SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 8-K12G3
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 30, 1998
CFS BANCSHARES, INC.
-----------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware Requested upon filing to be applied for
- ---------------------------- --------------------- -------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
1700 Third Avenue North, Birmingham, Alabama 35203
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (205) 328-2041
--------------
Not Applicable
---------------------------------------------------------
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
- ---------------------------------------------
On June 30, 1998 the Registrant completed the acquisition of Citizens
Federal Savings Bank (the "Bank") pursuant to an Agreement and Plan of
Reorganization in which the Bank became a wholly-owned subsidiary of the
Registrant, a newly formed holding company incorporated by the Bank for that
purpose. Under the terms of the Agreement and Plan of Reorganization, each
outstanding share of the common stock, $1.00 par value per share, of the Bank
(the "Bank's Common Stock") was converted into one share of the common stock,
$.01 par value per share, of the Registrant (the "Common Stock") and the former
holders of the Bank's Common Stock became the holders of all the outstanding
Common Stock. The Registrant has thereby become the successor issuer to the
Bank.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
- ---------------------------------------------------------------------------
Listed below are the financial statements filed as a part of this report.
(a)(1) Financial Statements of Business Acquired.
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements for the Years Ended
September 30, 1997, 1996 and 1995
Consolidated Balance Sheets as of September 30, 1997 and
March 31, 1998 (unaudited)
Consolidated Statements of Operations for the Three and Six
Month Periods Ended March 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements for the Six Months
Ended March 31, 1998 and 1997 (unaudited)
2
INDEPENDENT AUDITORS' REPORT
----------------------------
The Stockholders and Board of Directors
Citizens Federal Savings Bank and Subsidiary:
We have audited the accompanying consolidated balance sheets of Citizens Federal
Savings Bank and subsidiary (the Bank) as of September 30, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Bank'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 Citizens Federal
Savings Bank and subsidiary as of September 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
November 7, 1997
3
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1997 and 1996
Assets 1997 1996
-------- ----------- -----------
Cash and amounts due from depository institutions $ 2,963,847 2,744,905
Federal funds sold and overnight deposits 3,521,268 5,396,187
----------- -----------
Total cash and cash equivalents 6,485,115 8,141,092
Interest-bearing deposits in other financial institutions 157,574 255,691
Investment securities held to maturity (fair value of
$8,826,498 and $12,824,904, respectively) 8,803,393 13,055,699
Investment securities available for sale, at fair value (cost of
$35,872,942 and $28,762,349, respectively) 35,915,192 28,555,410
Federal Home Loan Bank stock 460,000 383,000
Loans receivable, net 42,572,877 30,532,084
Premises and equipment, net 4,202,944 3,800,967
Real estate acquired by foreclosure, net 99,494 128,896
Accrued interest receivable on investment securities 63,367 235,757
Accrued interest receivable on mortgage-backed securities 163,779 143,659
Accrued interest receivable on loans 412,654 255,765
Other assets 303,929 509,429
----------- -----------
Total assets $99,640,318 85,997,449
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Interest-bearing deposits $76,345,726 76,792,569
Advance payments by borrowers for taxes and insurance 324,174 285,325
Other liabilities 866,479 1,410,859
Employee Stock Ownership Plan debt 130,941 196,411
FHLB advances 9,200,000 --
Payables for investment securities transactions 4,975,130 --
----------- -----------
Total liabilities 91,842,450 78,685,164
Stockholders' equity:
Serial preferred stock; 300,000 shares authorized;
none outstanding -- --
Common stock of $1 par value; 700,000 shares authorized;
130,000 shares issued and outstanding 130,000 130,000
Additional paid-in capital 1,160,760 1,160,760
Retained earnings-substantially restricted 6,611,011 6,350,377
Unrealized gain (loss) on investment securities
available for sale, net of taxes 27,038 (132,441)
Employee Stock Ownership Plan debt (130,941) (196,411)
----------- -----------
Total stockholders' equity 7,797,868 7,312,285
----------- -----------
Commitments and contingencies (notes 12 and 13) -- --
----------- -----------
Total liabilities and stockholders' equity $99,640,318 85,997,449
=========== ===========
See accompanying notes to consolidated financial statements.
4
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended September 30, 1997, 1996, and 1995
1997 1996 1995
---------- ---------- ----------
Interest income:
Interest and fees on loans $3,269,831 2,858,178 2,667,390
Interest and dividend income on investment securities 942,405 988,589 850,317
Interest income on mortgage-backed securities 1,650,126 1,736,021 2,095,211
Interest income on federal funds sold 99,006 245,312 231,620
Other interest income 54,181 139,120 55,892
--------- --------- ---------
Total interest income 6,015,549 5,967,220 5,900,430
Interest expense:
Interest on deposits 3,062,187 3,168,919 2,993,153
Interest on FHLB advances 64,714 -- --
--------- --------- ---------
Total interest expense 3,126,901 3,168,919 2,993,153
Net interest income 2,888,648 2,798,301 2,907,277
Provision for loan losses -- -- --
--------- --------- ---------
Net interest income after provision for loan losses 2,888,648 2,798,301 2,907,277
Other income:
Service charges on deposit accounts 432,581 309,433 298,009
Gains on sales of investment securities 140,829 -- 111,638
Other 42,801 70,894 41,796
--------- --------- ---------
Total other income 616,211 380,327 451,443
--------- --------- ---------
Other expense:
Salaries and employee benefits 1,331,028 1,207,529 1,237,968
Net occupancy expense 128,943 265,617 259,690
Federal insurance premiums 117,915 696,120 196,752
Data processing expenses 208,221 219,561 185,370
Professional services 133,917 209,867 133,558
Depreciation and amortization 295,374 161,834 122,356
Advertising expense 150,545 68,573 73,647
Office supplies 78,989 74,375 72,465
Insurance expense 60,337 67,060 58,649
Other 441,264 503,009 494,177
--------- --------- ---------
Total other expense 2,946,533 3,473,545 2,834,632
--------- --------- ---------
Income (loss) before income taxes 558,326 (294,917) 524,088
Income tax (expense) benefit (200,192) 101,535 (188,657)
--------- --------- ---------
Net income (loss) $ 358,134 (193,382) 335,431
========= ========= =========
Net income (loss) per share $ 2.75 (1.49) 2.58
========= ========= =========
Average shares outstanding 130,000 130,000 130,000
========= ========= =========
See accompanying notes to consolidated financial statements.
5
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1997, 1996, and 1995
Unrealized
gain (loss) on
Retained investment Employee
Additional earnings - securities Stock Total
Common paid-in substantially available Ownership stockholders'
stock capital restricted for sale Plan debt equity
-------- ---------- -------------- --------------- ---------- --------------
Balance September 30, 1994 $130,000 1,160,760 6,403,328 -- (206,375) 7,487,713
Net income -- -- 335,431 -- -- 335,431
Change in unrealized gain
on investment securities
available for sale, net -- -- -- 80,640 -- 80,640
Issuance of Employee Stock
Ownership Plan debt -- -- -- -- (120,976) (120,976)
Payment of Employee Stock
Ownership Plan debt -- -- -- -- 65,470 65,470
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
-------- ---------- ------------- -------------- -------- -------------
Balance September 30, 1995 130,000 1,160,760 6,641,259 80,640 (261,881) 7,750,778
Net loss -- -- (193,382) -- -- (193,382)
Payment of Employee Stock
Ownership Plan debt -- -- -- -- 65,470 65,470
Change in unrealized loss on
investment securities available
for sale, net -- -- -- (213,081) -- (213,081)
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
-------- ---------- ------------- -------------- -------- -------------
Balance September 30, 1996 130,000 1,160,760 6,350,377 (132,441) (196,411) 7,312,285
Net income -- -- 358,134 -- -- 358,134
Payment of Employee Stock
Ownership Plan debt -- -- -- -- 65,470 65,470
Change in unrealized gain on
investment securities available
for sale, net -- -- -- 159,479 -- 159,479
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
-------- ---------- ------------- -------------- -------- -------------
Balance September 30, 1997 $130,000 1,160,760 6,611,011 27,038 (130,941) 7,797,868
======== ========== ============= ============== ======== =============
See accompanying notes to consolidated financial statements.
6
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 1997, 1996, and 1995
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $358,134 (193,382) 335,431
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for real estate losses -- -- --
Depreciation and amortization 295,374 161,834 122,356
Net amortization of premium and accretion of
discount on investment securities 11,385 27,423 80,262
Net accretion of discount on loans (15,376) (2,296) (19,956)
Gains on call of investment securities held to maturity -- -- (3,191)
Gains on sale of investment securities available
for sale, net (140,829) -- (99,440)
Gain on calls of investment securities
available for sale, net -- -- (9,007)
Loss (gain) on real estate acquired by foreclosure, net -- 1,549 (5,377)
Loss on sale of real estate acquired by foreclosure 19,001 -- --
Loss on disposal of equipment 390 -- --
Decrease in deferred gain on sale of
real estate acquired by foreclosure -- -- (30,942)
(Increase) decrease in accrued interest receivable (4,619) (37,923) 21,089
(Increase) decrease in other assets 115,793 (139,834) 59,336
(Increase) decrease in refundable income tax -- 106,894 (106,894)
Increase (decrease) in other liabilities (486,849) 478,379 366,466
Increase (decrease) in accrued interest on deposits 41,173 (60,155) 39,616
-------- -------- --------
Net cash provided by operating activities 193,577 342,489 749,749
-------- -------- --------
(Continued)
See accompanying notes to consolidated financial statements.
7
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years Ended September 30, 1997, 1996, and 1995
1997 1996 1995
----------- ----------- -----------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in
other financial institutions 98,117 (3,573) (2,118)
Proceeds from maturities or calls of
investment securities held to maturity 3,000,000 -- 1,135,600
Purchases of investment securities held to maturity (1,470,643) (3,004,013) (3,684,141)
Proceeds from principal collected on mortgage-
backed securities held to maturity 2,701,576 2,624,701 3,499,933
Proceeds from sales of investment securities
available for sale 7,119,866 -- 2,852,586
Proceeds from maturities or calls of investment
securities available for sale 3,000,000 2,500,000 1,000,000
Purchases of investment securities available for sale (6,567,938) (1,037,515) --
Purchases of mortgage-backed securities available for sale (7,911,562) (1,256,849) --
Proceeds from principal collected on mortgage-backed securities
available for sale 2,297,985 1,354,427 471,293
Net change in loans (12,178,490) (2,110,651) (1,184,000)
Purchase of premises and equipment (697,741) (2,035,474) (744,928)
Proceeds from sale of real estate acquired by foreclosure 121,565 122,591 179,476
Improvements to real estate acquired by foreclosure (15,622) -- --
Purchase of real estate acquired by foreclosure -- -- (1,242)
----------- ----------- -----------
Net cash provided by (used in) investing activities (10,502,887) (2,846,356) 3,522,459
Cash flows from financing activities:
Net increase (decrease) in interest-bearing deposits (488,016) 98,720 2,674,745
Cash dividends (97,500) (97,500) (97,500)
Increase (decrease) in advance payments by borrowers for
taxes and insurance 38,849 (134,180) 16,916
Proceeds from FHLB advances 9,200,000 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 8,653,333 (132,960) 2,594,161
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,655,977) (2,636,827) 6,866,369
Cash and cash equivalents at beginning of year 8,141,092 10,777,919 3,911,550
----------- ----------- -----------
Cash and cash equivalents at end of year $ 6,485,115 8,141,092 10,777,919
=========== =========== ===========
Supplemental information on cash payments:
Interest paid $ 3,085,728 3,229,074 2,967,315
Income taxes paid $ 35,000 96,782 320,972
Supplemental information on noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 95,541 191,430 164,950
Real estate sold and financed by the Bank $ 108,165 -- 153,785
Securities transferred from held to maturity to available for sale $ -- 25,939,464 --
See accompanying notes to consolidated financial statements.
8
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Citizens Federal Savings Bank (the "Bank") is a federally
chartered stock savings bank regulated by the Office of Thrift Supervision
(OTS) and certain other federal agencies. The Bank provides a full range of
banking services to customers through its offices in Birmingham and Eutaw,
Alabama. The Bank is subject to competition from other financial
institutions in the market in which it operates. The following is a
description of the more significant accounting and reporting policies which
the Bank follows in preparing and presenting its financial statements:
(A) BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of the Bank
and its wholly-owned subsidiary, Citizens Service Corporation. All
intercompany accounts and transactions have been eliminated in
consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
One estimate that is particularly susceptible to a significant change in
the near term relates to the determination of the allowance for loan
losses. A significant portion of the Bank's mortgage loans are secured
by real estate in Alabama, primarily in Jefferson County and the
surrounding areas. The ultimate collectibility of the loan portfolio is
susceptible to changes in market conditions in Alabama.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an internal part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require
the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.
(B) CASH AND CASH EQUIVALENTS
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from financial institutions and federal funds
sold. Generally, federal funds are purchased and sold for one-day
periods.
(C) INVESTMENT SECURITIES
---------------------
The Bank classifies its investment securities in two categories:
available for sale or held to maturity. Held to maturity securities are
those securities for which the Bank has the ability and intent to hold
the security until maturity. All other securities are classified as
available for sale.
9
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
(C) INVESTMENT SECURITIES, CONTINUED
--------------------------------
Available for sale securities are recorded at fair value. Held to
maturity securities are recorded at amortized cost adjusted for the
amortization or accretion of premiums and discounts. Unrealized holding
gains and losses, net of the related income tax effects, on securities
available for sale are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.
Mortgage-backed securities held to maturity are stated at their unpaid
principal balances, adjusted for unamortized premiums and unaccreted
discounts. Mortgage-backed securities available for sale are stated at
their estimated fair value.
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary results
in a charge to earnings and the establishment of a new cost basis for
the security. At September 30, 1997, the Bank did not have any
securities with other than temporary declines in value for which a new
cost basis had not been established.
Premiums and discounts are amortized or accreted over the life of the
related investment security as an adjustment to yield using the level-
yield method and prepayment assumptions. Dividend and interest income
are recognized when earned. Realized gains and losses for investment
securities sold are included in earnings and are derived using the
specific identification method for determining the cost of the security
sold.
The investment in the stock of the Federal Home Loan Bank is required of
insured institutions that utilize the services of the Federal Home Loan
Bank. The stock has no quoted fair value and no ready market exists.
However, the Federal Home Loan Bank has historically repurchased the
stock at cost. Accordingly, the stock is reported in the financial
statements at cost.
(D) LOANS AND INTEREST INCOME
-------------------------
Loans receivable are stated at their unpaid principal balance less the
undisbursed portion of loans in process, unearned interest income and an
allowance for loan losses. Interest income on loans is recorded when
earned. It is the general policy of the Bank to discontinue the accrual
of interest when principal or interest payments are delinquent 90 days
or more or the ultimate collection of either is in doubt. Unearned
discount on loans purchased is accreted to income over the remaining
life of the loans purchased using the level-yield method.
One of the procedures used by management in establishing the allowance
for loan losses is the evaluation of potential impairment on selected
loans. A loan is considered impaired when, based on current information
and events, it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the note agreement.
Impaired loans are measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate, or
at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent, beginning in fiscal
1996. Loans that are determined to be impaired require a valuation
allowance equivalent to the amount of impairment. Impairment losses are
included in the allowance for loan losses through a charge to the
provision for loan losses. Cash receipts on impaired loans which are
(Continued)
10
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
(D) LOANS AND INTEREST INCOME, CONTINUED
------------------------------------
accruing interest are applied to principal and interest under the
contractual terms of the loan agreement. Cash receipts on impaired loans
for which the accrual of interest has been discontinued are applied to
reduce the principal amount of such loans until the principal has been
recovered and are recognized as interest income thereafter.
At September 30, 1997, approximately 18 percent of the Bank's loan
portfolio consists of mortgage loans to churches. The Bank's exposure to
credit loss in the event of nonperformance by the parties to financial
instruments for mortgage loans to churches is represented by the
contractual amounts of these instruments.
(E) ALLOWANCE FOR LOAN LOSSES
-------------------------
Additions to the allowance for loan losses are based on management's
evaluation of the loan portfolio under current economic conditions,
including such factors as the volume and character of loans outstanding,
past loss experience, and such other factors which, in management's
judgment, deserve recognition in estimating loan losses. Loans are
charged to the allowance when, in the opinion of management, such loans
are deemed to be uncollectible. Provisions for loan losses and
recoveries of loans previously charged to the allowance are added to the
allowance.
(F) LOAN FEES
---------
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as a yield
adjustment using a method which approximates the level-yield method.
(G) REAL ESTATE ACQUIRED BY FORECLOSURE
-----------------------------------
For real estate acquired through foreclosure, a new cost basis is
established at the lower of cost or fair value, adjusted for estimated
costs to sell, at the time of foreclosure. Subsequent to foreclosure,
foreclosed assets are carried at the lower of fair value less estimated
costs to sell or cost, with the difference recorded as a valuation
allowance, on an individual asset basis. Changes in the valuation
allowance are recognized as charges or credits to earnings.
(H) INCOME TAXES
------------
The Bank provides for income taxes based upon pretax income, adjusted
for permanent differences between reported and taxable earnings.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be realized or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the period that includes the enactment
date.
(Continued)
11
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
(I) PREMISES AND EQUIPMENT
----------------------
Land is stated at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is provided over the estimated
useful lives of the respective assets on primarily the straight-line
method.
(J) NET INCOME PER SHARE
--------------------
Net income per share is calculated based on the average shares of common
stock and common stock equivalents, if dilutive, outstanding during the
year. Common stock equivalents included in the computation represent the
dilutive effect of shares issuable under stock options granted by the
Bank. All of the common shares owned by the ESOP are considered
outstanding.
(2) CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
-------------------------------------------------
The Bank is required to maintain certain daily reserve balances in
accordance with the Federal Reserve Board requirements. The Bank exceeded
the required balances of approximately $25,000 at September 30, 1997 and
1996.
(3) INVESTMENT SECURITIES
---------------------
The amortized cost and approximate fair value of investment securities held
to maturity at September 30, 1997 and 1996 were as follows:
1997 1996
------------------------ --------------------------
Amortized Fair Amortized Fair
cost value cost value
--------- --------- ---------- ----------
U.S. Treasury and U.S.
Government agencies $ -- -- 2,000,000 1,999,702
Alabama Minority Enterprise
Small Business Investment
Corporation stock 25,000 25,000 25,000 25,000
Mortgage-backed securities 6,980,689 7,004,917 9,522,695 9,336,425
Collateralized mortgage obligations 1,797,704 1,796,581 1,508,004 1,463,777
--------- --------- ---------- ----------
$ 8,803,393 8,826,498 13,055,699 12,824,904
========= ========= ========== ==========
The amortized cost and approximate fair value of investment securities
available for sale at September 30, 1997 and 1996, were as follows:
1997 1996
-------------------------- --------------------------
Amortized Fair Amortized Fair
cost value cost value
---------- ---------- ---------- ----------
U.S. Treasury and U.S.
Government agencies $ 11,468,592 11,523,106 12,577,960 12,533,997
Equity securities 2,439,885 2,445,671 1,037,515 1,030,526
Mortgage-backed securities 9,692,496 9,716,660 3,186,972 3,195,294
Collateralized mortgage obligations 12,271,969 12,229,755 11,959,902 11,795,593
---------- ---------- ---------- ----------
$ 35,872,942 35,915,192 28,762,349 28,555,410
========== ========== ========== ==========
(Continued)
12
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) INVESTMENT SECURITIES, CONTINUED
--------------------------------
The gross unrealized gains and losses of investment securities held to
maturity at September 30, 1997 and 1996, are as follows:
1997 1996
--------------------------- ------------------------
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
------ ------ ------ -------
U.S. Treasury and U.S.
Government agencies $ -- -- -- 298
Mortgage-backed securities 52,530 28,302 20,355 206,625
Collateralized mortgage obligations -- 1,123 -- 44,227
------ ------ ------ -------
$ 52,530 29,425 20,355 251,150
====== ====== ====== =======
The gross unrealized gains and losses of investment securities available
for sale at September 30, 1997 and 1996 are as follows:
1997 1996
--------------------------- ------------------------
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
------- ------ ------ -------
U.S. Treasury and U.S.
Government agencies $ 70,118 15,604 46,400 90,363
Equity securities 5,786 -- -- 6,989
Mortgage-backed securities 42,184 18,020 26,170 17,848
Collateralized mortgage obligations 22,786 65,000 16,276 180,585
------- ------ ------ -------
$ 140,874 98,624 88,846 295,785
======= ====== ====== =======
The contractual maturities of investment securities held to maturity,
excluding mortgage-backed securities and collateralized mortgage
obligations, are within one to five years.
The amortized cost and approximate fair value of investment securities
available for sale at September 30, 1997, by contractual maturities are
shown below. Actual maturities could differ from contractual maturities
due to call or prepayment provisions.
Amortized Fair
cost value
----------- ----------
Due from one to five years $10,467,938 10,524,981
Due from five to ten years 1,000,654 998,125
Mortgage-backed securities and collateralized
mortgage obligations 21,964,465 21,946,415
----------- ----------
$33,433,057 33,469,521
=========== ==========
There were no sales of investment securities available for sale in 1996.
Proceeds from sales of investment securities available for sale were
$7,119,866 and $2,852,586 for the years ended September 30, 1997 and 1995,
respectively. Gross gains of $140,829 and $99,440 were realized on those
sales for the years ended September 30, 1997 and 1995, respectively.
(Continued)
13
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) INVESTMENT SECURITIES, CONTINUED
--------------------------------
Investment securities with amortized cost of $29,558,918 and $30,125,458
at September 30, 1997 and 1996, respectively, were pledged to secure public
deposits as required by law and for other purposes. Additionally, in
accordance with Office of Thrift Supervision regulations, the Bank is
required to maintain a certain percentage (5 percent at September 30,
1997), of its withdrawable deposits and current borrowings in cash, U.S.
Treasury obligations, or other approved investments which are readily
convertible into cash. The Bank met this liquidity requirement at
September 30, 1997.
During 1996, the Bank transferred investment securities with an amortized
cost of $25,939,464 from held to maturity to available for sale. The fair
market value of the investment securities on the date of transfer was
$25,924,334 resulting in a decrease in the unrealized gain on investment
securities available for sale of $15,130. The investment securities were
transferred as a result of the reassessment of the appropriateness of the
classification of all securities following the issuance of the FASB Special
Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities.
(4) LOANS
-----
At September 30, 1997 and 1996, the Bank had the following net loans:
1997 1996
---------- ----------
Total loans $44,134,410 32,738,775
Less: Unearned discount on loans purchased 5,750 21,126
Unamortized loan origination fees 564,077 506,546
Undisbursed portion of loans in process 361,283 1,040,249
Allowance for loan losses 630,423 638,770
---------- ----------
1,561,533 2,206,691
---------- ----------
Net loans $42,572,877 30,532,084
========== ==========
The composition of the total loan portfolio was as follows:
1997 1996
---------- ----------
Residential real estate mortgage $30,542,426 20,687,591
Consumer installment 2,204,929 1,263,625
Nonresidential mortgage 11,066,054 10,340,692
Commercial 321,001 446,867
---------- ----------
Total loans $44,134,410 32,738,775
========== ==========
A summary of the transactions in the allowance for loan losses for the
years ended September 30, 1997, 1996, and 1995 follows:
1997 1996 1995
------- ------- -------
Balance at beginning of year $ 638,770 659,734 681,725
Net charge-offs:
Gross charge-offs (25,056) (59,566) (42,477)
Gross recoveries 16,709 38,602 20,486
Provision charged to earnings -- -- --
------- ------- -------
Balance at end of year $ 630,423 638,770 659,734
======= ======= =======
(Continued)
14
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) LOANS, CONTINUED
----------------
Impaired loans at September 30, 1997 and 1996 totaled $427,792 and
$293,842, respectively. The allowance amounts, which were $287,792 and
$293,842 in 1997 and 1996, respectively, were primarily determined using
the fair value of the related collateral. The average recorded investment
in impaired loans for the years ended September 30, 1997 and 1996, was
$365,000 and $350,000, respectively. The interest income recognized on
impaired loans for the years ended September 30, 1997 and 1996 was
approximately $6,041 and $2,445, respectively.
(5) PREMISES AND EQUIPMENT
----------------------
Premises and equipment are summarized as follows:
1997 1996
--------- ---------
Land $ 733,242 733,242
Buildings and leasehold improvements 3,018,361 729,692
Construction in progress -- 2,284,566
Furniture, fixtures and equipment 1,938,336 1,537,102
--------- ---------
5,689,939 5,284,602
Less: accumulated depreciation 1,486,995 1,483,635
--------- ---------
$ 4,202,944 3,800,967
========= =========
Rent expense under operating leases included in net occupancy expense, was
approximately $195,000 and $194,000 for the years ended September 30, 1996
and 1995, respectively. The operating lease was terminated in October 1996.
(6) REAL ESTATE ACQUIRED BY FORECLOSURE
-----------------------------------
Real estate acquired by foreclosure, net, as of September 30, 1997 and
1996 totaled $99,494 and $128,896, respectively. There were no transactions
in the allowance for losses on the real estate acquired by foreclosure in
1997 or 1996. The allowance for losses at the beginning of 1995 and
chargeoffs during 1995 totaled $52,087.
(Continued)
15
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) INTEREST-BEARING DEPOSITS
-------------------------
At September 30, 1997 and 1996, the composition of interest-bearing
deposits and applicable interest rates was as follows:
1997 1996
------------ ------------
NOW accounts (1997 -
1.00%, 1996 - 1.00%) $ 9,435,520 7,689,927
Super NOW accounts (1997 -
2.75%, 1996 - 2.75%) 3,566,811 5,040,044
Passbook savings (1997 -
2.75%, 1996 - 2.75%) 18,615,013 18,699,290
Time deposits:
Certificates of deposit
(1997 - 4.75% to 8.50%,
1996 - 2.62% to 8.50%) 24,160,256 23,190,717
Jumbo accounts (1997 -
4.65% to 6.00%, 1996 -
4.50% to 5.75%) 20,413,405 22,059,043
----------- -----------
Total time deposits 44,573,661 45,249,760
Accrued interest on deposits 154,721 113,548
----------- -----------
Total deposits $ 76,345,726 76,792,569
=========== ===========
Weighted average interest rates on deposit accounts were as follows at
September 30, 1997 and 1996:
1997 1996
------ ------
NOW accounts .88% .93%
Super NOW accounts 2.75% 2.75%
Passbook savings accounts 2.75% 2.75%
Certificates of deposit 5.27% 5.41%
Jumbo accounts 5.28% 5.02%
------ ------
Total 4.01% 4.04%
Interest on deposits is summarized as follows:
1997 1996 1995
----------- ----------- -----------
NOW accounts $ 94,328 92,221 78,021
Super NOW accounts 118,974 135,595 123,059
Passbook savings 486,639 507,602 497,452
Time deposits 2,362,246 2,433,501 2,294,621
----------- ----------- -----------
$ 3,062,187 3,168,919 2,993,153
=========== =========== ===========
The amounts and maturities of time deposits at September 30, 1997 and 1996
are as follows:
1997 1996
------------ ------------
Within one year $ 37,156,692 37,739,243
Within two years 2,898,609 2,354,514
Within three years 2,844,905 2,018,937
Within four years 237,967 2,057,070
Within five years 1,173,004 205,766
Greater than five years 262,484 874,230
------------ ------------
$ 44,573,661 45,249,760
============ ============
(Continued)
16
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) BORROWED FUNDS
--------------
The Company was liable to the Federal Home Loan Bank of Atlanta on the
following advances at September 30, 1997:
Maturity Date Interest rate 1997
------------- ------------- -----------
August 1998 5.98% $ 4,200,000
September 2002 5.66% 5,000,000
-----------
Total (weighted average rate of 5.75%) $ 9,200,000
===========
At September 30, 1997, the advances were collateralized by a blanket
pledge of first-mortgage residential loans.
(9) INCOME TAXES
------------
For the years ended September 30, 1997, 1996, and 1995, income tax
(expense) benefit consists of the following:
1997 1996 1995
--------- --------- ---------
Current:
Federal $ 43,520 (161,495) (129,246)
State 8,862 (18,063) (13,508)
--------- --------- ---------
52,382 (179,558) (142,754)
--------- --------- ---------
Deferred:
Federal (220,908) 250,985 (39,030)
State (31,666) 30,108 (6,873)
--------- --------- ---------
(252,574) 281,093 (45,903)
--------- --------- ---------
$(200,192) 101,535 (188,657)
========= ========= =========
The income tax expense above represents an effective tax rate of 35.9
percent, 34.4 percent, and 36.0 percent, for 1997, 1996 and 1995,
respectively. The actual income tax (expense) benefit for 1997, 1996 and
1995 differs from the "expected" income tax (expense) benefit for those
years which is computed by applying the U.S. Federal corporate income tax
rate of 34 percent for 1997, 1996 and 1995 to income before income taxes
as follows:
1997 1996 1995
--------- --------- ---------
Computed "expected" income tax (expense) benefit $(189,831) 100,272 (178,190)
State tax, net of federal effect (15,051) 8,354 (13,451)
Dividends paid to ESOP 7,205 7,326 6,824
Other, net (2,515) (14,417) (3,840)
--------- -------- ---------
$(200,192) 101,535 (188,657)
========= ======== =========
(Continued)
17
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) INCOME TAXES, CONTINUED
-----------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1997 and 1996 are presented below:
1997 1996
--------- --------
Deferred tax assets:
Loans - allowance for loan losses $ 230,735 245,298
Loans - unearned loan fee income 31,755 31,755
SAIF assessment accrual -- 180,986
Unrealized loss on investment securities available for sale -- 74,498
Writedown of investment securities -- 67,553
Prepaid expenses and accruals 34,312 34,368
Other 31,981 58,031
--------- --------
328,783 658,121
--------- --------
Deferred tax liabilities:
Loans - allowance for loan losses 146,397 139,450
FHLB stock 52,128 52,128
Unrealized gain on investment securities available for sale 15,212 --
Premises and equipment - differences in depreciation expense 23,005 32,217
Other 2,656 2,657
--------- --------
239,398 226,452
--------- --------
Net deferred tax asset $ 89,385 431,669
========= ========
Management believes results of future operations will generate sufficient
taxable income and resulting tax liabilities to realize the deferred tax
asset. There was no valuation allowance at September 30, 1997 or 1996,
or any change in the valuation allowance during the period ended
September 30, 1997, 1996 or 1995.
(10) EMPLOYEE BENEFITS PLANS
-----------------------
The Bank sponsors an Employee Stock Ownership Plan (ESOP). The ESOP is
available to all employees who have met certain age and service
requirements. Contributions to the plan are determined by the board of
directors, based on a percentage of the total payroll and certain
limitations as to the deductibility for tax purposes. The Bank intends to
make contributions to the Plan that, when combined with dividends on
unallocated shares, are sufficient to fund interest and principal payments
on the ESOP debt. The ESOP has borrowed funds on two occasions from an
unrelated financial institution to purchase shares of common stock of the
Bank for the benefit of the ESOP participants.
The common stock of the Bank acquired by the ESOP is held as collateral
for the loans. As of September 30, 1997, the ESOP holds 26,760 (20
percent) shares of the Bank's outstanding stock. of which 17,998 shares
have been allocated to the participants. The Bank makes contributions to
the ESOP which are used to make loan interest and principal payments.
Shares are released and allocated to the participants prorata with the
paydowns on the ESOP debt. The contributions are recorded as compensation
expense. The contributions attributable to the ESOP shares acquired in
1995 (1995 shares) approximate the fair value of the 1995 shares released
to participants. Contributions of $56,095, $61,928, and $60,000, were made
to the ESOP in 1997, 1996 and 1995, respectively.
(Continued)
18
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) EMPLOYEE BENEFITS PLANS, CONTINUED
----------------------------------
The first ESOP loan is due on demand and is repayable in monthly
installments of interest at 80 percent of the prime rate or $7,307, $9,632,
and $13,777 for the years ended September 30, 1997, 1996, and 1995,
respectively, and annual installments of principal in the amount of
$41,275. The interest rate is 6.8 percent and 6.6 percent at September 30,
1997 and 1996, respectively. The principal outstanding is $82,550 and
$123,825 at September 30, 1997 and 1996, respectively.
The second ESOP loan is repayable in annual installments of interest at
6.75 percent and 5 annual installments of principal in the amount of
$24,195. The principal outstanding at September 30, 1997 and 1996 is
$48,391 and $72,586, respectively. The principal balance approximates the
fair value of the unearned 1995 shares which approximated 1,300 and 1,900
at September 30, 1997 and 1996, respectively.
The Bank also sponsors a 401(k) retirement plan (401(k)). The 401(k) is a
trusteed, salary reduction plan which is available to all employees who
have completed one year of service and have attained the age of 21. 401(k)
participants may elect to defer a percentage of their compensation each
year up to a certain dollar limit established by law. The Bank's management
may make a discretionary matching contribution equal to a percentage of the
amount of salary reduction 401(k) participants elected to defer. Such
discretionary contributions for the year ended September 30, 1997, 1996,
and 1995 were $21,800, $25,952, and $24,332, respectively. The Bank also
provides major medical and dental coverage funded through pre-tax
withholdings from the participants.
(11) STOCKHOLDERS' EQUITY
--------------------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of
Tier I capital to average assets. Management believes, as of September 30,
1997, that the Bank meets all capital adequacy requirements and meets the
requirements to be classified as "well capitalized."
For capital Well
Actual adequacy purposes capitalized
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ------
As of September 30, 1997:
Total capital
(to risk weighted assets) $8,007,691 17.5% $3,655,338 8.0% $4,581,667 10.0%
Tier I capital
(to risk weighted assets) $7,770,829 17.0% 1,832,667 4.0% 2,749,000 6.0%
Tier I capital
(to average assets) $7,770,829 9.0% 3,459,160 4.0% 4,323,950 5.0%
(Continued)
19
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) STOCKHOLDERS' EQUITY, CONTINUED
-------------------------------
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- -------
As of September 30, 1996:
Total capital
(to risk weighted assets) $7,634,658 21.6% 2,832,000 8.0% 3,540,000 10.0
Tier I capital
(to risk weighted assets) $7,444,726 21.0% 1,416,000 4.0% 2,124,000 6.0
Tier I capital
(to average assets) $7,444,726 8.6% 3,442,000 4.0% 4,303,000 5.0
Savings institutions with more than a "normal" level of interest rate risk
are required to maintain additional total capital. A savings institution
with a greater than normal interest rate risk is required to deduct
specified amounts from total capital, for purposes of determining its
compliance with risk-based capital requirements. Management believes that
the Bank was in compliance with capital standards at September 30, 1997 and
1996.
Retained earnings at September 30, 1997 and 1996, include approximately
$2,200,000 for which no provision for income tax has been made. This amount
represents allocations of income to bad debt deductions for tax computation
purposes. If, in the future, this portion of retained earnings is used for
any purpose other than to absorb tax bad debt losses, income taxes may be
imposed at the then applicable rates. An additional $1,400,000 of retained
earnings is also restricted at September 30, 1997 and 1996, as a result of
the liquidation account established upon conversion to a stock company. No
dividends may be paid to stockholders if such dividends would reduce the
net worth of the Bank below the amount required by the liquidation account.
(12) CONTINGENT LIABILITIES AND COMMITMENTS
--------------------------------------
The Bank is defending various lawsuits and claims arising out of the
conduct of its business. While the ultimate results of these lawsuits and
claims cannot be predicted with certainty, in the opinion of management,
the ultimate disposition of these matters will not have a significant
effect on the consolidated financial position or results of operations of
the Bank.
On October 18, 1996, the Bank entered into a Supervisory Agreement
(Agreement) with the Office of Thrift Supervision (OTS) whereby the Bank
agreed to take certain actions. These actions primarily include: (a)
developing a business plan covering such matters as lending activities,
operating expenses, operating results and other matters, (b) reviewing by
the Bank's board of directors of the level, trend and causes of delinquent
and nonperforming assets of; (c) establishing and implementing procedures
for accurate preparation of the Thrift Financial Report; (d) establishing
and implementing written internal control procedures for all aspects of the
Bank's operations; (e) ensuring that the calculation of compliance with
regulatory liquidity requirements is accurate; and (f) monitoring of the
Bank's interest rate risk by the Bank's board of directors. Management
believes it is making good faith efforts to comply with the Agreement. It
is not presently determinable what actions, if any, the regulatory
authorities might take if the Bank does not comply with the provisions of
the Agreement.
(Continued)
20
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
---------------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Such
instruments involve elements of credit risk in excess of the amounts
recognized in the financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of these instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
The off-balance sheet financial instruments whose contract amounts
represent credit risk as of September 30, 1997, are as follows:
Commitments to extend credit $3,674,952
Commitments to fund lines of credit 777,180
----------
$4,452,132
==========
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
(14) OTHER EXPENSE
-------------
Components of other expense exceeding 1 percent of total interest and other
income included miscellaneous losses of $116,708 in 1996 and $142,558 in
1995, consisting primarily of costs related to bank robberies and
settlements of and provisions for various legal issues. There were no such
components exceeding the 1 percent criteria as stated which are not
presented separately in the 1997 consolidated statements of operations.
(15) STOCK OPTION PLAN
-----------------
Under the terms of the Bank's incentive stock option plan, the Bank has
granted 12,000 common stock options to officers and key employees in 1991.
The exercise price for the options is equal to $14 per share. All options
are exercisable through 2001. As of September 30, 1997, no options had been
exercised.
(16) SAVINGS ASSOCIATION INSURANCE FUND SPECIAL ASSESSMENT
-----------------------------------------------------
On September 30, 1996, the Federal Deposit Insurance Corporation imposed a
special assessment on Savings Association Insurance Fund (SAIF) assessable
deposits of depository institutions to recapitalize the SAIF. The Bank's
assessment of $493,687 was reflected in the statement of operations for the
year ended September 30, 1996.
(Continued)
21
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following table provides fair values of the Bank's financial
instruments at September 30, 1997 and 1996. Fair value estimates are made
at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one
time the Bank's entire holdings of a particular financial instrument.
Because no market exists for a portion of the Bank's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. Fair value estimates are based on
existing on and off-balance sheet financial instruments without attempting
to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates. The
assumptions used in the estimation of the fair value of the Bank's
financial instruments are explained below. Where quoted market prices are
not available, fair values are based on estimates using discounted cash
flow and other valuation techniques. Discounted cash flows can be
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. The following fair value estimates
cannot be substantiated by comparison to independent markets and should not
be considered representative of the liquidation value of the Bank's
financial instruments, but rather a good-faith estimate of the fair value
of financial instruments held by the Bank.
The following methods and assumptions were used by the Bank in estimating
the fair value of its financial instruments:
Cash and Cash Equivalents and Interest-Bearing Deposits in Other Banks --
Fair value equals the carrying value of such assets due to their nature.
Investment Securities and Accrued Interest Receivable -- The fair value of
investments and mortgage-backed securities is based on quoted market
prices. The carrying amount of related accrued interest receivable
approximates its fair value.
Federal Home Loan Bank Stock -- The Federal Home Loan Bank has historically
repurchased its stock at cost. Therefore, the carrying amount is considered
a reasonable estimate of its fair value.
Loans Receivable -- The fair value of loans is calculated using discounted
cash flows by loan type. The discount rate used to determine the present
value of the loan portfolio is an estimated market discount rate that
reflects the credit and interest rate risk inherent in the loan portfolio.
The estimated maturity is based on the Bank's historical experience with
repayments adjusted to estimate the effect of current market conditions.
The carrying amount of related accrued interest receivable approximates its
fair value.
Deposits -- Fair values for certificates of deposit have been determined
using discounted cash flows. The discount rate used is based on estimated
market rates for deposits of similar remaining maturities. The carrying
amount of all other deposits, due to their short-term nature, approximate
their fair values. The carrying amount of related accrued interest payable
approximates its fair value.
(Continued)
22
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
----------------------------------------------
FHLB Advances -- Fair value has been determined using discounted cash
flows. The discount rate used is based on estimated current rates for
advances with similar maturities.
1997 1996
---------------------- ----------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents $ 6,485,115 6,485,115 8,141,092 8,141,092
Interest-bearing deposits in other banks 157,574 157,574 255,691 255,691
Investments securities 44,718,585 44,741,690 41,611,109 41,380,314
Federal Home Loan Bank stock 460,000 460,000 383,000 383,000
Loans receivable, net 42,572,877 43,737,467 30,532,084 31,040,000
Accrued interest receivable 639,800 639,800 635,181 635,181
Financial liabilities:
Deposits, including accrued
interest payable 76,345,726 76,197,065 76,792,569 76,596,809
FHLB advances 9,200,000 9,202,000 -- --
23
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, September 30,
1998 1997
ASSETS
------
Cash and amounts due from depository
institutions $ 2,679,254 2,963,847
Federal funds sold and overnight deposits 594,746 3,521,268
------------- ------------
Total cash and cash equivalents 3,274,000 6,485,115
Interest bearing deposits 157,574 157,574
Investment securities held to maturity (fair value of
$7,627,067 and $8,826,498, respectively) 7,588,738 8,803,393
Investment securities available for sale, at fair value (cost of
$31,519,639 and $35,872,942, respectively) 31,572,949 35,915,192
Federal Home Loan Bank stock 460,000 460,000
Loans receivable, net of allowances 44,252,781 42,572,877
Premises and equipment, net 4,085,205 4,202,944
Real estate acquired by foreclosure 193,634 99,494
Accrued interest receivable on investment securities 85,346 63,367
Accrued interest receivable on mortgage-back securities 138,672 163,779
Accrued interest receivable on loans 366,805 412,654
Other assets 1,284,615 303,929
------------- ------------
Total assets $ 93,460,319 99,640,318
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing deposits $ 75,480,904 76,345,726
FHLB Advances 9,200,000 9,200,000
Advance payments by borrowers for
taxes and insurance 203,496 324,174
Other liabilities 539,979 866,479
Employee Stock Ownership Plan debt 186,746 130,941
Payables for investment securities transactions -- 4,975,130
------------- ------------
Total Liabilities 85,611,125 91,842,450
Stockholders' Equity:
Common Stock 130,000 130,000
Additional paid-in-capital 1,160,760 1,160,760
Retained earnings 6,711,061 6,611,011
Unrealized gain (loss) on investment securities 34,119 27,038
Employee Stock Ownership Plan debt (186,746) (130,941)
------------- ------------
Total Stockholders' Equity 7,849,194 7,797,868
------------- ------------
Total liabilities and stockholders' equity $ 93,460,319 99,640,318
============= ============
See accompanying notes to consolidated financial statements
24
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
INTEREST INCOME:
Interest and fees on loans $ 995,060 780,689 1,950,593 1,498,775
Interest and dividend income on
investment securities held to maturity 135,667 223,275 283,226 470,498
Interest income on investment
securities available for sale 484,529 445,135 996,675 864,537
Other interest income 33,211 33,777 65,002 103,807
--------- --------- --------- ---------
Total interest income 1,648,467 1,482,876 3,295,496 2,937,617
Interest on deposits 741,757 741,883 1,497,205 1,506,899
Interest on FHLB advances 133,540 - 275,550 -
--------- --------- --------- ---------
Total interest expense 875,297 741,883 1,772,755 1,506,899
Net interest income 773,170 740,993 1,522,741 1,430,718
OTHER INCOME:
Service charges on deposits 91,314 117,217 191,704 233,352
Gain on sale of assets 576 5,856 10,861 13,468
Gain on sale of securities 16,832 21,602 27,360 75,871
Other 6,556 7,534 13,657 14,573
--------- --------- --------- ---------
Total Other Income 115,278 152,209 243,582 337,264
EXPENSES:
Salaries and employee benefits 312,797 302,039 609,641 612,014
Net occupancy expense 34,496 30,925 64,966 88,619
Federal insurance premium 25,244 15,225 49,991 67,589
Data processing expenses 67,254 55,126 107,637 112,894
Professional services 48,731 48,658 126,809 100,163
Depreciation and amortization 66,930 69,825 134,032 158,053
Advertising expense 25,549 68,092 66,755 81,136
Office supplies 21,454 20,374 38,150 40,422
Insurance expense 15,269 13,764 30,793 27,376
Other 114,997 126,446 228,877 215,612
--------- --------- --------- ---------
Total other expense 732,721 750,474 1,457,651 1,503,878
--------- --------- --------- ---------
Income before income taxes 155,727 142,728 308,672 264,104
Income tax expense 56,062 51,040 111,122 95,077
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements
25
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
Net Income $ 99,665 91,688 197,550 169,027
======== ======== ======== ========
Basic earnings per common share $ 0.77 0.71 1.52 1.30
======== ======== ======== ========
Diluted earnings per common share $ 0.72 0.66 1.42 1.21
======== ======== ======== ========
Dividends declared and paid per
common share $ - - 0.75 0.75
======== ======== ======== ========
Basic average shares outstanding 130,000 130,000 130,000 130,000
======== ======== ======== ========
Diluted average shares outstanding 142,000 142,000 142,000 142,000
======== ======== ======== ========
See accompanying notes to consolidated financial statements
26
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
1998 1997
Cash flows from operating activities:
Net income $ 197,550 169,027
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 134,032 158,053
Net amortization of premium on
investment securities held to maturity 8,028 13,182
Net amortization of premium (accretion of discount)
on investment securities available for sale 17,795 (6,883)
Gain on sale of investment securities available for sale (27,360) (75,871)
Gain on sale of other assets - (7,610)
Charge off of investment securities held to maturity 25,000 -
Decrease in accrued interest receivable 48,977 27,421
Decrease (increase) in other assets (980,686) 149,695
Increase (decrease) in accrued interest on deposits (26,565) 27,778
Decrease in other liabilities (330,481) (489,645)
---------- ----------
Net cash used in operating activities (933,710) (34,853)
Cash flows from investing activities:
Purchase of investment securities held to maturity - (1,000,000)
Purchase of investment securities available for sale (11,199,771) (8,163,489)
Maturity or call of investment securities available for sale 3,255,835 1,000,000
Proceeds from sale of investment securities available for sale 4,878,741 5,393,391
Net change in loans (1,768,683) (4,177,087)
Proceeds from principal collected on
investment securities held to maturity 1,181,627 1,753,410
Proceeds from principal collected on
investment securities available for sale 2,452,935 1,087,645
Purchase of premises and equipment (16,293) (619,876)
Proceeds from sale of premises and equipment - 8,000
Purchase of real estate acquired by foreclosure (5,361) (6,860)
---------- ----------
Net cash used in investing activities (1,220,970) (4,724,866)
See accompanying notes to consolidated financial statements
27
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
1998 1997
Cash flows from financing activities:
Net (decrease) increase in interest bearing deposits (838,257) 804,902
Decrease in advance payments by
borrowers for taxes and insurance (120,678) (112,001)
Cash dividends (97,500) (97,500)
---------- ----------
Net cash (used in) provided by financing activities (1,056,435) 595,401
Net decrease in cash and cash equivalents (3,211,115) (4,164,318)
Cash and cash equivalents at beginning of period 6,485,115 8,141,092
---------- ----------
Cash and cash equivalents at end of period $3,274,000 3,976,774
========== ==========
Supplemental information on cash payments
Interest paid $1,494,236 1,479,121
Taxes paid - 20,000
Supplemental information on noncash transactions:
Loans transferred to real estate acquired by foreclosure $88,779 68,125
See accompanying notes to consolidated financial statements
28
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (none of which are other than normal
recurring accruals) necessary for a fair statement of financial position of the
Bank and the results of operations for the three month and six month periods
ended March 31, 1997 and 1998. The results contained in these statements are
not necessarily indicative of the results which may be expected for the entire
year. For further information, refer to the consolidated financial statements
and notes included in the Bank's annual report on Form 10-KSB for the year ended
September 30, 1997.
2. RECLASSIFICATIONS
Certain items in the 1997 consolidated financial statements have been
reclassified to conform to current year classifications.
3. IMPLEMENTATION IF FASB NO. 128
During the quarter ended December 31, 1997, the Bank adopted the requirements of
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
stock. The statement replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
the Bank's outstanding options to acquire common stock were exercised. The
exercise of these options accounts for the difference between basic and diluted
weighted average shares outstanding.
29
MANAGEMENT DISCUSSION AND ANALYSIS
- ----------------------------------
REVIEW OF RESULTS OF OPERATIONS
OVERVIEW
- --------
Net income for the three months ended March 31, 1998 was $99,665 an increase of
$7,977 when compared to the three months ended March 31, 1996. The improvement
in net earnings resulted primarily from an increase in net interest income of
$32,177 and a decrease in general and administrative expense of $17,753 which
were tempered by a decline in other income, which consists primarily of service
charges and gains on sale of assets, of $36,931.
Net income for the six months ended March 31, 1998 was $197,550, an increase of
$28,253 when compared to the six months ended March 31, 1997. The increase in
net earnings resulted from the same factors which impacted the earnings for the
three month period ended March 31, 1998. Net interest income increased by
$92,023, non-interest expense decreased by $46,227 and non-interest income
declined by $93,682 when compared to the six month period ended March 31, 1997.
NET INTEREST INCOME
- -------------------
Net interest income is the difference between the interest and fees earned on
loans, securities and other interest bearing assets (interest income) and the
interest paid on deposits and FHLB advances (interest expense). The Bank's
deposits and FHLB advances are primarily short term in nature and reprice faster
than the Bank's interest earring assets, consisting mainly of loans and mortgage
backed securities, which generally have longer maturities. The mix of the
Bank's interest earning assets and deposits and FHLB advances along with the
trend of market interest rates have a substantial impact on the change in net
interest margin. The cost of the Bank's interest bearing liabilities increased
23 basis points from 3.92% for the six month period ended March 31, 1997 to
4.15% during the six month period ended March 31, 1998 while the yield on
interest earning assets increased 63 basis points from 7.39% for the six month
period ended March 31, 1997 to 8.02% for the comparable period in the current
fiscal year.
The Bank's net interest income increased by $92,023 or 6.43% from $1,430,718 for
the six month period ended March 31, 1997 to $1,522,741 for the six month period
in the current fiscal year. The increase resulted from increase in both the
Bank's net interest margin and in the average balance of interest earning assets
for the six month period ended March 31, 1998 when compared to the same period
in the prior fiscal year. The increases in net interest margin and interest
earning assets are attributable to a significant increase in the Bank's loan
portfolio which grew from $34,641,046 at March 31, 1997 to $44,252,781 at
March 31, 1998 and increase of $9,611,735 or 27.75%. The funding for the growth
in the Bank's loan portfolio was provided primarily from Federal Home Loan Bank
(FHLB) advances which totaled $9,200,000 at March 31, 1998. There were no FHLB
advances outstanding at March 31, 1997. The advances have higher rates than the
weighted average cost of the Bank's deposits and are the primary cause for the
23 basis point increase in the average cost of interest bearing liabilities
between the six month period ended March 31, 1997 and the six month period in
the current fiscal year.
30
OTHER INCOME
- ------------
During the six month period ended March 31, 1998 other income decreased from
$337,264 for the six month period ended March 31, 1997 to $243,582 for the
comparable period in the current fiscal year. The decrease resulted from
declines in service charges on deposits of $41,648 and in gains on sale of
securities of $48,511 when comparing the six months ended March 31, 1998 to the
comparable period in the prior fiscal year.
OTHER EXPENSE
- -------------
During the six month period ended March 31, 1998 the Bank's other expense
declined by 3.07% or $44,568 from $1,503,878 for the six month period ended
March 31, 1997 to $1,457,651 for the comparable period in the current year.
Most categories of expense either declined or increased only modestly when
comparing the six month period ended March 31, 1998 to the comparable period in
the prior fiscal year. Line items which decreased significantly included net
occupancy expense, federal insurance premiums, depreciation and amortization and
advertising expense which decrease by $23,653, $17,598, $24,021 and $14,381,
respectively when compared to the six month period ended March 31, 1997.
Professional services increased by $26,646 from $100,163 for the six months
ended March 31, 1997 to $126,809 for the six month period in the current fiscal
year as a result of outsourcing the human resource function during the current
fiscal year . The decline in occupancy expense and depreciation relate to
expenses and leasehold improvement write-offs which were incurred during fiscal
1997 in conjunction with the Bank's move to a new main office. The decline in
federal insurance premiums resulted from a reduction in SAIF premiums which did
not become fully effective until January 1, 1997. During fiscal 1997 the Bank
conducted an extensive marketing campaign to enhance the Bank's image and
promote the Bank's products. Marketing efforts during the current fiscal year
have been less extensive and resulted in a decline in advertising expense.
REVIEW OF FINANCIAL CONDITION
- -----------------------------
Significant factors affecting the Bank's financial condition from September 30,
1997 to March 31, 1998 detailed below:
ASSETS
- ------
Total assets decreased $6,179,999 or 6.20% from $99,640,318 at September 30,
1997 to $93,460,319 at March 31, 1998. The decline is primarily attributable to
the settlement of a payable for investment securities transaction at September
30, 1997 in the amount of $4,975,130. The Bank committed to purchase several
mortgage backed securities during the latter part of September 1997 which did
not settle until October 1997. The funding for settlement of the securities
transactions was provided by a decrease in federal funds and overnight deposits,
proceeds from the sale of an investment security available for sale and from
cash flows from the investment portfolio. Between September 30, 1997 and March
31, 1998 the Bank's loan portfolio increased by $1,679,904 or 3.95% from
$42,572,877 at September 30, 1997 to $44,252,781 at March 31, 1998 while the
Bank's total investment portfolio decreased by $5,556,898 or 12.43% from
$44,718,585 at September 30, 1997 to $39,161,687 at March 31, 1998.
31
LIABILITIES
- -----------
Total liabilities decreased $6,233,389 or 6.79% between September 30, 1997 and
March 31, 1998. The decrease resulted from the settlement of a payable for
investment securities transactions which was previously discussed in the asset
section. The Bank's deposits declined $864,822 or 1.13% between September 30,
1997 and March 31, 1998.
LOAN QUALITY
- ------------
A key to long term earnings growth for Citizens Federal Savings Bank is
maintenance of a high quality loan portfolio. The Bank's directive in this
regard is carried out through its policies and procedures for review of loans.
The goals and results of these policies and procedures are to provide a sound
basis for new credit extensions and an early recognition of problem assets to
allow the most flexibility in their timely disposition.
At March 31, 1998 the Bank had $892,096 in assets classified as substandard
including real estate acquired by foreclosure of $193,634, no assets classified
as doubtful and $43,062 in assets classified as loss. The assets classified as
loss have been fully reserved. At September 30, 1997 the Bank had $366,603 in
assets classified as substandard including real estate acquired by foreclosure
of $99,494, no assets classified as doubtful and $252,792 in assets classified
as loss.
The allowance for loan losses was $391,332 at March 31, 1998. Management
believes that the current allowance for loan losses is adequate to cover any
potential future loan losses which exist in the loan portfolio, although there
can be no assurance that further increases in the loan loss allowance will not
be made as circumstances warrant.
LIQUIDITY AND INTEREST SENSITIVITY
- ----------------------------------
The Bank is required under applicable federal regulations to maintain specified
levels of cash and "liquid" investments in qualifying types of United States
Treasury and federal agency securities and other investments. Such investments
serve as a source of funds upon which the Bank may rely to meet deposit
withdrawals and other short term needs. The Bank monitors its cash flow
position to assure adequate liquidity levels and to take advantage of market
opportunities. The Bank maintains liquidity levels which significantly exceed
the minimum the regulatory requirements. Management believes that the Bank's
liquidity is adequate to fund all outstanding commitments and other cash needs.
Changes in interest rates will necessarily lead to changes in net interest
margin. The Bank's goal is to minimize volatility in the net interest margin by
taking an active role in managing the level, mix and maturity of assets and
liabilities. The Bank's primary emphasis in reducing its interest rate risk is
to focus on reducing the weighted average maturity of the loan portfolio and by
purchasing adjustable rate securities.
YEAR 2000 (Y2K) CONSIDERATIONS
- ------------------------------
The Bank has contacted its major computer service vendors and has received
assurances that those computer services will properly function on January 1,
2000, the date that computer problems are expected to develop world wide. The
Bank has also begun testing computer hardware and software for year 2000
compliance. Based on a review of our internal bookkeeping practices and our
conferences with our third party service companies, we do not expect to incur
32
significant additional bookkeeping, data processing or other expenses in
connection with issues related to the Year 2000 issue.
CAPITAL ADEQUACY AND RESOURCES
- ------------------------------
Management is committed to maintaining capital at a level sufficient to protect
stockholders and depositors, provide for reasonable growth, and fully comply
with all regulatory requirements. Management's strategy to maintain this goal
is to retain sufficient earnings while providing a reasonable return to
stockholders in the form of dividends and return on equity.
The Office of Thrift Supervision has issued guidelines identifying minimum
regulatory "tangible" capital equal to 1.50% of adjusted total assets, a minimum
3.00% core capital ratio and a minimum risk based capital of 8.00% of risk
weighted assets. The Bank has provided the majority of its capital requirements
through the retention of earnings.
At March 31, 1998 the Bank satisfied all regulatory requirements. The Bank's
compliance with the current standards is as follows:
For capital Well
Actual adequacy purposes capitalized
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- -------
Total capital
(to risk weighted assets) $8,034,970 17.29% 3,717,520 8.00% 4,646,900 10.00%
Tier I capital
(to risk weighted assets) $7,817,139 16.82% 1,858,760 4.00% 2,788,140 6.00%
Tier I capital
(to average assets) $7,817,139 8.23% 3,800,910 4.00% 4,751,138 5.00%
Reconciliation of capital: Risk Weighted Tier I Capital
Capital
Total stockholders' equity (GAAP) $7,851,258 $7,851,258
Unrealized gain of securities - AFS (34,119) (34,119)
Allowance for loan losses 348,270 --
Equity investments (130,439)
---------- ----------
Total $8,034,970 $7,817,139
33
Prior to the consummation of the holding company reorganization, the
Registrant did not have any significant assets or liabilities. Accordingly, no
financial statements of the Registrant are presented and the pro forma
consolidated financial statements of the Registrant would reflect no material
differences from the consolidated financial statements of the Bank for the years
ended September 30, 1997, 1996 and 1995 and the six months ended March 31, 1998
set forth below.
The following exhibits are filed with this report:
- -------------------------------------------------
Number Description
- ------ -----------
4 Specimen Common Stock Certificate of CFS Bancshares, Inc.
99.1 Citizens Federal Savings Bank Agreement and Plan of Reorganization
99.2 Press Release
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFS BANCSHARES, INC.
DATE: July 13, 1998 By: /s/ Bunny Stokes, Jr.
-------------------------------------
Bunny Stokes, Jr.
President
35