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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
COMMISSION FILE NUMBER 0-23971
CITIZENS SOUTH BANKING CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 54-2069979
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
519 South New Hope Road, Gastonia, North Carolina 28054-4040
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(Address of principal executive offices)
Registrant's telephone number, including area code: (704) 868-5200
Indicate by check [X] whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check whether the Registrant is an accelerated filer.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
COMMON STOCK, $0.01 PAR VALUE
7,254,515 SHARES OUTSTANDING AS OF AUGUST 8, 2005.
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CITIZENS SOUTH BANKING CORPORATION
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................................ 1
Consolidated Statements of Financial Condition
June 30, 2005 and December 31, 2004.......................................... 1
Consolidated Statements of Operations
three months and six months ended June 30, 2005 and 2004..................... 2
Consolidated Statements of Comprehensive Income
six months ended June 30, 2005 and 2004...................................... 3
Consolidated Statements of Changes in Stockholders' Equity
six months ended June 30, 2005 and 2004...................................... 4
Consolidated Statements of Cash Flows
six months ended June 30, 2005 and 2004...................................... 5
Notes to Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 16
Item 4. Controls and Procedures...................................................... 16
PART II. OTHER INFORMATION..................................................................... 16
SIGNATURES..................................................................................... 19
Exhibit 31.1 Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002............................. 20
Exhibit 31.2 Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002............................. 21
Exhibit 32.1 Statement of Chief Executive Officer Furnished Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002............................. 22
Exhibit 32.2 Statement of Chief Financial Officer Furnished Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002............................. 23
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CITIZENS SOUTH BANKING CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
JUNE 30, DECEMBER 31,
2005 2004
------------ ------------
(unaudited)
ASSETS:
Cash and due from banks ................................................. $ 8,330 $ 5,800
Interest-earning bank balances .......................................... 16,788 5,790
------------ ------------
Cash and cash equivalents ............................................. 25,118 11,590
Investment securities available-for-sale, at fair value ................. 43,735 52,407
Mortgage-backed and related securities available-for-sale,
at fair value........................................................... 68,637 81,169
Loans receivable, net of unearned income ................................ 331,198 317,156
Allowance for loan losses ............................................... (3,271) (3,029)
------------ ------------
Loans, net ............................................................ 327,927 314,127
Real estate owned ....................................................... 332 806
Accrued interest receivable ............................................. 1,678 1,662
Premises and equipment, net ............................................. 16,927 17,363
Federal Home Loan Bank stock ............................................ 3,917 3,461
Cash value of bank-owned life insurance policies ........................ 13,182 12,885
Intangible assets ....................................................... 7,388 7,560
Other assets ............................................................ 6,053 5,931
------------ ------------
Total assets .......................................................... $ 514,894 $ 508,961
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Demand deposit accounts ................................................. $ 54,895 $ 52,684
Money market deposit accounts ........................................... 72,474 77,924
Savings accounts ........................................................ 26,382 29,174
Time deposits ........................................................... 218,634 214,962
------------ ------------
Total deposits ........................................................ 372,385 374,744
Borrowed money .......................................................... 65,616 55,772
Deferred compensation ................................................... 5,293 5,850
Other liabilities ....................................................... 723 201
------------ ------------
Total liabilities ..................................................... 444,017 436,567
Common stock, $0.01 par value, 20,000,000 shares authorized, 9,062,727
shares issued and outstanding at June 30, 2005 and December 31, 2004 ... 91 91
Additional paid-in-capital .............................................. 68,381 68,381
Unallocated common stock held by Employee Stock Ownership Plan .......... (1,704) (1,796)
Unearned compensation related to Recognition and Retention Plan ......... (1,559) (1,698)
Retained earnings, substantially restricted ............................. 30,592 29,765
Accumulated unrealized loss on securities available-for-sale, net of tax (587) (419)
Treasury stock of 1,798,212 shares at June 30, 2005, and 1,630,683 shares
at December 31, 2004, at cost .......................................... (24,337) (21,930)
------------ ------------
Total stockholders' equity ............................................ 70,877 72,394
------------ ------------
Total liabilities and stockholders' equity ............................ $ 514,894 $ 508,961
============ ============
See accompanying notes to consolidated financial statements.
1
CITIZENS SOUTH BANKING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
INTEREST INCOME:
Loans ...................................................... $ 4,960 $ 3,836 $ 9,592 $ 7,722
Investment securities ...................................... 373 472 770 957
Interest-bearing deposits .................................. 119 46 154 66
Mortgage-backed and related securities ..................... 676 641 1,413 1,419
------------- ------------- ------------- -------------
Total interest income ..................................... 6,128 4,995 11,929 10,164
INTEREST EXPENSE:
Deposits ................................................... 1,945 1,461 3,642 2,887
Borrowed funds ............................................. 518 450 993 895
------------- ------------- ------------- -------------
Total interest expense .................................... 2,463 1,911 4,635 3,782
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Net interest income ........................................ 3,665 3,084 7,294 6,382
Provision for loan losses .................................. 120 30 270 60
------------- ------------- ------------- -------------
Net interest income after provision for loan losses ....... 3,545 3,054 7,024 6,322
NONINTEREST INCOME:
Fee income on deposit accounts ............................. 611 553 1,155 1,183
Income on mortgage banking and other lending activities .... 127 185 240 279
Dividends on FHLB stock .................................... 42 22 78 46
Gain on sale of assets ..................................... 7 180 138 470
Fair value adjustment on deferred compensation assets ...... 78 (37) 31 35
Other noninterest income ................................... 261 262 533 498
------------- ------------- ------------- -------------
Total noninterest income .................................. 1,126 1,165 2,175 2,511
NONINTEREST EXPENSE:
Compensation and benefits .................................. 1,670 1,539 3,266 3,096
Vesting expense for Recognition and Retention Plan ......... 70 81 139 267
Fair value adjustment on deferred compensation
obligations ............................................... 78 (37) 31 35
Occupancy and equipment expense ............................ 496 400 981 782
Professional services ...................................... 160 125 311 236
Amortization of intangible assets .......................... 84 104 171 221
Loss on sale of assets ..................................... 11 0 75 0
Other noninterest expense .................................. 812 650 1,656 1,456
------------- ------------- ------------- -------------
Total noninterest expense ................................. 3,381 2,862 6,630 6,093
Income before income taxes ................................. 1,290 1,357 2,569 2,740
Provision for income taxes ................................. 389 409 766 831
------------- ------------- ------------- -------------
Net Income ................................................. $ 901 $ 948 $ 1,803 $ 1,909
============= ============= ============= =============
Basic earnings per share ................................... $ 0.13 $ 0.12 $ 0.26 $ 0.24
Diluted earnings per share ................................. $ 0.13 $ 0.12 $ 0.25 $ 0.24
Basic average common shares outstanding .................... 6,969,151 7,780,751 7,026,493 8,024,668
Diluted average common shares outstanding .................. 7,029,230 7,891,635 7,115,649 8,117,736
See accompanying notes to consolidated financial statements.
2
CITIZENS SOUTH BANKING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(dollars in thousands)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2005 2004
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Net income ......................................................... $ 1,803 $ 1,909
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during period ................ (144) (1,625)
Reclassification adjustment for gains included in net income .. (24) (290)
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Other comprehensive income ...................................... (168) (1,915)
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Comprehensive income ............................................... $ 1,635 $ (6)
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See accompanying notes to consolidated financial statements.
3
CITIZENS SOUTH BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(dollars in thousands)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2005 2004
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COMMON STOCK:
At beginning of period ............................................. $ 91 $ 91
Issuance of common stock ........................................... - -
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At end of period ................................................... 91 91
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ADDITIONAL PAID-IN-CAPITAL:
At beginning of period ............................................. 68,381 68,280
Allocation from shares purchased with loan from ESOP ............... - -
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At end of period ................................................... 68,381 68,280
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UNALLOCATED COMMON STOCK HELD BY ESOP:
At beginning of period ............................................. (1,796) (1,979)
Allocation from shares purchased with loan from ESOP ............... 92 92
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At end of period ................................................... (1,704) (1,887)
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UNEARNED COMPENSATION RELATED TO RECOGNITION AND RETENTION PLAN:
At beginning of period ............................................. (1,698) (1,979)
Vesting of shares for plan ......................................... 139 267
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At end of period ................................................... (1,559) (1,712)
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RETAINED EARNINGS, SUBSTANTIALLY RESTRICTED:
At beginning of period ............................................. 29,765 28,824
Net income ......................................................... 1,803 1,909
Cash dividends declared on common stock ............................ (978) (1,054)
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At end of period ................................................... 30,592 29,679
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ACCUMULATED UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, NET
OF TAX:
At beginning of period ............................................. (419) (40)
Other comprehensive results, net of tax ............................ (168) (1,915)
------------ ------------
At end of period ................................................... (587) (1,955)
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TREASURY STOCK:
At beginning of period ............................................. (21,930) (5,528)
Exercise of options ................................................ 95 -
Repurchase of common stock ......................................... (2,502) (15,241)
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At end of period ................................................... (24,337) (20,769)
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See accompanying notes to consolidated financial statements.
4
CITIZENS SOUTH BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 1,803 $ 1,909
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses .................................... 270 60
Depreciation ................................................. 596 446
Net gain on sale of investments, available for sale .......... (38) (454)
Net gain on sale of other assets ............................. (25) (16)
Deferred loan origination fees ............................... (265) (16)
Allocation of shares to the ESOP ............................. 92 92
Vesting of shares for the Recognition and Retention Plan ..... 139 267
(Increase) decrease in accrued interest receivable ........... (16) 386
Amortization of intangible assets ............................ 171 221
(Increase) decrease in other assets .......................... (300) 878
Decrease in other liabilities ................................ (415) (746)
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Net cash provided by operating activities .................. 2,012 3,027
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable ................................. (13,805) (2,362)
Proceeds from the sale of investment securities .................. 5,517 2,266
Proceeds from the sale of mortgage-backed securities ............. 2,493 6,432
Proceeds from the sale of other assets ........................... 519 25
Maturities and prepayments of investment securities .............. 4,550 12,184
Maturities and prepayments of mortgage-backed securities ......... 9,828 11,948
Purchases of investments ......................................... (1,422) (14,292)
Purchases of mortgage-backed securities .......................... - (4,000)
(Purchase) sale of FHLB stock .................................... (456) 365
Capital expenditures for premises and equipment .................. (190) (2,906)
------------ ------------
Net cash provided by investment activities ................. 7,034 9,660
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits .............................. (2,359) 28,255
Exercise of options .............................................. 95 -
Dividends paid to stockholders ................................... (978) (1,054)
Repurchase of common stock ....................................... (2,502) (15,241)
Net increase (decrease) in borrowed money ........................ 9,844 (7,244)
Increase in advances from borrowers for insurance and taxes ...... 382 513
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Net cash provided by financing activities .................. 4,482 5,229
Net decrease in cash and cash equivalents .......................... 13,528 17,916
Cash and cash equivalents at beginning of period ................... 11,590 8,214
------------ ------------
Cash and cash equivalents at end of period ......................... $ 25,118 $ 26,130
============ ============
See accompanying notes to consolidated financial statements.
5
CITIZENS SOUTH BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In management's opinion, the accompanying consolidated financial
statements, which are unaudited, reflect all adjustments, consisting solely of
normal recurring accruals, necessary for a fair presentation of the financial
information as of and for the three- and six-month periods ended June 30, 2005
and 2004, in conformity with accounting principles generally accepted in the
United States of America. Results for the three and six months ended June 30,
2005, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
The consolidated financial statements include the accounts of Citizens
South Banking Corporation (the "Company") and the Company's wholly owned
subsidiary, Citizens South Bank (the "Bank").
The organization and business of the Company, accounting policies followed,
and other related information are contained in the notes to the consolidated
financial statements of the Company as of December 31, 2004 and 2003, and for
the years ended December 31, 2004, 2003, and 2002, filed as part of the
Company's annual report on Form 10-K. These consolidated financial statements
should be read in conjunction with the annual consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The accounting and financial policies of the Company and its subsidiaries
are prepared in accordance with accounting principles generally accepted in the
United States of America and conform to general practices in the banking
industry. We consider accounting policies that require significant judgment and
assumptions by management that have, or could have, a material impact on the
carrying value of certain assets or on income to be critical accounting
policies. Changes in underlying factors, assumptions or estimates could have a
material impact on our future financial condition and results of operations.
Based on the size of the item or significance of the estimate, the allowance for
loan losses is considered critical to our financial results. The allowance for
loan losses is calculated with the objective of maintaining an allowance
sufficient to absorb estimated probable loan losses. Management's determination
of the adequacy of the allowance is based on quarterly evaluations of the loan
portfolio and other relevant factors. However, this evaluation is inherently
subjective, as it requires an estimate of the loss for each type of loan and for
each impaired loan, an estimate of the amounts and timing of expected future
cash flows, and an estimate of the value of the collateral.
Management has established a systematic method for periodically evaluating
the credit quality of the loan portfolio in order to establish an allowance for
loan losses. The methodology is set forth in a formal policy and includes a
review of all loans in the portfolio on which full collectibility may or may not
be reasonably assured. The loan review considers among other matters, the
estimated fair value of the collateral, economic conditions, historical loan
loss experience, our knowledge of inherent losses in the portfolio that are
probable and reasonably estimable and other factors that warrant recognition in
providing an appropriate loan loss allowance. Specific allowances are
established for certain individual loans that management considers impaired
under Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan." The remainder of the portfolio is
segmented into groups of loans with similar risk characteristics for evaluation
and analysis. In originating loans, we recognize that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower, the term of the loan, general
economic conditions, and in the case of a secured loan, the quality of the
collateral. We increase our allowance for loan losses by charging provisions for
loan losses against our current period income. Management's periodic evaluation
of the adequacy of the allowance is consistently applied and is based on our
past loan loss experience, particular risks inherent in the different kinds of
lending that we engage in, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, current
economic conditions, and other relevant internal and external factors that
affect loan collectibility. Management believes this is a critical accounting
policy because this evaluation involves a high degree of complexity and requires
us to make subjective judgments that often require assumptions or estimates
about various matters.
6
STOCK OPTION EXPENSE DISCLOSURE
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure - An Amendment of FASB Statement No. 123, the Company has adopted
the disclosure-only option and elected to apply the provisions of APB No. 25 for
financial statement purposes. As such, no stock-based employee compensation cost
is reflected in net income for the Company's stock option plans. Pro forma
information regarding net income and earnings per share has been determined as
if the Company had accounted for its employee stock options using the fair value
method, and is presented in the following table.
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income (in thousands):
As reported $ 901 $ 948 $ 1,803 $ 1,909
Deduct: Total stock-based employee
compensation cost determined under
the fair value method, net of tax 19 16 38 28
------------- ------------- ------------- -------------
Pro forma $ 882 $ 932 $ 1,765 $ 1,881
------------- ------------- ------------- -------------
Basic earnings per share:
As reported $ 0.13 $ 0.12 $ 0.26 $ 0.24
Pro forma $ 0.13 $ 0.12 $ 0.25 $ 0.23
Diluted earnings per share:
As reported $ 0.13 $ 0.12 $ 0.25 $ 0.24
Pro forma $ 0.13 $ 0.12 $ 0.25 $ 0.23
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for the six-month periods ended June 30, 2005 and 2004:
dividend yield of 2.0%, expected volatility of 30%, risk-free investment rate of
3.5%, and expected lives of seven years.
NOTE 2 - USE OF ESTIMATES
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
7
NOTE 3 - EARNINGS PER SHARE
Earnings per share has been determined under the provisions of SFAS No.
128, Earnings Per Share. The only potential stock of the Company, as defined in
SFAS No. 128, Earnings Per Share, is stock options granted to various directors
and officers of the Bank. The following is a summary of the diluted earnings per
share calculation for the six months ended June 30, 2005 and 2004 (dollars in
thousands, except per share data):
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income ................................................. $ 901 $ 948 $ 1,803 $ 1,909
Weighted average outstanding shares ........................ 6,969,151 7,780,751 7,026,493 8,024,668
Dilutive effect of stock options ........................... 60,079 110,884 89,156 93,068
------------- ------------- ------------- -------------
Weighted average diluted shares ............................ 7,029,230 7,891,635 7,115,649 8,117,736
Diluted earnings per share ................................. $ 0.13 $ 0.12 $ 0.25 $ 0.24
NOTE 4 - PROPOSED ACQUISITION OF TRINITY BANK
On May 25, 2005, the Company announced the signing of a definitive
agreement for the merger of Trinity Bank ("Trinity") into Citizens South Bank.
Trinity is headquartered in Monroe, North Carolina, and has three offices
located in Union County, North Carolina, which has the fastest population growth
of any county in North Carolina. As of June 30, 2005, Trinity had total assets
of approximately $163 million, total loans of $116 million, total deposits of
$129 million and total equity of $14 million. The combined bank will have 14
full-service locations and one loan production office, and will rank 8th in the
Charlotte Metropolitan Statistical Area in deposit market share.
Under the terms of the merger agreement, the Company will issue a
combination of common stock and cash for the outstanding common shares of
Trinity Bank. Trinity shareholders will be given the option of receiving 1.3931
shares of Citizens South common stock for each share of Trinity common stock,
$18.25 in cash for each share of Trinity common stock, or a mixture of stock and
cash for each Trinity share, such that 50% of the shares of Trinity common stock
will be exchanged for Citizens South common stock. Based on the merger
consideration of $18.25 per share, the total transaction value is approximately
$35.5 million. The transaction price represents 255% of Trinity's book value as
of March 31, 2005. This transaction, which is subject to regulatory approval and
Trinity shareholder approval, is expected to close in the fourth quarter 2005.
Additional information regarding this transaction may be obtained by reviewing
the Registration Statement that the Company filed with the Securities and
Exchange Commission on August 1, 2005.
NOTE 5 - DIVIDEND DECLARATION
On July 18, 2005, the Board of Directors of the Company approved and
declared a regular cash dividend of seven cents per share of common stock to
stockholders of record as of August 1, 2005, and payable on August 15, 2005.
NOTE 6 - STOCK REPURCHASE PROGRAMS
On February 28, 2005, the Board of Directors of the Company authorized the
repurchase of up to 370,000 shares, or approximately 5%, of the Company's
then-outstanding shares of common stock. These repurchases may be carried out
through open market purchases, block trades, and negotiated private
transactions. The stock may be repurchased on an ongoing basis and will be
subject to the availability of stock, general market conditions, the trading
price of the stock, alternative uses for capital, and the Company's financial
performance. As of June 30, 2005,
8
management had repurchased a total of 95,600 shares at an average price of
$13.43 per share and had 274,400 shares remaining to be repurchased under this
plan. Management will consider repurchasing additional shares of common stock of
the Company at prices management considers to be attractive and in the best
interests of both the Company and its stockholders. Any repurchased shares will
be held as treasury stock and will be available for general corporate purposes.
NOTE 7 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised), Share Based Payment which establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. The primary focus of this statement is on accounting
for transactions in which an entity obtains employee services in exchange for
share-based payment transactions. As a result of a recent SEC ruling, this
Statement is now effective for the beginning of the first annual reporting
period that begins after June 15, 2005. SFAS No. 123 (revised) will be adopted
by the Company beginning with the first quarter ending March 31, 2006. Based on
the unvested options outstanding at June 30, 2005, the Company anticipates that
the adoption of SFAS 123 (revised) will result in additional compensation
expense of approximately $140,000 during 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements provided that the Company notes that a variety of
factors could cause the Company's actual results to differ materially from the
anticipated results expressed in the Company's forward looking statements.
Factors that may cause actual results to differ materially from those projected
in the forward looking statements include, but are not limited to, general
economic conditions that are less favorable than expected, changes in market
interest rates that result in reduced interest margins, risks in the loan
portfolio, including prepayments, that are greater than expected, legislation or
regulatory changes that have a less than favorable impact on the business of the
Company are enacted, and competitive pressures increase significantly.
Statements included in this report should be read in conjunction with the
Company's Annual Report on Form 10-K, which is incorporated into this discussion
by this reference. Forward looking statements speak only as of the date they are
made and the Company does not undertake to update forward looking statements to
reflect circumstances or events that occur after the date of the forward looking
statements or to reflect the occurrence of unanticipated events. Accordingly,
past results and trends should not be used by investors to anticipate future
results or trends.
COMPARISON OF FINANCIAL CONDITION
Assets. Total assets of the Company increased by $5.9 million, or 1.2%,
from $509.0 million as of December 31, 2004, to $514.9 million as of June 30,
2005. Loans receivable increased by $14.0 million, or 4.4%, to $331.2 million at
June 30, 2005. This loan growth was primarily caused by a $12.7 million, or
8.6%, increase in the commercial real estate portfolio to $161.3 million.
Commercial business loans increased by $2.5 million, or 17.9%, during the period
to $16.5 million. A large portion of the growth in our commercial real estate
and commercial business loan portfolios was attributable to the opening of a new
loan production office in Cornelius, North Carolina, which was opened during the
fourth quarter of 2004, and the hiring of several experienced commercial bankers
over the past six months to assist the Company in meeting its loan growth
objectives. The Company's consumer and mortgage loan portfolios were relatively
flat during the period, with consumer loans totaling $61.9 million at June 30,
2005, and residential loans totaling $91.4 million on the same date. Prepayments
on residential loans have slowed down,
9
allowing new originations to offset prepayments and normal amortization of the
residential portfolio. Moderate growth in the residential portfolio is expected
due to the increased demand for adjustable-rate mortgage loans and an expanded
product offering for our residential portfolio. Consumer loan pricing has become
increasingly competitive. However, we have been able to maintain our existing
portfolio. Modest growth is expected in our consumer loan portfolio for the
remainder of the year due, in part, to the expected opening of our twelfth
full-service office in Belmont, North Carolina, in the fourth quarter of 2005.
Management will seek to continue to grow the loan portfolio in a safe and
sound manner with an emphasis on adjustable-rate loans and shorter-term fixed
rate loans. As of June 30, 2005, $186.9 million, or 57.2% of the Company's loan
portfolio, was scheduled to reprice in July 2005. This sensitivity to rising
interest rates has been a driving factor in the Company's margin expansion over
the past several quarters as the prime interest rate has steadily increased from
a low of 4.0% to 6.25% at June 30, 2005.
Cash and cash equivalents increased by $13.5 million, or 116.7%, from $11.6
million at December 31, 2004, to $25.1 million at June 30, 2005. This increase
was largely due to a $9.8 million increase in borrowed money. These funds will
primarily be used to fund loan growth and repurchase the common stock of the
Company. Also during the six-month period, mortgage-backed securities decreased
$12.5 million, or 15.4%, to $68.6 million and investment securities decreased by
$8.7 million, or 16.6%, to $43.7 million. These decreases were largely due to
the sale of $2.5 million in mortgage-backed securities, maturities and
prepayments of $9.8 million in mortgage-backed securities, sales of $5.5 million
of investment securities, and maturities of $4.6 million in investment
securities during the period. The cash flows generated from these
mortgage-backed and investment securities were primarily used to fund loan
growth and repurchase stock during the six-month period. Management expects the
investment and mortgage-backed securities portfolios to continue to decrease as
a percentage of total assets as the cash flows generated from these investments
are reinvested into the loan portfolio and used to repurchase stock.
Other real estate owned, which consists of three residential properties
acquired by the Bank through foreclosure, decreased by 58.8% from $806,000 at
December 31, 2004, to $332,000 at June 30, 2005. This decrease was due to the
sale of twelve residential properties during the first half of 2005 for
$464,000. Management will continue to aggressively market these properties for a
timely disposition. All foreclosed properties are located in the Company's
primary lending area.
Allowance for loan losses and nonperforming assets. The Company has
established a systematic methodology for determining the adequacy of the
allowance for loan losses. This methodology is set forth in a formal policy and
considers all loans in the portfolio. Specific allowances are established for
certain individual loans that management considers impaired. The remainder of
the portfolio is segmented into groups of loans with similar risk
characteristics for evaluation and analysis. Management's periodic evaluation of
the allowance is consistently applied and based on inherent losses in the
portfolio, past loan loss experience, risks inherent in the different types of
loans, the estimated value of any underlying collateral, current economic
conditions, the borrower's financial position, and other relevant internal and
external factors that may affect loan collectibility. The allowance for loan
losses is increased by charging provisions for loan losses against income. As of
June 30, 2005, the allowance for loan losses was $3.3 million. Management
believes that this amount meets the requirement for losses on loans that
management considers to be impaired, for known losses, and for incurred losses
inherent in the remaining loan portfolio. Although management believes that it
uses the best information available to make such determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the determinations. The
following table presents an analysis of changes in the allowance for loan losses
for the periods and information with respect to nonperforming assets at the
dates indicated.
10
AT AND FOR THE THREE AT AND FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
(dollars in thousands) (dollars in thousands)
ALLOWANCE FOR LOAN LOSSES:
Beginning of period ........................................ $ 3,184 $ 2,998 $ 3,029 $ 2,969
Add:
Provision for loan losses .............................. 120 30 270 60
Recoveries ............................................. 2 0 7 1
Less:
Charge-offs ............................................ 35 126 35 128
------------- ------------- ------------- -------------
End of period .............................................. $ 3,271 $ 2,902 $ 3,271 $ 2,902
Nonaccrual loans ........................................... $ 1,413 $ 928 $ 1,413 $ 928
Real estate owned .......................................... 332 79 332 79
------------- ------------- ------------- -------------
Nonperforming assets ....................................... $ 1,745 $ 1,007 $ 1,745 $ 1,007
Allowance for loan losses as a
percentage of total loans ............................. 0.99% 0.97% 0.99% 0.97%
Nonperforming loans to
total loans ........................................... 0.43% 0.31% 0.43% 0.31%
Nonperforming assets to
total assets ......................................... 0.34% 0.20% 0.34% 0.20%
Liabilities. Total liabilities increased by $7.4 million, or 1.7%, from
$436.6 million as of December 31, 2004, to $444.0 million as of June 30, 2005.
This increase was primarily due to a $9.8 million, or 17.7%, increase in
borrowed money, the effects of which were partly offset by a $2.3 million, or
0.6%, decrease in total deposits. Demand deposit accounts (checking accounts)
increased by $2.2 million, or 4.2%, during the six-month period to $54.9
million. This was primarily due to a continued emphasis on increasing the
Company's number of retail and business checking account customers. The decrease
in other deposits was largely due to the loss of price sensitive customers as a
result of aggressive pricing from competitors. Management has always focused on
increasing deposits by building customer relationships and typically avoids
growing deposits by offering the highest rates in the market. Also, during the
six-month period, the Company increased its outstanding borrowed funds by $9.8
million. This increase was primarily due to the addition of two $5.0 million
adjustable rate Federal Home Loan Bank advances. These funds were primarily used
to fund loan growth and to repurchase common stock during the period.
Stockholders' Equity. Total stockholders' equity decreased by $1.5 million,
or 2.1%, from $72.4 million as of December 31, 2004, to $70.9 million as of June
30, 2005. The decrease in stockholders' equity was primarily due to the
repurchase of 184,600 shares of common stock for $2.5 million, at an average
cost of $13.56 per share. In February 2005, the Board of Directors authorized
the repurchase of up to 370,000 shares, or approximately 5%, of the outstanding
shares of common stock. As of June 30, 2005, management had repurchased a total
of 95,600 shares under the current program at an average price of $13.43 per
share and had 274,400 shares remaining to be repurchased. Management will
consider repurchasing additional shares of common stock of the Company at prices
that management considers to be attractive and in the best interests of both the
Company and its stockholders. Any repurchased shares will be held as treasury
stock and will be available for general corporate purposes. In addition, the
Company paid cash dividends totaling $978,000 during the six-month period,
representing $0.14 per share. These decreases in equity were partially offset by
a $168,000 decrease in unrealized losses on available for sale securities and
$1.8 million in earnings during the six-month period.
11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005
AND 2004
General. Net income for the three months ended June 30, 2005, amounted to
$901,000, or $0.13 per diluted share, as compared to $948,000, or $0.12 per
diluted share, for the three months ended June 30, 2004. This represents an 8.3%
increase in diluted earnings per share.
Net interest income. Net interest income increased by $581,000, or 18.8%,
to $3.7 million for the three months ended June 30, 2005. Interest income
increased by $1.1 million, or 22.7%, primarily as a result of an $8.6 million,
or 1.9%, increase in the average outstanding balance of interest-earning assets
to $454.6 million for the three months ended June 30, 2005. The increase in
average interest-earning assets was primarily the result of a $31.0 million, or
10.5%, increase in average outstanding loans to $324.8 million, the effects of
which were partially offset by a $21.0 million, or 13.8%, decrease in
interest-earning bank balances, investment securities and mortgage-backed
securities. In addition, the Company's average yield on earning assets increased
by 88 basis points, or 19.3%, to 5.43% for the quarter ended June 30, 2005.
Interest expense increased by $552,000, or 28.9%, for the comparable quarters.
This increase in interest expense was due to a 46 basis point, or 23.8%,
increase in the average cost of funds to 2.39%. In addition, the Company
experienced a $17.1 million, or 4.3%, increase in the average balance of
interest-bearing liabilities to $412.6 million. Average interest-bearing
liabilities increased primarily as a result of a $14.9 million, or 12.3%,
increase in average core deposits (checking accounts, savings accounts and money
market accounts), coupled with an $8.9 million, or 17.2%, increase in average
borrowed money. The net interest margin improved 45 basis points, or 16.2%, to
3.23% for the quarter ended June 30, 2005, compared to 2.78% for the quarter
ended June 30, 2004. This increase in the net interest margin was primarily the
result of increased yields on prime-based consumer and commercial loans due to
nine 25 basis point increases in the prime-lending rate since June 30, 2004.
Approximately 57% of the Company's loans have interest rates that are tied to
short-term rate indices such as the prime-lending rate.
Provision for loan losses. The provision for loan losses amounted to
$120,000 for the three months ended June 30, 2005, compared to $30,000 for the
three months ended June 30, 2004. The increase in the provision for loan losses
was primarily attributable to the continuing growth in the commercial real
estate portfolio. The allowance for loan losses was $3.3 million, or 0.99% of
total loans, as of June 30, 2005, compared to $2.9 million, or 0.97% of total
loans, as of June 30, 2004. While the Company continues to emphasize commercial
loans and consumer loans that are generally secured by real estate, in addition
to residential mortgage loans, the Company's ratio of nonperforming loans to
total loans remains below our peer group average, at 0.43% of total loans on
June 30, 2005, compared to 0.31% of total loans on June 30, 2004. A substantial
portion of the Company's nonperforming loans at June 30, 2005, were secured by
real estate.
Noninterest income. Noninterest income decreased by $39,000, or 3.3%, to
$1.1 million for the three months ended June 30, 2005, as compared to $1.2
million for the three months ended June 30, 2004. This decrease was primarily
due to a $173,000, or 96.1%, decrease in gains on sale of assets and a $58,000,
or 31.4%, decrease in fees generated from mortgage banking and other lending
activities. Mortgage banking fees decreased due to a lower level of mortgage
loan originations resulting from higher interest rates. These decreases were
partially offset by a $58,000, or 10.5%, increase in fee income on deposit
accounts, a $115,000 increase in the fair value of deferred compensation assets,
and a $20,000, or 90.9%, increase in dividends on Federal Home Loan Bank
("FHLB") stock. Fee income on deposit accounts increased due to higher charges
generated by transaction accounts. Management expects that fee income from
overdrawn checking accounts will be flat or decline slightly throughout the
remainder of the year. However, the effects of this possible decrease should be
partially offset by a growth in service charges arising from an increasing
number of transaction accounts. Dividends on FHLB stock were higher due to an
increase in the number of shares owned coupled with an increase in the dividend
rate.
During the quarter ended June 30, 2005, the Company recognized a gain of
$7,000 on the sale of assets. These gains were generated from the sale of
$554,000 in mortgage-backed securities. During the quarter ended June 30, 2004,
the Company recognized a gain of $180,000 from the sale of $1.0 million in
investment securities and a parcel of real estate owned.
12
Noninterest expense. Noninterest expense increased by $519,000, or 18.1%,
to $3.4 million for the quarter ended June 30, 2005. The Company experienced
increases in compensation and benefits, office occupancy and equipment,
professional services, and other expenses. Compensation and benefits increased
by $131,000, or 8.5%, and occupancy and equipment expense increased by $96,000,
or 24.0%, due in part to the expenses associated with operating a new loan
production office and a new Hispanic banking operation. The Company plans to
open its twelfth full-service office in Belmont, North Carolina, in the fourth
quarter of 2005. The Company experienced a $35,000, or 28.0% increase, in
professional services, primarily as a result of obtaining outside professionals
to provide assistance in complying with a number of new regulations and laws.
Other expense increased $162,000, or 24.9%, due in part to the upgrading of the
Company's technological capabilities in the areas of online banking, cash
management, document imaging, and core processing. These improvements in the
Company's infrastructure should enable the Company to pursue additional growth
both internally through offering improved products and services and externally
through acquisitions in order to enhance the franchise value of the Company. The
Company also experienced a $115,000 increase in the fair value adjustment of
deferred compensation assets. This expense is offset by a corresponding increase
in noninterest income. These increases in noninterest expense were partially
offset by a $20,000, or 19.2%, decrease in the amortization of intangible assets
and an $11,000 decrease in vesting expense for the Recognition and Retention
Plan.
Losses on the sale of assets amounted to $11,000 for the quarter ended June
30, 2005. These losses were primarily attributable to the $5,000 loss on the
sale of $375,000 in investment securities and a loss of $6,000 from the sale of
one foreclosed residential property. For the quarter ended June 30, 2004, the
Company recognized no losses from the sale of assets.
Income taxes. Income taxes amounted to $389,000, or 30.2% of taxable
income, for the quarter ended June 30, 2005, as compared to $409,000, or 30.1%
of taxable income, for the quarter ended June 30, 2004. The decrease in income
tax expense during the first quarter of 2005 was primarily due to a $67,000
decrease in net income before taxes. The effective tax rate was fairly flat
between the two periods. The Company invests in tax-advantaged sources of income
to reduce its overall tax burden. These tax-advantaged sources include
investments such as municipal securities and bank-owned life insurance. As the
Company continues to increase the amount of income derived from interest income
on loans and fee income on deposits, the effective tax rate is expected to
increase.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005
AND 2004
General. Net income for the six months ended June 30, 2005, amounted to
$1.8 million, or $0.25 per diluted share, as compared to $1.9 million, or $0.24
per diluted share, for the six months ended June 30, 2004. This represents an
increase of 4.2% in diluted earnings per share.
Net interest income. Net interest income increased by $912,000, or 14.3%,
to $7.3 million for the six months ended June 30, 2005. Interest income
increased by $1.8 million, or 17.4%, primarily as a result of a 70 basis point,
or 15.1%, increase in the average yield on earning assets to 5.35%. The increase
in yield was primarily due to a series of nine 25 basis point increases in the
prime lending rate during the past twelve months. In addition, the average
outstanding balance of interest earning assets increased by $8.0 million, or
1.8%, to $450.8 million. The increase in average interest-earning assets was
primarily the result of a $26.4 million, or 8.9%, increase in average
outstanding loans to $321.3 million, the effects of which were partially offset
by a $17.1 million, or 11.5%, decrease in interest-earning bank balances,
investment securities, and mortgage-backed securities. During the comparable
periods, interest expense increased by $853,000, or 22.6%, to $4.6 million for
the six-month period ended June 30, 2005. This increase in interest expense was
due to a 33 basis point, or 16.9%, increase in the average cost of funds to
2.28%. In addition, the average balance of interest-bearing liabilities
increased by $20.8 million, or 5.3%, to $410.1 million. Average interest-bearing
liabilities increased primarily as a result of a $17.2 million, or 14.4%,
increase in average core deposits (checking accounts, savings accounts and money
market accounts) coupled with a $6.7 million, or 13.0%, increase in average
borrowed money. The net interest margin was 3.26% for the six months ended June
30, 2005, compared to 2.91% for the six months ended June 30, 2004. This 35
basis point improvement in the net interest margin was primarily due to the nine
25 basis point increases in the prime lending rate over the past twelve months.
As of June 30, 2005, approximately 57% of the Company's loans were tied to
short-term indices such as the prime-lending rate.
13
Provision for loan losses. The provision for loan losses amounted to
$270,000 for the six months ended June 30, 2005, compared to $60,000 for the six
months ended June 30, 2004. The allowance for loan losses was $3.3 million, or
0.99% of total loans, as of June 30, 2005, compared to $2.9 million, or 0.97% as
of June 30, 2004. The increase in the provision for loan losses was primarily
attributable to the increase in outstanding loans during the respective periods
($14.0 million increase in outstanding loans during the six-month period ended
June 30, 2005, compared to a $2.0 million increase during the six-month period
ended June 30, 2004). While the Company continues to emphasize commercial loans
and consumer loans that are generally secured by real estate, in addition to
residential mortgage loans, the Company's ratio of nonperforming loans to total
loans remains below our peer group average, at 0.43% of total loans on June 30,
2005, compared to 0.31% of total loans on June 30, 2004. A substantial portion
of the Company's nonperforming loans at June 30, 2005, were secured by real
estate.
Noninterest income. Noninterest income decreased by $336,000, or 13.4%, to
$2.2 million for the six months ended June 30, 2005. This decrease was primarily
due to a $332,000 decrease in gains on sale of assets. The Company also
experienced a $39,000, or 14.0%, decrease in fee income from mortgage brokerage
and other lending activities resulting from decreased levels of residential loan
originations. Management expects that the level of residential loan originations
in 2005 will continue to be less than the 2004 level. Also, during the period,
fee income on deposit accounts decreased by $28,000, or 2.4%, due to a reduced
level of fees collected on overdrawn accounts. Management expects that fee
income from overdrawn checking accounts will be flat or decline slightly
throughout the remainder of the year. However, the effects of this possible
decrease should be partially offset by a growth in service charges arising from
an increasing number of transaction accounts. These decreases were partially
offset by a $32,000, or 69.6%, increase dividends on FHLB stock and a $35,000,
or 7.0%, increase in other noninterest income. Dividends on FHLB stock were
higher due to an increase in the number of shares owned and an increase in the
dividend rate while other noninterest income increased primarily as a result of
increased commissions from the sale of financial products.
During the six months ended June 30, 2005, the Company recognized a gain of
$138,000 on the sale of $5.5 million in investment securities, $2.5 million in
mortgage-backed securities, several parcels of residential foreclosed
properties, and other miscellaneous fixed assets. During the six months ended
June 30, 2004, the Company recognized a gain of $470,000 resulting from the sale
of $2.3 million in investment securities and $6.4 million in mortgage-backed
securities.
Noninterest expense. Noninterest expense increased $537,000, or 8.8%, to
$6.6 million for the six months ended June 30, 2005. This increase was partly
due to a $170,000, or 5.5%, increase in compensation and benefits and a
$199,000, or 25.4%, increase in occupancy and equipment as a result of opening a
new loan production office and a Hispanic banking operation. The Company also
experienced a $75,000, or 31.8% increase, in professional services, primarily as
a result of obtaining outside professionals to provide assistance in complying
with a number of new regulations and laws. Other expense increased $200,000, or
13.7%, due in part to the upgrading of the Company's technological capabilities
in the areas of online banking, cash management, document imaging, and core
processing. These improvements in the Company's infrastructure should enable the
Company to pursue additional growth both internally through offering improved
products and services and externally through acquisitions in order to enhance
the franchise value of the Company. These increases were offset, in part, by a
$128,000, or 47.9%, decrease in vesting expense for the Recognition and
Retention Plan and a $50,000, or 22.6%, decrease in the amortization of
intangible assets.
Losses on the sale of assets amounted to $75,000 for the six months ended
June 30, 2005, resulting from the sale of several foreclosed properties. For the
six months ended June 30, 2004, the Company did not recognize any losses from
the sale of assets.
Income taxes. Income taxes amounted to $766,000, or 29.8% of taxable
income, for the six months ended June 30, 2005, as compared to $831,000, or
30.3% of taxable income, for the six months ended June 30, 2004. This decrease
in income taxes was primarily due to a $171,000 decrease in net income before
taxes. The effective tax rate was fairly flat between the two periods. The
Company invests in tax-advantaged sources of income to reduce its overall tax
burden. These tax-advantaged sources include investments such as municipal
securities and bank-owned life insurance. As the Company continues to increase
the amount of income derived from interest income on loans and fee income on
deposits, the effective tax rate is expected to increase.
14
LIQUIDITY, MARKET RISK, AND CAPITAL RESOURCES
The objectives of the Company's liquidity management policy include
providing adequate funds to meet the cash needs of both borrowers and
depositors, to provide for the on-going operations of the Company, and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise. The primary sources of internally generated
funds are principal and interest payments on loans receivable, increases in
local deposits, cash flows generated from operations, and cash flows generated
by investments. If the Company requires funds beyond its internal funding
capabilities, it may rely upon external sources of funds such as brokered
deposits and Federal Home Loan Bank of Atlanta ("FHLB") advances. The Company
has $15.5 million in additional advances available from its line of credit from
the FHLB. The FHLB functions as a central reserve bank providing credit for
member financial institutions. As a member of the FHLB, the Company is required
to own capital stock in the FHLB and it is authorized to apply for advances on
the security of such stock and certain of our mortgage loans and other assets
(principally securities that are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met. Advances
are made pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit. The Company may also solicit brokered deposits for providing funds for
asset growth; however, to date, the Company has not used such deposits to
supplement its liquidity position. The Company believes that it has sufficient
sources of liquidity to fund the cash needs of both borrowers and depositors, to
provide for the on-going operations of the Company, and to capitalize on
opportunities for expansion.
In the normal course of business, various commitments are outstanding that
are not reflected in the consolidated financial statements. Commitments to
extend credit and undisbursed advances on customer lines of credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. The funding of these commitments and
previously approved undisbursed lines of credit could effect the Company's
liquidity position. At June 30, 2005, the Company had loan commitments of $18.7
million, unused lines of credit of $65.0 million, and undisbursed construction
loan proceeds of $5.9 million. The Company believes that it has adequate
resources to fund loan commitments and lines of credit as they arise. The
Company does not have any special purpose entities or other similar forms of
off-balance sheet financing.
The Company's most significant form of market risk is interest rate risk,
as the Company's assets and liabilities are sensitive to changes in interest
rates. The Company's Asset / Liability Committee ("ALCO") is responsible for
monitoring its level of interest rate risk and ensuring compliance with
Board-adopted limits. There were no changes in the Company's asset or liability
composition that could result in a material change in the Company's analysis of
interest rate sensitivity as discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
The Bank is subject to various regulatory capital requirements administered
by the banking regulatory agencies. As of June 30, 2005, Citizens South Bank's
capital exceeded all applicable regulatory requirements. Citizens South Bank's
Tier I capital was $60.0 million, or 11.8% of adjusted total assets. The minimum
Tier I capital ratio is 4.00%. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly discretionary actions by the 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 classifications are subject to qualitative judgments
by the regulators about components, risk-weightings, and other factors.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included above in Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, under the caption "Liquidity, Market Risk, and Capital Resources."
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms and in
timely alerting them to material information relating to the Company (or its
consolidated subsidiaries) required to be filed in its periodic SEC filings.
There has been no change in the Company's internal control over financial
reporting identified in connection with the quarterly evaluation that occurred
during the Company's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Bank is periodically
involved incidental to the Company's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three-month period ended June 30, 2005, the Company did not
repurchase any common stock.
TOTAL
NUMBER OF AVERAGE TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF SHARES
SHARES PRICE PAID PURCHASED AS PART OF THE THAT MAY BE PURCHASED UNDER
2005 PURCHASED PER SHARE CURRENT REPURCHASE PLAN CURRENT REPURCHASE PLAN
- ------ ----------- ---------- -------------------------- ----------------------------
April 0 $ 0.00 0 274,400
May 0 $ 0.00 0 274,400
June 0 $ 0.00 0 274,400
Total 0 $ 0.00 95,600 274,400
On February 28, 2005, the Board of Directors of the Company authorized the
repurchase of up to 370,000 shares, or approximately 5%, of the Company's
outstanding shares of common stock. These repurchases may be carried out through
open market purchases, block trades, and negotiated private transactions. The
stock may be repurchased on an ongoing basis and will be subject to the
availability of stock, general market conditions, the trading price of the
stock, alternative uses for capital, and the Company's financial performance. As
of June 30, 2005, management had repurchased a total of 95,600 shares at an
average price of $13.43 per share and had 274,400 shares remaining to be
repurchased under this plan. Management will consider repurchasing additional
shares of common stock of the Company at prices management considers to be
attractive and in the best interests of both the Company and its stockholders.
Any repurchased shares will be held as treasury stock and will be available for
general corporate purposes.
16
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposals were considered and acted upon at the Annual
Meeting of Stockholders of the Company held on May 9, 2005:
Proposal 1: To consider the election of two Directors to the Board of Directors.
James J. Fuller For 6,019,190 Withheld 62,485
Charles D. Massey For 6,019,404 Withheld 62,271
Proposal 2: To consider the ratification of the appointment of Cherry, Bekaert,
& Holland, L.L.P. as independent registered public accountants for the Company
for the fiscal year ending December 31, 2005.
For 6,002,591 Against 72,617 Abstain 6,467
17
EXHIBITS.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Written statement of Chief Executive Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Written statement of Chief Financial Officer furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
CITIZENS SOUTH BANKING CORPORATION
Date: August 9, 2005 By: /s/ Kim S. Price
----------------------------------------
Kim S. Price
President and Chief Executive Officer
Date: August 9, 2005 By: /s/ Gary F. Hoskins
-----------------------------------------
Gary F. Hoskins
Executive Vice President, Chief Financial
Officer and Treasurer
19