allowance for loan losses 1,109,570 1,123,165 986,825 983,070
Accrued interest receivable 11,748 11,748 10,033 10,033
Demand and savings deposits (671,821) (671,821) (653,532) (653,532)
Time deposits (708,492) (714,383) (578,812) (581,582)
Securities sold under repurchase agreements
and federal funds purchased (79,188) (79,188) (93,977) (93,977)
Federal Home Loan Bank advances (160,765) (161,062) (60,923) (60,875)
Accrued interest payable (5,098) (5,098) (3,668) (3,668)
</TABLE>
(Continued)
27.
<PAGE> 28
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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, 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, applied for the time period until
maturity. 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. In addition, 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.
(Continued)
28.
<PAGE> 29
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED PARENT COMPANY BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,610 $ 514
Interest-bearing balances with banks 2,941 16
-------------- ------------
Total cash and equivalents 5,551 530
Securities 11,980 2,761
Investment in bank subsidiaries 125,068 125,733
Investment in nonbank subsidiaries 1,578 1,392
Other assets 15,739 12,068
-------------- ------------
Total assets $ 159,916 $ 142,484
============== ============
LIABILITIES $ 3,249 $ 3,023
SHAREHOLDERS' EQUITY 156,667 139,461
-------------- ------------
Total liabilities and shareholders' equity $ 159,916 $ 142,484
============== ============
</TABLE>
CONDENSED PARENT COMPANY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiaries $ 24,969 $ 17,731 $ 5,372
Other interest and dividend income 791 362 308
----------- ----------- -----------
Total income 25,760 18,093 5,680
OPERATING EXPENSES 2,284 978 621
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES 23,476 17,115 5,059
INCOME TAX BENEFIT 550 120 118
----------- ----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES 24,026 17,235 5,177
EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES (1,606) 4,495 13,617
----------- ----------- -----------
NET INCOME $ 22,420 $ 21,730 $ 18,794
=========== =========== ===========
</TABLE>
(Continued)
29.
<PAGE> 30
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
CONDENSED PARENT COMPANY STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,420 $ 21,730 $ 18,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries 1,606 (4,495) (13,617)
Amortization 68 56 56
Change in other assets and liabilities (3,800) (9,507) 955
------------ ----------- -----------
Net cash provided by operating activities 20,294 7,784 6,188
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) (709) (1,297)
Net loan payments 7 282 13
------------ ----------- -----------
Net cash provided (used) by
investing activities (6,554) (531) 116
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders (9,054) (7,490) (4,342)
Proceeds from stock options exercised 447 79 127
Treasury stock purchase (351) (522) (125)
Proceeds from employee stock purchase plan 22
Pre-merger acquisition of pooled affiliate
common shares (1,127)
Proceeds from dividend reinvestment 217 205 107
------------ ----------- -----------
Net cash used by financing activities (8,719) (8,855) (4,233)
------------ ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,021 (1,602) 2,071
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 530 2,132 61
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,551 $ 530 $ 2,132
============ =========== ===========
</TABLE>
(Continued)
30.
<PAGE> 31
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
NOTE 16 - ACQUISITIONS
Effective March 6, 1998, Unibank, Steubenville, Ohio, affiliated with the
Corporation by merging into Citizens. The transaction was affected through the
exchange of 26.5 common shares of the Corporation (as restated for the stock
split discussed in Note 1) for each of Unibank's outstanding common shares, with
cash paid in lieu of fractional shares. Unibank had assets of approximately
$216,000 with 12 offices in Jefferson and Columbiana counties, and will be
operated as branches of Citizens.
Effective May 12, 1998, Century Financial Corporation, Rochester, Pennsylvania,
merged into the Corporation. The transaction was affected through the exchange
of .7926 common shares of the Corporation (as restated for the stock split
discussed in Note 1) for each of Century's outstanding common shares, with cash
paid in lieu of fractional shares. Century had assets of approximately $453,000
with 13 branches in Beaver and Butler counties in Pennsylvania.
Initially, Century will operate as a wholly-owned subsidiary of the Corporation.
The transactions were accounted for as poolings of interests. As discussed in
Note 1, the supplemental consolidated financial statements give retroactive
effect to the transactions. The following is a summary of the separate results
of operations of the Corporation, Unibank and Century for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net interest income
Corporation $ 42,625 $ 42,533 $ 39,640
Unibank 8,437 7,334 7,468
Century 17,396 16,698 15,060
----------- ----------- -----------
Combined $ 68,458 $ 66,565 $ 62,168
=========== =========== ===========
Net income
Corporation $ 16,756 $ 14,706 $ 12,563
Unibank 1,442 2,118 1,963
Century 4,222 4,906 4,268
----------- ----------- -----------
Combined $ 22,420 $ 21,730 $ 18,794
=========== =========== ===========
</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
FNB Corporation, Hermitage, Pennsylvania. In the transaction, Citizens acquired
$25.2 million of loans and approximately $1 million of other assets, assumed
$64.2 million of deposit liabilities and received approximately $32.9 million of
funds. Citizens paid a premium of $5.8 million in the transaction, which is
reflected in other assets in the supplemental consolidated balance sheet and is
being amortized on an accelerated basis over 15 years.
(Continued)
31.
<PAGE> 32
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
On May 16, 1997, prior to the merger, UniBank assumed certain deposit
liabilities and purchased certain assets from National City Bank, Northeast. In
the transaction, Unibank received $31.2 million of funds and approximately $1
million of other assets, and assumed $34.1 million of deposit liabilities.
Unibank paid a premium of $1.9 million on the transaction, which is reflected in
other assets in the supplemental consolidated balance sheet and is being
amortized on an accelerated basis over 10 years.
The Corporation also entered 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 3.6212 5.250
Corporation common shares issued 1,014,000 840,000
</TABLE>
NOTE 17 - DIVIDEND RESTRICTION AND REGULATORY MATTERS
Dividends paid by subsidiary banks are the primary source of funds available to
the Corporation for payment of dividends to shareholders and for other working
capital needs. Subsidiary banks are subject to certain restrictions on the
amount of dividends they may declare without prior regulatory approval. At
December 31, 1997, approximately $10,997 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 and its significant bank
subsidiaries meet all capital adequacy requirements to which they are subject.
(Continued)
32.
<PAGE> 33
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
The following table summarizes the Corporation's and significant subsidiary
banks' 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 and minimum requirements to be well
capitalized.
<TABLE>
<CAPTION>
Required to be
Minimum Required Well Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1997
- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL TO
RISK-WEIGHTED ASSETS
Corporation $ 159,687 14.1% $ 91,641 8.0% $ 113,052 10.0%
Citizens Banking Co. 67,512 10.3 49,647 8.0 62,059 10.0
Century National Bank 40,296 11.6 27,656 8.0 34,570 10.0
Unibank 17,520 12.6 11,108 8.0 13,885 10.0
TIER 1 CAPITAL TO
RISK-WEIGHTED ASSETS
Corporation $ 145,706 12.9% $ 45,821 4.0% $ 67,831 6.0%
Citizens Banking Co. 59,701 9.6 24,824 4.0 37,236 6.0
Century National Bank 35,970 10.3 13,828 4.0 20,742 6.0
Unibank 16,149 11.6 5,554 4.0 8,331 6.0
TIER 1 CAPITAL TO
AVERAGE ASSETS
Corporation $ 145,706 8.6% $ 67,912 4.0% $ 84,890 5.0%
Citizens Banking Co. 59,701 5.9 40,613 4.0 50,766 5.0
Century National Bank 35,970 7.7 18,440 4.0 23,050 5.0
Unibank 16,149 7.3 8,849 4.0 11,061 5.0
1996
- ----
TOTAL CAPITAL TO
RISK-WEIGHTED ASSETS
Corporation $ 150,365 15.6% $ 76,972 8.0% $ 96,230 10.0%
Citizens Banking Co. 77,809 14.7 42,289 8.0 52,862 10.0
Century National Bank 36,643 11.9 24,462 8.0 30,578 10.0
Unibank 18,077 16.6 8,697 8.0 10,872 10.0
TIER 1 CAPITAL TO
RISK-WEIGHTED ASSETS
Corporation $ 139,194 14.5% $ 38,486 4.0% $ 57,737 6.0%
Citizens Banking Co. 71,145 13.5 21,145 4.0 31,717 6.0
Century National Bank 33,409 10.9 12,231 4.0 18,347 6.0
Unibank 17,032 15.7 4,349 4.0 6,523 6.0
</TABLE>
(Continued)
33.
<PAGE> 34
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TIER 1 CAPITAL TO
AVERAGE ASSETS
Corporation $ 139,194 9.3% $ 59,575 4.0% $ 74,457 5.0%
Citizens Banking Co. 71,145 7.9 35,887 4.0 44,858 5.0
Century National Bank 33,409 8.2 16,197 4.0 20,246 5.0
Unibank 17,032 9.0 7,545 4.0 9,431 5.0
</TABLE>
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>
<S> <C> <C> <C> <C>
1997
Interest income $ 30,598 $ 32,783 $ 33,843 $ 34,443
Net interest income 16,515 17,182 17,226 17,535
Provision for loan losses 613 602 672 2,448
Net income 5,923 6,209 6,543 3,745
Earnings per common share - basic 0.34 0.35 0.37 0.21
Earnings per common share - diluted 0.34 0.35 0.37 0.21
1996
Interest income $ 28,496 $ 29,345 $ 29,558 $ 30,583
Net interest income 15,977 17,125 16,560 16,903
Provision for loan losses 532 599 568 580
Net income 5,298 5,659 5,061 5,712
Earnings per common share - basic 0.30 0.32 0.29 0.32
Earnings per common share - diluted 0.30 0.32 0.29 0.32
</TABLE>
34.
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Citizens Bancshares, Inc.
Salineville, Ohio
We have audited the accompanying supplemental consolidated balance sheets of
Citizens Bancshares, Inc. as of December 31, 1997 and 1996 and the related
supplemental 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 supplemental financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
supplemental financial statements based on our audits. The supplemental
consolidated financial statements give retroactive effect to the merger of the
Corporation and Century Financial Corporation (Century), which has been
accounted for using the pooling of interests accounting method as described in
Note 16 to the supplemental consolidated financial statements. We did not audit
the 1997, 1996 or 1995 financial statements of Century, which statements reflect
total assets comprising 26% at year-end 1997 and 27% at year-end 1996, and net
income comprising 19% for 1997, 23% for 1996 and 1995 of the related
supplemental consolidated financial statement totals. Those statements were
audited by other auditors, whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for Century, is based
solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the mergers on May 12, 1998 with Century Financial Corporation and on March 6,
1998 with UniBank, which have been accounted for as poolings of interests as
described in the notes to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These supplemental consolidated financial statements do not extend through the
date of consummation; however, they will become the historical consolidated
financial statements of Citizens Bancshares, Inc. after the consolidated
financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental 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 applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination.
/s/Crowe, Chizek and Company LLP
Columbus, Ohio
May 12, 1998
35.
<PAGE> 36
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
SUPPLEMENTAL CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $ 131,667 $ 117,982 $ 110,791 $ 98,948 $ 94,893
Interest expense 63,209 51,417 48,623 39,985 40,163
------------ ------------- ------------ ------------ ------------
Net interest income 68,458 66,565 62,168 58,963 54,730
Provision for loan losses 4,335 2,279 2,504 2,895 5,418
------------ ------------- ------------ ------------ ------------
Net interest income after provision for
loan losses 64,123 64,286 59,664 56,068 49,312
Other income 10,991 8,735 7,531 7,184 7,956
Other expenses 43,228 41,737 40,172 40,560 40,284
------------ ------------- ------------ ------------ ------------
Income before income taxes 31,886 31,284 27,023 22,692 16,984
Income taxes 9,466 9,554 8,229 6,746 4,442
------------ ------------- ------------ ------------ ------------
Net income $ 22,420 $ 21,730 $ 18,794 $ 15,946 $ 12,542
============ ============= ============ ============ ============
Cash dividends declared $ 9,462 $ 7,503 $ 5,472 $ 3,570 $ 2,891
============ ============= ============ ============ ============
PER SHARE DATA: (1)
Basic net income $ 1.27 $ 1.23 $ 1.06 $ 0.90 $ 0.71
Diluted net income 1.26 1.22 1.06 0.90 0.71
Cash dividends declared 0.56 0.42 0.25 0.15 0.09
Book value at year-end 8.84 7.89 7.16 6.01 5.69
Weighted average shares outstanding
basic (1) 17,671 17,708 17,783 17,783 17,783
Weighted average shares outstanding
diluted (1) 17,778 17,768 17,806 17,788 17,783
Shares outstanding at year-end (1) 17,721 17,684 17,796 17,785 17,779
BALANCE SHEET DATA AT YEAR-END:
Total assets $ 1,791,023 $ 1,543,029 $ 1,441,695 $ 1,360,002 $ 1,317,368
Securities available for sale 432,306 334,024 331,505 160,424 142,045
Securities held to maturity 87,207 88,371 74,851 256,373 291,251
Loans, net of unearned income 1,127,846 1,002,454 927,014 855,685 784,610
Allowance for loan losses 18,276 15,629 14,856 15,693 14,715
Deposits 1,380,313 1,232,344 1,179,399 1,113,959 1,112,830
Federal Home Loan Bank advances 160,765 60,923 96,380 87,932 60,198
Total shareholders' equity 156,667 139,461 127,425 106,891 101,123
AVERAGE BALANCES:
Total assets $ 1,674,298 $ 1,469,112 $ 1,398,458 $ 1,337,933 $ 1,262,090
Total earning assets 1,582,715 1,399,017 1,332,638 1,271,933 1,195,927
Deposits 1,294,597 1,205,123 1,156,198 1,120,987 1,098,863
Net loans 1,054,380 941,848 866,871 802,484 743,248
Shareholders' equity 147,166 132,138 118,074 104,601 95,505
</TABLE>
(Continued)
36.
<PAGE> 37
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
SIGNIFICANT RATIOS:
Return on average assets 1.34% 1.48% 1.34% 1.19% 0.99%
Return on average shareholders' equity 15.23 16.44 15.92 15.24 13.13
Average shareholders' equity to average
assets 8.79 8.99 8.44 7.82 7.57
Average loans as a percent of average
deposits 82.74 80.21 77.12 73.60 68.72
Shareholders' equity as a percent of
year-end assets 8.75 9.04 8.84 7.86 7.68
Allowance for loan losses as a percent of
loans 1.62 1.56 1.60 1.83 1.88
Net charge-offs as a percent of average loans 0.16 0.16 0.38 0.23 0.25
Dividends declared as a percent of net
income 42.20 34.53 29.12 22.39 23.05
Net interest margin, fully-taxable equivalent 4.47 4.91 4.80 4.76 4.71
Nonperforming loans to total loans 0.59 0.32 0.49 1.23 0.92
Nonperforming assets to total assets 0.38 0.31 0.45 0.92 0.87
Allowance for loan losses to
nonperforming loans 274.87 483.72 326.08 149.13 202.94
Noninterest expense as a percent of
average assets 2.58 2.84 2.87 3.03 3.19
Operating efficiency ratio 52.86 53.87 56.11 60.06 63.60
</TABLE>
(1) Per share data has been restated to reflect the two-for-one stock split
declared on May 12, 1998 and the three-for-two stock split declared in
1995 and all acquisitions accounted for as poolings of interests (see Note
16 of the financial statements.)
SUPPLEMENTAL 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. All information has
been retroactively restated to reflect mergers accounted for as poolings of
interests discussed in Note 16 to the supplemental consolidated financial
statements.
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
(Continued)
37.
<PAGE> 38
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1997 was $22,420 , an increase of $690, or 3.2% over the 1996
earnings of $21,730. Basic earnings per share for 1997 were $1.27, with diluted
earnings per share being $1.26, representing increases of 3.3%, over the $1.23
basic and $1.22 diluted earnings in 1996. In 1995, net income was $18,794 or
$1.06 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 15.6% over the last five
years.
Dividends declared in 1997 totaled $0.56 per share. This represented an increase
of 33.3% over 1996, when dividends declared were $0.42 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
$0.25 per share. The compound annual growth rate for the Corporation's per share
dividend declaration for the last five years is 57.9%.
The Corporation's return on average total equity in 1997 was 15.23%, as compared
to 16.44% in 1996 and 15.92% in 1995, for a five-year average of 15.19%. At
December 31, 1997, the ratio of equity to assets was 8.79%, compared to 8.99% at
year-end 1996 and 8.44% at year-end 1995. The Corporation's return on average
assets was 1.34% in 1997, compared to 1.48% in 1996 and 1.34% in 1995, and has
averaged 1.27% over the last five years. The steady 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 69.5% of total revenues in 1997, 71.5% in 1996 and
70.3% in 1995. Interest on investment and mortgage-backed securities is also a
significant source of revenue, accounting for 21.6% of revenues in 1997, 20.0%
in 1996 and 22.0% 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%.
(Continued)
38.
<PAGE> 39
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
The following table shows the increases over the last three years in actual and
FTE net interest income:
<TABLE>
<S> <C> <C> <C>
Net interest income $ 68,458 $ 66,565 $ 62,168
Taxable equivalent adjustments to net interest income 2,342 2,157 1,796
----------- ----------- -----------
Net interest income, fully-taxable equivalent $ 70,800 $ 68,722 $ 63,964
=========== =========== ===========
Net interest margin 4.33% 4.76% 4.67%
Taxable equivalent adjustment .14 .15 .13
----------- ----------- -----------
Net interest margin, fully taxable equivalent 4.47% 4.91% 4.80%
=========== =========== ===========
</TABLE>
In 1997, FTE net interest income provided 86.6% of the Corporation's net
revenues, compared with 88.7% in 1996 and 89.5% in 1995. The increase of $2,078
in FTE net interest income in 1997 was primarily attributable to an increase in
average interest-earning assets of 13.1% or $183,698. During 1997, the growth in
average interest-earning assets was primarily in securities and loans, which
increased $77,028 and $113,774. 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 44 basis points in
1997 to 4.47%. The principal factors contributing to the decrease were lower
yielding loans and an increase in the cost of interest bearing liabilities. An
increase over 1996 levels in average noninterest-bearing demand deposits and
average shareholders' equity of 2.4% and 11.4%, 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
elsewhere in this report which attempts to minimize negative impacts on net
interest income when such movements occur in the market.
(Continued)
39.
<PAGE> 40
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
To provide a more in-depth analysis of net interest income, the following
average balance sheets and net interest income analysis detail the contribution
of earning assets to overall net interest income and the impact of the cost of
funds.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
1997 1996 1995
-------------------------------- -------------------------------- --------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-earning
deposits $ 4,013 $ 212 5.28% $ 2,258 $ 119 5.27% $ 1,840 $ 101 5.49%
Federal funds
sold and other 26,219 1,462 5.58 35,078 1,895 5.40 27,376 1,588 5.80
Securities
Taxable 446,421 29,034 6.50 367,345 23,442 6.37 384,274 24,198 6.30
Tax exempt 34,863 1,772 5.08 36,911 1,870 5.07 35,995 1,777 4.94
Loans 1,071,199 99,187 9.26 957,425 90,656 9.47 883,153 83,127 9.41
---------- -------- ---------- -------- ---------- ---------
Total interest-
earning
assets 1,582,715 131,667 8.32 1,399,017 117,982 8.43 1,332,638 110,791 8.31
Nonearning assets 91,583 70,095 65,820
---------- ---------- ----------
Total assets $1,674,298 $1,469,112 $1,398,458
========== ========== ==========
Interest-bearing liabilities
Demand deposits $ 178,131 3,688 2.07 $ 173,763 3,514 2.02 $ 171,015 3,524 2.06
Savings deposits 360,104 10,720 2.98 360,472 10,559 2.93 373,176 11,591 3.11
Time deposits 632,738 36,845 5.82 550,124 31,085 5.65 494,988 27,298 5.51
Federal funds and
repurchase
agreements 107,405 5,807 5.41 49,680 2,529 5.09 34,738 1,880 5.41
Borrowings 107,756 6,149 5.71 67,960 3,730 5.49 76,376 4,330 5.67
---------- -------- ---------- -------- ---------- ---------
Total interest-
bearing
liabilities 1,386,134 63,209 4.56 1,201,999 51,417 4.28 1,150,293 48,623 4.23
-------- -------- ---------
Noninterest-bearing
liabilities 140,998 134,975 130,091
Shareholders'
equity 147,166 132,138 118,074
---------- ---------- ----------
Total liabilities
and equity $1,674,298 $1,469,112 $1,398,458
========== ========== ==========
NET INTEREST INCOME $ 68,458 $ 66,565 $ 62,168
======== ======== =========
NET INTEREST INCOME
TO EARNING ASSETS 4.33% 4.76% 4.67%
</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.
(Continued)
40.
<PAGE> 41
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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-bearing deposits $ 93 $ 93 $ 22 $ (4) $ 18
Federal funds sold (492) $ 59 (433) 422 (115) 307
Securities:
Taxable 5,128 464 5,592 (1,040) 284 (756)
Tax exempt (104) 6 (98) 46 47 93
Loans (net) 10,572 (2,041) 8,531 7,030 499 7,529
---------- ----------- ---------- ---------- ------------ -----------
Total interest income 15,197 (1,512) 13,685 6,480 711 7,191
---------- ----------- ---------- ---------- ------------ -----------
Deposits
Interest-bearing demand deposits 89 85 174 56 (66) (10)
Savings deposits (11) 172 161 (386) (646) (1,032)
Time deposits 4,787 973 5,760 3,102 685 3,787
---------- ---------- ---------- ---------- ------------ -----------
Total deposits 4,865 1,230 6,095 2,772 (27) 2,745
Federal funds and repurchase
agreements 3,112 166 3,278 766 (117) 649
Borrowings 2,265 154 2,419 (465) (135) (600)
---------- ---------- ---------- ----------- ------------- ------------
Total interest bearing
liabilities 10,242 1,550 11,792 3,073 (279) 2,794
---------- ---------- ---------- ----------- ------------- ------------
Net interest income $ 4,955 $ (3,062) $ 1,893 $ 3,407 $ 990 $ 4,397
========== =========== ========== ========== ============ ===========
</TABLE>
OTHER INCOME
Other income totaled $10,991 in 1997, a 25.8% increase over 1996. The 1996 total
of $8,735 represented an increase of $1,204 or 16.0% from 1995. This increase
was primarily the result of other income, which totaled $6,359 in 1997, compared
to $4,524 in 1996 and $3,656 in 1995. Included in other income were fees
associated with credit products, which totaled $750 for 1997. In addition,
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 $801 for 1997. Additionally, service charges and fees on
deposit accounts totaled $4,622 in 1997, compared to $4,232 in 1996 and $3,977
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.
(Continued)
41.
<PAGE> 42
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 52.86%
for 1997, improved by 101 basis points from 53.87% 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 56.11% in 1995.
Other expenses were $43,228 in 1997, compared to $41,737 in 1996 and $40,172 in
1995. During 1997, 1996 and 1995, 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 equipment 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. In 1996, salaries and employee
benefits increased 5.0% over 1995.
In 1996, 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 $0.02 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.
INCOME TAXES
The Corporation's effective income tax rate was 29.7%, 30.5% and 30.5% in 1997,
1996 and 1995. 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. Therefore, 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
(Continued)
42.
<PAGE> 43
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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.
MATURITY OR NEXT RATE ADJUSTMENT DATE
- -------------------------------------
<TABLE>
<CAPTION>
0-3 3-12 One Through Over Five Not
Months Months Five Years Years Classified Total
------ ------ ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (RSA)
Loans (a) $ 315,679 $ 114,267 $ 353,467 $ 343,236 $ 1,197 $ 1,127,846
Securities (b) 36,119 93,983 153,423 214,982 21,006 519,513
Federal funds sold 21,960 21,960
Interest-bearing deposits 4,611 4,611
----------- ----------- ----------- ----------- ----------- -----------
Rate sensitive assets $ 378,369 $ 208,250 $ 506,890 $ 558,218 $ 22,203 $ 1,673,930
=========== =========== =========== =========== =========== ===========
RATE SENSITIVE LIABILITIES (RSL)
Interest-bearing demand
deposits $ 183,337 $ 183,337
Interest-bearing savings
deposits 354,267 354,267
Interest-bearing time
deposits 156,636 $ 236,320 $ 291,101 $ 24,435 708,492
Securities sold under
repurchase agreements
and federal funds
purchased 42,808 4,100 32,280 79,188
Federal Home Loan Bank
advances 74,305 42,960 43,500 160,765
----------- ----------- ----------- ----------- -----------
Rate sensitive
liabilities $ 811,353 $ 283,380 $ 366,881 $ 24,435 $ 1,486,049
============ =========== =========== =========== ===========
Gap (c) $ (432,984) $ (75,130) $ 140,009 $ 533,783 $ 22,203 $ 187,881
Cumulative gap (432,984) (508,114) (368,105) 165,678 187,881
RSA/RSL 46.6% 73.5% 138.2% NM NM
Cumulative gap/RSA (d) (25.9) (30.4) (22.0) 9.9%
</TABLE>
(Continued)
43.
<PAGE> 44
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
Notes to 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 $1,673,930.
NM - Not Meaningful
Total interest-earning assets exceeded interest-bearing liabilities by $188,000
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 $508,114. However, repricing of certain categories of assets and
liabilities is subject to competitive and other influences that are beyond the
Corporation's control. Therefore, 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.
LOAN PORTFOLIO
The Corporation's loan portfolio is its largest and most profitable component of
average earning assets, totaling 67.7% of average earning assets. The
Corporation continued to emphasize increasing its loan portfolio in 1997.
Average total loans increased by $113,774 or 11.9% in 1997, following a 8.4% or
$74,272 increase in 1996. The Corporation's loan-to-deposit ratio at December
31, 1997 was 81.7%. This ratio compares to 81.3% 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 $125,392 or 12.5% 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 $63,991 or 15.7% during 1997.
Residential real estate loans increased by $42,711 or 10.2%. Consumer loans
increased by $19,701 or 13.0%. The Corporation's loan portfolio contains no
loans to foreign borrowers. Over the past four years, total loans have increased
$343,236, due to internal growth and acquisitions. While loan growth has been
substantial, the Corporation imposes underwriting and credit standards that are
designed to maintain a quality loan portfolio.
Loans secured by real estate, which in total constituted approximately 54.7% 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
(Continued)
44.
<PAGE> 45
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 that 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 $4,335 in 1997, compared to $2,279 and $2,504
in 1996 and 1995. 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
$1,688, which represents 0.16% of average loans. This compares to net losses of
0.16% of average loans in 1996. The provision for loan losses to net losses was
256.8% in 1997.
The allowance for loan losses at December 31, 1997 was $18,276, an increase of
$2,647 since year-end 1996. The allowance was 1.62% of total loans at year-end
1997, compared to 1.56% at year-end 1996. The allowance for loan losses as a
percent of nonperforming loans decreased to 274.9% at December 31, 1997, from
483.7% 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 $6,815
at year-end 1997, compared to $4,847 at year-end 1996, an increase of $1,968 or
40.6%.
SECURITIES
The Corporation's securities portfolio, including securities available for sale
plus securities held to maturity, increased from $422,395 at December 31, 1996
to $519,513 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 $266,566 and comprise 51.3% of the carrying value of total
investments.
(Continued)
45.
<PAGE> 46
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 was 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 $1,257,091 at December 31, 1997, an increase of
$118,175, or 10.64%, from year-end 1996. At December 31, 1997, core deposits
represented 113.3% of net loans, compared to 115.4% 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 $76,003, an decrease of $2,885 or 3.7% from December 31,
1996. Additionally, the Corporation has secondary sources of liquidity in
investment and mortgage-backed securities available for sale totaling $432,306
at year-end 1997 compared to $334,024 at year-end 1996, as well as maturities
and repayments of loans and investment securities held to maturity.
Securities sold under repurchase agreements and federal funds purchased at
December 31, 1997 of $79,188 decreased $14,789 or 15.7% from year-end 1996. At
December 31, 1997 $43,308 of repurchase agreements were with bank customers in
the Corporation's market area 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 $160,765 at December 31,
1997, from $60,923 at year-end 1996, an increase of $99,842. 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 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.
(Continued)
46.
<PAGE> 47
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
As summarized in the Consolidated Statements of Cash Flows in the consolidated
financial statements, 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 $190,547, the
receipt of proceeds from maturities and payments on securities available for
sale of $94,998, and the net increase in loans of $92,093.
<TABLE>
<CAPTION>
CAPITAL RESOURCES
1997 1996
---- ----
<S> <C> <C>
Common shareholders' equity $ 156,667 $ 139,461
Book value per share 8.84 7.89
</TABLE>
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on
investment securities available for sale, plus minority interest in subsidiaries
from Citizens' Series A Preferred Stock, less goodwill. Tier 2 capital includes
Tier 1 capital plus the allowance for loan losses not to exceed 1.25% of risk
weighted assets. The leverage capital ratio was 8.6% at December 31, 1997, as
compared to 9.3% 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 1997 branch acquisitions. The leverage capital ratio is computed by
dividing Tier 1 capital by total assets, net of certain intangible assets. Total
shareholders' equity increased $17,206 or 12.3% in 1997. For 1996, total
shareholders' equity increased $12,036 or 9.4%. Shareholders' equity was 8.75%
of total assets at December 31, 1997, as compared to 9.04% 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 (including dividends of
pooled affiliates), totaling $12,958, $14,226 and $13,323 were added to retained
earnings in 1997, 1996 and 1995. Dividends declared to common shareholders were
$0.56, $0.42 and $0.25 per share in 1997, 1996 and 1995. The dividends per share
have been adjusted to reflect the Corporation's two-for-one stock split declared
in May 1998, payable June 1, 1998 and three-for-two stock split declared in
December 1995, payable January 12, 1996.
At year-end 1997, a $3,919 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.
(Continued)
47.
<PAGE> 48
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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. 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.
(Continued)
48.
<PAGE> 49
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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.
TABLE 1. PROJECTED CHANGE IN NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
Change in Rates $ Amount $ Change % Change
--------------- -------- -------- --------
<S> <C> <C> <C>
+200 Basis points $ 176,542 $ (19,979) (10.2)%
BASE 196,521
- -200 Basis points 190,582 (5,939) (3.0)%
</TABLE>
The projected volatility in net portfolio value falls well within the Board of
Directors guidelines for + or - 30%.
(Continued)
49.
<PAGE> 50
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
TABLE 2. PROJECTED NET INTEREST INCOME VOLATILITY
<TABLE>
<CAPTION>
Change in Rates $ Amount $ Change % Change
--------------- -------- -------- --------
1998
- ----
<S> <C> <C> <C>
+200 Basis points $ 73,720 $ 1,110 1.53%
FLAT 72,610
- -200 Basis points 71,548 (1,062) (1.46)%
1999
- ----
+200 Basis points $ 77,150 $ 1,178 1.55%
FLAT 75,927
- -200 Basis points 73,350 (2,577) (3.39)%
</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.
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 in 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 calling for
UniBank, Steubenville, Ohio, to affiliate with the Corporation. Under the terms
of the Agreement, 26.5 shares of the Corporation's common stock was exchanged
for each share of UniBank common stock outstanding in a tax-free exchange that
took place on March 6, 1998. UniBank had assets of $216 million and deposits of
$192 million at year-end 1997. The merger was accounted for as a pooling of
interests.
On November 21, 1997, Citizens acquired the Belmont County Branches of
Metropolitan Savings Bank of Ohio, an affiliate of FNB Corporation, Hermitage,
Pennsylvania. The branch offices are located in Martins Ferry, St. Clairsville,
and Barnsville. 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.
(Continued)
50.
<PAGE> 51
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
On December 3, 1997, The Corporation announced the signing of a Definitive
Agreement with Century Financial Corporation. At year-end 1997, Century had
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. The transaction was
consummated on May 12, 1998 through the issuance of .3963 shares of the
Corporation's stock for each Century share. The merger was accounted for as a
pooling of interests.
On May 21, 1998, the Corporation announced the signing of a Definitive Agreement
with Mid Am, Inc. ("Mid Am"). Under the terms of the Agreement, 0.770 shares of
the Corporation's common stock will be exchanged for each share of Mid Am common
stock outstanding in a tax-free exchange expected to accounted for as a pooling
of interests. Mid Am has assets of $2.2 billion, loans of $1.6 billion, and
deposits of $1.8 billion. Headquartered in Bowling Green, Ohio, Mid Am operates
five banks in Ohio and Michigan and eight financial service companies in Ohio,
Michigan, Indiana and Florida. The transaction, which is subject to regulatory
and shareholder approval, is expected to close in the third or fourth quarter of
1998.
As with all financial institutions, the Corporation's operations depend almost
entirely on computer systems. The Corporation is addressing the potential
problems associated with the possibility that the computers that control or
operate its operating systems, facilities and infrastructure may not be
programmed to read four-digit date codes and, upon arrival of the year 2000, may
recognize the two-digit "00" as the year 1900, causing systems to fail to
function or to generate erroneous data. Bancshares is working with the companies
that supply or service its computer-operated or -dependent systems to identify
and remedy any year 2000 related problems. The Corporation has not identified
material, specific expenses that are reasonably likely to be incurred in
connection with this issue and does not expect to incur material expense to
implement corrective measures. No assurance can be given, however, that material
expense will not be incurred in future periods. The Corporation has established
a Year 2000 project team responsible for resolving this issue.
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.
(Continued)
51.
<PAGE> 52
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL FINANCIAL REVIEW
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
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 period;
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.
52.
<PAGE> 53
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
Citizens Bancshares, Inc.'s statistical disclosures required by Industry Guide 3
are presented as follows. All information has been retroactively restated to
reflect mergers accounted for as poolings of interests discussed in Note 16 to
the supplemental consolidated financial statements.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL: See "Financial Review - Average Balance
Sheets And Related Yields And Rates."
II. INVESTMENT PORTFOLIO
A. The amortized costs, unrealized gains and losses and estimated fair
values are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
DECEMBER 31, 1997 Cost Gains Losses Value
- ----------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 19,963 $ 124 $ (3) $ 20,084
U.S. Government agencies and corporations 82,934 1,164 (161) 83,937
Obligations of states and political
subdivisions 14,278 480 (36) 14,722
Corporate and other securities 27,870 328 (108) 28,090
Mortgage-backed securities 263,638 1,425 (596) 264,467
------------ ----------- ------------ ------------
Total debt securities available for sale 408,683 3,521 (904) 411,300
Marketable equity securities 17,610 3,397 (1) 21,006
------------ ----------- ------------ ------------
Total securities available for sale $ 426,293 $ 6,918 $ (905) $ 432,306
============ =========== ============ ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 38,618 $ 158 $ (8) $ 38,768
U.S. Government agencies and corporations 22,981 51 (13) 23,019
Obligations of states and political
subdivisions 22,013 428 22,441
Corporate and other securities 1,496 (24) 1,472
Mortgage backed securities 2,099 219 2,318
------------ ----------- ----------- ------------
Total securities held to maturity $ 87,207 $ 856 $ (45) $ 88,018
============ =========== =========== ============
</TABLE>
53.
<PAGE> 54
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
DECEMBER 31, 1996 Cost Gains Losses Value
- ----------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 27,193 $ 132 $ (45) $ 27,280
U.S. Government agencies and corporations 48,989 488 (296) 49,181
Obligations of states and political
subdivisions 14,929 483 (13) 15,399
Corporate and other securities 16,584 84 (232) 16,436
Mortgage-backed securities 212,329 1,112 (1,008) 212,433
------------ ----------- ----------- ------------
Total debt securities available for sale 320,024 2,299 (1,594) 320,729
Marketable equity securities 12,370 943 (18) 13,295
------------ ----------- ----------- ------------
Total securities available for sale $ 332,394 $ 3,242 $ (1,612) $ 334,024
============ =========== ========== ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 47,339 $ 134 $ (30) $ 47,443
U.S. Government agencies and corporations 13,459 (129) 13,330
Obligations of states and political
subdivisions 23,623 200 (82) 23,741
Corporate and other securities 1,498 (45) 1,453
Mortgage backed securities 2,452 208 2,660
------------ ----------- ----------- ------------
Total securities held to maturity $ 88,371 $ 542 $ (286) $ 88,627
============ =========== =========== ============
DECEMBER 31, 1995
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 20,116 $ 261 $ (1) $ 20,376
U.S. Government agencies and corporations 68,909 643 (289) 69,263
Corporate and other securities 20,012 190 (198) 20,004
Obligations of states and political
subdivisions 26,943 688 (78) 27,553
Mortgage-backed securities 184,871 1,595 (670) 185,796
------------ ----------- ----------- ------------
Total debt securities available for
sale 320,851 3,377 (1,236) 322,992
Marketable equity securities 7,891 622 8,513
------------ ----------- ----------- ------------
Total securities available for sale $ 328,742 $ 3,999 $ (1,236) $ 331,505
============ =========== =========== ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 37,293 $ 440 $ (10) $ 37,723
U.S. Government agencies and corporations 14,482 4 (119) 14,367
Obligations of states and political
subdivisions 18,122 196 (102) 18,216
Corporate and other securities 2,020 32 (41) 2,011
Mortgage-backed securities 2,934 227 3,161
------------ ----------- ----------- ------------
Total securities held to maturity $ 74,851 $ 899 $ (272) $ 75,478
============ =========== =========== ============
</TABLE>
54.
<PAGE> 55
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(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 $21,006 have been excluded from
this schedule.
<TABLE>
<CAPTION>
Within 1 Yr 1-5 Yrs 5-10 Yrs Over 10 Yrs
----------- ------- -------- -----------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 14,493 5.64% $ 5,591 6.41%
U.S. Government
agencies and
corporations 1,989 5.03 28,758 6.53 $ 53,190 7.35%
Obligations of
states and
political
subdivisions 1,284 7.48 2,430 6.34 6,882 5.99 $ 4,126 6.52%
Other securities 6,605 6.33 12,370 6.52 1,956 5.64 7,159 9.03
---------- ---- ---------- ---- --------- ---- --------- ----
Total investment
securities 24,371 49,149 62,028 11,285
Mortgage-backed
securities 78,231 7.01 37,321 6.64 55,424 6.77 93,491 7.23
---------- ---- ---------- ---- --------- ---- --------- ----
Total debt
securities
available for
sale $ 102,602 6.74% $ 86,470 6.56% $ 117,452 6.97% $ 104,776 7.31%
========== ==== ========== ===== ========= ==== ========= ====
</TABLE>
55.
<PAGE> 56
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
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.
<TABLE>
<CAPTION>
Within 1 Yr 1-5 Yrs 5-10 Yrs Over 10 Yrs
----------- ------- -------- -----------
Amount Yield Amount Yield Amount Yield Amount Yield
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 12,893 6.15% $ 25,725 6.00%
U.S. Government
agencies and
corporations 6,879 4.87 16,102 6.48
Obligations of
states and
political
subdivisions 1,898 9.26 15,124 7.36 $ 4,395 7.77% $ 596 8.16%
Other securities 480 5.44 5 5.50 1,011 5.46
--------- --------- --------- ---------
Total investment
securities 22,150 56,956 5,406 596
Mortgage-backed
securities 2,099 9.11
--------- --------- --------- ---------
Total debt
securities
available for
sale $ 22,150 6.00% $ 56,956 6.50% $ 5,406 7.34% $ 2,695 8.90%
========= ==== ========= ===== ======== ===== ========= =====
</TABLE>
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.
56.
<PAGE> 57
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
III. LOAN PORTFOLIO
A. TYPES OF LOANS: Total loans on the consolidated balance sheets are
comprised of the following classifications at December 31.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Commercial, financial and
agricultural $ 471,796 $ 407,805 $ 350,474 $ 289,395 $ 250,855
Real estate mortgage 449,828 409,157 405,284 409,022 394,195
Construction 15,591 15,746 19,120 14,451 13,716
Consumer 184,296 162,555 148,228 142,233 116,690
Real estate mortgage loans
held for sale 6,335 7,191 3,908 584 9,154
------------ ------------ ------------ ------------ ------------
Total Loans $ 1,127,846 $ 1,002,454 $ 927,014 $ 855,685 $ 784,610
============ ============ ============ ============ ============
</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>
Commercial, financial and
agricultural $ 87,643 $ 182,591 $ 201,562 $ 471,796
Construction 7,532 931 7,128 15,591
----------- ------------ ------------ ------------
Total $ 95,175 $ 183,522 $ 208,690 $ 487,387
=========== ============ ============ ============
Total due after one year
- ------------------------
Fixed rate commercial, financial,
agricultural and construction $ 54,920 $ 87,852 $ 142,772
Variable rate commercial, financial,
agricultural and construction 128,602 120,838 392,212
------------ ------------ ------------
Total $ 183,522 $ 208,690 $ 534,984
============ ============ ============
</TABLE>
57.
<PAGE> 58
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
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 $ 5,203 $ 2,138 $ 3,718 $ 7,632 $ 5,775
(b) Accruing loans which are
contractually past due
90 days or more as to
interest or principal
payments 1,446 1,093 838 2,891 1,476
(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 $ 6,860 $ 3,649 $ 5,381 $ 10,523 $ 7,568
=========== =========== =========== =========== ===========
</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 $ 518
Less: Interest income actually recorded on nonaccrual loans and included in interest
income for the period 38
----------
Interest income not recognized during the period $ 480
=========
</TABLE>
1) The policy for placing loans on nonaccrual status is to cease accruing
interest on loans when management believes that the collection of
interest is doubtful, or when loans are past due as to principal and
interest ninety days or more, except that in certain circumstances
interest accruals are continued on loans deemed by management to be
fully collectible. In such cases, the loans are individually evaluated
in order to determine whether to continue income recognition after 90
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 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.
58.
<PAGE> 59
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
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 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.
5) No material amount of loans classified during subsidiary banks' most
recent regulatory examinations as loss, substandard, doubtful or
special mention have been excluded from the amounts discussed as
nonaccrual, past due 90 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.
59.
<PAGE> 60
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
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 (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans outstanding
during period (1) $ 1,071,199 $ 957,425 $ 883,153 $ 817,450 $ 756,795
============ ============ ============ ============ ============
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of
the period $ 15,629 $ 14,856 $ 15,693 $ 14,715 $ 11,212
Loans charged-off:
Commercial and
agricultural loans (821) (657) (2,745) (1,663) (2,284)
Real estate mortgage loans (190) (668) (603) (352) (200)
Consumer loans (1,967) (1,747) (1,394) (1,202) (806)
------------ ------------ ------------ ------------ ------------
Total charge-offs (2,978) (3,072) (4,742) (3,217) (3,290)
------------ ------------ ------------ ------------ ------------
Recoveries:
Commercial and
agricultural loans 680 1,056 812 854 954
Real estate-mortgage
loans 136 72 221 101 62
Consumer loans 474 438 368 345 331
Loans secured by leases 28
------------ ------------ ------------ ------------ ------------
Total recoveries 1,290 1,566 1,401 1,300 1,375
------------ ------------ ------------ ------------ ------------
Net loans charged-off (1,688) (1,506) (3,341) (1,917) (1,915)
Provision charged to
operating expense 4,335 2,279 2,504 2,895 5,418
------------ ------------ ------------ ------------ ------------
Balance at the end of the
period $ 18,276 $ 15,629 $ 14,856 $ 15,693 $ 14,715
============ ============ ============ ============ ============
Ratio of net charge-offs to
average loans outstanding .16% .16% .38% .23% .25%
</TABLE>
(1) Net of unearned income.
60.
<PAGE> 61
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
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
(dollars in thousands) Amount Total Loans
------ -----------
<S> <C> <C>
December 31, 1997
Commercial, financial and agricultural $ 3,396 41.8%
Real estate mortgage 1,419 39.9
Real estate construction 1.4
Consumer 2,542 16.3
Unallocated 10,919
Real estate mortgage loans held for sale 0.6
----------- ------
Total $ 18,276 100.0%
=========== ======
December 31, 1996
Commercial, financial and agricultural $ 2,622 40.7%
Real estate mortgage 1,458 40.8
Real estate construction 1.6
Consumer 1,872 16.2
Unallocated 9,677
Real estate mortgage loans held for sale 0.7
----------- ------
Total $ 15,629 100.0%
=========== ======
December 31, 1995
Commercial, financial and agricultural $ 3,434 37.8%
Real estate mortgage 1,107 43.7
Real estate construction 2.1
Consumer 1,622 16.0
Unallocated 8,693
Real estate mortgage loans held for sale 0.4
----------- ------
Total $ 14,856 100.0%
=========== ======
</TABLE>
61.
<PAGE> 62
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
<TABLE>
<S> <C> <C>
December 31, 1994
Commercial, financial and agricultural $ 5,390 33.8%
Real estate mortgage 1,642 47.8
Real estate construction 58 1.7
Consumer 1,528 16.6
Unallocated 7,075
Real estate mortgage loans held for sale 0.1
----------- ------
Total $ 15,693 100.0%
=========== ======
December 31, 1993
Commercial, financial and agricultural $ 6,150 32.0%
Real estate mortgage 1,634 50.2
Real estate construction 1.7
Consumer 1,577 14.9
Unallocated 5,354
Real estate mortgage loans held for sale 1.2
----------- ------
Total $ 14,715 100.0%
=========== ======
</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 (in thousands of dollars):
<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 $ 123,624 $ 120,764 $ 117,019
Interest-bearing
demand deposits 178,131 173,763 171,015 2.07% 2.02% 2.06%
Savings deposits 360,104 360,472 373,176 2.98 2.93 3.11
Time deposits 632,738 550,124 494,988 5.82 5.65 5.51
------------ ------------ ------------
Total $ 1,294,597 $ 1,205,123 $ 1,156,198
============ ============ ============
</TABLE>
The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 1997:
<TABLE>
<S> <C>
Three months or less $ 50,649
Three through six months 30,797
Six through twelve months 9,878
Over twelve months 31,898
-----------
Total $ 123,222
===========
</TABLE>
62.
<PAGE> 63
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL STATISTICAL INFORMATION
(Dollars in thousands)
VI. RETURN ON EQUITY AND ASSETS
The information required by this section is set forth under the heading
"Financial Review - Selected Financial Data" elsewhere in this document.
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
---- ---- ----
<S> <C> <C> <C>
Total securities sold under agreement to repurchase and
Federal funds purchased at period-end $ 79,188 $ 93,977 $ 25,060
Weighted average interest rate at period-end 5.72% 5.99% 4.92%
Maximum outstanding at any month-end during the year $ 146,941 $ 94,816 $ 44,697
Average amount outstanding 107,405 49,680 34,738
Weighted average rates during the year 5.41% 5.09% 5.41%
</TABLE>
63.
<PAGE> 64
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
March 31 December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 42,428 $ 54,043
Federal funds sold 5,225 21,960
-------------- ------------
Total cash and cash equivalents 47,653 76,003
Interest-bearing deposits with financial institutions 5,657 4,661
Securities available for sale 461,448 432,306
Securities held to maturity (Estimated fair value $61,449 and
$88,018) 60,815 87,207
Total loans 1,146,419 1,127,846
Less allowance for loan losses (18,373) (18,276)
-------------- ------------
Net loans 1,128,046 1,109,570
Premises and equipment, net 29,707 30,794
Accrued interest receivable and other assets 52,354 50,482
-------------- ------------
Total assets $ 1,785,680 $ 1,791,023
============== ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 134,270 $ 134,217
Interest-bearing deposits 1,267,696 1,246,096
-------------- ------------
Total deposits 1,401,966 1,380,313
Securities sold under repurchase agreements and federal funds
purchased 82,016 79,188
Federal Home Loan Bank advances 128,805 160,765
Accrued interest payable and other liabilities 15,316 14,090
-------------- ------------
Total liabilities 1,628,103 1,634,356
-------------- ------------
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value; authorized 200,000 shares;
none issued
Common stock, no par value; 36,000,000 shares authorized;
17,846,593 and 17,738,935 shares issued 31,520 31,189
Retained earnings 123,392 122,106
Less treasury stock, 128,340 and 17,626, shares at cost (930) (222)
ESOP obligations and unearned shares (262) (325)
Unrealized gain on securities available for sale 3,857 3,919
-------------- ------------
Total shareholders' equity 157,577 156,667
-------------- ------------
Total liabilities and shareholders' equity $ 1,785,680 $ 1,791,023
============== ============
</TABLE>
See notes to supplemental interim consolidated financial statements.
64.
<PAGE> 65
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) For the three months
ended March 31,
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 25,739 $ 23,288
Securities
Taxable 7,730 6,403
Nontaxable 425 438
Federal funds sold and other 456 469
----------- -----------
Total interest income 34,350 30,598
----------- -----------
INTEREST EXPENSE
Deposits 13,841 11,862
Federal funds and repurchase agreements 1,440 1,470
Federal Home Loan Bank advances and other 1,717 751
----------- -----------
Total interest expense 16,998 14,083
----------- -----------
NET INTEREST INCOME 17,352 16,515
PROVISION FOR LOAN LOSSES 695 613
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 16,657 15,902
----------- -----------
OTHER INCOME
Service charges and fees on deposits 1,106 1,037
Other income 1,532 1,241
Increase in value in bank owned life insurance 305 34
Investment gains (losses) 31 (4)
----------- ------------
Total other income 2,974 2,308
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 4,831 5,183
Occupancy and equipment expense 1,775 1,573
Merger, integration, and restructuring expense 3,932
Other operating expense 3,537 2,875
----------- -----------
Total other expenses 14,075 9,631
----------- -----------
INCOME BEFORE INCOME TAXES 5,556 8,579
INCOME TAXES 1,428 2,656
----------- -----------
NET INCOME $ 4,128 $ 5,923
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.23 $ 0.34
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.23 $ 0.33
=========== ===========
</TABLE>
See notes to supplemental interim consolidated financial statements.
65.
<PAGE> 66
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands of dollars) For the three months
ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net Income $ 4,128 $ 5,923
Other comprehensive income, net of tax:
Unrealized losses on securities available for sale (62) (2,112)
---------- ----------
Comprehensive income $ 4,066 $ 3,811
========== ==========
</TABLE>
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands of dollars) For the three months
ended March 31,
1998 1997
---- ----
<S> <C> <C>
Balances at January 1 as previously reported $ 119,960 $ 105,424
Restated to capital structure for pooling of interests 36,707 34,037
------------ ------------
Balances at January 1, as restated 156,667 139,461
Net income 4,128 5,923
Cash dividends declared (2,128) (1,706)
Unrealized loss on securities available for sale (62) (2,112)
Change in employee stock ownership plan obligation
and release of shares 63 63
Purchase of treasury stock (682)
Pre-merger transactions of pooled affiliates:
Cash dividends declared (564) (506)
Stock options exercised 281 84
Purchase of treasury stock (342) (51)
Sale of treasury stock 50
Tax benefit from stock options exercised 216
------------ ------------
Balances at March 31 $ 157,577 $ 141,206
============ ============
</TABLE>
See notes to supplemental interim consolidated financial statements.
66.
<PAGE> 67
CITIZENS BANCSHARES, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) For The Three Months
Ended March 31,
1998 1997
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 2,900 $ 6,702
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 391
Proceeds from paydowns, maturities, calls 42,805 16,744
Purchases (65,851) (85,841)
Securities held to maturity:
Proceeds from paydowns, maturities, calls 20,260 25,661
Purchases (395) (27,304)
Net increase in loans (9,795) (25,133)
Net change in interest-bearing deposits with financial institutions (996) 253
Purchases of premises and equipment (1,128) (921)
Sales of other real estate 4
----------- -----------
Net cash from investing activities (15,096) (96,150)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends and fractional shares paid (2,399) (2,092)
Net increase in deposit accounts 21,653 25,524
Net change in repurchase agreements and Federal funds purchased (2,828) 37,732
Net change in short-term FHLB advances (62,210)
Proceeds from long-term FHLB advances 36,000 19,650
Repayment of long-term FHLB advances (5,750) (182)
Redemption of minority interest in subsidiary (559) (561)
Proceeds from stock options exercised 281 84
Treasury stock purchase (342) (51)
Proceeds from sale of treasury stock 50
----------- -----------
Net cash from financing activities (16,154) 80,154
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (28,350) (9,294)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 76,003 78,888
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 47,653 $ 69,594
=========== ===========
</TABLE>
See notes to supplemental interim consolidated financial statements.
67.
<PAGE> 68
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Citizens
Bancshares, Inc., ("the Corporation") and its wholly-owned subsidiaries, The
Citizens Banking Company ("Citizens"), Century National Bank ("Century"),
Freedom Financial Life Insurance Company ("Insurance Company"), Freedom Express,
Inc. and First National Bank of Chester ("FNB"). All significant inter-company
transactions have been eliminated in consolidation.
Effective March 6, 1998 the Corporation acquired UniBank and effective May 12,
1998, the Corporation acquired Century Financial Corporation and its subsidiary,
Century National Bank, in transactions accounted for as poolings of interests
(see Note 6.) The supplemental consolidated financial statements give
retroactive effect to the transactions and, as a result, the supplemental
consolidated balance sheets, statements of income and statements of cash flows
are presented as if the Corporation, UniBank and Century had been consolidated
for all periods presented. The supplemental consolidated statements of changes
in shareholders' equity reflect the accounts of the Corporation as if the common
stock issued in the acquisitions had been outstanding during all periods
presented. Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation of the
Century acquisition. However, they will become the historical consolidated
financial statements of the Corporation after financial statements covering the
date of consummation of the business combination are issued. The supplemental
consolidated financial statements, including the notes thereto, should be read
in conjunction with the supplemental annual financial statements included
elsewhere in this document and the Corporation's historical consolidated
financial statements of the Corporation included in its December 31, 1997 Annual
Report on Form 10-K.
These supplemental interim consolidated financial statements are prepared
without audit and reflect all adjustments which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Corporation at March 31, 1998, and its results of operations and cash flows for
the periods presented. All such adjustments are of a normal, recurring nature.
The supplemental consolidated financial statements do not purport to contain all
the necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary under the circumstances.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year. For the three months ended March 31, 1998 and
1997, the Corporation paid interest in the amount of $17,077 and $13,437 and
paid (received) taxes in the amount of $(900) and $415.
The Corporation's non-cash transactions resulting from transfers from loans to
other real estate owned were $0 for each of the three months ended March 31,
1998 and 1997. Securities with an amortized cost of $6,512 were transferred from
held to maturity to available for sale at March 6, 1998. These securities were
owned by UniBank before its merger with Citizens with no significant differences
between fair value and amortized cost. They were transferred to conform the
combined entity with the Corporation's existing interest rate risk position.
(Continued)
68.
<PAGE> 69
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
revises accounting treatment for transfers of financial assets, such as loans
and securities, and for distinguishing between sales and secured borrowings. The
adoption of SFAS No. 125 did not materially impact the Corporation's financial
statements.
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale.
Earnings per share are calculated based on the weighted average number of shares
outstanding. On May 11, 1998, the Board of Directors declared a 2-for-1 stock
split to be paid on June 1, 1998, to shareholders of record May 12, 1998. All
earnings and dividends per share disclosures have been restated to reflect the
stock split and the acquisitions discussed in Note 8 accounted for as poolings
of interests. Basic and diluted weighted average shares outstanding for the
quarter ended March 31, 1998, were 17,699,000 and 17,808,000. Basic and diluted
weighted average shares outstanding for the quarter ended March 31, 1997, were
17,657,000 and 17,726,000 respectively. Diluted shares outstanding include
additional common shares issuable under stock options using the treasury stock
method.
NOTE 2 - SECURITIES
The amortized costs, unrealized gains and losses and estimated fair values are
as follows as of March 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 10,230 $ 116 $ (1) $ 10,345
U.S. Government agencies and corporations 99,064 1,249 (199) 100,114
Obligations of states and political subdivisions 15,905 486 (37) 16,354
Corporate and other securities 22,364 603 (161) 22,806
Mortgage-backed securities 289,201 1,354 (879) 289,676
------------ ---------- ----------- ------------
Total debt securities available for sale 436,764 3,808 (1,277) 439,295
Marketable equity securities 18,764 3,485 (96) 22,153
------------ ---------- ----------- ------------
Total securities available for sale $ 455,528 $ 7,293 $ (1,373) $ 461,448
============ ========== =========== ============
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 39,619 $ 185 $ (9) $ 39,795
U.S. Government agencies and corporations 100 (1) 99
Obligations of states and political subdivisions 21,091 459 21,550
Corporate and other 5 5
------------ ---------- ---------- ------------
Total securities held to maturity $ 60,815 $ 644 $ (10) $ 61,449
============ ========== =========== ============
</TABLE>
(Continued)
69.
<PAGE> 70
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The amortized cost and estimated market value of debt securities at March 31,
1998, by contractual maturity are shown below. Expected maturities will likely
differ from contractual maturities because some issuers have the right to call
or repay obligations at any time with or without penalty.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
<S> <C> <C>
DEBT SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 11,001 $ 11,036
Due after one year through five years 52,580 52,924
Due after five years through ten years 65,951 67,375
Due after ten years 18,031 18,284
Mortgage-backed securities 289,201 289,676
------------ ------------
Total debt securities available for sale $ 436,764 $ 439,295
============ ============
DEBT SECURITIES HELD TO MATURITY
Due in one year or less $ 16,209 $ 16,283
Due after one year through five years 37,035 37,363
Due after five years through ten years 6,823 7,021
Due after ten years 748 782
------------ ------------
Total debt securities held to maturity $ 60,815 $ 61,449
============ ============
</TABLE>
There were no sales of securities for the quarter or three-month period ended
March 31, 1998. Gains on securities sold resulted from calls within the UniBank
portfolio. Sales proceeds totaled $391 for the three-month period ended March
31, 1997, resulting in gross losses of $4.
NOTE 3 - LOANS
<TABLE>
<CAPTION>
The loan portfolio is summarized as follows:
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 307,623 $ 317,884
Residential real estate mortgages 496,295 462,545
Commercial real estate 142,889 153,912
Construction 13,427 15,591
Consumer 171,010 171,579
Real estate mortgage loans held for sale 15,175 6,335
------------ ------------
Total loans $ 1,146,419 $ 1,127,846
============ ============
Nonaccrual and past due loans:
Loans accounted for on a nonaccrual basis $ 4,861 $ 5,203
Loans past due more than 90 days and still accruing interest 1,984 1,446
------------ ------------
$ 6,845 $ 6,649
============ ============
</TABLE>
(Continued)
70.
<PAGE> 71
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Following is a summary of the activity in the allowance for loan losses for the
quarter ended March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at January 1 $ 18,276 $ 15,629
Provision for loan losses 695 613
Recoveries 248 297
Loans charged-off (846) (765)
----------- -----------
Balance at March 31 $ 18,373 $ 15,774
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Information regarding impaired loans is as follows:
For the quarter
ended March 31,
1998 1997
---- ----
<S> <C> <C>
Average investment in impaired loans $ 6,291 $ 3,962
Interest income recognized on impaired loans 67 84
Interest income received on impaired loans 58 68
</TABLE>
<TABLE>
<CAPTION>
March 31, Dec. 31,
1998 1997
<S> <C> <C>
Balance of impaired loans $ 8,178 $ 5,025
Specific allocation associated with impaired loans 707 545
</TABLE>
The balance of impaired loans includes certain delinquent and nonaccrual loans
disclosed in Note 3, totaling $3,129 and $3,413 at March 31, 1998, and December
31, 1997.
NOTE 5 - COMMITMENTS, CONTINGENCIES AND 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, Stark, Mahoning, Carroll and Belmont, in the southwestern
Pennsylvania counties of Beaver and Butler, and in the West Virginia county of
Hancock.
Real estate mortgage loans, including construction loans and loans held for
sale, totaled $524,897 of loans at March 31, 1998, and are secured primarily by
one- to four-family residences. Commercial real estate loans comprised 12.46% of
loans at March 31, 1998, and represent borrowings secured by commercial
buildings and real estate primarily in the Citizens, Century, and FNB market
areas.
(Continued)
71.
<PAGE> 72
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
In addition, at March 31, 1998, 7.7% 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.
Citizens, Century, and FNB are parties to financial instruments that involve
off-balance-sheet risk. These instruments are entered into in the normal course
of business to meet the financing needs of their customers. These financial
instruments include commitments to make loans. All fixed-rate mortgage real
estate commitments expire after 60 days. Since many expire without being used,
they do not necessarily represent future cash commitments.
The exposure to credit loss in case 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,
Century, and FNB follow the same credit policy to make such commitments as is
followed for those loans recorded in the financial statements. In management's
opinion, these commitments represent normal banking transactions and no material
losses are expected to result therefrom. Collateral obtained upon exercise of
the commitments is determined using management's credit evaluation of the
borrower and may include real estate and/or business assets.
Citizens, Century, and FNB are involved in various legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of these
matters will not have a material effect on Bancshares.
NOTE 6 - ACQUISITIONS
Effective March 6, 1998, UniBank affiliated with the Corporation by merging into
Citizens. The transaction was affected through the exchange of 26.5 common
shares of Bancshares for each of UniBank's 75,000 outstanding common shares
other than those owned by the Corporation, with cash paid instead of fractional
shares. UniBank had assets of $217,397 with ten offices in Jefferson County, and
will be operated as branches of Citizens.
Effective May 12, 1998, Century Financial Corporation and its subsidiary,
Century National Bank, Rochester, Pennsylvania, merged into the Corporation. The
transaction was affected through the exchange of .7926 common shares of the
Corporation for each of Century's outstanding common shares, with cash paid in
lieu of fractional shares. Century had assets of approximately $453,000 with 13
branches in Beaver and Butler counties in Pennsylvania. Initially, Century
National Bank will operate as a wholly-owned subsidiary of the Corporation.
(Continued)
72.
<PAGE> 73
CITIZENS BANCSHARES, INC.
NOTES TO SUPPLEMENTAL INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The transactions were accounted for as poolings of interests. The following is a
summary of the separate results of operations of the Corporation, Unibank and
Century for the three months ended March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
Net Interest Net Interest
Income Net Income Income Net Income
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Corporation $ 13,017 $ 2,765 $ 10,472 $ 4,109
Unibank 1,815 512
Century 4,335 1,363 4,228 1,302
----------- ---------- ----------- ----------
Combined $ 17,352 $ 4,128 $ 16,515 $ 5,923
=========== ========== =========== ==========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The purpose of this discussion is to focus on information concerning the
consolidated financial condition of the Corporation at March 31, 1998, compared
to December 31, 1997, and the results of operations for the quarter ended March
31, 1998, as compared to the same period in 1997. This discussion should be read
in conjunction with the supplemental interim consolidated financial statements
and the footnotes thereto. Forward-looking statements contained in this
discussion involve risks and uncertainties and are subject to change based on
various important factors. 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 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
experiences expressed by the Corporation in its forward-looking statements.
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1998 included nonrecurring items of
income and expense, including a $3,932 merger, integration and restructuring
charge related to an acquisition ($2,486 after-tax impact) and gains on the
sales and calls of loans and securities of $62 ($40 after-tax impact.) The
merger, integration and restructuring charge was for severance pay, service
contracts, transaction fees and costs related to branch closures in the
elimination of duplicate facilities. As a result of the after-tax financial
impact of the nonrecurring items, net income was $4,128 for the first quarter of
1998, a decrease of 30.3% from the $5,923 earned in the comparable period in
1997. Basic and diluted earnings per share for the first quarter of 1998 were
$.23, compared to $.34 basic earnings per share and $.33 diluted earnings per
share for the comparable period in 1997.
(Continued)
73.
<PAGE> 74
CITIZENS BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data)
Excluding the after-tax financial impact of merger, integration, and
restructuring expense and gains on sales of loans and investments, core earnings
were $6,574 in the first quarter of 1998, a 11.0% increase from the $5,923
earned in the comparable period in 1997. Basic earnings per common share before
the nonrecurring items for the first quarter of 1998 were $.37 compared to $.33
net income per share in the first quarter of 1997.
The provision for loan losses of $695 for the quarter ended March 31, 1998,
increased $82 from the comparable period in 1997, a result of loan growth and an
increase in nonperforming loans.
Total other income of $2,974 for the first quarter of 1998 increased $666 or
28.9% from the comparable period in 1997. This increase was primarily the result
of income earned on bank-owned life insurance ("BOLI"). The cash surrender value
of the life insurance experienced a net increase of $271 for the first quarter
of 1998. Citizens implemented the single premium BOLI to offset the cost of
certain employee benefits. The increase in other income also was affected by an
increase in service charges on deposit accounts and higher fees on loans and
ATMs.
Total other expense of $14,075 for the first quarter of 1998 increased $4,444 or
46.1% from the comparable period in 1997. This increase was primarily due to the
pretax merger, integration and restructure expense of $3,932 discussed above.
The increase in other operating expense also was affected by an increase in
amortization of intangible assets of $248.
Excluding the nonrecurring after-tax expense and income items discussed above,
the annualized return on average shareholders' equity was 16.90% and return on
average assets was 1.49%. In addition, excluding the nonrecurring after tax
expense and income, the Corporation's efficiency ratio, a measure of operating
efficiency, was 48.52% for the first quarter of 1998.
Net interest income taxable equivalent, of $17,963, for the three months ended
March 31, 1998, increased $924 from the comparable period in 1997, as summarized
below:
<TABLE>
<CAPTION>
For the three months
ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net interest income $ 17,352 $ 16,515
Taxable equivalent adjustment 611 524
----------- -----------
Net interest income taxable equivalent $ 17,963 $ 17,039
=========== ===========
Net interest margin 4.14% 4.47%
Taxable equivalent adjustment .14 .14
----------- ----------
Net interest margin taxable equivalent 4.28% 4.61%
=========== ==========
</TABLE>
(Continued)
74.
<PAGE> 75
CITIZENS BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data)
The net interest margin, fully-taxable equivalent of 4.28% for the first three
months of 1998 decreased from 4.61% for the comparable period in 1997. The yield
on average earning assets was 8.19% for the first three months of 1998 compared
to 7.81% for the comparable period in 1997. The cost of interest bearing
liabilities was 4.57% for the first three months of 1998 compared to 4.38% for
the comparable period in 1997. Increases in interest rates paid on Federal Home
Loan Bank advances and securities sold under repurchase agreements have
contributed to the increase in the cost of interest bearing liabilities for the
first three months of 1998 compared to the same period in 1997.
Average gross earning assets increased $225,934 during the first quarter of
1998, while the average rate earned on these assets decreased from 8.32% at
December 31, 1997, to 8.19% at March 31, 1998.
CHANGES IN FINANCIAL CONDITION
Total assets of $1,785,680 at March 31, 1998, remained relatively constant
compared to year-end 1997. Total deposits at March 31, 1998, of $1,401,966
increased $21,653 from December 31, 1997. These lower cost sources of funds were
used to purchase investment and mortgage-backed securities available for sale,
to fund loan growth and to pay down Federal Home Loan Bank advances. Net loans
totaled $1,128,046 at March 31, 1998, representing an increase of $18,476 or
1.7% since year-end 1997.
NONPERFORMING ASSETS
Nonperforming loans as a percentage of total loans were .60% at March 31, 1998,
as compared to .59% at December 31, 1997. The allowance for loan losses as a
percentage of total loans at March 31, 1998, was 1.60% compared to 1.62% at
December 31, 1997. Nonperforming loans as a percentage of the allowance for loan
losses increased to 37.3% at March 31, 1998, from 36.4% at December 31, 1997.
Other real estate totaled $139 at March 31, 1998, and $166 at December 31, 1997.
The Corporation continues to analyze the adequacy of its allowance for loan
losses as a percentage of total loans on a quarterly basis. Annualized net
charge-offs constituted .21% of average loans for the three months ended March
31, 1998, as compared to .16% for the year ended December 31, 1997.
LIQUIDITY
The Corporation's liquidity position remained stable during the first quarter of
1998. Core deposits represent the Corporation's largest, most stable and
generally least costly source of funds, and totaled $1,271,118 and were 110.9%
of total loans at March 31, 1998. Core deposit levels at March 31, 1998
approximated the levels at year-end 1997.
(Continued)
75.
<PAGE> 76
CITIZENS BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data)
Cash and cash equivalents, interest-bearing time deposits and securities
available for sale are the Corporation's most liquid assets. At March 31, 1998,
these assets totaled $514,758, an increase of $1,788 or .35% from December 31,
1997.
Management believes that the Corporation's liquidity position is adequate based
on its level of cash, cash equivalents, core deposits, the stability of its
other funding sources and its capital base.
CAPITAL RESOURCES
Shareholders' equity totaled $157,577 at March 31, 1998, compared to $156,667 at
December 31, 1997. The ratio of shareholders' equity to assets was 8.82% at
March 31, 1998 and 8.75% at December 31, 1997. The following table summarizes
Bancshares' consolidated leverage capital ratio and required amounts at March
31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital
Actual $ 148,931 13.3% $ 145,706 12.9%
Required 45,616 4.0 45,821 4.0
Total risk-based capital
Actual $ 163,237 14.5% $ 159,687 14.1%
Required 91,233 8.0 91,641 8.0
Leverage Ratio
Actual $ 148,931 8.3% $ 145,706 8.6%
Required 90,026 5.0 84,890 5.0
</TABLE>
The unrealized gain on securities available for sale, net of tax effect, was
$3,857 at March 31, 1998, compared to an unrealized gain of $3,919 at December
31, 1997. The decrease of $62 was primarily attributable to the changing
interest rate environment.
(Continued)
76.
<PAGE> 77
CITIZENS BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data)
GENERAL
The Corporation acquired UniBank on March 6, 1998, and the branches of UniBank
became branches of Citizens. In the communities of Steubenville and
Wintersville, duplications of branch offices existed; therefore, Citizens
consolidated two offices without sacrificing customer service while yielding
greater efficiencies in operations.
The acquisition of Century Financial Corporation was completed May 12, 1998. The
Rochester, Pennsylvania, based one-bank holding company has 13 banking offices
in Beaver and Butler Counties. Its subsidiary, Century National Bank, will
initially operate as a wholly-owned bank subsidiary of the Corporation.
On May 21, 1998, the Corporation announced the signing of a Definitive Agreement
with Mid Am, Inc. ("Mid Am"). Under the terms of the Agreement, 0.770 shares of
the Corporation's common stock will be exchanged for each share of Mid Am common
stock outstanding in a tax-free exchange expected to accounted for as a pooling
of interests. Mid Am has assets of $2.2 billion, loans of $1.6 billion, and
deposits of $1.8 billion. Headquartered in Bowling Green, Ohio, Mid Am operates
five banks in Ohio and Michigan and eight financial service companies in Ohio,
Michigan, Indiana and Florida. The transaction, which is subject to regulatory
and shareholder approval, is expected to close in the third or fourth quarter of
1998.
As with all financial institutions, the Corporation's operations depend almost
entirely on computer systems. The Corporation is addressing the potential
problems associated with the possibility that the computers that control or
operate its operating systems, facilities and infrastructure may not be
programmed to read four-digit date codes and, upon arrival of the year 2000, may
recognize the two-digit "00" as the year 1900, causing systems to fail to
function or to generate erroneous data. Bancshares is working with the companies
that supply or service its computer-operated or -dependent systems to identify
and remedy any year 2000 related problems. The Corporation has not identified
material, specific expenses that are reasonably likely to be incurred in
connection with this issue and does not expect to incur material expense to
implement corrective measures. No assurance can be given, however, that material
expense will not be incurred in future periods. The Corporation has established
a Year 2000 project team responsible for resolving this issue.
In the second quarter of 1997, the Corporation began offering trust and
investments services. The Trust Group, is based in Boardman, Ohio, has grown to
$73 million in assets. Considering recent acquisitions, plans include expanding
an office presence in the Steubenville area and the continuation of Century's
trust office in Rochester.
The Corporation expects to move into our new retail bank/trust and investment
complex in Boardman during the third quarter of 1998. The new facility will
replace an older branch in Boardman and will incorporate the administrative and
operations areas of the Trust Group in a separate section.
77.
<PAGE> 78
CITIZENS BANCSHARES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT
The Corporation's 1997 annual report and Form 10-K provide information about the
Company's management of interest rate risk and, to a lesser extent, liquidity
risk. Bancshares does not maintain a trading account for any class of financial
instrument and is not affected by foreign currency exchange risk or commodity
price risk. Of the $22 million in equities held by Bancshares and subsidiaries,
$13 million represent FHLB stock and Federal Reserve Bank Stock.
Due to the pooling of UniBank, Steubenville, and Century, Rochester, which were
acquired on March 6, 1998 and May 12, 1998, the market value of portfolio equity
has changed, but the projected volatility of +/- 200 bp change in interest rates
still falls well within the Board of Directors guidelines of +/- 30%.
<TABLE>
<CAPTION>
Projected change in net portfolio value
---------------------------------------
Change in rates $ Amount $ Change % Change
--------------- -------- -------- --------
<S> <C> <C> <C> <C>
+200bp $ 235,759 $ 10,316 4.6%
Base 225,872
-200bp 246,872 21,429 9.5
</TABLE>
78.
<PAGE> 1
Exhibit 99(b)
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Century Financial Corporation
We have audited the accompanying consolidated balance sheet of Century
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' 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 consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 financial position of Century Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
As explained in the notes to the consolidated financial statements, effective
January 1, 1995, the Corporation adopted a new method of accounting for
impairment of loans and related allowance for loan losses.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
January 16, 1998
