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CZBS > SEC Filings for CZBS > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for CITIZENS BANCSHARES CORP /GA/

Form 10-K for CITIZENS BANCSHARES CORP /GA/


31-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company

Citizens Bancshares Corporation (collectively with its subsidiary, the "Company") is a holding company that provides a full range of commercial banking services to individual and corporate customers through its wholly owned subsidiary, Citizens Trust Bank (the "Bank"). The Bank operates under a state charter and serves its customers through its home office and six full-service branches in metropolitan Atlanta, one full-service branch in Columbus, Georgia, one full-service branch in Birmingham, Alabama, and one full-service branch in Eutaw, Alabama. All significant intercompany accounts and transactions have been eliminated in consolidation.

The following discussions of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and related notes, appearing in other sections of this Annual Report.

Forward Looking Statements

In addition to historical information, this Annual Report on Form 10-K may contain forward-looking statements. For this purpose, any statements contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Also, statements that do not describe historical or current facts, including statements about future levels of revenues, net interest margin, FDIC and other regulatory expense, and credit quality are forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties. Without limiting the foregoing, these statements often include the words "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "initiatives," "potentially," "probably," "projects," "outlook" or similar expressions or future conditional verbs such as "may," "will," "should," "would," and "could" and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Forward-looking statements are based on current management expectations and, by their nature, are subject to risk and uncertainties because of the possibility of changes in underlying factors and assumptions.

Factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in Item 1A of Part I of this report and include risks discussed in this section of the Annual Report and in other periodic reports that we file with the SEC. Those factors include:
difficult market conditions have adversely affected our industry; current levels of market volatility are unprecedented; the soundness of other financial institutions could adversely affect us; there can be no assurance that recently enacted legislation ,or any proposed federal programs, will stabilize the U.S. financial system, and such legislation and programs may adversely affect us; the impact on us of recently enacted legislation, in particular the EESA and its implementing regulations, and actions by the FDIC, cannot be predicted at this time; credit risk; weakness in the economy and in the real estate market, including specific weakness within our geographic footprint, has adversely affected us and may continue to adversely affect us; weakness in the real estate market, including the secondary residential mortgage loan markets, has adversely affected us and may continue to adversely affect us; as a financial services company, adverse changes in general business or economic conditions could have a material adverse effect on our financial condition and results of operations; changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital or liquidity; the fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings; clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding; consumers may decide not to use banks to complete their financial transactions, which could affect net income; negative public opinion could damage our reputation and adversely impact our business and revenues; we rely on other companies to provide key components of our business infrastructure; we rely on our systems, employees, and certain counterparties, and certain failures could materially adversely affect our operations; we depend on the accuracy and completeness of information about clients and counterparties; regulation by federal and state agencies could adversely affect our business, revenue, and profit margins; competition in the financial services industry is intense and could result in losing business or reducing margins; future legislation could harm our competitive position; maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services.

These factors should be considered in evaluating the "forward-looking statements" and undue reliance should not be placed on such statements. The Company undertakes no obligation to, nor does it intend to, update forward-looking statements to reflect circumstances or events that occur after the date hereof or to reflect the occurrence of unanticipated events. All written or oral forward-looking statements attributable to the Company are expressly qualified in the entirety by these cautionary statements.

Critical Accounting Policies

Our significant accounting policies are described in detail in Note 1, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements and are integral to understanding the Management's Discussion and Analysis of Financial Condition and Results of Operations. We have identified certain accounting policies as being critical because (1) they require our judgment about matters that are highly uncertain and (2) different estimates that could be reasonably applied would result in materially different assessments with respect to ascertaining the valuation of assets, liabilities, commitments, and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability, or reducing a liability. Our accounting and reporting policies are in accordance with U.S. GAAP, and they conform to general practices within the financial services industry. We have established detailed policies and control procedures that are intended to ensure these critical accounting estimates are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.

In response to the Securities and Exchange Commission's ("SEC") Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has identified the following as the most critical accounting policies upon which its financial status depends. The critical policies were determined by considering accounting policies that involve the most complex or subjective decisions or assessments by the Company's management. The Company's most critical accounting policies are:

Investment Securities-The Company classifies investments in one of three categories based on management's intent upon purchase: held to maturity securities which are reported at amortized cost, trading securities which are reported at fair value with unrealized holding gains and losses included in earnings, and available for sale securities which are recorded at fair value with unrealized holding gains and losses included as a component of accumulated other comprehensive income. The Company had no investment securities classified as trading securities during 2013, 2012, or 2011.

Premiums and discounts on available for sale and held to maturity securities are amortized or accreted using a method which approximates a level yield. Amortization and accretion of premiums and discounts is presented within investment securities interest income on the Consolidated Statements of Income.

Gains and losses on sales of investment securities are recognized upon disposition, based on the adjusted cost of the specific security. A decline in market value of any security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. The determination of whether an other-than-temporary impairment has occurred involves significant assumptions, estimates, changes in economic conditions and judgment by management. There was no other-than-temporary impairment for securities recorded during 2013, 2012 or 2011.

Loans Receivable and Allowance for Loan Losses-Loans are reported at principal amounts outstanding less unearned income and the allowance for loan losses. Interest income on loans is recognized on a level yield basis. Loan fees and certain direct origination costs are deferred and amortized over the estimated terms of the loans using the level yield method. Premiums and discounts on loans purchased are amortized and accreted using the level yield method over the estimated remaining life of the loan purchased. The accretion and amortization of loan fees, origination costs, and premiums and discounts are presented as a component of loan interest income on the Consolidated Statements of Income.

Management considers a loan to be impaired when, based on current information and events, there is a potential that all amounts due according to the contractual terms of the loan may not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.

Loans are generally placed on nonaccrual status when the full and timely collection of principal or interest becomes uncertain or the loan becomes contractually in default for 90 days or more as to either principal or interest, unless the loan is well collateralized and in the process of collection. When a loan is placed on nonaccrual status, current period accrued and uncollected interest is charged-off against interest income on loans unless management believes the accrued interest is recoverable through the liquidation of collateral. Interest income, if any, on impaired loans is recognized on the cash basis.

The Company considers its accounting policies related to the allowance for loan losses to be critical, as these policies involve considerable subjective judgment and estimation by management. The Company provides for estimated losses on loans receivable when any significant and permanent decline in value occurs. The level of the allowance for loan losses reflects the Company's continuing evaluation of specific lending risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. Additionally, these estimates for loan losses are based on individual assets and their related cash flow forecasts, sales values, independent appraisals, the volatility of certain real estate markets, and concern for disposing of real estate in distressed markets. For loans that are pooled for purposes of determining necessary provisions, estimates are based on loan types, history of charge-offs, and other delinquency analyses. Therefore, the value used to determine the provision for losses is subject to the reasonableness of these estimates. The adequacy of the allowance for loan losses is reviewed on a monthly basis by management and the Board of Directors. This assessment is made in the context of historical losses as well as existing economic conditions, performance trends within specific portfolio segments, and individual concentrations of credit.

Loans are charged-off against the allowance when, in the opinion of management, such loans are deemed to be uncollectible and subsequent recoveries are added to the allowance.

We believe that the allowance for loan losses at December 31, 2013 is adequate to cover probable inherent losses in the loan portfolio. However, underlying assumptions may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which was not known to management at the time of the issuance of the Company's Consolidated Financial Statements. Therefore, our assumptions mayor may not prove valid. Thus, there can be no assurance that loan losses in future periods, including potential incremental losses resulting from the sale of the commercial loans held for sale, will not exceed the current allowance for loan losses amount or that future increases in the allowance for loan losses will not be required. Additionally, no assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant factors, will not require significant future additions to the allowance for loan losses, thus adversely impacting the Company's business, financial condition, results of operations, and cash flows.

See Item 1A. Risk Factors contained herein for discussion regarding the material risks and uncertainties that we believe impact our allowance for loan losses.

Other Real Estate Owned-The value of other real estate owned represents another accounting estimate that depends heavily on current economic conditions. Other real estate owned is carried at fair value less estimated selling costs, establishing a new cost basis. Fair value of such real estate is reviewed regularly and write-downs are recorded when it is determined that the carrying value of the real estate exceeds the fair value less estimated costs to sell. Write-downs resulting from the periodic reevaluation of such properties, costs related to holding such properties, and gains and losses on the sale of other real estate owned are charged against income. Costs relating to the development and improvement of such properties are capitalized.

The fair value of properties in the other real estate owned portfolio is generally determined from appraisals obtained from independent appraisers. We review the appraisal assumptions for reasonableness and may make adjustments when necessary to reflect current market conditions. Such assumptions may not prove to be valid. Moreover, no assurance can be given that changing economic conditions and other relevant factors impacting our foreclosed real estate portfolio will not cause actual occurrences to differ from underlying assumptions thus adversely impacting our business, financial condition, results of operations, and cash flows.

Income Taxes-Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for the portion of a deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

A description of the Company's other accounting policies are summarized in Note 1, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

Selected Financial Data



The following selected financial data for Citizens Bancshares Corporation and
subsidiary should be read in conjunction with the Consolidated Financial
Statements and related Notes appearing in another section of this Annual Report.



                                                           Years ended December 31,
                                                2013                  2012                 2011
                                               (amounts in thousands, except per share data and
                                                              financial ratios)
Statement of income data:
  Net interest income                     $     12,863          $     14,478          $     14,566
  Provision for loan losses               $        425          $      2,400          $      3,882
  Net income                              $      1,349          $        769          $        269
  Net income available to common
shareholders                              $      1,112          $        532          $         32
Per share data:
  Net income per common share -
basic                                     $       0.52          $       0.25          $       0.02
  Book value per common share             $      16.06          $      17.60          $      17.40
  Cash dividends paid per common
share                                     $       0.08          $       0.08          $       0.08
Balance sheet data:
  Loans, net of unearned income           $    185,276          $    190,998          $    199,387
  Deposits                                $    336,962          $    340,593          $    343,031
  Advances from Federal Home Loan
Bank                                      $        273          $        292          $        310
  Total assets                            $    387,733          $    395,605          $    397,160
  Average stockholders' equity            $     47,773          $     48,605          $     47,102
  Average assets                          $    398,063          $    396,231          $    390,289
Ratios:
  Net income available to common
shareholders to average assets                    0.28 %                0.13 %                0.01 %
  Net income available to common
shareholders to average
stockholders' equity                              2.33 %                1.09 %                0.07 %
  Dividend payout ratio per common
share                                            15.45 %               31.81 %              530.29 %
  Average stockholders' equity to
average assets                                   12.00 %               12.27 %               12.07 %

In 2013, the Company reported net income available to common shareholders of $1,112,000, a 109 percent increase over net income available to common shareholders of $532,000 reported in 2012, which represented a 1,563 percent increase over 2011 net income available to common shareholders. The year over year increase in 2013 net income available to common shareholders is attributed primarily to the successful implementation of the Company's asset disposition plan started in 2012 which reduced the amount of nonperforming assets on the Company's books and its negative impact on earnings. The provision for loan losses declined by 82 percent or $1,975,000 in 2013 due to continued improvement in credit quality. Also, other real estate owned related expenses decreased 67 percent or $2,289,000.

The Company is a participant in the U.S. Department of the Treasury TARP CPP program and paid preferred dividends of $237,000 in 2013, 2012, and 2011. Basic and diluted earnings per common share were $0.52 and $0.51 for the year ended December 31, 2013, respectively. Basic and diluted earnings per common share were $0.25 and $0.02 for 2012 and 2011, respectively.

The Company has maintained its strong capital position during the financial crisis that has affected the banking system and financial markets. The ratio of average stockholders' equity to average assets is one measure used to determine capital strength. The Company's average stockholders' equity to average assets ratio for 2013, 2012, and 2011 was 12.00%, 12.27% and 12.07%, respectively. The Company's net income available to common shareholders to average stockholders' equity (return on equity), was 2.33%,1.09% and 0.07% in 2013, 2012 and 2011, respectively.

The following statistical information is provided for the Company for the years ended December 31, 2013, 2012 and 2011. The data is presented using daily average balances. The data should be read in conjunction with the financial statements appearing elsewhere in this Annual Report on Form 10-K. Some of the financial information provided has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Financial Statements, the Notes thereto and the other financial data included elsewhere in this Annual Report (amounts in thousands).

                                              2013                                  2012                                  2011
                                            Interest                              Interest                              Interest
                               Average      Income/      Yield/      Average      Income/      Yield/      Average      Income/      Yield/
                              Balances      Expense       Rate      Balances      Expense       Rate      Balances      Expense       Rate
Assets:

Interest-earning assets:
Loans, net  (a)              $ 178,652     $ 10,487       5.87 %     191,862     $ 12,082       6.30 %     192,080     $ 11,971       6.23 %

Investment securities:
Taxable                        104,531        1,912       1.83 %      92,291        1,875       2.03 %      81,531        2,295       2.81 %
Tax-exempt (b)                  35,314        1,924       5.45 %      42,648        2,285       5.36 %      46,757        2,674       5.72 %
Interest bearing deposits       38,348           97       0.25 %      28,536           65       0.23 %      24,232           62       0.26 %
Total interest-earning
assets                         356,845     $ 14,420       4.04 %     355,337     $ 16,307       4.59 %     344,600     $ 17,002       4.93 %

Other non-interest earning
assets                          41,218                                40,894                                45,689

Total Assets                 $ 398,063                               396,231                               390,289

Liabilities and
stockholders' equity:

Interest bearing
liabilities:

Deposits:
Interest bearing demand
and savings                  $ 124,003     $    271       0.22 %     125,372     $    246       0.20 %     124,654     $    359       0.29 %
Time                           146,831          632       0.43 %     153,326          805       0.53 %     152,419        1,168       0.77 %
Other borrowings                   419            1       0.24 %         549            1       0.18 %         324           -        0.00 %
Total interest bearing
liabilities                  $ 271,253     $    904       0.33 %     279,247     $  1,052       0.38 %     277,397     $  1,527       0.55 %

Other non-interest bearing
liabilities                     79,037                                68,379                                65,790
Stockholders' equity  (c)       47,773                                48,605                                47,102

Total liabilities and
stockholders' equity         $ 398,063                               396,231                               390,289

Excess of interest-earning
assets over
Interest-bearing
liabilities                  $  85,592                                76,090                                67,203

Ratio of interest-earning
assets to
Interest-bearing
liabilities                     131.55 %                              127.25 %                              124.23 %

Net interest income                        $ 13,516                              $ 15,255                              $ 15,475

Net interest spread                                       3.71 %                                4.21 %                                4.38 %

Net interest yield on
interest earning assets                                   3.79 %                                4.29 %                                4.49 %

(a) Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are also included.

(b) Reflects taxable equivalent adjustments using a tax rate of 34% to adjust interest on tax-exempt investment securities to a fully taxable basis, including the impact of the disallowed interest expense related to carrying such tax-exempt securities.

(c) Includes voting and non-voting common stock and preferred stock

Average Balance Sheets, Interest Rate, and Interest Differential (Continued)



The following table sets forth, for the year ended December 31, 2013, a summary
of the changes in interest earned and interest paid resulting from changes in
volume and changes in rates (amounts in thousands):



                                     December 31,            Increase          Due to Change in (a)
                                  2013          2012        (decrease)        Volume            Rate
Interest earned on:

Loans, net                     $  10,487     $  12,082     $    (1,595 )   $     (804 )     $     (791 )
Taxable investment
securities                         1,912         1,875              37            261             (224 )
Tax-exempt investment
securities (b)                     1,924         2,285            (361 )         (396 )             35
Interest bearing deposits             97            65              32             24                8
   Total interest income          14,420        16,307          (1,887 )         (915 )           (972 )

Interest paid on:

Savings & interest-bearing
demand deposits                      271           246              25             (3 )             28
Time deposits                        632           805            (173 )          (31 )           (142 )
Other borrowed funds                   1             1              -              -                -
   Total interest expense            904         1,052            (148 )          (34 )           (114 )

Net interest income            $  13,516     $  15,255     $    (1,739 )   $     (881 )     $     (858 )

(a) The change in interest due to both rate and volume has been allocated proportionately to the volume and rate components.

(b) Reflects taxable equivalent adjustments using a tax rate of 34% to adjust interest on tax-exempt investment securities to a fully taxable basis, including the impact of the disallowed interest expense related to carrying such tax-exempt securities.

Average Balance Sheets, Interest Rate, and Interest Differential (Continued)



The following table sets forth, for the year ended December 31, 2012, a summary
of the changes in interest earned and interest paid resulting from changes in
volume and changes in rates (amounts in thousands):



                                     December 31,            Increase          Due to Change in (a)
                                  2012          2011        (decrease)        Volume            Rate
Interest earned on:

Loans, net                     $  12,082     $  11,971     $       111     $      (14 )     $      125
Taxable investment
securities                         1,875         2,295            (420 )          233             (653 )
Tax-exempt investment
securities (b)                     2,285         2,674            (389 )         (228 )           (161 )
. . .
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