UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended December 31, 2006
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED].
For the transition period from _______________ to ______________________
Commission File Number 000-23971
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A. Full title of the plan and the address of the plan, if different from
that of the issuer named below:
Citizens South Bank Employees' Savings & Profit Sharing Plan and Trust
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
Citizens South Banking Corporation
519 South New Hope Road
Gastonia, North Carolina 28054-4040
CITIZENS SOUTH BANK
EMPLOYEES' SAVINGS & PROFIT SHARING
PLAN AND TRUST
Financial Statements
As of December 31, 2006
CITIZENS SOUTH BANK
EMPLOYEES' SAVINGS & PROFIT SHARING
PLAN AND TRUST
Table of Contents
Page
Report of Independent Registered Public Accounting Firm................ 2
Statements of Net Assets Available for Benefits........................ 3
Statement of Changes in Net Assets Available for Benefits.............. 4
Notes to Financial Statements.......................................... 5
Supplemental Schedules:
Form 5500 Schedule H, Line 4i - Schedule of Assets Held at
End of Year December 31, 2006................................ 10
NOTE: All other schedules required by Section 2520.103-10 of the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974 have been omitted because they are not
applicable.
Cherry
Bekaert &
Holland
Certified Public
Accountants &
Consultants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------
The Participants and Administrator of the
Citizens South Bank Employees' Savings & Profit Sharing Plan
Gastonia, North Carolina
We have audited the accompanying statements of Net Assets Available for Benefits
of the Citizens South Bank Employees' Savings & Profit Sharing Plan (the Plan)
as of December 31, 2006 and 2005 and the related Statement of Changes in Net
Assets Available for Benefits for the year ended December 31, 2006. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on the financial statements of the Plan
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements of the Plan, referred to above, as of
December 31, 2006 and 2005 present fairly, in all material respects, the net
assets available for benefits of the Plan as of December 31, 2006 and 2005, and
changes in net assets available for benefits for the year ended December 31,
2006 in conformity with accounting principles generally accepted in the United
States of America.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of Assets (Held
at End of Year) is presented for the purpose of additional analysis and is not a
required part of the basic financial statements but is supplementary information
required by the Department of Labor's Rules and Regulations for Reporting and
Disclosure under the Employee Retirement Income Security Act of 1974. This
supplemental schedule has been subjected to the auditing procedures applied in
the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Cherry, Bekaert & Holland, L.L.P.
- ---------------------------------------
Gastonia, North Carolina
June 27, 2007
2
Citizens South Bank
Employees' Savings and Profit Sharing
Plan and Trust
Statements of Net Assets Available for Benefits
December 31, 2006 and 2005
2006 2005
Assets ------------- --------------
Investments:
Investments, at fair value $ 7,033,333 $ 5,512,456
Participant loans 127,426 73,606
------------- --------------
Total investments 7,160,759 5,586,062
------------- --------------
Receivables:
Participants' contributions 16,694 12,138
Employer contributions 6,078 4,428
Securities sold 20,702 22,421
Accrued income 870 718
------------- --------------
Total receivables 44,344 39,705
------------- --------------
Total Assets 7,205,103 5,625,767
------------- --------------
Liabilities
Securities purchased and adminstrative expenses 29,008 31,052
Refund of excess contributions - 4,161
------------- --------------
Total Liabilities 29,008 35,213
------------- --------------
Net assets available for benefits $ 7,176,095 $ 5,590,554
============= ==============
See notes to financial statements.
-3-
<page>
Citizens South Bank
Employees' Savings and Profit Sharing
Plan and Trust
Statement of Changes in Net Assets Available for Benefits
Year ended December 31, 2006
2006
Additions: -------------
Investment activity:
Net appreciation in fair value of investments $ 558,458
Interest and dividends 100,158
-------------
Total investment gain 658,616
-------------
Contributions:
Employer contributions 159,853
Participant contributions 473,166
-------------
Total contributions 633,019
-------------
Transfers:
Transfer from other plan 722,304
-------------
Deductions:
Benefits paid directly to participants 390,453
Administrative expenses 37,945
-------------
Total deductions 428,398
-------------
Net increase 1,585,541
Net assets available for benefits
Beginning of year 5,590,554
-------------
End of year $ 7,176,095
=============
See notes to financial statements.
-4-
<page>
Citizens South Bank
Employees' Savings & Profit Sharing
Plan and Trust
Notes to Financial Statements
December 31, 2006
Note 1 - Description of Plan
The following description of the Citizens South Bank Employees' Savings & Profit
Sharing Plan and Trust (the "Plan") provides only general information.
Participants should refer to the Plan Agreement for a more complete description
of the Plan's provisions.
General - The Plan is a defined contribution plan that covers all full-time
employees of Citizens South Bank (the "Company") who have completed three months
of service and have attained the age of 18 years. The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions - Each year participants may contribute any percentage of pretax
annual compensation to the Plan, not to exceed the lesser of 75% of Plan Salary
(defined as the employee's basic salary rate, plus overtime, bonus, and
commissions) or the annual maximum contribution as defined by United States
Treasury Regulations. Participants who have attained age 50 before the end of
the Plan year are eligible to make catch-up contributions in accordance with,
and subject to the limitations of, Section 414(v) of the Internal Revenue Code.
Participants may also contribute amounts representing distributions from other
qualified defined benefit or contribution plans. Participants direct the
investment of their contributions into various investment options offered by the
Plan. The Company may make matching contributions equal to a discretionary
percentage determined by the Company. For the year ended December 31, 2006, the
Company contributed 50% of the first 6% of Plan Salary that a participant
contributed to the Plan. The Company may also make profit-sharing contributions
to the Plan at the discretion of the Company's Board of Directors.
Profit-sharing contributions are allocated to participants in the same ratio as
a participant's compensation, as defined, bears to the total compensation of all
participants. Profit sharing contributions were not made for 2006. All
contributions are subject to certain limitations.
Participant accounts - Individual accounts are maintained for each Plan
participant. Each participant's account is credited with the participant's
contributions, and allocations of (a) the Company's contributions and (b) plan
earnings, and charged with an allocation of administrative expenses. Allocations
are based on participant earnings or account balances, as defined. The benefit
to which a participant is entitled is the benefit that can be provided from the
participant's vested account.
Investments - Participants direct the investment of their contributions into up
to 15 various investment options offered by the Plan. Company contributions are
automatically invested in the same investment options directed for the
investment of the employee contributions. If no investment direction is given,
all contributions from participants and the Company are invested in the Short
Term Investment Fund (Money Market Fund), which is one of the Plan's bond/fixed
income funds. The Plan currently offers eight stock funds, three bond/fixed
income funds, three asset allocation funds, and the Citizens South Banking
Corporation (CSBC) Employer Stock Fund as investment options for participants.
Except for the CSBC Employer Stock Fund, which is managed by The Bank of New
York as Trustee, State Street Global Advisors assumed investment manager
responsibilities for all funds from Barclays Global Investors and became
5
Citizens South Bank
Employees' Savings & Profit Sharing
Plan and Trust
Notes to Financial Statements
December 31, 2006
the provider of benchmark index returns effective November 4, 2005. Participants
may change or transfer their investment options at any time via telephone or the
internet or by written request via fax or mail.
Vesting - Participants are immediately vested in their voluntary contributions
to the Plan, plus investment earnings thereon. Vesting in the Company matching
and discretionary profit sharing contributions of their accounts is based on
years of continuous service. A participant is fully vested after three years of
service (cliff vesting) or upon death, approved disability, or attainment of age
65 while employed with the Company. Any years of employment prior to attaining
the age of 18 are excluded for vesting purposes. Employment with Citizens Bank,
Salisbury, North Carolina, or with Trinity Bank, Monroe, North Carolina, is
included for the purpose of vesting.
Participant loans - Participants may borrow from their fund accounts a minimum
of $1,000 up to the lesser of a maximum of $50,000 or 50 percent of their vested
account balance, reduced by the highest outstanding loan balance(s) from the
Plan during the preceding 12 months. The loans are secured by the balances in
the participant's accounts and bear interest at the Barron's Prime Rate plus 1%,
fixed on the date of the disbursement of the loan, which is deemed to be based
upon prevailing interest rates charged by persons in the business of lending
money for loans which would be made under similar circumstances. Pentegra
Services, Inc. collects from the participant a $50.00 origination fee and a
$40.00 annual administration fee that are subtracted from the participant's
account. Principal and interest are paid ratably through semi-monthly payroll
deductions and credited to the loan account monthly.
Payment of benefits - Upon termination of service, a participant will receive a
lump-sum distribution equal to the value of the participant's vested interest in
his or her account. If no such request is made, distribution is made at normal
retirement age.
Forfeitures - At December 31, 2006 and 2005, forfeited non-vested accounts
derived from employer contributions were $12,715 and $4,459, respectively, which
are invested in the Money Market Fund. Forfeited non-vested accounts derived
from employer matching contributions accounts may be used to reduce future
employer matching contributions or may be allocated to participants as profit
sharing contributions. Forfeited non-vested accounts derived from the Company's
profit sharing contributions may be added to any Company profit-sharing
contributions or allocated to participants as additional profit sharing
contributions. Forfeited contributions are allocated to participants in the same
ratio as a participant's compensation bears to the total compensation of all
participants. During 2006, $4,459 of forfeited non-vested derived from employer
contributions accounts were allocated to participants. During 2006, no forfeited
non-vested accounts were used to reduce employer matching contributions.
6
Citizens South Bank
Employees' Savings & Profit Sharing
Plan and Trust
Notes to Financial Statements
December 31, 2006
Note 2 - Summary of significant accounting policies and activities
Basis of accounting - The Plan's financial statements are prepared using the
accrual method of accounting except for the payment of participant benefits
which are recorded when paid.
Use of estimates - The preparation of financial statements in conformity with
the accounting principles generally accepted in the United States of America
requires the plan administrator and plan sponsor to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Investment valuation and income recognition - The Plan's investments are stated
at fair value. Quoted market prices are used to value investments. Shares of
mutual funds are valued at quoted market prices, which represent the net asset
value of shares held by the Plan at year end. Participant loans are valued at
the outstanding loan balances, which approximates fair value.
Purchases and sales of securities are recorded on a trade-date basis. Interest
income is recorded on the accrual basis. Dividends are recorded on the
ex-dividend date.
Management fees and operating expenses charged to the Plan for investments in
the mutual funds are deducted from income earned on a daily basis and are not
separately reflected. Consequently, management fees and operating expenses are
reflected as a reduction of investment return for such investments.
Risks and Uncertainties - The Plan utilizes various investment securities
including, mutual funds and corporate stocks. Investment securities, in general,
are exposed to various risks, such as interest rate risk, credit risk, and
overall market volatility. Due to the level of risk associated with certain
investment securities, it is reasonably possible that changes in the values of
investment securities will occur in the near term and that such changes could
materially affect the amounts reported in the financial statements.
Administrative expenses - Except for annual audit and third party administration
fees, which are paid by the Company, all other administrative expenses are paid
by the Plan.
Benefit payments - Benefit payments to participants are recorded upon
distribution.
Excess contributions payable - The Plan is required to return contributions to
certain active participants in order to satisfy the relevant nondiscrimination
provisions of the Plan.
7
Citizens South Bank
Employees' Savings & Profit Sharing
Plan and Trust
Notes to Financial Statements
December 31, 2006
Note 3 - Investments
The Plan's investments that represented five percent or more of the Plan's net
assets available for benefits as of December 31, 2006 and 2005 are as follows:
2006 2005
----------- -----------
Citizens South Common Stock, 247,089 and 263,068 shares, respectively $3,197,332 $3,135,507
State Street Global Advisors Stable Value Fund, 56,085 and 52,536 units, respectively 404,793 529,204
State Street Global Advisors S&P 500 Stock Fund, 1,752 units - 406,636
State Street Global Advisors Mid-cap Stock Fund, 13,181 units - 336,371
State Street Global Advisors Russell 2000 Fund, 2,137 units 574,621 -
State Street S&P 500 Value Fund, 13,646 units 384,341 -
State Street Global Advisors International Fund, 600,755 units 600,755 -
During the year ended December 31, 2006, the Plan's mutual fund investments
(including gains and losses on investments bought and sold, as well as held
during the year) appreciated (depreciated) in value as follows:
Common Stock $ 249,327
Mutual Funds:
Equity Funds 257,104
Balanced Funds 59,134
Governmental Bond Funds ( 7,107)
- ----------
Net appreciation of investments $ 558,458
=========
Note 4 - Exempt party-in-interest transactions
Certain Plan investments are shares of mutual funds and company stock managed by
The Bank of New York. The Bank of New York is the trustee as defined by the Plan
and, therefore, these transactions qualify as exempt party-in-interest
transactions. Fees paid by the Plan for investment management services were
included as a reduction of the return earned on each fund.
At December 31, 2006 and 2005, the Plan held 247,089 and 263,068 units,
respectively, of common stock of Citizens South Banking Corporation, the parent
company of the sponsoring employer, with a cost basis of $1,939,012 and
$2,015,965, respectively. During the year ended December 31, 2006, the Plan
recorded dividend income of $74,127.
8
Citizens South Bank
Employees' Savings & Profit Sharing
Plan and Trust
Notes to Financial Statements
December 31, 2006
Note 5 - Plan Termination
Although it has not expressed any intention to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions set forth in ERISA. In the event that the Plan is
terminated, participants would become 100 percent vested in their accounts.
Note 6 - Federal Income Tax status
Effective January 1, 1998, the Company has adopted, and from time to time has
amended, a non-standardized form for a prototype profit sharing plan sponsored
by Pentegra Services, Inc. The prototype plan has received an opinion letter
from the Internal Revenue Service dated March 7, 2002, as to the prototype
plan's qualified status. The prototype plan opinion letter has been relied on by
this Plan. The Plan Administrator believes the Plan is designed and is being
operated in compliance with the applicable provisions of the Internal Revenue
Code.
Note 7 - Reconciliation to Forms 5500
The following is a reconciliation of net assets available for benefits per the
financial statements to the Forms 5500 for the years ended December 31, 2006 and
2005:
2006 2005
----------- -----------
Net assets available for benefits per the financial statements $ 7,176,094 $5,590,554
Less: Contribution receivable not reflected on the Form 5500 22,772 -
Add: Accrued excess participant contributions - 4,161
Less: Adjustment for rounding 1 0
----------- -----------
0
Net assets available for benefit per the Form 5500 $7,153,321 $5,594,715
=========== ==========
The following is a reconciliation of changes in net assets available for
benefits per the financial statements to net income per the Form 5500 for the
year ended December 31, 2006:
Net change in net assets available for benefits per the financial statements $1,585,541
Less: Contributions receivable not reflected on Form 5500 (22,773)
Less: Transfer in of assets from Trinity Bank Plan (722,304)
Less: Distributions in 2006 for excess participant contributions in 2005 (4,161)
-----------
Net change in net assets available for benefits per the Form 5500 $ 836,303
===========
Note 8 - Transfers from other plans
During 2006, there was a transfer of $722,304 from the Trinity Bank Plan. After
the acquisition of Trinity Bank, certain former employees of Trinity Bank became
participants in the Citizens South Bank Employees' Savings & Profit Sharing Plan
and Trust and transferred their account balances from the Trinity Plan.
******
9
Citizens South Bank
Employees' Savings and Profit Sharing
Plan and Trust
Notes to Financial Statements
December 31, 2006
10
<page>
Citizens South Bank
Employees' Savings and Profit Sharing
Plan and Trust
EIN: 56-02380
Plan Number: 004
Form 5500 Schedule H, Line 4i
Schedule of Assets Held At End of Year - December 31, 2006
Description of Investment Including Maturity
Identity of Issuer, Borrower, Date, Rate of Interest, Collateral, Par or Maturity
Lessor or Similar Party Value Cost Current Value
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Common Stock - 247,089 shares, par value of $0.01
* Citzens South Banking Corporation per share ** $ 3,197,332
* Pentegra Retirement Services Stable Value Fund - 38,416 units ** 404,793
State Street Global Advisors Moderate Strategic Balanced Fund - 17,669 units ** 241,343
State Street Global Advisors Conservative Strategic Balanced Fund - 7,181 units ** 105,789
State Street Global Advisors Aggressive Stratigic Balanced Fund - 9,461 units ** 117,313
State Street Global Advisors Russell 2000 Stock Fund - 9,965 units ** 255,382
State Street Global Advisors S&P 500 Stock Fund - 2,137 units ** 574,621
State Street Global Advisors S&P 500 Growth Stock Fund - 15,542 units ** 177,190
State Street Global Advisors S&P 500 Value Stock Fund - 22,421 units ** 278,112
State Street Global Advisors Midcap Stock Fund - 13,646 units ** 384,341
State Street Global Advisors Nasdaq 100 Stock Fund - 2,919 units ** 31,686
State Street Global Advisors US REIT Index Fund - 2253 units ** 73,679
State Street Global Advisors International Stock Fund- 6,425 units ** 136,235
State Street Global Advisors Money Market Fund - 600,755 units ** 600,755
State Street Global Advisors Aggregate Bond Fund - 314 units ** 5,405
State Street Global Advisors Government Bond Fund - 23,096 units ** 244,630
* Pentegra Retirement Services Short-Term Investment Fund - 204,727 units ** 204,727
* Participant loans Loans, ranging 0-5 years maturity with interest 0 127,426
rates of 5.00% to 10.50% -----------
Total assets held at end of year $ 7,160,759
===========
* A party-in-interest transaction as defined by ERISA
** Cost omitted for participant directed investments
-10-
<Page>
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the employee benefit plan)
have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
CITIZENS SOUTH BANK EMPLOYEES' SAVINGS &
PROFIT SHARING PLAN AND TRUST
Date: June 26, 2007 By: /s/ Paul L. Teem, Jr.
-----------------------------
Name: Paul L. Teem, Jr.
Title: Executive Vice President, Secretary
and Chief Administrative Officer,
Citizens South Bank
<Page>
Cherry
Bekaert &
Holland
Certified Public
Accountants &
Consultants
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Citizens South Banking Corporation
Gastonia, North Carolina
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-103218, 333-77657 and 333-111228) of Citizens South Banking
Corporation of our report dated June 27, 2007, related to the statements of net
assets available for benefits of as of December 31, 2006 and 2005 and the
related statement of changes in net assets available for benefits for the year
ended December 31, 2006 which are included in the December 31, 2006 Annual
Report on Form 11-K of Citizens South Bank Employees' Savings & Profit Sharing
Plan.
/s/ Cherry, Bekaert & Holland, L.L.P.
- -------------------------------------
Gastonia, North Carolina
June 27, 2007