11-K 1 form11k_june2006.txt FORM 11-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]. For the fiscal year ended December 31, 2005 ------------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]. For the transition period from _______________ to ______________________ Commission File Number 000-23971 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: Citizens South Bank Employees' Savings & Profit Sharing Plan and Trust B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: Citizens South Banking Corporation 519 South New Hope Road Gastonia, North Carolina 28054-4040 CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Financial Statements As of December 31, 2005 CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Table of Contents Page Report of Independent Registered Public Accounting Firm.................... 2 Statements of Net Assets Available for Benefits............................ 3 Statements of Changes in Net Assets Available for Benefits................. 4 Notes to Financial Statements.............................................. 5 Supplemental Schedules: Form 5500 Schedule H, Line 4i - Schedule of Assets Held at End of Year December 31, 2005.............................................. 10 NOTE: All other schedules required by Section 2520.103-10 of the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 have been omitted because they are not applicable. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Participants and Administrator of the Citizens South Bank Employees' Savings & Profit Sharing Plan Gastonia, North Carolina We have audited the accompanying statement of Net Assets Available for Benefits of the Citizens South Bank Employees' Savings & Profit Sharing Plan (the Plan) as of December 31, 2005 and 2004 and the related Statement of Changes in Net Assets Available for Benefits for the year ended December 31, 2005. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on the financial statements of the Plan based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements of the Plan, referred to above, as of December 31, 2005 and 2004 present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2005 and 2004, and changes in net assets available for benefits for the year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of Assets (Held at End of Year) are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Cherry, Bekaert & Holland, L.L.P. Gastonia, North Carolina June 26, 2006 2 Citizens South Bank Employees' Savings and Profit Sharing Plan and Trust Statements of Net Assets Available for Benefits December 31, 2005 and 2004
2005 2004 ------------ ------------- Assets Cash & investments: Cash $ - $ 672 Investments, at fair value 5,512,456 5,881,334 Participant loans 73,606 98,421 ------------ ------------- Total investments 5,586,062 5,980,427 ------------ ------------- Receivables: Participants' contributions 12,138 9,255 Employer contributions 4,428 6,508 Securities sold 22,421 7,367 Accrued income 718 247 ------------ ------------- Total receivables 39,705 23,377 ------------ ------------- Total Assets 5,625,767 6,003,804 ------------ ------------- Liabilities Securities purchased and adminstrative expenses 31,052 17,330 Refund of excess contributions 4,161 2,507 ------------ ------------- Total Liabilities 35,213 19,837 ------------ ------------- Net assets available for benefits $ 5,590,554 $ 5,983,967 ============ =============
See notes to financial statements 3 Citizens South Bank Employees' Savings and Profit Sharing Plan and Trust Statement of Changes in Net Assets Available for Benefits Year ended December 31, 2005
2005 ------------ Additions: Investment activity: Net depreciation in fair value of investments $ (485,184) Interest and dividends 85,583 ------------ Total investment loss (399,601) ------------ Contributions: Employer contributions 339,279 Participant contributions 113,737 ------------ Total contributions 453,016 ------------ Deductions: Benefits paid directly to participants 417,182 Administrative expenses 29,646 ------------ Total deductions 446,828 ------------ Net decrease (393,413) Net assets available for benefits Beginning of year 5,983,967 ------------ End of year $ 5,590,554 ============
See notes to financial statements 4 CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Notes to Financial Statements Years ended December 31, 2005 and 2004 Note 1 - Description of Plan The following description of the Citizens South Bank Employees' Savings & Profit Sharing Plan and Trust (the "Plan") provides only general information. Participants should refer to the Plan Agreement for a more complete description of the Plan's provisions. General - The Plan is a defined contribution plan that covers all full-time employees of Citizens South Bank (the "Company") who have completed three months of service and have attained the age of 18 years. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Contributions - Each year participants may contribute any percentage of pretax annual compensation to the Plan, not to exceed the lesser of 75% of Plan Salary (defined as the employee's basic salary rate, plus overtime, bonus, and commissions) or the annual maximum contribution as defined by United States Treasury Regulations. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions in accordance with, and subject to the limitations of, Section 414(v) of the Internal Revenue Code. Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans. Participants direct the investment of their contributions into various investment options offered by the Plan. The Company may make matching contributions equal to a discretionary percentage determined by the Company. For the year ended December 31, 2005, the Company contributed 50% of the first 6% of Plan Salary that a participant contributed to the Plan. The Company may also make profit-sharing contributions to the Plan at the discretion of the Company's Board of Directors. Profit-sharing contributions are allocated to participants in the same ratio as a participant's compensation, as defined, bears to the total compensation of all participants. Profit sharing contributions were not made for 2004 or 2005. All contributions are subject to certain limitations. Participant accounts - Individual accounts are maintained for each Plan participant. Each participant's account is credited with the participant's contributions, and allocations of (a) the Company's contributions and (b) plan earnings, and charged with an allocation of administrative expenses. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. Investments - Participants direct the investment of their contributions into up to 15 various investment options offered by the Plan. Company contributions are automatically invested in the same investment options directed for the investment of the employee contributions. If no investment direction is given, all contributions from participants and the Company are invested in the Short Term Investment Fund (Money Market Fund), which is one of the Plan's bond/fixed income funds. The Plan currently offers eight stock funds, three bond/fixed income funds, three asset allocation funds, and the Citizens South Banking Corporation (CSBC) Employer Stock Fund as investment options for participants. Except for the CSBC Employer Stock Fund, which is managed by The Bank of New York as Trustee, State Street Global Advisors assumed investment manager responsibilities for all funds from Barclays Global Investors and became 5 CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Notes to Financial Statements Years ended December 31, 2005 and 2004 the provider of benchmark index returns effective November 4, 2005. Participants may change or transfer their investment options at any time via telephone or the internet or by written request via fax or mail. Vesting - Participants are immediately vested in their voluntary contributions to the Plan, plus investment earnings thereon. Vesting in the Company matching and discretionary profit sharing contributions of their accounts is based on years of continuous service. A participant is fully vested after five years of service (cliff vesting) or upon death, approved disability, or attainment of age 65 while employed with the Company. Any years of employment prior to attaining the age of 18 is excluded for vesting purposes. Employment with Citizens Bank, Salisbury, North Carolina, or with Trinity Bank, Monroe, North Carolina, is included for the purpose of vesting. Participant loans - Participants may borrow from their fund accounts a minimum of $1,000 up to the lesser of a maximum of $50,000 or 50 percent of their vested account balance, reduced by the highest outstanding loan balance(s) from the Plan during the preceding 12 months. The loans are secured by the balances in the participant's accounts and bear interest at the Barron's Prime Rate plus 1%, fixed on the date of the disbursement of the loan, which is deemed to be based upon prevailing interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. Pentegra Services, Inc. collects from the participant a $50.00 origination fee and a $40.00 annual administration fee that are subtracted from the participant's account. Principal and interest are paid ratably through semi-monthly payroll deductions and credited to the loan account monthly. Payment of benefits - Upon termination of service, a participant will receive a lump-sum distribution equal to the value of the participant's vested interest in his or her account. If no such request is made, distribution is made at normal retirement age. Forfeitures - At December 31, 2005 and 2004, forfeited non-vested accounts derived from employer contributions were $4,459 and 10,684, respectively, which is invested in the Money Market Fund. Forfeited non-vested accounts derived from employer matching contributions accounts may be used to reduce future employer matching contributions or allocated to participants as profit sharing contributions. Forfeited non-vested accounts derived from the Company's profit sharing contributions may be added to any Company profit-sharing contributions or allocated to participants as profit sharing contributions. Forfeited contributions are allocated to participants in the same ratio as a participant's compensation bears to the total compensation of all participants. During 2005 and 2004, $6,351 and $6,876, respectively, of forfeited non-vested accounts were allocated to participants. During 2004 and 2005, no forfeited non-vested accounts were used to reduce employer matching contributions. 6 CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Notes to Financial Statements Years ended December 31, 2005 and 2004 Note 2 - Summary of significant accounting policies and activities Basis of accounting - The Plan's financial statements are prepared using the accrual method of accounting except for the payment of participant benefits which are recorded when paid. Use of estimates - The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America requires the plan administrator and plan sponsor to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Investment valuation and income recognition - The Plan's investments are stated at fair value. Quoted market prices are used to value investments. Shares of mutual funds are valued at quoted market prices, which represent the net asset value of shares held by the Plan at year end. Participant loans are valued at the outstanding loan balances, which approximates fair value. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Management fees and operating expenses charged to the Plan for investments in the mutual funds are deducted from income earned on a daily basis and are not separately reflected. Consequently, management fees and operating expenses are reflected as a reduction of investment return for such investments. Risks and Uncertainties - The Plan utilizes various investment securities including, mutual funds and corporate stocks. Investment securities, in general, are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements. Administrative expenses - Except for annual audit and third party administration fees, which are paid by the Company, all other administrative expenses are paid by the Plan. Benefit payments - Benefit payments to participants are recorded upon distribution. Excess contributions payable - The Plan is required to return contributions to certain active participants in order to satisfy the relevant nondiscrimination provisions of the Plan. 7 CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Notes to Financial Statements Years ended December 31, 2005 and 2004 Note 3 - Investments The Plan's investments that represented five percent or more of the Plan's net assets available for benefits as of December 31, 2005 and 2004, are as follows:
2005 2004 ---- ---- Citizens South Common Stock, 263,068 and 254,400 shares, respectively $3,135,507 $3,627,744 State Street Global Advisors Stable Value Fund, 52,536 units 529,204 - State Street Global Advisors S&P 500 Stock Fund, 1,752 units 406,636 - State Street Global Advisors Mid-cap Stock Fund, 13,181 units 336,371 - Barclays Global Investors Stable Value Fund, 29,835 units - 457,807 Barclays Global Investors S&P 500 Stock Fund, 26,455 units - 450,434 Barclays Global Investors Mid-cap Stock Fund, 10,534 units - 265,984
During the year ended December 31, 2005, the Plan's mutual fund investments (including gains and losses on investments bought and sold, as well as held during the year) appreciated (depreciated) in value as follows: Common Stock $ (601,143) Mutual Funds: Equity Funds 80,983 Balanced Funds 23,165 Governmental Bond Funds 11,811 ---------- Net appreciation of investments $(485,184) ========== Note 4 - Exempt party-in-interest transactions Certain Plan investments are shares of mutual funds managed by The Bank of New York. The Bank of New York is the trustee as defined by the Plan and, therefore, these transactions qualify as exempt party-in-interest transactions. Fees paid by the Plan for investment management services were included as a reduction of the return earned on each fund. At December 31, 2005 and 2004, the Plan held 263,068 and 254,400 units, respectively, of common stock of Citizens South Banking Corporation, the parent company of the sponsoring employer, with a cost basis of $2,015,965 and $1,891,489, respectively. During the year ended December 31, 2005, the Plan recorded dividend income of $73,659. 8 CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Notes to Financial Statements Years ended December 31, 2005 and 2004 Note 5 - Plan Termination Although it has not expressed any intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions set forth in ERISA. In the event that the Plan is terminated, participants would become 100 percent vested in their accounts. Note 6 - Federal Income Tax status Effective January 1, 1998, the Company has adopted, and from time to time has amended, a non-standardized form for a prototype profit sharing plan sponsored by Pentegra Services, Inc. The prototype plan has received an opinion letter from the Internal Revenue Service dated March 7, 2002, as to the prototype plan's qualified status. The prototype plan opinion letter has been relied on by this Plan. The Plan Administrator believes the Plan is designed and is being operated in compliance with the applicable provisions of the Internal Revenue Code. Note 7 - Subsequent Events On October 31, 2005, Citizens South Bank acquired Trinity Bank. As a result of the transaction, the Trinity Bank 401(k) Retirement Plan was merged into this plan effective January 1, 2006. Participant account balances were transferred to the Plan in February 2006. Note 8 - Reconciliation to Forms 5500 The following is a reconciliation of net assets available for benefits per the financial statements to the Forms 5500 for the years ended December 31, 2005 and 2004:
2005 2004 Net assets available for benefits per the financial statements $5,590,554 $5,983,967 Add: Accrued excess participant contributions 4,161 2,507 ---------- ---------- Net assets available for benefit per the Form 5500 $5,594,715 $5,986,474 ========== ==========
The following is a reconciliation of changes in net assets available for benefits per the financial statements to net income per the Form 5500 for the year ended December 31, 2005:
Net change in net assets available for benefits per the financial statements $ (393,413) Add: Accrued excess participant contributions distributed in 2006 4,161 Less: Distributions in 2005 for excess participant contributions in 2004 (2,507) ------------- Net change in net assets available for benefits per the Form 5500 $ (391,759) =============
****** 9 Citizens South Bank Employees' Savings and Profit Sharing Plan and Trust EIN: 56-02380 Plan Number: 004 Form 5500 Schedule H, Line 4i Schedule of Assets Held At End of Year - December 31, 2005
Identity of Issue, Borrower, Description of Investment Including Maturity Lessor or Similar Party Date, Rate of Interest,Collateral Par or Maturity Value Cost Cuurent Value ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) (e) ------------------------------------------------------------------------------------------------------------------------------------ * Citzens South Bank Common Stock - 263,068 shares ** $ 3,135,508 * Pentegra Retirement Services Stable Value Fund - 52,536 units ** 529,204 State Street Global Advisors Moderate Strategic Balanced Fund - 3,768 units ** 46,154 State Street Global Advisors Conservative Strategic Balanced Fund - 1,809 units ** 24,771 State Street Global Advisors Aggressive Stratigic Balanced Fund - 1,422 units ** 15,272 State Street Global Advisors Russell 2000 Stock Fund - 8,924 units ** 193,508 State Street Global Advisors S&P 500 Stock Fund - 1,751 units ** 406,636 State Street Global Advisors S&P 500 Growth Stock Fund - 8,436 units ** 86,382 State Street Global Advisors S&P 500 Value Stock Fund - 12,394 units ** 127,436 State Street Global Advisors Midcap Stock Fund - 13,180 units ** 336,371 State Street Global Advisors Nasdaq 100 Stock Fund - 87 units ** 893 State Street Global Advisors US REIT Index Fund - 31 units ** 767 State Street Global Advisors International Stock Fund- 2,089 units ** 35,060 State Street Global Advisors Money Market Fund - 188,002 units ** 188,002 State Street Global Advisors Government Bond Fund - 17,878 units ** 185,950 * Pentegra Retirement Services Short-Term Investment Fund - 200,542 units ** 200,542 Loans, ranging 0-5 years maturity with interest * Participant loans rates of 5.00% to 10.50% 0 73,606 ----------- Total assets held at end of year $ $ 5,586,062 ===========
* A party-in-interest transaction as defined by ERISA ** Cost omitted for participant directed investments 10 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Citizens South Banking Corporation Gastonia, North Carolina We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-103218, 333-77657 and 333-111228) of Citizens South Banking Corporation of our report dated June 26, 2006, related to the statements of net assets available for benefits of as of December 31, 2005 and 2004 and the related statement of changes in net assets available for benefits for the year ended December 31, 2005 which are included in the December 31, 2005 Annual Report on Form 11-K of Citizens South Bank Employees' Savings & Profit Sharing Plan. /s/ Cherry, Bekaert & Holland, L.L.P. Gastonia, North Carolina June 26, 2006 SIGNATURES The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. CITIZENS SOUTH BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Date: June 21, 2006 By: /s/ Paul L. Teem, Jr. -------------------------------- Name: Paul L. Teem, Jr. Title: Executive Vice President, Secretary and Chief Administrative Officer, Citizens South Bank