**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

 

**FORM 10 –Q/A**

 

| **ý****QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **For the quarterly period ended       June 30, 2003**                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **or**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **For the transition period from                                      to                                 ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Commission File No:  0 - 14535**                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **CITIZENS  BANCSHARES CORPORATION**                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (Exact name of registrant as specified in  its charter)                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Georgia**                                                                                                                                                                                                                                                                                                                                                                                                                                           | **58 - 1631302** |
| (State or other jurisdiction of  incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                       | (IRS Employer Identification No.) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **175 John Wesley Dobbs Avenue, N.E., Atlanta, Georgia**                                                                                                                                                                                                                                                                                                                                                                                              | **30303** |
| (Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                              | (Zip Code) |

 

 

Registrant’s telephone number, including areacode:           **(404) 659 - 5959**

 

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Exchange Act during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe 90 days.   Yes  ý            No  o.

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act) o Yes    ý No.

 

APPLICABLE ONLY TO ISSUERS

 

Indicate by check mark whether registrant has filed all documents andreports required to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court               o Yes    o No

 

| SEC 1296 (08-03) | **Potential persons who are to respond to the  collection of information controlled in this form are not required to respond  unless the form displays a currently valid OMB control number.** |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding for each of the issuer’sclasses of common stock as of the latest practicable date: 2,070,547 shares ofCommon Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock,$1.00 par value outstanding on July 31, 2003.

 

**ThisForm 10Q/A is filed to add certain footnote disclosures and expand or revisecertain data in the financial statements and in the management, discussion andanalysis included in the Form 10Q filed August 19, 2003.  All other data remains as originally filedin the Form 10Q.   These changes did notimpact earnings or earnings per share as reported in the 10Q filing on August19, 2003.**

** **

 

----

 

**PART 1.****                FINANCIALINFORMATION**

**ITEM1.**  Financialstatements

 

**CITIZENS BANCSHARESCORPORATION AND SUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETS**

**JUNE 30, 2003 AND DECEMBER 31, 2002**

**(In thousands, except share data)**

 
|                                                                                                |   | **2003**        |       | **2002** |       |
|-----------------------------------------------------------------------------------------------------|--------|-----------------|------------|----------|------------|
|                                                                                                |   | **(Unaudited)** |       |     |       |
| **ASSETS**                                                                                          |   |            |       |     |       |
| Cash and due from banks                                                                             |   | $               | 17,404     |     | $          | 11,117 |   |
| Federal funds sold                                                                                  |   | 725             |       | —   |       |
| Interest-bearing deposits with banks                                                                |   | 980             |       | 15,192   |       |
| Certificates of deposit                                                                             |   | 3,248           |       | 3,095    |       |
| Investment securities available for sale, at fair  value                                            |   | 105,995         |       | 53,972   |       |
| Investment securities held to maturity, at cost                                                     |   | 7,232           |       | 2,376    |       |
| Other investments                                                                                   |   | 2,587           |       | 2,226    |       |
| Loans receivable, net                                                                               |   | 201,225         |       | 172,077  |       |
| Premises and equipment, net                                                                         |   | 9,594           |       | 6,732    |       |
| Cash surrender value of life insurance                                                              |   | 7,348           |       | 6,880    |       |
| Other assets                                                                                        |   | 8,052           |       | 5,823    |       |
|                                                                                                |   |            |       |     |       |
| Total assets                                                                                        |   | $               | 364,390    |     | $          | 279,490 |   |
|                                                                                                |   |            |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                      |   |            | ** ** |     | ** ** |
|                                                                                                |   |            |       |     |       |
| LIABILITIES:                                                                                        |   |            |       |     |       |
| Noninterest-bearing deposits                                                                        |   | $               | 61,408     |     | $          | 62,394 |   |
| Interest-bearing deposits                                                                           |   | 227,515         |       | 166,217  |       |
|                                                                                                |   |            |       |     |       |
| Total deposits                                                                                      |   | 288,923         |       | 228,611  |       |
|                                                                                                |   |            |       |     |       |
| Accrued expenses and other liabilities                                                              |   | 4,099           |       | 3,347    |       |
| Notes payable                                                                                       |   | 543             |       | 740      |       |
| Trust preferred securities                                                                          |   | 5,000           |       | 5,000    |       |
| Advances from Federal Home Loan Bank                                                                |   | 41,018          |       | 18,750   |       |
|                                                                                                |   |            |       |     |       |
| Total liabilities                                                                                   |   | 339,583         |       | 256,448  |       |
|                                                                                                |   |            |       |     |       |
| COMMITMENTS AND CONTINGENCIES                                                                       |   |            |       |     |       |
|                                                                                                |   |            |       |     |       |
| STOCKHOLDERS’ EQUITY:                                                                          |   |            |       |     |       |
| Common stock - $1 par value; 5,000,000 shares  authorized; 2,230,065 shares issued and outstanding  |   | 2,230           |       | 2,230    |       |
| Nonvoting common stock - $1 par value; 5,000,000  shares  authorized; 90,000 issued and outstanding |   | 90              |       | 90       |       |
| Additional paid-in capital                                                                          |   | 7,445           |       | 7,445    |       |
| Retained earnings                                                                                   |   | 15,932          |       | 14,921   |       |
| Treasury stock, at cost (240,996 shares at 2003  and 2002)                                          |   | (2,046          | )          | (2,046   | )          |
| Accumulated other comprehensive income                                                              |   | 1,156           |       | 402      |       |
|                                                                                                |   |            |       |     |       |
| Total stockholders’ equity                                                                     |   | 24,807          |       | 23,042   |       |
|                                                                                                |   |            |       |     |       |
|                                                                                                |   | $               | 364,390    |     | $          | 279,490 |   |

 

See notes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited - In thousands, exceptper share data)**

 
|                                                     |   | **Three Months  Ended June 30,** |       | **Six Months  Ended June 30,** |       |
|----------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                     |   | **2003**                         |       | **2002**                       |       | **2003** |   | **2002** |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Interest income:                                         |   |                             |       |                           |       |   |   |   |   |
| Loans, including fees                                    |   | $                                | 3,958      |                           | $          | 3,094 |   | $ | 7,423 |   | $ | 6,212 |   |
| Investment securities:                                   |   |                             |       |                           |       |   |   |   |   |
| Taxable                                                  |   | 775                              |       | 837                            |       | 1,428 |   | 1,546 |   |
| Tax-exempt                                               |   | 246                              |       | 241                            |       | 481 |   | 454 |   |
| Federal funds sold                                       |   | 7                                |       | 2                              |       | 10 |   | 12 |   |
| Interest-bearing  deposits                               |   | 37                               |       | 107                            |       | 77 |   | 238 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Total interest income                                    |   | 5,023                            |       | 4,281                          |       | 9,419 |   | 8,462 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Interest expense:                                        |   |                             |       |                           |       |   |   |   |   |
| Deposits                                                 |   | 1,011                            |       | 1,157                          |       | 1,929 |   | 2,493 |   |
| Other borrowings                                         |   | 335                              |       | 160                            |       | 598 |   | 324 |   |
| Total interest expense                                   |   | 1,346                            |       | 1,317                          |       | 2,527 |   | 2,817 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Net interest income                                      |   | 3,677                            |       | 2,964                          |       | 6,892 |   | 5,645 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Provision for loan  losses                               |   | 65                               |       | 225                            |       | 280 |   | 400 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Net interest income  after provision for loan losses     |   | 3,612                            |       | 2,739                          |       | 6,612 |   | 5,245 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Noninterest income:                                      |   |                             |       |                           |       |   |   |   |   |
| Service charges on  deposits                             |   | 895                              |       | 887                            |       | 1,736 |   | 1,745 |   |
| Gain on sales of  securities                             |   | 218                              |       | 212                            |       | 218 |   | 242 |   |
| Mortgage origination  fees                               |   | —                           |       | —                         |       | — |   | 120 |   |
| Other operating income                                   |   | 279                              |       | 363                            |       | 586 |   | 707 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Total noninterest  income                                |   | 1,392                            |       | 1,462                          |       | 2,540 |   | 2,814 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Noninterest expense:                                     |   |                             |       |                           |       |   |   |   |   |
| Salaries and employee  benefits                          |   | 1,875                            |       | 1,794                          |       | 3,631 |   | 3,511 |   |
| Net occupancy and  equipment                             |   | 740                              |       | 551                            |       | 1,302 |   | 1,107 |   |
| Other operating  expenses                                |   | 1,451                            |       | 1,388                          |       | 2,519 |   | 2,627 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Total noninterest  expense                               |   | 4,066                            |       | 3,733                          |       | 7,452 |   | 7,245 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Income before income  taxes                              |   | 938                              |       | 468                            |       | 1,700 |   | 814 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Income tax expense                                       |   | 219                              |       | 39                             |       | 377 |   | 64 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Net income                                               |   | $                                | 719        |                           | $          | 429 |   | $ | 1,323 |   | $ | 750 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Net income per share -  basic and diluted                |   | $                                | 0.35       |                           | $          | 0.20 |   | $ | 0.64 |   | $ | 0.35 |   |
|                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Weighted average  outstanding shares - basic and diluted |   | 2,079                            |       | 2,109                          |       | 2,079 |   | 2,118 |   |
|                                                     |   |                             |       |                           |       |   |   |   |   |
| Dividends per common  share                              |   | $                                | —     |                           | $          | — |   | $ | 0.15 |   | $ | 0.15 |   |

 

See notes to consolidated financial statements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASHFLOWSFor the six months ended June 30, 2003 and 2002(in thousands)**

 
|                                                                                         |   | **2003**        |   | **2002** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------|--------|----------|--------|
|                                                                                         |   | **(Unaudited)** |   |
| **OPERATING  ACTIVITIES:**                                                                   |   |            |   |     |   |
| Net income                                                                                   |   | $               | 1,323  |     | $      | 750 |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:**       |   |            |   |     |   |
| Provision for loan  losses                                                                   |   | 280             |   | 400      |   |
| Depreciation                                                                                 |   | 257             |   | 478      |   |
| Amortization  (accretion), net                                                               |   | 22              |   | (4       | )      |
| Gain on sale of assets  and investments                                                      |   | 218             |   | (242     | )      |
| Change in mortgage loans  held for sale                                                      |   | —          |   | 422      |   |
| Change in other assets                                                                       |   | 273             |   | 99       |   |
| Change in accrued  expenses and other liabilities                                            |   | (464            | )      | (850     | )      |
|                                                                                         |   |            |   |     |   |
| Net cash provided by  operating activities                                                   |   | 1,909           |   | 1,053    |   |
|                                                                                         |   |            |   |     |   |
| **INVESTING  ACTIVITIES:**                                                                   |   |            |   |     |   |
| Proceeds from sale and  maturities of investment securities held to maturity                 |   | 398             |   | 300      |   |
| Proceeds from sale and  maturities of investment securities available for sale               |   | 21,264          |   | 17,022   |   |
| Purchases of investment  securities held to maturity                                         |   | (3,688          | )      | —   |   |
| Purchases of investment  securities available for sale                                       |   | (15,132         | )      | (35,360  | )      |
| Net change in other  investments                                                             |   | (361            | )      | —   |   |
| Net change in loans                                                                          |   | 3,473           |   | 3,587    |   |
| Increase in cash  surrender value of life insurance                                          |   | (468            | )      | (37      | )      |
| Net cash received in  acquisition of CFS Bancshares                                          |   | 2,759           |   | —   |   |
| Purchases (sales), net  of premises and equipment                                            |   | 104             |   | (763     | )      |
| Net change in interest  bearing deposits with banks                                          |   | 14,212          |   | 34,514   |   |
|                                                                                         |   |            |   |     |   |
| Net cash provided by  investing activities                                                   |   | 22,561          |   | 19,263   |   |
|                                                                                         |   |            |   |     |   |
| **FINANCING  ACTIVITIES:**                                                                   |   |            |   |     |   |
| Net change in  noninterest-bearing deposits                                                  |   | (986            | )      | 1,697    |   |
| Net change in  interest-bearing deposits                                                     |   | (19,283         | )      | (30,136  | )      |
| Purchase of treasury  stock                                                                  |   | —          |   | (225     | )      |
| Proceeds from issuance  of trust preferred securities                                        |   | —          |   | 5,000    |   |
| Principal payments on  debt                                                                  |   | (197            | )      | (530     | )      |
| Increase in advances  from Federal Home Loan Bank                                            |   | 3,320           |   | —   |   |
| Dividends paid                                                                               |   | (312            | )      | (341     | )      |
|                                                                                         |   |            |   |     |   |
| Net cash used in  financing activities                                                       |   | (17,458         | )      | (24,535  | )      |
|                                                                                         |   |            |   |     |   |
| Net change in cash and  cash equivalents                                                     |   | 7,012           |   | (4,219   | )      |
|                                                                                         |   |            |   |     |   |
| Cash and cash  equivalents at beginning of period                                            |   | 11,117          |   | 14,437   |   |
|                                                                                         |   |            |   |     |   |
| Cash and cash equivalents  at end of period                                                  |   | $               | 18,129 |     | $      | 10,218 |   |
|                                                                                         |   |            |   |     |   |
| **Supplemental  disclosures of cash paid during the period for:**                            |   |            |   |     |   |
| Interest                                                                                     |   | $               | 1,066  |     | $      | 3,191 |   |
|                                                                                         |   |            |   |     |   |
| Income taxes                                                                                 |   | $               | 181    |     | $      | 290 |   |
|                                                                                         |   |            |   |     |   |
| **Supplemental  disclosures of noncash transactions:**                                       |   |            |   |     |   |
| Change in unrealized  gain (loss) on investment securities available  for sale, net of taxes |   | $               | 753    |     | $      | 700 |   |

 

See notes to consolidated financial statements.

 

4

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** **

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

**Notesto the Consolidated Financial Statements**

**June30, 2003 and 2002**

(Unaudited)

 

**SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

** **

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial banking and mortgage brokerageservices to individual and corporate customers in metropolitan Atlanta andColumbus, Georgia, and as of February 28, 2003, in Birmingham and Eutaw,Alabama, through its wholly owned subsidiary, Citizens Trust Bank (the“Bank”).  The Bank operates under astate charter and serves its customers through eight full-service branches inmetropolitan Atlanta, Georgia, one full-service branch in Columbus, Georgia,two full-service branches in Birmingham, Alabama, and one full-service branchin Eutaw, Alabama.

 

The accompanying unaudited consolidated financial statements have beenprepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required bygenerally accepted accounting principles are not included herein. These interimstatements should be read in conjunction with the financial statements andnotes thereto included in the Company’s latest Annual Report on Form 10-K filedwith the Securities and Exchange Commission for the year ended December 31,2002.  The results of operations for theinterim periods reported herein are not necessarily representative of theresults expected for the full 2003 fiscal year.

 

Theconsolidated financial statements of the Company as of June 30, 2003 and forthe three and six month periods ended June 30, 2003 and 2002 areunaudited.  In the opinion ofmanagement, all adjustments necessary for a fair presentation of the financialposition and results of operations and cash flows for the three month and sixmonth periods have been included.  Alladjustments are of a normal recurring nature. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

**ACCOUNTING POLICIES**

** **

The Company’s consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”), which often require the judgment of management in theselection and application of certain accounting principles and methods.  Reference is made to the accounting policiesof the Company described in the notes to the consolidated financial statementscontained in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.  The Company hasfollowed those policies in preparing this report.  Management believes that the quality and reasonableness of itsmost critical policies enable the fair presentation of its financial positionand of its results of operations.

 

Cash and cash equivalents - Cash equivalents include cash and due frombanks and federal funds sold.

 

5

----

 

**ACQUISITION**

 

On February 28, 2003, the Company acquired CFS Bancshares, Inc., asavings and loan holding company located in Birmingham, Alabama, whose bankingsubsidiary, Citizens Federal Savings Bank, simultaneously merged into theBank.   The Company has paidapproximately $8,444,000 in cash for all outstanding shares of CFS Bancshares,Inc. tendered through June 30, 2003. This acquisition has resulted in a significant expansion of theCompany’s market area and allows it to begin serving customers in theBirmingham metropolitan area.  Theacquisition of CFS Bancshares, Inc. was accounted for as a purchase.  The fair value of the assets and liabilitiesacquired were determined by management and independent valuation specialists,and were recorded as of the date of purchase. Goodwill was not recorded as the net fair value of the assets andliabilities acquired exceeded the purchase price.  The Company recorded a finite lived intangible asset related tothe value of deposit accounts acquired of approximately $373,000 and isamortizing the amount over 7 years.

 

 

The company is completing its review and determination of the fairvalues of the other assets acquired and liabilities assumed.  Accordingly, the allocation of the purchaseprice is subject to revision, which is not expected to be material, based onthe final determination of appraised and other fair values. A summary of theassets acquired and liabilities assumed in the acquisition follows (inthousands):

 
| Estimated fair values: |   |    |    |
|------------------------|--------|---------|---------|
| Assets acquired        |   | $       | 109,219 |   |
| Liabilities assumed    |   | 100,775 |    |
| Purchase Price         |   | 8,444   |    |
| Less Cash acquired     |   | (11,203 | )       |
| Net cash received      |   | $       | 2,759   |   |

 

 

The following table presents the Company’s results of operations on apro forma basis as if the transaction was completed on January 1 of eachrespective year:

 

**Forthe six months ended June 30, 2003:**

 
|       |   | **Citizens  Bancshares** |   | **CFS  Bancshares** |   | **Subtotal** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined** |       |
|------------|--------|--------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|-------------------------|------------|
|       |   |                     |   |                |   |         |   |                       |   |                    |       |
| Revenues   |   | $                        | 11,959 |                | $      | 967          |   | $                          | 12,926 |                    | —     |   | $ | 12,926 |   |
| Net Income |   | $                        | 1,323  |                | $      | (3,592       | )      | $                          | (2,269 | )                       | $          | 3,728 |   | $ | 1,459 |   |
| EPS        |   |                     |   |                |   |         |   |                       |   | $                       |  0.70 |   |
|            |        |                          |        |                     |        |              |        |                            |        |                         |            |  |  |  |  |  |  |

 

**Forthe six months ended June 30, 2002:**

 
|       |   | **Citizens  Bancshares** |   | **CFS  Bancshares** |   | **Subtotal** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined** |   |
|------------|--------|--------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|-------------------------|--------|
|       |   |                     |   |                |   |         |   |                       |   |                    |   |
| Revenues   |   | $                        | 11,276 |                | $      | 3,188        |   | $                          | 14,464 |                    | — |   | $ | 14,464 |   |
| Net Income |   | $                        | 750    |                | $      | 207          |   | $                          | 957    |                    | $      | 139 |   | $ | 1,096 |   |
| EPS        |   |                     |   |                |   |         |   |                       |   | $                       | 0.52   |   |
|            |        |                          |        |                     |        |              |        |                            |        |                         |        |  |  |  |  |  |

 

6

----

 

##### **INTANGIBLE ASSETS**

 

The following table presents information about ourintangible assets at June 30, 2003 and December 31, 2002:

 
|                         |   | **June 30, 2003**          |      | **December 31, 2002**         |   |
|------------------------------|--------|----------------------------|-----------|-------------------------------|--------|
|                         |   | **Gross Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                         |   |                       |      |                          |   |   |   |   |   |
| Amortized intangible  asset: |   |                       |      |                          |   |   |   |   |   |
| Core deposit intangible      |   | $                          | 2,836,665 |                          | $      | 1,182,047 |   | $ | 2,463,665 |   | $ | 997,198 |   |
|                              |        |                            |           |                               |        |  |  |  |  |  |  |  |  |

 

The following table presents information about aggregate amortizationexpense:

 
|                                                            |   | **For the 3 months  ended June 30,  2003** |    | **For the 6 months  ended June 30,  2003** |   | **For the 3 months  ended June 30,  2002** |   | **For the 6 months  ended June 30,  2002** |   |
|-----------------------------------------------------------------|--------|--------------------------------------------|---------|--------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                            |   |                                       |    |                                       |   |                                       |   |                                       |   |
| Aggregate amortization  expense of amortized intangible assets  |   | $                                          | 96,861  |                                       | $      | 184,849                                    |   | $                                          | 87,988 |   | $ | 175,976 |   |
|                                                            |   |                                       |    |                                       |   |                                       |   |                                       |   |
| Estimated amortization  expense of amortized intangible assets: |   |                                       |    |                                       |   |                                       |   |                                       |   |
|                                                            |   |                                       |    |                                       |   |                                       |   |                                       |   |
| For year ended 12/31/03                                         |   | $                                          | 387,445 |                                       |   |                                       |   |                                       |   |   |
| For year ended 12/31/04                                         |   | $                                          | 405,192 |                                       |   |                                       |   |                                       |   |   |
| For year ended 12/31/05                                         |   | $                                          | 405,192 |                                       |   |                                       |   |                                       |   |   |
| For year ended 12/31/06                                         |   | $                                          | 405,192 |                                       |   |                                       |   |                                       |   |   |
| For year ended 12/31/07                                         |   | $                                          | 111,900 |                                       |   |                                       |   |                                       |   |   |
| For year ended 12/31/08                                         |   | $                                          | 53,240  |                                       |   |                                       |   |                                       |   |   |
| For year ended 12/31/09                                         |   | $                                          | 53,240  |                                       |   |                                       |   |                                       |   |   |
| For year ended 12/31/10                                         |   | $                                          | 18,466  |                                       |   |                                       |   |                                       |   |   |
|                                                                 |        |                                            |         |                                            |        |                                            |        |                                            |        |  |  |  |  |

 

# **COMMON STOCK**

** **

Basic net income per share (EPS) is computed based on net incomedivided by the weighted average number of common shares outstanding.  Diluted EPS is computed based on net incomedivided by the weighted average number of common and potential common shares.The Company’s potential common shares are due to outstanding stock options,which were not dilutive during the six months ended June 30, 2003 and 2002.

 

# **RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In April 2003, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 149, Amendment of Statement 133 on Derivative Instruments andHedging Activities (“SFAS No. 149”) which is effective for hedgingrelationships entered into or modified after June 30, 2003. SFAS No. 149 amendsand clarifies financial accounting and reporting for derivative instrumentsincluding certain derivative instruments embedded in other contracts and forhedging activities. The adoption of SFAS No. 149 had no impact on the CompanyConsolidated Financial Statements.

 

7

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In May 2003, the FASB issued SFAS No. 150, Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity(“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity in its balance sheet. SFAS No. 150 is effective forfinancial instruments entered into or modified after May 31, 2003; otherwise,this statement is effective at the beginning of the first interim periodbeginning after June 15, 2003.  Theadoption of SFAS No. 150 had no impact on the Company Consolidated FinancialStatements.

 

**RECLASSIFICATIONS**

 

Certain2002 amounts have been reclassified to conform to the 2003 presentation.

 

**OTHER MATTERS**

 

OnApril 1, 2003, the Company announced a curtailment of its postretirementmedical and life plans.  The curtailmentreduced the Company’s associated plan liabilities by approximately $255,000during the quarter ending June 2003.

 

**ITEM2.****                                                           MANAGEMENT’SDISCUSSION AND ANALYSIS**

** **

**INTRODUCTION**

** **

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial banking and mortgage brokerageservices to individuals and corporate customers in its primary market areas,metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabamathrough its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 12 full-service branches inGeorgia and Alabama.

 

**Forward Looking Statements**

 

Inaddition to historical information, this report on Form 10-Q may containforward-looking statements. For this purpose, any statements contained herein,including documents incorporated by reference, that are not statements ofhistorical fact may be deemed to be forward-looking statements. Forward-lookingstatements are subject to numerous assumptions, risks and uncertainties. Withoutlimiting the foregoing, the words “believe,” “anticipates,” “plan,” expects,”and similar expressions are intended to identify forward-looking statements.

 

Forward-lookingstatements are based on current management expectations and, by their nature, aresubject to risk and uncertainties because of the possibility of changes inunderlying factors and assumptions. Actual conditions, events or results coulddiffer materially from those contained in or implied by such forward-lookingstatements for a variety of reasons, including: sharp and/or rapid changes ininterest rates; significant changes in the economic scenario from the currentanticipated scenario which could materially change anticipated credit qualitytrends and the ability to generate loans and gather deposits; significant delayin or inability to execute strategic initiatives designed to grow revenuesand/or control expenses; unanticipated issues during the integration ofacquisitions; and significant changes in accounting, tax or regulatory practicesor requirements. 

 

8

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TheCompany undertakes no obligation to, nor does it intend to, updateforward-looking statements to reflect circumstances or events that occur afterthe date hereof or to reflect the occurrence of unanticipated events.

 

The following discussion is of the Company’s financial condition as ofJune 30, 2003 and the changes in the financial condition and results ofoperations for the three and six month periods ended June 30, 2003 and 2002.

** **

**Accounting Policies**

** **

Inresponse to the Securities and Exchange Commission’s (“SEC”) Release No.33-8040, Cautionary Advice Regarding Disclosure About Critical AccountingPolicies, the Company has identified the following as the most critical accountingpolicies upon which its financial status depends.  The critical policies were determined by considering accountingpolicies that involve the most complex or subjective decisions or assessments.  The Company’s most critical accountingpolicies relate to:

 

**InvestmentSecurities**- The Company classifiesinvestments in one of three categories based on management’s intent uponpurchase: held to maturity securities which are reported at amortized cost,trading securities which are reported at fair value with unrealized holdinggains and losses included in earnings, and available for sale securities whichare recorded at fair value with unrealized holding gains and losses included asa component of accumulated other comprehensive income.  The Company had no investment securitiesclassified as trading securities during 2003 or 2002.

 

Premiumsand discounts on available for sale and held to maturity securities areamortized or accreted using a method which approximates a level yield.

 

Gainsand 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 isdeemed other than temporary is charged to earnings resulting in theestablishment of a new cost basis for the security.

 

**Loans**  -Loans are reported at principal amounts outstanding less unearned income andthe allowance for loan losses.  Interestincome on loans is recognized on a level-yield basis. Loan fees andcertain direct origination costs are deferred and amortized over the estimatedterms of the loans using the level-yield method.  Discounts on loans purchased are accreted using the level-yieldmethod over the estimated remaining life of the loan purchased.

** **

**Allowancefor Loan Losses** - The Company providesfor estimated losses on loans receivable when any significant and permanentdecline in value occurs.  Theseestimates for losses are based on not only on individual assets and theirrelated cash flow forecasts, sales values, independent appraisals, but also thevolatility of certain real estate markets, and the concern for disposing ofreal estate in distressed markets.  Forloans that are pooled for purposes of determining necessary provisions,estimates are based on loan types, history of charge-offs, and otherdelinquency analyses.  Therefore, thevalue used to determine the provision for losses is subject to thereasonableness of these estimates.  Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a quarterly basis a comprehensive review of the adequacy of theallowance for loan losses is performed. This assessment is made in the context of historical losses as well asexisting economic conditions, performance trends within specific portfoliosegments, and individual concentrations of credit.  Loans are charged against the allowance when, in the opinion ofmanagement, such loans are deemed uncollectible and subsequent recoveries areadded to the allowance.

 

A description of other accounting policies are summarized in Note 1,Summary of Significant Accounting Policies in the Notes to ConsolidatedFinancial Statements of the Company’s Annual Report on Form 10-K for the yearended December 31, 2002.  The Companyhas followed those policies in preparing this report.

 

###### **FINANCIALCONDITION**

** **

CitizensBancshares Corporation’s total assets at June 30, 2003 were $364,390,000, anincrease of $84,900,000 or 30% compared to $279,490,000 at December 31, 2002.This increase is primarily due to the acquisition of CFS Bancshares, Inc. (the“Alabama Division”), a bank holding company in Birmingham, Alabama, forapproximately $8,444,000 in cash on February 28, 2003.  The acquisition of CFS Bancshares, Inc.allows the Company to extend its geographical base and provides new avenues forthe Bank to sell its products and services. Accordingly, many significantchanges in the financial condition of the Company are attributed to thisacquisition.

 

AtJune 30, 2003, the Company maintained balances of cash and due from banks andfederal funds sold of $17,404,000 and $725,000, respectively.  The increase in the Company’s cash and duefrom banks and federal funds sold balances by $6,287,000 and $725,000,respectively, were partially offset by a $14,212,000 decrease in interestbearing deposits with banks.  Similarly, the increases in investments of $52,023,000 for available forsale and $4,856,000 for held to maturity were partially offset by the $14,212,000decrease in interest bearing deposits with banks.  At June 30, 2003, approximately $44,650,000 and $410,000 ofinvestments classified as available for sale and held for maturity,respectively, are attributed to the Alabama Division.

 

Loans,net increased $29,148,000, during the six month period ended June 30,2003.  The acquisition of the AlabamaDivision accounted for the majority of this increase. The Alabama Division hadloans, net of approximately $30,090,000 at June 30, 2003.  Additionally, fixed assets increased$2,862,000 primarily due to the addition of $3,223,000 in fixed assets relatedto the Alabama division.

 

Otherassets increased $2,229,000 to $8,052,000 at June 30, 2003.  This increase is attributed to severalcomponents including an increase in accrued interest receivables of $786,000,an increase in other real estate owned of $595,000 and an increase in federalincome tax benefit of $1,243,000 obtained in the acquisition of the AlabamaDivision.  The increases in other assetswere partially offset by deferred income taxes of $996,000.

 

Totalliabilities increased $83,135,000 to $339,583,000 at June 30, 2003 fromDecember 31, 2002. Total deposits, a component of total liabilities, increased$60,312,000 to $288,923,000. Approximately $77,955,000 of the increase is attributed to the AlabamaDivision at June 30, 2003, offset by withdrawal of matured certificate ofdeposits by local governmental customers of approximately $12,800,000.  Corporate and Governmental customers of theBank make significant monthly deposits and withdrawals based on their budgetaryneeds.  Another component of totalliabilities, advances from Federal Home Loan Bank increased $22,268,000 as aresult of additional advances by the Company and $18,950,000 in advances acquiredfrom the Alabama Division at February 28, 2003.

 

9

----

 

**INVESTMENT SECURITIES**

 

TheCompany invests a portion of its assets in U.S. treasury bills and notes, U.S.government sponsored agency securities, mortgage backed bonds, as well ascertain equity securities.  At June 30,2003 and December 31, 2002, the Company’s investment securities portfoliorepresented approximately 31% and 20% of total assets, respectively.

 

10

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Investmentsecurities available for sale are summarized as follows (in thousands):

 
| **At June 30, 2003**                        |   | **Amortized  Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|---------------------------------------------|--------|---------------------|---------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                        |   |                |    |                         |   |                          |   |           |   |
| U.S. Treasury and U.S.  Government agencies |   | $                   | 9,189   |                         | $      | 175                           |   | $              | — |   | $ | 9,364 |   |
| State, county, and  municipal securities    |   | 16,279              |    | 1,183                        |   | —                        |   | 17,462         |   |
| Mortgage-backed  securities                 |   | 77,374              |    | 707                          |   | 92                            |   | 77,989         |   |
| Mutual funds                                |   |                |    |                         |   |                          |   | —         |   |
| Equity securities                           |   | 1,400               |    | —                       |   | 220                           |   | 1,180          |   |
| Totals                                      |   | $                   | 104,242 |                         | $      | 2,065                         |   | $              | 312    |   | $ | 105,995 |   |

 
| **At December 31, 2002**                    |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|---------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                        |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S.  Government agencies |   | $                   | 4,021  |                         | $      | 16                            |   | $              | — |   | $ | 4,037 |   |
| State, county, and  municipal securities    |   | 15,798              |   | 492                          |   | —                        |   | 16,290         |   |
| Mortgage-backed  securities                 |   | 32,145              |   | 204                          |   | 15                            |   | 32,334         |   |
| Equity securities                           |   | 1,400               |   | —                       |   | 89                            |   | 1,311          |   |
| Totals                                      |   | $                   | 53,364 |                         | $      | 712                           |   | $              | 104    |   | $ | 53,972 |   |

 

Investmentsecurities held to maturity are summarized as follows (in thousands):

 
| **At June 30, 2003**                        |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|---------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                        |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S.  Government agencies |   | $                   | 1,000  |                         | $      | 3                             |   | $              | — |   | $ | 1,003 |   |
| Mortgage backed  securities                 |   | 579                 |   | 10                           |   | —                        |   | 589            |   |
| State, county, and  municipal securities    |   | 5,653               |   | 302                          |   | —                        |   | 5,955          |   |
|                                        |   |                |   |                         |   |                          |   |           |   |
| Totals                                      |   | $                   | 7,232  |                         | $      | 315                           |   | $              | — |   | $ | 7,547 |   |

 

11

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| **December 31, 2002**                    |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                     |   |                |   |                         |   |                          |   |           |   |
| State, county, and  municipal securities |   | $                   | 2,376  |                         | $      | 135                           |   | $              | — |   | $ | 2,511 |   |
|                                     |   |                |   |                         |   |                          |   |           |   |
| Totals                                   |   | $                   | 2,376  |                         | $      | 135                           |   | $              | — |   | $ | 2,511 |   |

 

**LOANS**

 

Loansoutstanding by classification are summarized as follows (in thousands):

 
|                                     |   | **June 30,  2003** |    | **December 31,  2002** |   |
|------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                     |   |               |    |                   |   |
| Commercial, financial,  and agricultural |   | $                  | 53,091  |                   | $      | 53,940 |   |
| Installment                              |   | 7,541              |    | 5,652                  |   |
| Real estate - mortgage                   |   | 93,743             |    | 96,999                 |   |
| Real estate -  construction              |   | 14,859             |    | 14,058                 |   |
| Other                                    |   | 37,078             |    | 5,376                  |   |
|                                     |   | 206,312            |    | 176,025                |   |
| Less:  Net deferred loan fees       |   | 989                |    | 537                    |   |
| Allowance for loan  losses               |   | 3,419              |    | 2,630                  |   |
| Discount on loans  acquired from FDIC    |   | 679                |    | 781                    |   |
|                                     |   |               |    |                   |   |
| Total Loans                              |   | $                  | 201,225 |                   | $      | 172,077 |   |

 

**NONPERFORMING ASSETS**

 

Nonperforming assets include nonperforming loans, real estate acquiredthrough foreclosure and repossessed assets. Nonperforming loans consist of loans that are past due with respect toprincipal or interest more than 90 days or have been placed on nonaccrualstatus.

 

With the exception of the loans included within nonperforming assets inthe table below, management is not aware of any loans classified for regulatorypurposes as loss, doubtful, substandard, or special mention that have not beendisclosed which (1) represent or result from trends or uncertainties which managementreasonably expects will materially impact future operating results, liquidity,or capital resources, or (2) represent any information on material creditswhich management is aware that causes management to have serious doubts as tothe abilities of such borrowers to comply with the loan repayment terms.

 

Nonperforming assets increased by $1,747,000 to $6,810,000 at June 30,2003 from $5,063,000 at December 31, 2002. Nonperforming assets represented 3.35% of loans, net of unearned income,discounts and real estate acquired through foreclosure at June 30, 2003 ascompared to 2.91% at December 31, 2002.

 

The table below presents a summary of the Company’s nonperformingassets at June 30, 2003 

 

12

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and December 31, 2002.

 
|                                                                                                             |   | **2003**                                     |   | **2002** |   |
|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------|--------|
|                                                                                                             |   | **(in thousands, except  financial ratios)** |   |
| Nonperforming assets:                                                                                            |   |                                         |   |     |   |
| Nonperforming loans:                                                                                             |   |                                         |   |     |   |
| Nonaccrual loans                                                                                                 |   | $                                            | 5,486  |     | $      | 4,333 |   |
| Past-due loans                                                                                                   |   | —                                       |   | —   |   |
| Nonperforming loans                                                                                              |   | 5,486                                        |   | 4,333    |   |
|                                                                                                             |   |                                         |   |     |   |
| Real estate acquired  through foreclosure                                                                        |   | 1,324                                        |   | 730      |   |
| Total nonperforming  assets                                                                                      |   | $                                            | 6,810  |     | $      | 5,063 |   |
|                                                                                                             |   |                                         |   |     |   |
| Ratios:                                                                                                          |   |                                         |   |     |   |
| Nonperforming loans to  loans, net of unearned  income and discount on loans                                     |   | 2.68                                         | %      | 2.49     | %      |
|                                                                                                             |   |                                         |   |     |   |
| Nonperforming assets to  loans, net of unearned income,  discounts, and real estate acquired through foreclosure |   | 3.35                                         | %      | 2.91     | %      |
|                                                                                                             |   |                                         |   |     |   |
| Nonperforming assets to  total assets                                                                            |   | 1.87                                         | %      | 1.81     | %      |
|                                                                                                             |   |                                         |   |     |   |
| Allowance for loan  losses to nonperforming loans                                                                |   | 62.32                                        | %      | 60.69    | %      |
|                                                                                                             |   |                                         |   |     |   |
| Allowance for loan  losses to nonperforming assets                                                               |   | 50.21                                        | %      | 51.94    | %      |

 

**ALLOWANCE FOR LOAN LOSSES**

 

The allowance for loan losses is primarily available to absorb lossesinherent in the loan portfolio. Credit exposures deemed uncorrectable arecharged against the allowance for loan losses. Recoveries of previouslycharged-off amounts are credited to the allowance for loan losses.

 

The Company provides for estimated losses on loans receivable when anysignificant and permanent decline in value occurs.  These estimates for losses are based on individual assets andtheir cash flow forecasts, sales values, independent appraisals, the volatilityof certain real estate markets, and concern for disposing of real estate indistressed markets.  For loans that arepooled for purposes of determining necessary provisions, estimates are based onloan types, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine theprovision for losses is subject to the reasonableness of these estimates. Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a quarterly basis a comprehensive review of the adequacy of allowancefor loan losses is performed.  Thisassessment is made in the context of historical losses as well as existingeconomic conditions, performance trends within specific portfolio segments, andindividual concentrations of credit.

 

Loans are charged against the allowance when, in theopinion of management, such loans are

 

13

----

 

deemed uncollectible and subsequent recoveries areadded to the allowance.  For the sixmonths ended June 30, 2003, provisions for loan losses totaled $280,000compared to $400,000 for the same period in 2002.

 

The allowance for loan losses at June 30, 2003 was approximately$3,419,000, representing 1.67% of total loans, net of unearned income comparedto approximately $2,630,000 at December 31, 2002, which represented 1.51% oftotal loans, net of unearned income.

 

Management believes the allowance for loan losses is adequate. Whilemanagement uses available information to recognize losses on loans, futureadditions to the allowance may be necessary based on changes in economicconditions, particularly in the metropolitan Atlanta area. In addition,regulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses. Such agencies mayrequire the Company to recognize additions to the allowance based on theirjudgments about information available to them at the time of their examination.

 

Asubstantial portion of the Company’s loan portfolio is secured by real estatein the metropolitan Atlanta market, including a concentration of church loansand convenience stores.  The Company’schurch loans were approximately $42.2 million at June 30, 2003 and $37.7million at December 31, 2002.  TheCompany’s loans to area convenience stores were approximately $26.0 million atJune 30, 2003 and $26.3 million at December 31, 2002.  Accordingly, the ultimate collectability of the substantialportion of the Company’s loan portfolio is susceptible to changes in marketconditions in the metropolitan Atlanta area.

 

14

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The following table summarizes loans, changes in the allowance for loanlosses arising from loans charged off, recoveries on loans previously chargedoff by loan category, and additions to the allowance which have been charged tooperating expense as of and for the six month period ended June 30, 2003 andyear ended December 31, 2002, respectively.

 
|                                                                                                                    |   | **2003**                                             |    | **2002** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|---------|----------|--------|
|                                                                                                                    |   | **(Amounts in thousands, except  financial ratios)** |    |
|                                                                                                                    |   |                                                 |    |     |   |
| Loans, net of unearned  income and discounts                                                                            |   | $                                                    | 204,644 |     | $      | 174,707 |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Average loans, net of  unearned income, discounts  and the allowance for loan losses                                    |   | $                                                    | 191,373 |     | $      | 157,867 |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Allowance for loans  losses at the  beginning of period                                                                 |   | $                                                    | 2,630   |     | $      | 2,003 |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Loans charged off:                                                                                                      |   |                                                 |    |     |   |
| Commercial, financial,  and agricultural                                                                                |   | 15                                                   |    | 840      |   |
| Real estate - loans                                                                                                     |   | 279                                                  |    | 245      |   |
| Installment loans to  individuals                                                                                       |   | 171                                                  |    | 751      |   |
| Total loans charged off                                                                                                 |   | 465                                                  |    | 1,836    |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Recoveries of loans  previously charged off:                                                                            |   |                                                 |    |     |   |
| Commercial, financial,  and agricultural                                                                                |   | 43                                                   |    | 503      |   |
| Real estate - loans                                                                                                     |   | 197                                                  |    | 151      |   |
| Installment loans to  individuals                                                                                       |   | 126                                                  |    | 149      |   |
| Total loans recovered                                                                                                   |   | 366                                                  |    | 803      |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Net loans charged off                                                                                                   |   | 99                                                   |    | 1,033    |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Allowance for loan  losses transferred from acquired institution                                                        |   | 608                                                  |    | —   |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Additions to allowance  for loan losses  charged to operating expense                                                   |   | 280                                                  |    | 1,660    |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Allowance for loan  losses at period end                                                                                |   | $                                                    | 3,419   |     | $      | 2,630 |   |
|                                                                                                                    |   |                                                 |    |     |   |
| Ratio of net loans  charged off to average loans, net of  unearned income, discounts, and the allowance for loan losses |   | 0.05                                                 | %       | 0.65     | %      |
|                                                                                                                    |   |                                                 |    |     |   |
| Ratio of allowance for  loan losses to loans, net of unearned  income and discounts                                     |   | 1.67                                                 | %       | 1.51     | %      |

 

15

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**DEPOSITS**

 

Depositsremain the Company’s primary source of funding loan growth.  Total deposits for the six month periodended June 30, 2003 increased by 26.4% or $60,312,000 to $288,923,000.  Noninterest-bearing deposits decreased by$986,000 or 1.6%, while interest-bearing deposits increased by $61,298,000 or36.9%.  The increase in total depositsis primarily attributed the Company’s Alabama Division acquired on February 28,2003 and Corporate and Governmental customers who make significant monthlydeposits and withdrawals based on their budgetary needs.

 

The following is a summary of interest-bearingdeposits (in thousands):

 
|                              |   | **June 30  2003** |    | **December 31,  2002** |   |
|-----------------------------------|--------|-------------------|---------|------------------------|--------|
|                              |   |              |    |                   |   |
| NOW and money market accounts     |   | $                 | 39,444  |                   | $      | 37,485 |   |
| Savings accounts                  |   | 70,580            |    | 44,061                 |   |
| Time deposits of $100,000 or more |   | 57,809            |    | 46,387                 |   |
| Other time deposits               |   | 59,682            |    | 38,284                 |   |
|                              |   |              |    |                   |   |
|                              |   | $                 | 227,515 |                   | $      | 166,217 |   |

 

**OTHER BORROWED FUNDS**

** **

While the Company continues to emphasize funding earning asset growththrough deposits, the Company has relied on other borrowings as a supplementalfunding source.  Other borrowingsconsist of Federal Home Loan Bank (the “FHLB”) advances and short-termborrowings.  The Company’s banksubsidiary had outstanding advances from the FHLB of $41,018,000 at June 30,2003 and $18,750,000 at December 31, 2002.  The following advances are collateralized by a blanket lien on theCompany’s 1-4 family mortgage loans.

 
| **Maturity**                 |   | **Callable** |       | **Type** |       | **June 30, 2003** |       | **December 31, 2002** |       |
|------------------------------|--------|--------------|------------|----------|------------|-------------------|------------|-----------------------|------------|
|                         |   |         | ** ** |     | ** ** |              | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| April 2010                   |   | Quarterly    |       | Fixed    |       | 5.82              | %          | $                     | 10,000,000 |   | 5.82 | % | $ | 10,000,000 |   |
| July 2003                    |   | Daily        |       | Variable |       | 1.50              | %          | 31,018,000            |       | 1.30 | % | 8,750,000 |   |
|                         |   |         |       |     |       |              |       |                  |       |   |   |   |   |
| Total Principal  Outstanding |   |         |       |     |       |              |       | $                     | 41,018,000 |   |   |   | $ | 18,750,000 |   |
|                         |   |         |       |     |       |              |       |                  |       |   |   |   |   |
| Weighted Average Rate        |   |         |       |     |       | 2.59              | %          |                  |       | 3.76 | % |   |   |

 

 

The Company has an unsecured note payable of approximately $543,000 atJune 30, 2003 and $740,000 at December 31, 2002.  The note bears interest at the lender’s prime rate minus 50 basispoints.

 

16

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**RESULTSOF OPERATIONS**

 

**Net Interest Income:**

** **

Netinterest income is the principal component of a financial institution’s incomestream and represents the difference, or spread, between interest and feeincome generated from earning assets and the interest expense paid on depositsand borrowed funds.  Fluctuations ininterest rates as well as volume and mix changes in earning assets and interestbearing liabilities can materially impact net interest income.

 

Forthe six months ended June 30, 2003, the Company’s net interest income increased$1,247,000 to $6,892,000 compared to June 30, 2002.  Total interest income increased $957,000 and is attributed toloans, including fees income which increased $1,211,000 partially offset by adecrease in interest-bearing deposits income of $161,000.  The Company reallocated its mix of earningassets by moving excess funds held in low yielding interest bearing deposits tohigher yielding loans assets.  Inaddition, interest expense on deposits decreased $564,000 as the Company wasable to lower its funding cost for the six month period ended June 30, 2003compared to same period in 2002.  Thisdecrease in interest on deposits was partially offset by a $274,000 increase ininterest paid on other borrowings due to an increase in the amount ofborrowings outstanding during the six month period of 2003 compared with 2002.

 

Netinterest income increased $713,000 for the three month period ended June 30,2003 as compared with the same period of the previous year.  The increase in net interest income resultedfrom the increase in the amount of higher yielding loans assets which generatedadditional interest income of $864,000, partially offset by a $70,000 decreasein interest bearing deposits compared to the same period last year.  In addition, interest expense on depositsdecreased $146,000 for the three month period ended June 30, 2003 as theCompany was able to lower its funding cost compared to same period in2002.  This decrease in interest ondeposits was partially offset by a $175,000 increase in interest paid on otherborrowings due to an increase in the amount of borrowings outstanding.

** **

**Noninterest income:**

** **

Noninterestincome consists of revenues generated from a broad range of financial servicesand activities, including fee-based services, origination fees from MortgageServices, and profits and commissions earned through securities and insurancesales.  In addition, gains and lossesrealized from the sale of investment portfolio securities and sales of assets areincluded in noninterest income. Noninterest income totaled $2,540,000 for thesix month period ended June 30, 2003, a decrease of $274,000 or 9.7% comparedwith the same period ended June 30, 2002. This decrease is attributed to a$120,000 decrease in origination fees from the Company’s mortgage subsidiaryand a $121,000 decrease in other operating income.   In March 2002, the Company’s mortgage subsidiary’s operationsceased and all mortgage loan activities are presented as a component of theBank’s operations within other operating income.  The decrease in other operating income is attributed to variousimmaterial components of other operating income including other recoveries.

 

Forthe three month period ended June 30, 2003, noninterest income totaled$1,392,000, a decrease of $70,000 or 4.8% compared to the three month periodended June 30, 2002.  This decrease isattributed to a $84,000 decrease in other operating income, partially offset byan $8,000 increase in service charges fees and a $6,000 increase in gains onthe sale of securities.

 

17

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**Noninterest expense**:

 

Noninterest expense totaled $7,452,000 for the six month period endedJune 30, 2003, an increase of $207,000 or 2.9% compared to the same period lastyear.  The increase, in large part, isdue to the acquisition of CFS Bancshares, Inc. on February 28, 2003 and theresulting growth in the Company’s operations.

 

Salaries and employeebenefits increased $120,000 or 3.4% for the six month period ended June 30,2003 compared to the same period in 2002. This increase is attributed to approximately 32 employees at the AlabamaDivision acquired during the purchase of CFS Bancshares, Inc.  As of June 30, 2003, the company completedit conversion of the Alabama Division’s computer system to the Company’scomputer system.  As a result, theCompany plans to eliminate any overlapping functions to reduce salariesexpense.  For the three month periodended June 30, 2003, salaries and employee benefits increased $381,000primarily as a result of the acquisition of the Alabama Division and an earlyretirement program offered during the three month period ended June 30,2003.  The additional salary and benefitcosts were partially offset by a $251,000 gains realized on the curtailment ofthe Company’s postretirement medical and life plans on April 1, 2003.

 

Net occupancy and equipment expense increased by $195,000 or17.6% to $1,302,000 for the six month period ended June 30, 2003 comparedto the same period in 2002.  Similarly,for the three month period ended June 30, 2003, net occupancy and equipmentexpense increased by $189,000. These increases are primarily the results of theacquisition of the Alabama Division on February 28, 2003, which has three fullservice branches.  In June 2003, theCompany consolidated two branches into its Cascade branch, located in SouthwestAtlanta, Georgia.  The consolidatedbranches were closed by the Company to control overhead cost.

 

Other operating expenses, decreased $108,000 or 4.1%to $2,519,000 for the six month period ended June 30, 2003, compared to$2,627,000 for the same period in 2002. This decrease is primarily due to also due to management’s efforts tocontrol overhead costs.   For the threemonth period ended June 30, 2003, other operating expenses increased $63,000primarily as a result of the acquisition of the Alabama Division on February28, 2003.

 

## ***INTERESTRATE SENSITIVITY MANAGEMENT***

 

Interest rate sensitivity management involves managing the potentialimpact of interest rate movements on net interest income within acceptablelevels of risk.  The Company seeks toaccomplish this by structuring the balance sheet so that repricingopportunities exist for both assets and liabilities in equivalent amounts andtime intervals.  Imbalances in theserepricing opportunities at any point in time constitutes a financialinstitution’s interest rate risk.  TheCompany’s ability to reprice assets and liabilities in the same dollar amountsand at the same time minimizes interest rate risk.

 

One method of measuring the impact ofinterest rate sensitivity is the cumulative gap analysis.  The difference between interest ratesensitive assets and interest rate sensitive liabilities at various timeintervals is referred to as the gap. The Company is liability sensitive on a short-term basis as reflected inthe following table.  Generally, a netliability sensitive position indicates that there would be a negative impact onnet interest income in an increasing rate environment.  However, interest rate sensitivity gap doesnot necessarily indicate the impact of general interest rate movements on thenet interest margin, since all interest rates and yields do not adjust at thesame

 

18

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velocity and the repricing of variouscategories of assets and liabilities is subject to competitive pressures andthe needs of the Company’s customers. In addition, various assets and liabilities indicated as repricingwithin the same period may in fact reprice at different times within such periodand at different rates.  Forconservative purposes, the Company has included demand deposits such as NOW,money market and savings accounts in the three month category.  However, the actual repricing of theseaccounts may lag beyond twelve months. The interest rate sensitivity gap is only a general indicator ofpotential effects of interest rate changes on net interest income.

 

The following table sets forth thedistribution of the repricing of the Company’s interest rate sensitive assetsand interest rate sensitive liabilities as of June 30, 2003.

 
|                                                                    |   | **Cumulative  amounts as of June 30, 2003  Maturing and repricing within** |     |
|-------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|----------|
|                                                                    |   | **3  Months**                                                              |     | **3 to 12  Months** |   | **1 to 5  Years** |   | **Over  5 Years** |   | **Total** |   |
|                                                                    |   | **(amounts  in thousands, except ratios)**                                 |     |
| Interest-sensitive assets:                                              |   |                                                                       |     |   |   |   |   |   |   |   |   |
| Investments                                                             |   | $                                                                          | 100      |   | $ | 157 |   | $ | 5,237 |   | $ | 107,733 |   | $ | 113,227 |   |
| Certificates of deposit                                                 |   | 1,095                                                                      |     | 1,900 |   | 253 |   | — |   | 3,248 |   |
| Loans                                                                   |   | 10,053                                                                     |     | 21,390 |   | 85,916 |   | 88,953 |   | 206,312 |   |
| Federal Funds Sold                                                      |   | 725                                                                        |     | — |   | — |   | — |   | 725 |   |
| Interest-bearing deposits with other banks                              |   | 980                                                                        |     | — |   | — |   | — |   | 980 |   |
| Total interest-sensitive assets                                         |   | $                                                                          | 12,953   |   | $ | 23,447 |   | $ | 91,406 |   | $ | 196,686 |   | $ | 324,492 |   |
|                                                                    |   |                                                                       |     |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |   |                                                                       |     |   |   |   |   |   |   |   |   |
| Deposits   (a)                                                     |   | $                                                                          | 150,261  |   | $ | 57,816 |   | $ | 17,538 |   | $ | 1,900 |   | $ | 227,515 |   |
| Notes payable                                                           |   | 543                                                                        |     | — |   | — |   | — |   | 543 |   |
| Trust preferred securities                                              |   | —                                                                     |     | — |   | 5,000 |   | — |   | 5,000 |   |
| Other borrowings                                                        |   | 41,018                                                                     |     | — |   | — |   | — |   | 41,018 |   |
| Total interest-sensitive liabilities                                    |   | $                                                                          | 191,822  |   | $ | 57,816 |   | $ | 22,538 |   | $ | 1,900 |   | $ | 274,076 |   |
|                                                                    |   |                                                                       |     |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |   | $                                                                          | (178,869 | ) | $ | (34,369 | ) | $ | 68,868 |   | $ | 194,786 |   | $ | 50,416 |   |
|                                                                    |   |                                                                       |     |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to  total interest-sensitive assets |   | (55.12                                                                     | )%       | (65.71 | )% | (44.49 | )% | 15.54 | % | 15.54 | % |

 

(a)Savings, Now and money market deposits totaling  $110,024 are included in the maturing in 3 months classification.

 

**LIQUIDITY**

 

Liquidity is the ability of the Company to convert assets into cash orcash equivalents without significant loss and to raise additional funds byincreasing liabilities. Liquidity management involves maintaining the Company’sability to meet the day-to-day cash flow requirements of its customers, whetherthey are depositors wishing to withdraw funds or borrowers requiring funds to meettheir credit needs.  Without properliquidity management, the Company would not be able to perform the primaryfunction of a financial intermediary and would, therefore, not be able to meetthe needs of the communities we serve. Additionally, the parent holding company requires cash for variousoperating needs including: dividends to shareholders; business combinations;capital injections to its subsidiaries; the servicing of debt; and the paymentof general corporate

 

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expenses.

 

The primary source of liquidity for the parent holding company isdividends from the Bank. The amount of dividends paid by the Bank to theCompany is limited by various banking regulatory agencies.  The Georgia Department of Banking andFinance regulates the dividend payments and must approve dividend payments thatexceed 50% of the Bank’s net income for the prior year. The total dividendsthat could be paid by the Bank to the Company in 2003 without prior regulatoryapproval is approximately $928,000. Also, the Company has access to various capital markets. The Companydoes not anticipate any liquidity requirements in the near future that it willnot be able to meet.  In March 2003, theBank paid cash dividends totaling $928,000 to the Company.

 

Asset and liability management functions not only serve to assureadequate liquidity in order to meet the needs of the Company’s customers, butalso to maintain an appropriate balance between interest-sensitive assets andinterest-sensitive liabilities so that the Company can earn a return that meetsthe investment requirements of its shareholders.  Daily monitoring of the sources and uses of funds is necessary tomaintain an acceptable cash position that meets both requirements.

 

The asset portion of the balance sheet provides liquidity primarilythrough loan principal repayments, maturities of investment securities and, toa lesser extent, sales of investment securities available for sale and tradingaccount securities. Other short-term investments such as federal funds sold,securities purchased under agreements to resell and maturing interest bearingdeposits with other banks, are additional sources of liquidity funding.

 

Theliability portion of the balance sheet provides liquidity through variouscustomers’ interest bearing and noninterest bearing deposit accounts. Federalfunds purchased, securities sold under agreements to repurchase and othershort-term borrowings are additional sources of liquidity and, basically,represent the Company’s incremental borrowing capacity. These sources ofliquidity are short-term in nature and are used as necessary to fund assetgrowth and meet short-term liquidity needs.

 

**CAPITAL RESOURCES**

 

Shareholders’ equity increased $1,765,000 for the six months ended June30, 2003, due to the increase change in retained earnings and an increase inaccumulated other comprehensive income. On March 15, 2003, the Company paid a cash dividend of approximately$312,000 to stockholders of record as of March 1, 2003.  The annual dividend rate in 2003 was $0.15per common share.  For the six monthperiod ended June 30, 2003, accumulated other comprehensive income increased$754,000 to $1,156,000, compared with an accumulated other comprehensive incomeof $402,000 at December 31, 2002.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total and Tier 1 capital torisk weighted assets, and Tier 1 capital to average assets.  As of June 30, 2003, the Company’s banksubsidiary’s total and Tier 1 capital to risk weighted assets and Tier 1 toaverage assets were 13%, 12% and 8% respectively.  As of June 30, 2003, the Company meets all capital adequacy requirementsto which it is subject.

 

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# **ITEM 3.**  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

** **

Quantitative information about market risk is asfollows (in thousands):

 
|                       |   | **Carrying  Value** |    | **Fair  Value** |   | **% Increase (Decrease) in  Fair Value due to Rate Movement** |   |
|----------------------------|--------|---------------------|---------|-----------------|--------|---------------------------------------------------------------|--------|
|                       |   |                |    |            |   | **Down 100bps**                                               |   | **Up 100 bps** |   |
|                       |   |                |    |            |   |                                                          |   |   |   |
| Investments                |   | $                   | 113,227 |            | $      | 113,542                                                       |   | 1.92 | % | (3.15 | )% |
| Loans                      |   | 206,312             |    | 200,535         |   | 3.40                                                          |   | (4.60 | ) |
| Interest-bearing  deposits |   | 227,515             |    | 225,012         |   | 1.70                                                          |   | (1.70 | ) |
| Other borrowings           |   | 46,561              |    | 54,290          |   | 5.70                                                          |   | (5.30 | ) |
|                            |        |                     |         |                 |        |                                                               |        |  |  |  |  |

 

The Company has adopted an asset/liability management program tomonitor the Company’s interest rate sensitivity and to ensure that the Companyis competitive in the loan and deposit markets.  Management seeks to manage the relationship betweeninterest-sensitive assets and liabilities in order to protect against wideinterest rate fluctuations, including those resulting from inflation.  The Company has not entered into anyderivative financial instruments such as futures, forwards, swaps oroptions.  Additionally, refer to ourinterest sensitive management and liquidity disclosures within Part 1, Item 2,of this Form 10-Q/A.

# ** **

# **ITEM 4.**  CONTROLSAND PROCEDURES

 

Based on the evaluation of our disclosure controls and procedures, theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective as of June 30, 2003 in timely alerting them to material informationrequired to be included in our reports filed with or furnished to theSecurities and Exchange Commission. There have been no changes in the Company’s internal controls overfinancial reporting that occurred during the quarter ended June 30, 2003 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

 

# **PART II.  OTHER INFORMATION**

 
| **ITEM 1.** |   | **LEGAL PROCEEDINGS**                                                                                                                                                |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                 |
|        |   | The Company is not aware of any  material pending legal proceedings to which the Company or its subsidiary is  a party or to which any of their property is subject. |
|        |   |                                                                                                                                                                 |
| **ITEM 2.** |   | **CHANGES IN  SECURITIES**                                                                                                                                           |
|        |   |                                                                                                                                                                 |
|        |   | None                                                                                                                                                                 |
|        |   |                                                                                                                                                                 |
| **ITEM 3.** |   | **DEFAULTS UPON  SENIOR SECURITIES**                                                                                                                                 |
|        |   |                                                                                                                                                                 |
|        |   | None                                                                                                                                                                 |
|        |   |                                                                                                                                                                 |
| **ITEM 4.** |   | **SUBMISSION OF  MATTERS TO VOTE OF SECURITY HOLDERS**                                                                                                               |

 

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|   |   | The Company held its  Annual Shareholders’ Meeting on Wednesday, May 28, 2003, at 10:00 a.m., at  the Atlanta Life Insurance Company, Herndon Plaza, 100 Auburn Avenue, N.E.,  Atlanta, Georgia.  The purpose of the  Annual Shareholders’ Meeting was to elect four (4) Class I directors who will  serve a three year term expiring at the 2006 annual meeting.  The following table presents the results  of the shareholders vote: |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **Directors**     |   | **For**   |   | **Withhold** |   |
|-------------------|--------|-----------|--------|--------------|--------|
|              |   |      |   |         |   |
| Ray Robinson      |   | 1,126,134 |   | 30,682       |   |
| H. Jerome Russell |   | 1,140,014 |   | 16,802       |   |
| Bunny Stokes, Jr. |   | 1,139,739 |   | 17,077       |   |
| James E. Young    |   | 1,139,019 |   | 17,797       |   |

 
| **ITEM 5.** |   | **OTHER INFORMATION**                                                                                                                                                                                                                   |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                    |
|        |   | None                                                                                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                    |
| **ITEM 6.** |   | **EXHIBITS AND  REPORTS ON FORM 8-K**                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                    |
| **(a)**     |   | **Exhibits:**                                                                                                                                                                                                                           |
|        |   |                                                                                                                                                                                                                                    |
|        |   | **Exhibit 31**                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                    |
|        |   | Section 302 Certification by the Company’s executive officers with  respect to the Company’s Quarterly Report on Form 10-Q/A for the quarter  ended June 30, 2003.                                                            |
|        |   |                                                                                                                                                                                                                                    |
|        |   | **Exhibit 32**                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                    |
|        |   | Section 906 Certification pursuant to Section 1350 of Chapter 63 of  Title 18 U.S.C. by the Company’s executive officers with respect to the  Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30,  2003. |
|        |   |                                                                                                                                                                                                                                    |
| **(b)**     |   | **Reports on Form  8-K:**                                                                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                                    |
|        |   | On May 15, 2003, the Company filed a Current Report on Form 8-K  reporting under Item 2, Acquisition of Assets, the acquisition of CFS  Bancshares on February 28, 2003.                                                                |

 

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**SIGNATURES**

** **

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

** **

**CITIZENS BANCSHARES CORPORATION**

** **
| Date:  | January 14, 2004 | By:                                                         | /s/ James E. Young   |
|--------|------------------|-------------------------------------------------------------|----------------------|
|   |             | James E. Young                                              |
|   |             | President and Chief Executive Officer                       |
|   |             |                                                        |                 |
| Date:  | January 14, 2004 | By:                                                         | /s/ Willard C. Lewis |
|   |             | Willard C. Lewis                                            |
|   |             | Senior Executive Vice President and Chief Operating Officer |
|   |             |                                                        |                 |
| Date:  | January 14, 2004 | By:                                                         | /s/ Samuel J. Cox    |
|   |             | Samuel J. Cox                                               |
|   |             | Senior Vice President and Chief Financial Officer           |

 

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