1
Page 1 of _________
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
Commission File Number 0-18209
CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1372535
- ---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 East Main Street, Salineville, Ohio 43945
- -------------------------------------- -------
(Address of principal executive offices)
Registrant's telephone number, 330/679-2328
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such report(s) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
On July 22, 1997 there were 5,897,540 shares of Common Stock, without par value,
of Citizens Bancshares, Inc., outstanding.
2
CITIZENS BANCSHARES, INC.
FORM 10-Q
QUARTER ENDED June 30, 1997
Part I - Financial Information
ITEM 1 FINANCIAL STATEMENTS
- ----------------------------
Interim Financial Information required by Rule 10-01 of Regulation S-X is
included in this Form 10-Q as referenced below:
Page
Number
------
Financial Statements
- --------------------
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity 5
Condensed Consolidated Statements of
Cash Flows 6
Notes to the Consolidated Financial
Statements 7 - 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS 14 - 18
-----------------------------------
PART II - OTHER INFORMATION 19 - 21
- ---------------------------
Exhibit Index 20 - 21
Signatures 22
2
3
CITIZENS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, December 31,
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1997 1996
----------- -----------
ASSETS
Cash and due from banks ...................................... $ 29,718 $ 25,467
Federal funds sold ........................................... 700 1,900
----------- -----------
Total cash and cash equivalents ......................... 30,418 27,367
Interest-bearing deposits with financial institutions ........ 208 364
Securities available for sale (Note 2) ....................... 299,697 240,375
Securities held to maturity (estimated market value of $51,113
at June 30 and $65,454 at December 31 (Note 2) ............. 50,954 65,230
Total loans (Note 3) ......................................... 623,494 595,247
Less allowance for loan losses (Note 4) .................... (11,759) (11,350)
----------- -----------
Net loans ............................................... 611,735 583,897
Premises and equipment, net .................................. 15,601 15,316
Accrued interest receivable and other assets ................. 37,109 15,381
----------- -----------
Total assets ............................................ $ 1,045,722 $ 947,930
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing deposits ................................. $ 68,741 $ 67,817
Interest-bearing deposits .................................... 648,728 641,775
----------- -----------
Total deposits .......................................... 717,469 709,592
Securities sold under repurchase agreements and
Federal funds purchased .................................... 137,426 87,939
Federal Home Loan Bank advances .............................. 86,206 49,923
Accrued interest payable and other liabilities ............... 8,901 9,163
Obligation under employee stock ownership plan ............... 350 413
----------- -----------
Total liabilities ....................................... 950,352 857,030
----------- -----------
MINORITY INTEREST IN SUBSIDIARY ................................... 627 1,188
SHAREHOLDERS' EQUITY
Serial preferred stock, $10.00 par value; authorized
200,000 shares; none issued
Common stock, no par value; 12,000,000 shares
authorized; 5,899,790 shares issued ........................ 16,514 16,514
Retained earnings ............................................ 78,075 72,818
Less treasury stock, 2,250 shares at cost .................... (5) (5)
ESOP obligations and unearned shares ......................... (350) (413)
Unrealized gain on securities available for sale ............. 509 798
----------- -----------
Total shareholders' equity .............................. 94,743 89,712
----------- -----------
Total liabilities and shareholders' equity .............. $ 1,045,722 $ 947,930
=========== ===========
See notes to the consolidated financial statements
3
4
CITIZENS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months For the six months
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) ended June 30, ended June 30,
1997 1996 1997 1996
-------- -------- ------- -------
INTEREST INCOME
Loans, including fees ........................... $ 14,847 $ 14,614 $29,111 $28,540
Securities
Taxable ....................................... 5,495 3,760 10,209 7,348
Nontaxable .................................... 281 298 553 595
Federal funds sold and other .................... 20 106 57 296
-------- -------- ------- -------
Total interest income ....................... 20,643 18,778 39,930 36,779
-------- -------- ------- -------
INTEREST EXPENSE
Deposits ........................................ 6,977 6,691 13,769 13,378
Federal Home Loan Bank advances ................. 1,166 686 1,917 1,507
Federal funds and repurchase agreements and other 1,816 260 3,088 575
-------- -------- ------- -------
Total interest expense ...................... 9,959 7,637 18,774 15,460
-------- -------- ------- -------
NET INTEREST INCOME ................................ 10,684 11,141 21,156 21,319
PROVISION FOR LOAN LOSSES (NOTE 4) ................. 407 469 825 856
-------- -------- ------- -------
INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ....................... 10,277 10,672 20,331 20,463
-------- -------- ------- -------
OTHER INCOME
Service charges and fees on deposits ............ 639 567 1,214 1,037
Other income .................................... 1,007 659 1,784 1,237
Investment losses (Note 2) ..................... (12) (12)
-------- -------- ------- -------
Total other income .......................... 1,646 1,214 2,998 2,262
-------- -------- ------- -------
OTHER EXPENSE
Salaries and employee benefits .................. 2,978 2,746 5,800 5,498
Occupancy expense ............................... 377 358 765 779
Equipment expense ............................... 539 616 1,032 1,106
Merger, integration, and restructuring expense .. 425 425
Other operating expense ......................... 1,633 1,800 3,180 3,651
-------- -------- ------- -------
Total other expense ......................... 5,527 5,945 10,777 11,459
-------- -------- ------- -------
INCOME BEFORE INCOME TAXES ........................ 6,396 5,941 12,552 11,266
INCOME TAXES ...................................... 2,063 1,963 4,110 3,690
-------- -------- ------- -------
NET INCOME ........................................ $ 4,333 $ 3,978 $ 8,442 $ 7,576
======== ======== ======= =======
EARNINGS PER COMMON SHARE ......................... $ .73 $ .67 $ 1.43 $ 1.28
======== ======== ======= =======
See notes to the consolidated financial statements
4
5
CITIZENS BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1997 1996
-------- --------
(IN THOUSANDS OF DOLLARS)
Balances at January 1 $ 89,712 $ 80,111
Net income 8,442 7,576
Change in employee stock ownership plan obligation
and shares earned 63 44
Cash paid for fractional shares (1) (8)
Cash dividends declared ($.54 per share in 1997 and
$.38 in 1996) (3,184) (2,268)
Change in unrealized gain (loss) on securities
available for sale (289) (2,693)
-------- --------
Balances at June 30 $ 94,743 $ 82,762
======== ========
See notes to the consolidated financial statements
5
6
CITIZENS BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
NET CASH FLOWS FROM OPERATING ACTIVITIES ........................... $ 8,962 $ 9,533
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of other real estate ...................................... 125 193
Securities available for sale:
Proceeds from sales ........................................... 2,674
Proceeds from paydowns, maturities ............................ 27,001 22,984
Purchases ..................................................... (87,449) (61,739)
Securities held to maturity:
Proceeds from paydowns, maturities ............................ 28,010 27,353
Purchases ..................................................... (13,725) (21,678)
Net (increase) in loans ......................................... (30,727) (9,183)
Proceeds from commercial and student loans sold ................. 2,000 4,362
Net change in interest-bearing deposits
with financial institutions .................................... (156) (501)
Proceeds from premises and equipment sold ....................... 434
Purchases of premises and equipment ............................. (1,442) (1,527)
Purchases of life insurance contracts ........................... (20,000)
-------- --------
Net cash from investing activities ............................ (95,929) (37,062)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends and fractional shares paid ....................... (3,068) (2,722)
Net increase in deposit accounts ................................ 7,877 7,278
Net increase in repurchase agreements and Federal funds purchased 49,487 13,210
Net change in short-term FHLB advances .......................... 18,000
Proceeds from long-term FHLB advances ........................... 40,400 2,250
Repayment of long-term FHLB advances ............................ (4,117) (16,049)
Redemption of minority interest in subsidiary ................... (561) (25)
-------- --------
Net cash from financing activities .......................... 90,018 21,942
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................ 3,051 (5,587)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................... 27,367 40,926
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 30,418 $ 35,339
======== ========
See notes to the consolidated financial statements
6
7
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Citizens
Bancshares, Inc., ("Bancshares") and its wholly-owned subsidiaries, The Citizens
Banking Company ("Citizens"), Freedom Financial Life Insurance Company
("Insurance Company"), Freedom Express, Inc. and First National Bank of Chester
("FNB"). All significant inter-company transactions have been eliminated in
consolidation. Bancshares' consolidated financial statements have been restated
for prior periods due to the October 11, 1996 merger of The Navarre Deposit Bank
Company of Ohio, Navarre, Ohio, ("Navarre") into Citizens.
These interim consolidated financial statements are prepared without audit and
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of Bancshares at June 30,
1997 and its results of operations and cash flows for the periods presented. All
such adjustments are of a normal, recurring nature. The consolidated financial
statements do not purport to contain all the necessary financial disclosures
required by generally accepted accounting principles that might otherwise be
necessary under the circumstances and should be read in conjunction with the
1996 consolidated financial statements and notes thereto of Bancshares included
in its Annual Report to Shareholders for the year ended December 31, 1996.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
For the six months ended June 30, 1997 and 1996, Bancshares paid interest in the
amount of $18,084 and $15,549 respectively, and taxes in the amount of $4,549
and $4,313, respectively.
Bancshares' non-cash transactions resulting from transfers from loans to other
real estate owned were $0 and $12 for each of the six months ended June 30, 1997
and 1996, respectively.
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
revises accounting treatment for transfers of financial assets, such as loans
and securities, and for distinguishing between sales and secured borrowings.
SFAS No. 125 did not materially impact Bancshares' financial statements for the
quarter or six month period ended June 30, 1997.
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As Bancshares has not had significant dilution from stock options, the
new calculation methods are not expected to significantly affect future basic
earnings per share and diluted earnings per share.
Earnings per share are calculated on the basis of the weighted average number of
shares outstanding after considering the Bancshares common shares issued in the
merger discussed above. The weighted average number of shares used in the
computation for 1997 and 1996 was 5,897,540. Fully diluted and primary weighted
shares outstanding at June 30, 1997 were 5,904,412 and 5,893,886, respectively.
Earnings per share remain at $.73 and $1.43 for the quarter and six month period
ended June 30, 1997 for fully diluted, primary and basic earnings per share.
7
8
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized costs, unrealized gains and losses and estimated fair values are
as follows:
JUNE 30, 1997
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 11,002 $ 48 $ $ 11,050
U.S. Government agencies
and corporations 67,476 40 (375) 67,141
Obligations of states and political
subdivisions 100 (1) 99
Corporate and other securities 4,000 24 4,024
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 178,791 798 (856) 178,733
Agency collateralized mortgage obligations 18,297 32 (200) 18,129
Other 5,515 15 (5) 5,525
-------- ------- ------- --------
Total debt securities available for sale 285,181 957 (1,437) 284,701
Marketable equity securities 13,733 1,326 (63) 14,996
-------- ------- ------- --------
Total investment securities available for sale $298,914 $ 2,283 $(1,500) $299,697
======== ======= ======= ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 28,324 $ 101 $ (34) $ 28,391
U.S. Government agencies and corporations 100 (4) 96
Obligations of states and political
subdivisions 22,525 192 (96) 22,621
Corporate and other 5 5
-------- ------- ------- --------
Total investment securities held to maturity $ 50,954 $ 293 $ (134) $ 51,113
======== ======= ======= ========
8
9
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES - CONTINUED
The amortized costs, unrealized gains and losses and estimated fair values are
as follows:
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 11,001 $ 80 $ (9) $ 11,072
U.S. Government agencies
and corporations 27,279 379 (77) 27,581
Obligations of states and
political subdivisions 100 100
Corporate and other securities 14 14
Mortgage-backed securities
GNMA, FHLMC and FNMA certificates 164,027 838 (641) 164,224
Agency collateralized mortgage obligations 19,200 (269) 18,931
Other 6,076 7 (7) 6,076
-------- ------- -------- --------
Total debt securities available for sale 227,697 1,304 (1,003) 227,998
Marketable equity securities 11,452 943 (18) 12,377
-------- ------- -------- --------
Total investment securities available for sale $239,149 $ 2,247 $ (1,021) $240,375
======== ======= ======== ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 42,342 $ 132 $ (13) $ 42,461
U.S. Government agencies and corporations 100 (2) 98
Obligations of states and political
subdivisions 22,783 189 (82) 22,890
Other 5 5
-------- ------- -------- --------
Total investment securities held to maturity $ 65,230 $ 321 $ (97) $ 65,454
======== ======= ======== ========
9
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CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES - CONTINUED
The amortized cost and estimated market value of debt securities at June 30,
1997 by contractual maturity are shown below. Expected maturities will likely
differ from contractual maturities because some issuers have the right to call
or repay obligations at any time with or without penalty.
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
DEBT SECURITIES AVAILABLE FOR SALE:
Due in one year or less $ 7,498 $ 7,505
Due after one year through five years 7,754 7,755
Due after five years through ten years 62,826 62,542
Due after ten years 4,500 4,512
Mortgage-backed securities 202,603 202,387
-------- --------
Total debt securities available for sale $285,181 $284,701
======== ========
DEBT SECURITIES HELD TO MATURITY:
Due in one year or less $ 9,702 $ 9,763
Due after one year through five years 29,329 29,378
Due after five years through ten years 11,338 11,373
Due after ten years 585 599
-------- --------
Total debt securities held to maturity $ 50,954 $ 51,113
======== ========
There were no sales of securities for the quarter or six month periods ended
June 30, 1997. For the quarter and six month periods ended June 30, 1996,
securities available for sale with an amortized cost of $2,686 were sold. These
securities had related gross realized losses of $20 and gross realized gains of
$8.
10
11
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 3 - LOANS
The loan portfolio at June 30, 1997 and December 31, 1996 was as follows:
JUNE 30, December 31,
1997 1996
-------- ------------
Commercial, financial and agricultural $162,522 $140,977
Residential real estate mortgage 280,132 280,779
Commercial real estate 115,727 113,327
Construction 4,108 4,704
Consumer 49,462 48,269
Real estate mortgage loans held for sale 11,543 7,191
-------- --------
Total loans $623,494 $595,247
======== ========
Nonaccrual and past due loans:
JUNE 30, December 31,
1997 1996
-------- ------------
Loans accounted for on a nonaccrual basis $ 929 $ 1,158
Loans past due more than 90 days and
still accruing interest 3,278 674
-------- --------
$ 4,207 $ 1,832
======== ========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the six months
ended June 30, 1997 and 1996 was as follows:
1997 1996
-------- ------------
Balance at January 1 $ 11,350 $ 10,895
Provision for loan losses 825 856
Recoveries 495 632
Loans charged-off (911) (1,111)
-------- --------
Balance at June 30 $ 11,759 $ 11,272
======== ========
Information regarding impaired loans is as follows:
Six months ended
JUNE 30, June 30,
1997 1996
---- ----
Average investment in impaired loans $2,764 $4,464
Interest income recognized on impaired loans 130 190
Interest income received on impaired loans 123 137
11
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CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES - CONTINUED
JUNE 30, December 31,
1997 1996
---- ----
Balance of impaired loans $2,557 $3,116
Specific allocation associated with
impaired loans $ 259 $ 416
The balance of impaired loans includes certain delinquent and nonaccrual loans
previously disclosed in Note 3 in the aggregate amount of $484 and $981 at June
30, 1997 and December 31, 1996, respectively.
NOTE 5 - CONCENTRATIONS OF CREDIT RISK
Bancshares, through its subsidiary banks, grants residential, consumer and
commercial loans to customers located primarily in the eastern Ohio counties of
Columbiana, Jefferson, Stark, Mahoning and Carroll and in the West Virginia
county of Hancock.
Real estate mortgage loans, including construction loans and loans held for
sale, totaled $295,783 of loans at June 30, 1997, and are secured primarily by 1
- - 4 family residences. Commercial real estate loans comprised 18.56% of loans at
June 30, 1997, and represent borrowings secured by commercial buildings and real
estate primarily in the Citizens and FNB market areas.
Also at June 30, 1997, 12.3% of total loans were to a group of related
enterprises involved in purchasing pools of one-to-four family residential, home
equity and other consumer loans. The primary repayment source for the latter is
the underlying pools of consumer and mortgage debt that represent diverse loan
types and geographic distribution.
Citizens and FNB are parties to financial instruments which involve off-balance
sheet risk. These instruments are entered into in the normal course of business
to meet the financing needs of their customers. These financial instruments
include commitments to make loans. There were $48,200 in variable rate
commitments and $6,898 in fixed rate commitments at June 30, 1997. The fixed
rate commitments have an interest rate range of 6.375% to 8.750%. There were
$45,450 in variable rate commitments and $3,237 in fixed rate commitments at
year end 1996. The fixed rate commitments have an interest rate range of 6.50%
to 8.75%. All fixed rate mortgage real estate commitments expire after sixty
days. Since many expire without being used, these amounts do not necessarily
represent future cash commitments.
The exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to make loans and lines and letters of
credit is represented by the contractual amount of those instruments. Citizens
and FNB follow the same credit policy to make such commitments as is followed
for those loans recorded in the financial statements. In management's opinion,
these commitments represent normal banking transactions and no material losses
are expected to result therefrom. Collateral obtained upon exercise of the
commitments is determined using management's credit evaluation of the borrower
and may include real estate and/or business assets.
12
13
CITIZENS BANCSHARES, INC.
-------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
(Dollars in thousands, except per share data)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Citizens and FNB are involved in various legal actions arising in the ordinary
course of business. In the opinion of management, the outcome of these matters
will not have a material effect on Bancshares.
Bancshares' subsidiary banks were required to have approximately $8,843 of cash
on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve
requirements at June 30, 1997. These balances do not earn interest.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Bancshares' Federal Home Loan Bank advances at June 30, 1997 were:
Maturity or first
Amount Rate repricing date
------ ---- --------------
$59,956 5.66% 1997
2,750 5.66 1998
8,500 6.53 1999
15,000 5.93 2002
-------
$86,206
=======
13
14
CITIZENS BANCSHARES, INC.
-------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
(Dollars in thousands, except per share data)
The purpose of this discussion is to focus on information concerning the
consolidated financial condition of Bancshares at June 30, 1997, compared to
December 31, 1996, and the results of operations for the quarter and six months
ended June 30, 1997, as compared to the same periods in 1996, which is not
otherwise apparent from the financial statements. This discussion should be read
in conjunction with the interim consolidated financial statements and the
footnotes thereto included elsewhere in this Form 10-Q. Forward-looking
statements contained in this discussion involve risks and uncertainties and are
subject to change based on various important factors. Actual results could
differ from those expressed or implied.
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1997, was $4,333, an 8.9% increase
from the $3,978 earned for the quarter ended June 30, 1996. Earnings per share
for the second quarter of 1997 were $.73, representing an increase of 9.0% over
the $.67 earned in the comparable period for 1996.
Net income for the six months ended June 30, 1997 was $8,442, compared to $7,576
for the same period in 1996. Bancshares' 11.4% increase in net income for the
six months ended June 30, 1997, compared to the same period in 1996, was due
primarily to a 32.5% increase in other income. Service charges and fees on
deposits have risen due to product fee increases, and other fees associated with
credit products have contributed $250 for the quarter and $550 for the six
months ended June 30, 1997. Additionally, other expense decreased 5.95% for the
six months ended June 30, 1997 as compared to the same period in 1996. For the
quarter and six months ended June 30, 1996, merger, integration and
restructuring expense totaled $425.
Earnings per common share for the six months ended June 30, 1997 were $1.43, up
11.7% over the same period in 1996.
Net income for the quarter and six months ended June 30, 1996 included net
nonrecurring after tax income discussed below of $259 or $.04 per common share.
Core earnings for the quarter and six months ended June 30, 1996 were $3,719 and
$7,317, respectively. Since net income for the quarter and six months ended June
30, 1997 included no nonrecurring income or expense, the result was an increase
in core earnings of 16.5% for the second quarter of 1997, and an increase in
core earnings of 15.3% for the six months ended June 30, 1997, compared to the
comparable periods in 1996.
The nonrecurring items for the quarter and six months ended June 30, 1996 were a
$422 after tax loan discount recognized as loan income upon prepayment, a $112
after tax other income FHLMC remittance settlement and a $276 after tax
restructuring charge related to an acquisition.
The provision for loan losses of $825 for the six months ended June 30, 1997
decreased $31 from the comparable period in 1996. The provision of $407 for the
quarter ended June 30, 1997 decreased $62 from the quarter ended June 30, 1996.
These decreases are a result of lower net loan losses and increased coverage of
loan losses as the provision for loan losses to actual losses increased from
178.71% at June 30, 1996 to 198.32% at June 30, 1997.
14
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CITIZENS BANCSHARES, INC.
-------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS (CONTINUED).
- -----------------------
(Dollars in thousands, except per share data)
RESULTS OF OPERATIONS - CONTINUED
Return on average shareholders' equity for the first six months of 1997 was
18.54%, as compared to 18.61% for the same period in 1996. Return on average
assets for the first six months of 1997 was 1.71%, as compared to 1.74% for the
same period in 1996.
NET INTEREST INCOME
Six months ended
------------------------------
JUNE 30, 1997 June 30, 1996
------------- -------------
Net interest income $21,156 $21,319
Taxable equivalent adjustment 433 424
------- -------
Net interest income taxable equivalent $21,589 $21,743
======= =======
Net interest margin 4.50% 5.02%
Taxable equivalent adjustment .09 .10
------- -------
Net interest margin taxable equivalent 4.59% 5.12%
======= =======
Net interest income of $21,156 for the six months ended June 30, 1997 decreased
$163 from the comparable period in 1996. Included in total interest income for
the six months ended June 30, 1996 was $650 nonrecurring income which was loan
discount recognized as loan income upon prepayment. This prepayment resulted in
an increase in the net interest margin, fully taxable equivalent for the six
months ended June 30, 1996 of approximately 10 basis points.
The net interest margin, fully taxable equivalent of 4.59% for the first half of
1997 decreased from 5.12% for the comparable period in 1996. The yield on
average earning assets was 8.50% for the first half of 1997 compared to 8.79%
for the comparable period in 1996. The cost of interest bearing liabilities was
4.56% for the first half of 1997 compared to 4.29% for the comparable period in
1996. Increases in interest rates paid on Federal Home Loan Bank advances and
securities sold under repurchase agreements have contributed to the increase in
the cost of interest bearing liabilities for the first half of 1997 compared to
the same period in 1996.
Average gross earning assets increased $29,793 during the second quarter of
1997, while the average rate earned on these assets decreased from 8.67% at
December 31, 1996 to 8.50% at June 30, 1997.
CHANGES IN FINANCIAL CONDITION
Total assets of $1,045,722 at June 30, 1997 increased $97,792 or 10.3% compared
to year-end 1996. Total deposits and repurchase agreements at June 30, 1997 of
$717,469 and $137,426 increased $7,877, and $49,487, respectively, from December
31, 1996. These lower cost sources of funds were used to purchase investment and
mortgage-backed securities available for sale. Net loans totaled $611,735 at
June 30, 1997, representing an increase of $27,838 or 4.8% since year-end 1996.
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CITIZENS BANCSHARES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -----------------------------------------------------------------------
OF OPERATIONS (CONTINUED).
- --------------------------
(Dollars in thousands, except per share data)
CHANGES IN FINANCIAL CONDITION - CONTINUED
During the quarter ended March 31, 1997, there were $25,000 in variable rate
mortgaged-backed securities purchased, with rates to change annually, initially
yielding 6.64%. There were $40,000 in fixed rate callable agencies purchased
with call dates from one to three years in the future, and final maturity dates
between five and eight years. Yields on these callable bonds ranged from 7.13%
to 7.47%. The variable rate securities were purchased with variable rate
borrowings. The callable bonds were purchased with like Federal Home Loan Bank
advances. Net interest rate spreads on the purchases approximated 110-113 basis
points.
During the quarter ended June 30, 1997, $15,900 in securities were purchased.
There were $5,300 in short term fixed rate treasuries, $5,000 fixed rate
callable agencies with call dates two years in the future and $4,000 fixed rate
corporate debt securities. The treasuries and callable agencies replaced like
maturities of similar investments.
During the six months ended June 30, 1997, Citizens implemented a Bank Owned
Life Insurance Program ("BOLI"). Single premium policies totaling $20,000 were
purchased on employees. The BOLI is included in line item accrued interest
receivable and other assets. This is the primary reason for the increase in the
balance sheet line since December 31, 1996. Citizens will realize accrued income
on its financial statement, in the line titled other income, based on the
interest crediting rates in the insurance policies.
NONPERFORMING ASSETS
Nonperforming loans as a percentage of total loans were .67% at June 30, 1997,
as compared to .31% at December 31, 1996. The allowance for loan losses as a
percentage of total loans at June 30, 1997 was 1.89% compared to 1.91% at
December 31, 1996. Nonperforming loans as a percentage of the allowance for loan
losses increased to 35.78% at June 30, 1997, from 16.14% at December 31, 1996.
Other real estate totaled $93 at June 30, 1997 and $214 at December 31, 1996.
Bancshares continues to analyze the adequacy of its allowance for loan losses as
a percentage of total loans on a quarterly basis. Annualized net charge-offs
constituted .14% of average loans for the six months ended June 30, 1997, as
compared to .20% for the year ended December 31, 1996.
LIQUIDITY
Bancshares' liquidity position remained strong during the second quarter of
1997. Core deposits, representing Bancshares' largest most stable and generally
least costly source of funds, totaled $661,372 and were 108.1% of total loans at
June 30, 1997. The core deposit levels at June 30, 1997 approximated the levels
at year-end 1996.
Cash and cash equivalents, interest-bearing time deposits and securities
available for sale are Bancshares' most liquid assets. At June 30, 1997, these
assets totaled $330,323, an increase of $62,217 or 23.2% from December 31, 1996.
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CITIZENS BANCSHARES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -----------------------------------------------------------------------
OF OPERATIONS (CONTINUED).
- --------------------------
(Dollars in thousands, except per share data)
LIQUIDITY - CONTINUED
Management believes that Bancshares' liquidity position is strong based on its
high level of cash, cash equivalents, core deposits, the stability of its other
funding sources and its capital base.
CAPITAL RESOURCES
Shareholders' equity totaled $94,743 at June 30, 1997, compared to $89,712 at
December 31, 1996. The ratio of shareholders' equity to assets was 9.06% at June
30, 1997 and 9.5% at December 31, 1996, respectively.
JUNE 30, 1997 December 31, 1996
------------- -----------------
AMOUNT PERCENT Amount Percent
------ ------- ------ -------
Tier 1 risk-based capital
Actual $ 93,594 15.26% $88,753 16.23%
Required 24,532 4.00 21,876 4.00
Total risk-based capital
Actual $101,307 16.52% $95,645 17.49%
Required 49,064 8.00 43,753 8.00
The following table summarizes Bancshares' consolidated leverage capital ratio
and required amounts at June 30, 1997 and December 31, 1996.
JUNE 30, 1997 December 31, 1996
------------- -----------------
Leverage Ratio AMOUNT PERCENT Amount Percent
- -------------- ------ ------- ------ -------
Actual $93,594 9.42% $88,753 9.91%
Minimum required 29,812 3.00 26,879 3.00
Maximum required 49,686 5.00 44,799 5.00
The unrealized gain on securities available for sale, net of tax effect, was
$509 at June 30, 1997, compared to an unrealized gain of $798 at December 31,
1996. The decrease of $289 was primarily attributable to the changing interest
rate environment.
GENERAL
Bancshares' common stock closed at an all-time high of $55 on June 30, 1997. The
share price has increased 65.41% since December 31, 1996. Management believes
that the value of the shares has increased due to the Corporation's continued
solid performance and investors' strong demand for the financial institution
sector. Part of this increase may also stem from the recent inclusion of the
Corporation's stock in the Russell 2000 and Russell 3000 indices, which are
indices of "small cap" stocks.
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CITIZENS BANCSHARES, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -----------------------------------------------------------------------
OF OPERATIONS (CONTINUED).
- --------------------------
(Dollars in thousands, except per share data)
GENERAL - CONTINUED
The Corporation recently received national recognition by placing second in U.S.
Banker magazine's 1997 ranking of the 200 mid-sized publicly traded bank holding
companies. The ranking was based on each bank's 1996 performance in five areas:
capitalization, asset quality, two measures of profitability and efficiency. We
are very proud of this accomplishment.
Progress continues toward the acquisition of the Belmont County branches of
Metropolitan Savings Bank of Ohio, an affiliate of F.N.B. Corporation,
Hermitage, Pennsylvania. The branch offices are located in Martins Ferry, St.
Clairsville and Barnsville. Citizens will acquire approximately $66 million in
deposits and $26 million in loans for a 9% premium on the deposits in connection
with this transaction. The value of the transaction is approximately $6 million.
In our first quarter 10-Q, we announced the Corporation's intentions to offer
trust and investment services, and the hiring of three individuals to manage
these activities. During the second quarter, Bancshares began to offer
comprehensive services, including personal trust, estate administration, IRA and
employee benefit accounts and investment services through our wholly-owned
subsidiary, First National Bank of Chester. The Trust Department personnel are
operating from the Citizens' office at 80 Boardman-Poland Road (Route 224) in
Boardman, Ohio. Trust and investment services will be marketed throughout the
Corporation's market area in the near future. Management projects that the
long-term prospects for the Trust Company will add fee income to Bancshares
while providing a valuable service. Bancshares' 1997 core earnings will be
reduced by approximately $.03 per common share due to the after tax impact of
planned Trust Company expenses.
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CITIZENS BANCSHARES, INC.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- ----------------------------
There is no pending litigation, other than routine litigation
incidental to the business of Bancshares and its affiliates, or of a
material nature involving or naming Bancshares or any of its affiliates
as a defendant. Further, there are no material legal proceedings in
which any director, executive officer, principal shareholder or
affiliate of Bancshares is a party or has a material interest which is
adverse to Bancshares or any of its affiliates. None of the routine
litigation in which Bancshares or any of its affiliates are involved is
expected to have a material adverse impact upon the financial position
or results of operations of Bancshares or any of its affiliates.
ITEM 2. CHANGES IN SECURITIES.
- --------------------------------
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ------------------------------------------
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
- ---------------------------
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -------------------------------------------
(a) The following Exhibits are included in this Form 10-Q or are
incorporated by reference as noted in the following index:
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CITIZENS BANCSHARES, INC.
PART II - OTHER INFORMATION - CONTINUED
EXHIBIT INDEX
EXHIBIT 3 Articles of Incorporation, By laws
(1) Registrant's Fourth Amended Articles of Incorporation,
(incorporated by reference in Exhibit 3 (1) to the Form 10-K
of Citizens Bancshares, Inc. for the quarter ended December
31, 1996).
(2) Registrant's Regulations, as amended (incorporated by
reference in Exhibit 3 (2) to the Form S-4 Registration
Statement No. 0-18209 of Citizens Bancshares, Inc.).
EXHIBIT 10 Material Contracts
(1) The Citizens Bancshares Inc. Profit-Sharing Plan and Trust
(formerly known as the CBC Salineville Profit Sharing Plan and
Trust) (incorporated by reference in Exhibit 10 (2) to the
Form S-4 Registration Statement No. 0-18209 of Citizens
Bancshares, Inc.).
(2) Citizens Bancshares, Inc. Employee Stock Ownership Plan
(incorporated by reference in Exhibit 10 (3) to the Form S-4
Registration Statement No. 0-18209 of Citizens Bancshares,
Inc.).
(3) Form of Indemnification Agreement between Citizens Bancshares,
Inc. and Individual Directors, Officers or Representatives
(incorporated by reference in Exhibit 10 (4) to the Form 10-K
of Citizens Bancshares, Inc. for the fiscal year ended
December 31, 1989).
(4) Employment Agreement by and among Citizens Bancshares, Inc.,
The Citizens Banking Company and Marty E. Adams (incorporated
by reference in Exhibit 10 (5) to the Form 10-K of Citizens
Bancshares, Inc. for the fiscal year ended December 31, 1992).
(5) Amendment to Executive Employment Agreement by and among
Citizens Bancshares, Inc., The Citizens Banking Company and
Marty E. Adams. (incorporated by reference in Exhibit 10 (8)
to the Form 10-K of Citizens Bancshares, Inc. for the fiscal
year ended December 31, 1993).
(6) Agreement by and among Citizens Bancshares, Inc., The Citizens
Banking Company and Frank J. Koch. (incorporated by reference
in Exhibit 10 (9) to the Form 10-K of Citizens Bancshares,
Inc. for the fiscal year ended December 31, 1993).
(7) Citizens Bancshares, Inc. Non-Statutory Stock Option and Stock
Appreciation Rights Plan.(incorporated by reference in Exhibit
10 (11) to the Form 10-Q of Citizens Bancshares, Inc. for the
quarter ended June 30, 1995).
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CITIZENS BANCSHARES, INC.
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PART II - OTHER INFORMATION
---------------------------
EXHIBIT INDEX (CONTINUED)
-------------------------
(8) The Employee Retirement Plan for Citizens Bancshares, Inc.
(incorporated by reference in Exhibit 10 (12) to the Form 10-Q
of Citizens Bancshares, Inc. for the quarter ended June 30,
1995).
(9) Affiliation Agreement by and among Citizens Bancshares, Inc.,
The Citizens Banking Company, Western Reserve Bank of Ohio
(incorporated by reference in Exhibit 2 (1) to the Form S-4
Registration Statement No.33-99036 of Citizens Bancshares,
Inc.).
(10) Agreement of Merger by and among Citizens Bancshares, Inc.,
The Citizens Banking Company and Western Reserve Bank of Ohio
(incorporated by reference in Exhibit 10 (12) to the Form 10-K
of Citizens Bancshares, Inc. for the fiscal year ended
December 31, 1995).
(11) Plan and Agreement of Merger by and among Citizens Bancshares,
Inc., The Citizens Banking Company and the Navarre Deposit
Bank Company (incorporated by reference in Exhibit 10 (13) to
the Form 10-Q of Citizens Bancshares, Inc. for the quarter
ended March 31, 1996).
(12) Purchase and Assumption agreement between The Metropolitan
Savings Bank of Ohio and The Citizens Banking Company
(incorporated by reference in Exhibit 10 (12) to the Form 10-Q
of Citizens Bancshares, Inc. for the quarter ended June 30,
1997).
EXHIBIT 11
Statement regarding Computation of Per Share Earnings
(included in Note 1 to the Consolidated Financial Statements).
EXHIBIT 27 Financial Data Schedule
REPORTS ON FORM 8-K
-------------------
None
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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.
Citizens Bancshares, Inc.
Date: July 22, 1997 Marty E. Adams
------------- --------------
Marty E. Adams
President & Chief Executive Officer
Vice Chairman
Date: July 22, 1997 William L. White III
------------- --------------------
William L. White III
Senior Vice President
Chief Financial Officer
22