** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 - Q**

** **

| **(Mark  One)** |
|-----------------|
|            |   |   |
| **ý**      |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|            |   |   |
|            |   | **For the  quarterly period ended March 31, 2004** |
|            |   |   |
| **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 area code:     **(404) 659 - 5959** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

ý  Yes  o  No.

 

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

 

APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGSDURING THE PRECEDING FIVE YEARS:

 

Indicate by check markwhether registrant has filed all documents and reports required to be filed bySections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent tothe distribution of securities under a plan confirmed by acourt.     o  Yes  o  No.

 

SEC1296 (08-03)           **Potential persons who are torespond to the collection of information contained in this form are notrequired to respond unless the form displays a currently valid OMB controlnumber.**

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate the number ofshares outstanding for each of the issuer’s classes of common stock as of thelatest practicable date: 1,983,876 shares of Common Stock, $1.00 par value and90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on April30, 2004.

 

 

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**PART 1.                FINANCIAL INFORMATION**

**ITEM 1.  Financial statements**

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2004 AND DECEMBER 31, 2003**

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

 
|                                                                                                      |   | **2004**        |    | **2003** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------|---------|----------|--------|
|                                                                                                      |   | **(Unaudited)** |    |     |   |
| **ASSETS**                                                                                                |   |            |    |     |   |
| Cash and due from banks                                                                                   |   | $               | 10,790  |     | $      | 11,694 |   |
| Interest-bearing deposits with banks                                                                      |   | 1,619           |    | 108      |   |
| Certificates of deposit                                                                                   |   | 1,683           |    | 2,983    |   |
| Investment securities available for sale,  at fair value                                                  |   | 81,707          |    | 97,301   |   |
| Investment securities held to maturity, at  cost                                                          |   | 10,329          |    | 10,553   |   |
| Other investments                                                                                         |   | 1,847           |    | 2,734    |   |
| Loans receivable, net                                                                                     |   | 210,862         |    | 208,814  |   |
| Premises and equipment, net                                                                               |   | 9,003           |    | 9,161    |   |
| Cash surrender value of life insurance                                                                    |   | 8,226           |    | 8,150    |   |
| Foreclosed real estate, net                                                                               |   | 2,431           |    | 2,053    |   |
| Other assets                                                                                              |   | 6,721           |    | 6,892    |   |
|                                                                                                      |   |            |    |     |   |
| Total assets                                                                                              |   | $               | 345,218 |     | $      | 360,443 |   |
|                                                                                                      |   |            |    |     |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                             |   |            |    |     |   |
|                                                                                                      |   |            |    |     |   |
| LIABILITIES:                                                                                              |   |            |    |     |   |
| Noninterest-bearing deposits                                                                              |   | $               | 74,470  |     | $      | 55,832 |   |
| Interest-bearing deposits                                                                                 |   | 219,972         |    | 220,947  |   |
|                                                                                                      |   |            |    |     |   |
| Total deposits                                                                                            |   | 294,442         |    | 276,779  |   |
|                                                                                                      |   |            |    |     |   |
| Accrued expenses and other liabilities                                                                    |   | 3,048           |    | 3,219    |   |
| Federal funds purchased                                                                                   |   | —          |    | 4,000    |   |
| Notes payable                                                                                             |   | 540             |    | 540      |   |
| Trust preferred securities                                                                                |   | 5,000           |    | 5,000    |   |
| Advances from Federal Home Loan Bank                                                                      |   | 16,961          |    | 46,961   |   |
|                                                                                                      |   |            |    |     |   |
| Total liabilities                                                                                         |   | 319,991         |    | 336,499  |   |
|                                                                                                      |   |            |    |     |   |
| COMMITMENTS AND CONTINGENCIES                                                                             |   |            |    |     |   |
|                                                                                                      |   |            |    |     |   |
| STOCKHOLDERS’ EQUITY:                                                                                |   |            |    |     |   |
| Common stock - $1 par value; 15,000,000  shares authorized; 2,230,065 shares issued                       |   | 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                                                                                         |   | 16,777          |    | 16,114   |   |
| Treasury stock at cost, 246,189 and 249,518 shares at March 31, 2004  and December 31, 2003, respectively |   | (1,999          | )       | (2,025   | )      |
| Accumulated other comprehensive income, net  of income taxes                                              |   | 684             |    | 90       |   |
|                                                                                                      |   |            |    |     |   |
| Total stockholders’ equity                                                                           |   | 25,227          |    | 23,944   |   |
|                                                                                                      |   |            |    |     |   |
|                                                                                                      |   | $               | 345,218 |     | $      | 360,443 |   |

 

See notes toconsolidated financial statements.

 

2

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**CITIZENS BANCSHARESCORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFINCOME**

**(Unaudited - In thousands,except per share data)**

** **
|                                                 |   | **Three  Months  Ended March 31,** |   |
|------------------------------------------------------|--------|------------------------------------|--------|
|                                                 |   | **2004**                           |   | **2003** |   |
| Interest income:                                     |   |                               |   |   |   |
| Loans, including fees                                |   | $                                  | 3,941  |   | $ | 3,465 |   |
| Investment securities:                               |   |                               |   |   |   |
| Taxable                                              |   | 819                                |   | 653 |   |
| Tax-exempt                                           |   | 207                                |   | 235 |   |
| Federal funds sold                                   |   | —                             |   | 2 |   |
| Interest-bearing deposits                            |   | 13                                 |   | 40 |   |
|                                                 |   |                               |   |   |   |
| Total interest income                                |   | 4,980                              |   | 4,395 |   |
|                                                 |   |                               |   |   |   |
| Interest expense:                                    |   |                               |   |   |   |
| Deposits                                             |   | 700                                |   | 918 |   |
| Other borrowings                                     |   | 281                                |   | 263 |   |
| Total interest expense                               |   | 981                                |   | 1,181 |   |
|                                                 |   |                               |   |   |   |
| Net interest income                                  |   | 3,999                              |   | 3,214 |   |
|                                                 |   |                               |   |   |   |
| Provision for loan losses                            |   | 300                                |   | 215 |   |
|                                                 |   |                               |   |   |   |
| Net interest income after provision for  loan losses |   | 3,699                              |   | 2,999 |   |
|                                                 |   |                               |   |   |   |
| Noninterest income:                                  |   |                               |   |   |   |
| Service charges on deposits                          |   | 843                                |   | 841 |   |
| Gain on sales of securities                          |   | 58                                 |   | — |   |
| Gain on sales of assets                              |   | 7                                  |   | — |   |
| Other operating income                               |   | 290                                |   | 308 |   |
|                                                 |   |                               |   |   |   |
| Total noninterest income                             |   | 1,198                              |   | 1,149 |   |
|                                                 |   |                               |   |   |   |
| Noninterest expense:                                 |   |                               |   |   |   |
| Salaries and employee benefits                       |   | 1,954                              |   | 1,756 |   |
| Net occupancy and equipment                          |   | 651                                |   | 562 |   |
| Other operating expenses                             |   | 1,432                              |   | 1,068 |   |
|                                                 |   |                               |   |   |   |
| Total noninterest expense                            |   | 4,037                              |   | 3,386 |   |
|                                                 |   |                               |   |   |   |
| Income before income taxes                           |   | 860                                |   | 762 |   |
|                                                 |   |                               |   |   |   |
| Income tax expense                                   |   | 198                                |   | 158 |   |
|                                                 |   |                               |   |   |   |
| Net income                                           |   | $                                  | 662    |   | $ | 604 |   |
|                                                 |   |                               |   |   |   |
| Net income per share - basic and diluted             |   | $                                  | 0.32   |   | $ | 0.29 |   |
|                                                 |   |                               |   |   |   |
| Weighted average outstanding shares - basic          |   | 2,072                              |   | 2,079 |   |
|                                                 |   |                               |   |   |   |
| Weighted average outstanding shares -  diluted       |   | 2,082                              |   | 2,079 |   |
| Dividends per common share                           |   | $                                  | — |   | $ | 0.15 |   |

 

Seenotes to consolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THE THREE MONTHS ENDED MARCH31, 2004 AND 2003**

**(In thousands)**

** **
|                                                                                        |   | **March 31,**   |       |
|---------------------------------------------------------------------------------------------|--------|-----------------|------------|
|                                                                                        |   | **2004**        |       | **2003** |   |
|                                                                                        |   | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                   |   |            |       |   |   |
| Net income                                                                                  |   | $               | 662        |   | $ | 604 |   |
| **Adjustments to reconcile net income to net  cash provided by operating activities:**      |   |            |       |   |   |
| Provision for loan losses                                                                   |   | 300             |       | 215 |   |
| Depreciation                                                                                |   | 261             |       | 257 |   |
| Amortization and accretion, net                                                             |   | 111             |       | 36 |   |
| Provision for deferred income taxes                                                         |   | 114             |       | — |   |
| Gain on sale of assets and investments                                                      |   | (65             | )          | — |   |
| Change in other assets                                                                      |   | (426            | )          | 1,402 |   |
| Change in accrued expenses and other  liabilities                                           |   | (171            | )          | 1,434 |   |
| Net cash provided by operating activities                                                   |   | 786             |       | 3,948 |   |
|                                                                                        |   |            |       |   |   |
| **INVESTING ACTIVITIES:**                                                                   |   |            |       |   |   |
| Proceeds from calls and maturities of  investment securities held to maturity               |   | 217             |       | 335 |   |
| Proceeds from sales and maturities of  investment securities available for sale             |   | 17,397          |       | 5,029 |   |
| Purchases of investment securities held to  maturity                                        |   | —          |       | (3,651 | ) |
| Purchases of investment securities  available for sale                                      |   | (1,016          | )          | (8,462 | ) |
| Net change in other investments                                                             |   | 887             |       | (395 | ) |
| Net change in loans receivable                                                              |   | (2,576          | )          | 3,618 |   |
| Net expenditures on foreclosed real estate                                                  |   | 18              |       | — |   |
| Increase in cash surrender value of life  insurance                                         |   | —          |       | (323 | ) |
| Net cash and cash equivalents acquired from  CFS Bancshares                                 |   | —          |       | 2,802 |   |
| Purchases of premises and equipment, net                                                    |   | (95             | )          | (113 | ) |
| Net change in interest bearing deposits  with banks                                         |   | (1,511          | )          | 14,314 |   |
| Net change in certificates of deposit                                                       |   | 1,300           |       | — |   |
| Net cash provided by investing activities                                                   |   | 14,621          |       | 13,154 |   |
|                                                                                        |   |            |       |   |   |
| **FINANCING ACTIVITIES:**                                                                   |   |            |       |   |   |
| Net change in deposits                                                                      |   | 17,663          |       | (23,515 | ) |
| Sale of treasury stock                                                                      |   | 26              |       | — |   |
| Net change in advances from Federal Home  Loan Bank                                         |   | (30,000         | )          | 15,300 |   |
| Decrease in federal funds sold                                                              |   | (4,000          | )          | — |   |
| Dividends paid                                                                              |   | —          |       | (312 | ) |
|                                                                                        |   |            |       |   |   |
| Net cash used in financing activities                                                       |   | (16,311         | )          | (8,527 | ) |
|                                                                                        |   |            |       |   |   |
| Net change in cash and cash equivalents                                                     |   | (904            | )          | 8,575 |   |
|                                                                                        |   |            |       |   |   |
| Cash and and cash equivalents, beginning of  period                                         |   | 11,694          |       | 11,117 |   |
|                                                                                        |   |            |       |   |   |
| Cash and and cash equivalents at end of  period                                             |   | $               | 10,790     |   | $ | 19,692 |   |
|                                                                                        |   |            |       |   |   |
| **Supplemental disclosures of cash paid  during the period for:**                           |   |            |       |   |   |
| Interest                                                                                    |   | $               | 1,017      |   | $ | 1,066 |   |
|                                                                                        |   |            |       |   |   |
| Income taxes                                                                                |   | $               | 150        |   | $ | 181 |   |
|                                                                                        |   |            |       |   |   |
| **Supplemental disclosures of noncash  transactions:**                                      |   |            |       |   |   |
| Change in unrealized gain (loss) on  investment securities available for sale, net of taxes |   | $               | 594        |   | $ | 294 |   |

 

See notes to consolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

**Notes to the Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation**

 

Citizens BancsharesCorporation (the “Company”) is a holding company that provides a full range ofcommercial banking and mortgage brokerage services to individual and corporatecustomers in metropolitan Atlanta and Columbus, Georgia, and in Birmingham andEutaw, 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 unauditedconsolidated financial statements have been prepared pursuant to the rules andregulations for reporting on Form 10-Q. Accordingly, certain disclosures required by generally accepted accountingprinciples are not included herein. These interim statements should be read inconjunction with the financial statements and notes thereto included in theCompany’s latest Annual Report on Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 2003.  The results of operations for the interimperiods reported herein are not necessarily representative of the resultsexpected for the full 2004 fiscal year.

 

The consolidated financialstatements of the Company for the three month periods ended March 31, 2004 and2003 are unaudited.  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 periodshave been included.  All adjustments areof a normal recurring nature.  Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

**AccountingPolicies**

 

The Company’s consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”), whichoften require the judgment of management in the selection and application ofcertain accounting principles and methods. Reference is made to the accounting policies of the Company described inthe notes to the consolidated financial statements contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.  The Company has followed those policies inpreparing this report.  Managementbelieves that the quality and reasonableness of its most critical policiesenable the fair presentation of its financial position and of its results ofoperations.

 

**RecentlyIssued Accounting Standards**

 

In December 2002, theFinancial Accounting Standards Board (FASB) issued Statements of AccountingStandards (SFAS) No. 148, *“Accounting forStock-Based Compensation-Transition and Disclosure—an Amendment of FASBStatement No. 123.”* This Statement amends SFAS No. 123*, “Accounting for Stock-Based Compensation,”*to provide alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based employee compensation. In addition,this Statement amends the disclosure requirements of SFAS No. 123 to requiremore prominent disclosures about the method of accounting for stock-basedemployee compensation and

 

5

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the effect of the methodused on reported results in both annual and interim financial statements. ThisStatement was effective for financial statements for fiscal years ending afterDecember 15, 2002. As permitted by SFAS No. 148, during 2004 the Companycontinued to apply the provisions of Accounting Principles Board Opinion No.25, *“Accounting for Stock Issued toEmployees,”* for all employee stock option grants and has elected todisclose pro forma net income and earnings per share amounts as if thefair-value based method had been applied in measuring compensation costs.

 

The Company’s as reportedand pro forma information, including stock-based compensation expense as if thefair-value based method had been applied, is illustrated in the following table(in thousands):

 
|                                                                                   |   | **For the three months ended March  31,** |   |
|----------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                   |   | **2004**                                  |   | **2003** |   |
|                                                                                   |   |                                      |   |   |   |
| As reported net income available to common  stockholders                               |   | $                                         | 662    |   | $ | 604 |   |
| Less: stock-based compensation expense  determined under fair value method, net of tax |   | (7                                        | )      | (4 | ) |
|                                                                                   |   |                                      |   |   |   |
| Pro forma net income                                                                   |   | $                                         | 655.00 |   | $ | 600.00 |   |
|                                                                                   |   |                                      |   |   |   |
| As reported earnings per share                                                         |   | $                                         | 0.32   |   | $ | 0.29 |   |
| Pro forma earnings per share                                                           |   | $                                         | 0.32   |   | $ | 0.29 |   |
| As reported earnings per diluted share                                                 |   | $                                         | 0.32   |   | $ | 0.29 |   |
| Pro forma earnings per diluted share                                                   |   | $                                         | 0.31   |   | $ | 0.29 |   |

 

Compensation expense in thepro forma disclosures is not indicative of future amounts, as options vest overseveral years and additional grants could be made each year.

 

**2.  INTANGIBLE ASSETS**

 

Finite lived intangibleassets of the Company represent deposit assumption premiums recorded upon thepurchase of certain assets and liabilities from other financial institutions.  Deposit assumption premiums are amortizedover seven years, the estimated average lives of the deposit bases acquired,using the straight-line method and are included within other assets on theConsolidated Balance Sheets.

 

The Company applies a fairvalue-based impairment test to the carrying value of goodwill on an annualbasis and on an interim basis if certain events or circumstances indicate thatan impairment loss may have been incurred.

 

The following table presentsinformation about our intangible assets at March 31, 2004 and December 31, 2003(in thousands):

 

6

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|                          |   | **March 31, 2004**         |   | **December 31, 2003**         |   |
|-------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                          |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Unamortized intangible asset: |   |                       |   |                          |   |   |   |   |   |
| Goodwill                      |   | $                          | 362    |                          | $      | — |   | $ | 362 |   | $ | — |   |
|                          |   |                       |   |                          |   |   |   |   |   |
| Amortized intangible assets:  |   |                       |   |                          |   |   |   |   |   |
| Core deposit intangibles      |   | $                          | 2,836  |                          | $      | 1,486 |   | $ | 2,836 |   | $ | 1,385 |   |

 

The following table presentsinformation about aggregate amortization expense:

 
|                                                                                                    |   | **For the 3  months  ended March 31, 2004** |   | **For the 3  months  ended March 31, 2003** |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                    |   |                                        |   |                                        |   |
| Aggregate amortization expense of core  deposit intangibles:                                            |   | $                                           | 101    |                                        | $      | 88 |   |
|                                                                                                    |   |                                        |   |                                        |   |
| Estimated aggregate amortization expense of  core deposit intangibles for the years ending December 31: |   |                                        |   |                                        |   |
|                                                                                                    |   |                                        |   |                                        |   |
| 2004                                                                                                    |   | $                                           | 405    |                                        |   |   |
| 2005                                                                                                    |   | $                                           | 405    |                                        |   |   |
| 2006                                                                                                    |   | $                                           | 405    |                                        |   |   |
| 2007                                                                                                    |   | $                                           | 112    |                                        |   |   |
| 2008                                                                                                    |   | $                                           | 53     |                                        |   |   |
|                                                                                                         |        |                                             |        |                                             |        |  |  |

 

**3.  COMPREHENSIVE INCOME**

 

Comprehensive incomeincludes: (1) reported net income and (2) unrealized gains and losses onmarketable securities.  The followingtable shows our comprehensive income for the three months ended March 31, 2004and 2003 (in thousands):

 
|                       |   | **Three  Months Ended March 31,** |
|----------------------------|--------|-----------------------------------|
|                       |   | **2004**                          |   | **2003** |   |
|                       |   |                              | ** ** |   | ** ** |
| Net Income                 |   | $                                 | 662 |   | $ | 604 |   |
|                       |   |                              |   |   |   |
| Other comprehensive income |   | 594                               |   | 294 |   |
|                       |   |                              |   |   |   |
| Comprehensive income       |   | $                                 | 1,256 |   | $ | 898 |   |

 

7

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**4.  NET INCOME PERCOMMON AND COMMON EQUIVALENT SHARE**

 

Basic and diluted net incomeper common and potential common share has been calculated based on the weightedaverage number of shares outstanding. The following schedule reconciles the numerator and denominator of thebasic and diluted net income per common and potential common share for thethree months ended March 31, 2004 and 2003 (in thousands, except per sharedata):

 
|                                                             |   | **Net Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|------------------------------------------------------------------|--------|-----------------------------|--------|---------------------------|--------|-----------------------|--------|
|                                                             |   |                        |   |                      |   |                  |   |
| **Three month ended March 31, 2004**                             |   |                        |   |                      |   |                  |   |
|                                                             |   |                        |   |                      |   |                  |   |
| Basic earnings per share                                         |   | $                           | 662    |                      | 2,072  |                  | $      | 0.32 |   |
| Effect of dilutive securities: options to purchase common shares |   | —                      |   | 10                        |   | —                |   |
|                                                             |   |                        |   |                      |   |                  |   |
| Diluted earnings per share                                       |   | $                           | 662    |                      | 2,082  |                  | $      | 0.32 |   |
|                                                             |   |                        |   |                      |   |                  |   |
| **Three month ended March 31, 2003**                             |   |                        |   |                      |   |                  |   |
|                                                             |   |                        |   |                      |   |                  |   |
| Basic earnings per share                                         |   | $                           | 604    |                      | 2,079  |                  | $      | 0.29 |   |
| Effect of dilutive securities: options to purchase common shares |   | —                      |   | —                    |   | —                |   |
|                                                             |   |                        |   |                      |   |                  |   |
| Diluted earnings per share                                       |   | $                           | 604    |                      | 2,079  |                  | $      | 0.29 |   |

 

8

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS** |
|-------------|-----------------------------------------------|

 

**INTRODUCTION**

 

Citizens BancsharesCorporation (the “Company”) is a holding company that provides a full range ofcommercial banking and mortgage brokerage services to individuals and corporatecustomers in its primary market areas, metropolitan Atlanta and Columbus,Georgia, and Birmingham and Eutaw, Alabama through its wholly owned subsidiary,Citizens Trust Bank (the “Bank”).  TheBank is a member of the Federal Reserve System and operates under a statecharter.  The Company serves itscustomers through 12 full-service branches in Georgia and Alabama.

 

**ForwardLooking Statements**

 

In addition to historicalinformation, this report on Form 10-Q may contain forward-looking statements.For this purpose, any statements contained herein, including documents incorporatedby reference, that are not statements of historical fact may be deemed to beforward-looking statements. Forward-looking statements are subject to numerousassumptions, risks and uncertainties. Without limiting the foregoing, the words“believe,” “anticipates,” “plan,” expects,” and similar expressions areintended to identify forward-looking statements.

 

Forward-looking statementsare based on current management expectations and, by their nature, are subjectto risk and uncertainties because of the possibility of changes in underlyingfactors and assumptions. Actual conditions, events or results could differmaterially 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 regulatorypractices or requirements. The Company undertakes no obligation to, nor does itintend to, update forward-looking statements to reflect circumstances or eventsthat occur after the date hereof or to reflect the occurrence of unanticipatedevents.

 

The following discussion isof the Company’s financial condition as of March 31, 2004 and the changes inthe financial condition and results of operations for the three month periodsended March 31, 2004 and 2003.

 

**CriticalAccounting Policies**

 

In response to theSecurities and Exchange Commission’s (“SEC”) Release No. 33-8040, CautionaryAdvice Regarding Disclosure About Critical Accounting Policies, the Company hasidentified the following as the most critical accounting policies upon whichits financial status depends.  The criticalpolicies were determined by considering accounting policies that involve themost complex or subjective decisions or assessments.  The Company’s most critical accounting policies relate to:

 

**InvestmentSecurities**– TheCompany classifies investments in one of three categories based on management’sintent upon purchase: held to maturity securities which are reported atamortized cost, trading securities which are reported at fair value withunrealized holding gains and losses included in earnings, and available forsale securities which are recorded at fair value with unrealized holding gainsand losses included as a component of accumulated other comprehensiveincome.  The Company had no investmentsecurities classified as trading

 

9

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securities during 2004 or2003.

 

Premiums and discounts onavailable for sale and held to maturity securities are amortized or accretedusing a method which approximates a level yield.

 

Gains and losses on sales ofinvestment securities are recognized upon disposition, based on the adjustedcost of the specific security.  Adecline in market value of any security below cost that is deemed other thantemporary is charged to earnings resulting in the establishment of a new costbasis for the security.

 

**Loans**– Loans are reported at principal amountsoutstanding less unearned income and the allowance for loan losses.  Interest income on loans is recognized on alevel-yield basis. Loan fees and certain direct origination costs are deferredand amortized over the estimated terms of the loans using the level-yieldmethod.  Discounts on loans purchasedare accreted using the level-yield method over the estimated remaining life ofthe loan purchased.

 

**Allowancefor Loan Losses** - TheCompany provides for estimated losses on loans receivable when any significantand permanent decline in value occurs. These estimates for losses are based on not only on individual assetsand their related cash flow forecasts, sales values, independent appraisals,but also the volatility of certain real estate markets, and the concern fordisposing of real estate in distressed markets.  For loans that are pooled for purposes of determining necessaryprovisions, estimates are based on loan types, history of charge-offs, andother delinquency analyses.  Therefore,the value 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 otheraccounting policies are summarized in Note 1, Summary of Significant AccountingPolicies in the Notes to Consolidated Financial Statements of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.  The Company has followed those policies inpreparing this report.

 

**FINANCIALCONDITION**

 

Citizens BancsharesCorporation’s total assets at March 31, 2004 were $345,218,000, a decrease of $15,225,000 or 4% compared to$360,443,000 at December 31, 2003. This decrease is due to the planned effortof the Company’s management to reduce the size of the Company in order toimprove its earnings and capital to assets ratios.

 

At March 31, 2004, theCompany maintained a balance of cash and due from banks of $10,790,000representing a decrease of $904,000 from December 31, 2003.  Investment securities classified as availablefor sale and held to maturity also decreased $15,594,000 and $224,000,respectively, since December 31, 2003. The decrease in investments available for sale are attributable tosecurity sales made in a planned decision to restructure the investmentportfolio in order to reduce the portfolio duration risk and to fund thewithdrawal of public funds that the Company elected not to renew.  This decision was premised on the fact thatpublic deposits require a significant amount of collateralization in the formof pledged securities.  By opting not torenew some of its public deposits, the Company effectively reduced its cost offunds and relied more on deposits acquired through the open market.

 

10

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Loans receivable, netincreased $2,048,000 to $210,862,000 for the period ended March 31, 2004compared to $208,814,000 at December 31, 2003.

 

Total liabilities decreased$16,508,000 to $319,991,000 at March 31, 2004 compared to $336,499,000 atDecember 31, 2003. Total deposits, a component of total liabilities, increased$17,663,000 from $276,779,000 at December 31, 2003 to $294,442,000 at March 31,2004.  Another significant component oftotal liabilities, advances from Federal Home Loan Bank decreased $30,000,000to $16,961,000.  This decrease inborrowings was funded by the increase in total deposits and the sale andmaturity of investment securities.

 

**INVESTMENTSECURITIES**

 

The Company invests aportion of its assets in U.S. treasury bills and notes, U.S. governmentsponsored agency securities, mortgage backed bonds, as well as certain equitysecurities.  At March 31, 2004 andDecember 31, 2003, the Company’s investment securities portfolio representedapproximately 27% and 31% of total assets, respectively.

 

Investment securitiesavailable for sale are summarized as follows (in thousands):

 
| **At March 31, 2004**                      |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|--------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                       |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S. Government agencies |   | $                   | 9,947  |                         | $      | 185                           |   | $              | — |   | $ | 10,132 |   |
| State, county, and municipal securities    |   | 13,596              |   | 861                          |   |                          |   | 14,457         |   |
| Mortgage-backed securities                 |   | 55,727              |   | 353                          |   | 105                           |   | 55,975         |   |
| Equity securities                          |   | 1,400               |   | —                       |   | 257                           |   | 1,143          |   |
| Totals                                     |   | $                   | 80,670 |                         | $      | 1,399                         |   | $              | 362    |   | $ | 81,707 |   |

 
| **At December 31, 2003**                   |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|--------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                       |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S. Government agencies |   | $                   | 14,820 |                         | $      | 95                            |   | $              | 8      |   | $ | 14,907 |   |
| State, county, and municipal securities    |   | 13,602              |   | 450                          |   | 14                            |   | 14,038         |   |
| Mortgage-backed securities                 |   | 67,343              |   | 241                          |   | 397                           |   | 67,187         |   |
| Equity securities                          |   | 1,400               |   | —                       |   | 231                           |   | 1,169          |   |
| Totals                                     |   | $                   | 97,165 |                         | $      | 786                           |   | $              | 650    |   | $ | 97,301 |   |

 

11

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Investment securities heldto maturity are summarized as follows (in thousands):

 
| **At March 31, 2004**                      |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|--------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                       |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S. Government agencies |   | $                   | 3,000  |                         | $      | 16                            |   | $              | 1      |   | $ | 3,015 |   |
| Mortgage-backed securities                 |   | 1,938               |   | 8                            |   | 13                            |   | 1,933          |   |
| State, county, and municipal securities    |   | 5,391               |   | 329                          |   | —                        |   | 5,720          |   |
|                                       |   |                |   |                         |   |                          |   |           |   |
| Totals                                     |   | $                   | 10,329 |                         | $      | 353                           |   | $              | 14     |   | $ | 10,668 |   |

 
| **At December 31, 2003**                   |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|--------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                       |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S. Government agencies |   | $                   | 3,000  |                         | $      | 9                             |   | $              | 23     |   | $ | 2,986 |   |
| State, county, and municipal securities    |   | 5,549               |   | 213                          |   | —                        |   | 5,762          |   |
| Mortgage-backed securities                 |   | 2,004               |   | 10                           |   | 35                            |   | 1,979          |   |
| Totals                                     |   | $                   | 10,553 |                         | $      | 232                           |   | $              | 58     |   | $ | 10,727 |   |

 

**LOANS**

 

Loans outstanding, byclassification, are summarized as follows (in thousands):

 
|                                    |                       | **March 31,  2004** |    | **December  31,  2003** |   |
|-----------------------------------------|----------------------------|---------------------|---------|-------------------------|--------|
|                                    |                       |                |    |                    |   |
| Commercial, financial, and agricultural |                       | $                   | 17,111  |                    | $      | 16,919 |   |
| Installment                             |                       | 5,804               |    | 13,342                  |   |
| Real estate - mortgage                  |                       | 144,465             |    | 135,194                 |   |
| Real estate - construction              |                       | 15,633              |    | 15,381                  |   |
| Other                                   |                       | 32,437              |    | 32,379                  |   |
|                                    |                       | 215,450             |    | 213,215                 |   |
| Less:                                   | Net deferred loan fees     |                | 598     |                    | 589    |   |
|                                    | Allowance for loan losses  |                | 3,471   |                    | 3,240  |   |
|                                    | Discount on loans acquired |                | 519     |                    | 572    |   |
|                                    |                       |                |    |                    |   |
| Loans receivable, net                   |                       | $                   | 210,862 |                    | $      | 208,814 |   |

 

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**NONPERFORMINGASSETS**

 

Nonperforming assets includenonperforming loans, real estate acquired through foreclosure, and repossessedassets.  Nonperforming loans consist ofloans that are past due with respect to principal or interest more than 90 daysor have been placed on nonaccrual status.

 

With the exception of theloans included within nonperforming assets in the table below, management isnot aware of any loans classified for regulatory purposes as loss, doubtful,substandard, or special mention that have not been disclosed which (1)represent or result from trends or uncertainties which management reasonablyexpects will materially impact future operating results, liquidity, or capitalresources, or (2) represent any information on material credits whichmanagement is aware that causes management to have serious doubts as to theabilities of such borrowers to comply with the loan repayment terms.

 

Nonperforming assetsdecreased by $1,730,000 to $6,800,000 at March 31, 2004 from $8,530,000 atDecember 31, 2003.  Improved monitoringand oversight of loans have contributed to this decline.  Nonperforming assets represents 3.14% ofloans, net of unearned income, discounts, and real estate acquired throughforeclosure at March 31, 2004 as compared to 4.06% at December 31, 2003.

 

The table below presents asummary of the Company’s nonperforming assets at March 31, 2004 and December31, 2003.

 
|                                                                                                            |   | **March 31,  2004**                           |   | **December  31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-------------------------|--------|
|                                                                                                            |   | **(in  thousands, except  financial ratios)** |   |
|                                                                                                            |   |                                          |   |                    |   |
| Nonperforming assets:                                                                                           |   |                                          |   |                    |   |
| Nonperforming loans:                                                                                            |   |                                          |   |                    |   |
| Nonaccrual loans                                                                                                |   | $                                             | 4,363  |                    | $      | 6,477 |   |
| Past-due loans                                                                                                  |   | 6                                             |   | —                  |   |
| Nonperforming loans                                                                                             |   | 4,369                                         |   | 6,477                   |   |
|                                                                                                            |   |                                          |   |                    |   |
| Real estate acquired through foreclosure                                                                        |   | 2,431                                         |   | 2,053                   |   |
| Total nonperforming assets                                                                                      |   | $                                             | 6,800  |                    | $      | 8,530 |   |
|                                                                                                            |   |                                          |   |                    |   |
| Ratios:                                                                                                         |   |                                          |   |                    |   |
| Nonperforming loans to loans, net of  unearned income and discount on loans                                     |   | 2.04                                          | %      | 3.05                    | %      |
|                                                                                                            |   |                                          |   |                    |   |
| Nonperforming assets to loans, net of  unearned income, discounts, and real estate acquired through foreclosure |   | 3.14                                          | %      | 3.98                    | %      |
|                                                                                                            |   |                                          |   |                    |   |
| Nonperforming assets to total assets                                                                            |   | 1.97                                          | %      | 2.37                    | %      |
|                                                                                                            |   |                                          |   |                    |   |
| Allowance for loan losses to nonperforming  loans                                                               |   | 79.45                                         | %      | 50.02                   | %      |
|                                                                                                            |   |                                          |   |                    |   |
| Allowance for loan losses to nonperforming  assets                                                              |   | 51.04                                         | %      | 37.98                   | %      |

 

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**ALLOWANCEFOR LOAN LOSSES**

 

The allowance for loanlosses is primarily available to absorb losses inherent in the loan portfolio.Credit exposures deemed uncorrectable are charged against the allowance forloan losses. Recoveries of previously charged-off amounts are credited to theallowance for loan losses.

 

The Company provides forestimated losses on loans receivable when any significant and permanent declinein value occurs.  These estimates forlosses are based on individual assets and their cash flow forecasts, salesvalues, independent appraisals, the volatility of certain real estate markets,and concern for disposing of real estate in distressed markets.  For loans that are pooled for purposes ofdetermining necessary provisions, estimates are based on loan types, history ofcharge-offs, and other delinquency analyses. Therefore, the value used to determine the provision for losses issubject to the reasonableness of these estimates. The adequacy of the allowancefor loan losses is reviewed on a monthly basis by management and the Board ofDirectors.  On a quarterly basis acomprehensive review of the adequacy of allowance for loan losses isperformed.  This assessment is made inthe context of historical losses as well as existing economic conditions,performance trends within specific portfolio segments, and individualconcentrations of credit.

 

Loans are charged againstthe allowance when, in the opinion of management, such loans are deemeduncollectible and subsequent recoveries are added to the allowance.  For the three months ended March 31, 2004provisions for loan losses totaled $300,000 compared to $215,000 for the sameperiod in 2003.

 

The allowance for loanlosses at March 31, 2004 was approximately $3,471,000, representing 1.62% oftotal loans, net of unearned income and discounts compared to approximately$3,240,000 at December 31, 2003, which represented 1.53% of total loans, net ofunearned income and discounts.

 

Management believes theallowance for loan losses is adequate. While management uses availableinformation to recognize losses on loans, future additions to the allowance maybe necessary based on changes in economic conditions, particularly in themetropolitan Atlanta area. In addition, regulatory agencies, as an integralpart of their examination process, periodically review the Company’s allowancefor loan losses. Such agencies may require the Company to recognize additionsto the allowance based on their judgments about information available to themat the time of their examination.

 

A substantial portion of theCompany’s loan portfolio is secured by real estate in the metropolitan Atlantamarket, including a concentration of loans to churches and conveniencestores.  The Company’s outstandingchurch loans were approximately $53.2 million at March 31, 2004 and $36.6million at December 31, 2003.  TheCompany’s loans to area convenience stores were approximately $27.1 million atMarch 31, 2004 and $27.3 million at December 31, 2003.  Accordingly, the ultimate collectability ofthe substantial portion of the Company’s loan portfolio is susceptible tochanges in market conditions in the metropolitan Atlanta area.

 

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The following table summarizes loans, changesin the allowance for loan losses arising from loans charged off, recoveries onloans previously charged off by loan category, and additions to the allowancewhich have been charged to operating expense as of and for the three monthperiod ended March 31, 2004 (amount in thousands, except financial ratios):

 

 
|                                                                                                                   |   | **2004** |    |
|------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|
|                                                                                                                   |   |     |    |
| Loans, net of unearned income and discounts                                                                            |   | $        | 214,333 |   |
|                                                                                                                   |   |     |    |
| Average loans, net of unearned income,  discounts and the allowance for loan losses                                    |   | $        | 210,542 |   |
|                                                                                                                   |   |     |    |
| Allowance for loans losses at the beginning  of period                                                                 |   | $        | 3,240   |   |
|                                                                                                                   |   |     |    |
| Loans charged off:                                                                                                     |   |     |    |
| Commercial, financial, and agricultural                                                                                |   | —   |    |
| Real estate - loans                                                                                                    |   | 114      |    |
| Installment loans to individuals                                                                                       |   | 72       |    |
| Total loans charged off                                                                                                |   | 186      |    |
|                                                                                                                   |   |     |    |
| Recoveries of loans previously charged off:                                                                            |   |     |    |
| Commercial, financial, and agricultural                                                                                |   | 69       |    |
| Real estate - loans                                                                                                    |   | 21       |    |
| Installment loans to individuals                                                                                       |   | 27       |    |
| Total loans recovered                                                                                                  |   | 117      |    |
|                                                                                                                   |   |     |    |
| Net loans charged off                                                                                                  |   | 69       |    |
|                                                                                                                   |   |     |    |
| Allowance for loan losses transferred from  acquired institution                                                       |   | —   |    |
|                                                                                                                   |   |     |    |
| Additions to allowance for loan losses  charged to operating expense                                                   |   | 300      |    |
|                                                                                                                   |   |     |    |
| Allowance for loan losses at period end                                                                                |   | $        | 3,471   |   |
|                                                                                                                   |   |     |    |
| Ratio of net loans charged off to average  loans, net of unearned income, discounts, and the allowance for loan losses |   | 0.03     | %       |
|                                                                                                                   |   |     |    |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                                     |   | 1.62     | %       |

 

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**DEPOSITS**

 

Deposits are the Company’sprimary source of funding loan growth. Total deposits for the three month period ended March 31, 2004 increasedby 6% or $17,662,000 to $294,442,000. Noninterest-bearing deposits increased by $18,638,000 or 33%, whileinterest-bearing deposits decreased by $975,000 or 0.44%.  The increase in total deposits is primarilyattributed to Corporate and Governmental customers who make significant monthlydeposits and withdrawals based on their budgetary needs and the Company’sdecision to not renew several governmental customer deposits.  Approximately $14,000,000 of the increase innoninterest bearing deposits was attributable to a single governmentalcustomer, which withdrew the amount in April 2004.

 

The following is a summaryof interest-bearing deposits (in thousands):

 
|                              |   | **March 31,  2004** |    | **December  31,  2003** |   |
|-----------------------------------|--------|---------------------|---------|-------------------------|--------|
|                              |   |                |    |                    |   |
| NOW and money market accounts     |   | $                   | 57,592  |                    | $      | 54,840 |   |
| Savings accounts                  |   | 44,641              |    | 43,524                  |   |
| Time deposits of $100,000 or more |   | 71,468              |    | 77,187                  |   |
| Other time deposits               |   | 46,271              |    | 45,396                  |   |
|                              |   |                |    |                    |   |
|                              |   | $                   | 219,972 |                    | $      | 220,947 |   |

 

**OTHERBORROWED FUNDS**

 

While the Company continuesto emphasize funding earning asset growth through deposits, the Company hasrelied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal HomeLoan Bank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from theFHLB of $16,961,000 at March 31, 2004 and $46,961,000 at December 31,2003.   The following advances arecollateralized by a blanket lien on the Company’s 1-4 family mortgage loans.

 
| **Maturity**                |   | **Callable** |   | **Type** |   | **March 31,  2004** |   | **December  31, 2003** |       |
|-----------------------------|--------|--------------|--------|----------|--------|---------------------|--------|------------------------|------------|
|                        |   |         |   |     |   |                |   |                   |       |   |   |   |   |
| April 2010                  |   | Quarterly    |   | Fixed    |   | 5.82                | %      | $                      | 10,000,000 |   | 5.82 | % | $ | 10,000,000 |   |
| July 2004                   |   | Daily        |   | Variable |   | 1.25                | %      | 6,961,000              |       | 1.30 | % | 36,961,000 |   |
|                        |   |         |   |     |   |                |   |                   |       |   |   |   |   |
| Total Principal Outstanding |   |         |   |     |   |                |   | $                      | 16,961,000 |   |   |   | $ | 46,961,000 |   |
|                        |   |         |   |     |   |                |   |                   |       |   |   |   |   |
| Weighted Average Rate       |   |         |   |     |   | 3.94                | %      |                   |       | 3.76 | % |   |   |
|                        |   |         |   |     |   |                |   |                   |       |   |   |   |   |

 

The Company had an unsecurednote payable of approximately $540,000 at March 31, 2004 and December 31,2003.  The note bears interest at thelender’s prime rate minus 50 basis points.

 

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**RESULTS OF OPERATIONS**

 

**NetInterest Income:**

 

Net interest income is theprincipal component of a financial institution’s income stream and representsthe difference, or spread, between interest and fee income generated fromearning assets and the interest expense paid on deposits and borrowedfunds.  Fluctuations in interest ratesas well as volume and mix changes in earning assets and interest bearingliabilities can materially impact net interest income.

 

For the three month periodending March 31, 2004, net interest income increased $785,000 to $3,999,000compared to $3,214,000 in the same period ended March 31, 2003.  This increase in net interest income islargely due to the increase in average earning assets.  Notably, for the three month period endingMarch 31, 2004, average loans, net of unearned income, discounts and theallowance for loan losses increased $5,837,000 to $213,890,000 compared to$208,053,000 at March 31, 2003.  Inaddition, interest income on investment securities increased $139,000 for theperiod ending March 31, 2004 when compared to the same period ending March 31,2003.  Two factors contributed to theincrease in interest income on investment securities: 1) the yield oninvestments improved in 2004, and 2) in 2004, the Company recorded three monthsof interest income on securities acquired from CFS Bancshares Corporation onFebruary 28, 2003, as compared to one month of interest income in 2003.  In addition, total interest expense decreased$200,000 as the Company strategically eliminated a number of large publicdeposits from its portfolio.

 

**Noninterestincome:**

 

Noninterest income consistsof revenues generated from a broad range of financial services and activities,including fee-based services and origination fees from the Company’s mortgagelending division.  In addition, gainsand losses realized from the sale of investment portfolio securities and salesof assets are included in noninterest income. Non-interest income totaled $1,198,000 for the three month period endedMarch 31, 2004, an increase of $49,000 or 4% compared with the same periodended March 31, 2003.  This increase isprimarily due to $65,000 net gains on the sale of securities and fixed assets.  The gains were partially offset by adecrease of $18,000 attributed to various immaterial components of othernon-interest income.

 

**Noninterestexpense**:

 

Non-interest expense totaled$4,037,000 for the three month period ended March 31, 2004, an increase of$651,000 or 19% compared to the same period in 2003.  The increase, in large part, is due to the acquisition of CFSBancshares, Inc. on February 28, 2003, whereby the bank recorded only one monthof operating expenses related to the acquired institution in 2003, compared tothree months of expenses in 2004.   Muchof the increases related to noninterest expenses are attributable to theadditional two months of expenses recorded as a result of the acquisition.

 

Salaries and employeebenefits increased by $198,000 or 11% for the three month period ended March31, 2004 compared to the same period in 2003. The addition of the CFS employee payroll for a full three months infirst quarter ended March 31, 2004 as opposed to only one month in thecomparable 2003 period, accounted for this change.

 

Net occupancy and equipment expenseincreased by $89,000 or 16% to $651,000 for the three month

 

17

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period ended March 31, 2004compared to the same period in 2003. The increase is primarily the result of the acquisition of the AlabamaDivision on February 28, 2003, which has three full service branches.   Two additional months of depreciationexpense on premises and equipment acquired from CFS Bancshares Corporation wasrecorded in the three month period ended March 31, 2004 as opposed to one monthin the comparable 2003 period.

 

Other operating expensesincreased $364,000 or 34% to $1,432,000 for the three month period ended March31, 2004 compared to $1,068,000 for the same period in 2003.   This increase is due in large part to theacquisition of CFS Bancshares on February 28, 2003 and the recognition ofoperating expenses for three months in the first quarter of 2004 compared toonly one month in the first quarter of 2003.

 

**INTERESTRATE SENSITIVITY MANAGEMENT**

 

Interest rate sensitivitymanagement involves managing the potential impact of interest rate movements onnet interest income within acceptable levels of risk.  The Company seeks to accomplish this by structuring the balancesheet so that repricing opportunities exist for both assets and liabilities inequivalent amounts and time intervals. Imbalances in these repricing opportunities at any point in timeconstitute a financial institution’s interest rate risk.  The Company’s ability to reprice assets andliabilities in the same dollar amounts and at the same time minimizes interestrate risk.

 

One method of measuring theimpact of interest 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 velocity and the repricing of various categories of assets and liabilitiesis subject to competitive pressures and the needs of the Company’scustomers.  In addition, various assetsand liabilities indicated as repricing within the same period may in fact repriceat different times within such period and at different rates. The followingtable shows the contractual maturities of all investment securities at March31, 2004.  Expected maturities maydiffer from contractual maturities because issuers may have the right to callor prepay obligations with or without call or prepayment penalties.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market, and savings accounts in thethree month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

 

The following table setsforth the distribution of the repricing of the Company’s interest ratesensitive assets and interest rate sensitive liabilities as of March 31,2004.

 

18

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|                                                                    |   | **Cumulative  amounts as of March 31, 2004  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                                                             |   | $                                                                           | 988     |   | $ | 1,613 |   | $ | 19,949 |   | $ | 71,333 |   | $ | 93,883 |   |
| Certificates of deposit                                                 |   | 688                                                                         |    | 95 |   | 900 |   | — |   | 1,683 |   |
| Loans                                                                   |   | 69,656                                                                      |    | 8,130 |   | 75,079 |   | 62,585 |   | 215,450 |   |
| Interest-bearing deposits with other banks                              |   | 1,619                                                                       |    | — |   | — |   | — |   | 1,619 |   |
| Total interest-sensitive assets                                         |   | $                                                                           | 72,951  |   | $ | 9,838 |   | $ | 95,928 |   | $ | 133,918 |   | $ | 312,635 |   |
|                                                                    |   |                                                                        |    |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |   |                                                                        |    |   |   |   |   |   |   |   |   |
| Deposits   (a)                                                     |   | $                                                                           | 142,959 |   | $ | 54,517 |   | $ | 21,918 |   | 578 |   | $ | 219,972 |   |
| Notes payable                                                           |   | 540                                                                         |    | — |   | — |   | — |   | 540 |   |
| Trust preferred securities                                              |   | —                                                                      |    | — |   | 5,000 |   | — |   | 5,000 |   |
| Other borrowings                                                        |   | 6,961                                                                       |    | — |   | — |   | 10,000 |   | 16,961 |   |
| Total interest-sensitive liabilities                                    |   | $                                                                           | 150,460 |   | $ | 54,517 |   | $ | 26,918 |   | $ | 10,578 |   | $ | 242,473 |   |
|                                                                    |   |                                                                        |    |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |   | $                                                                           | (77,509 | ) | $ | (44,679 | ) | $ | 69,010 |   | $ | 123,340 |   | $ | 70,162 |   |
|                                                                    |   |                                                                        |    |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to  total interest-sensitive assets |   | (24.79                                                                      | )%      | (39.08 | )% | (17.01 | )% | 22.44 | % | 22.44 | % |

 

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(a) Savings, Now, and money market deposits totaling  $104,058 are included in the maturing in 3months classification.

 

**LIQUIDITY**

 

Liquidity is the ability ofthe Company to convert assets into cash or cash equivalents without significantloss and to raise additional funds by increasing liabilities. Liquiditymanagement involves maintaining the Company’s ability to meet the day-to-daycash flow requirements of its customers, whether they are depositors wishing towithdraw funds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, theCompany would not be able to perform the primary function of a financial intermediaryand would, therefore, not be able to meet the needs of the communities itserves.  Additionally, the Bank holdingcompany requires cash for various operating needs including: dividends paid toshareholders; business combinations; capital injections to its subsidiaries;the servicing of debt; and the payment of general corporate expenses.

 

The primary source ofliquidity for the Bank holding company is dividends from the Bank. The amountof dividends paid by the Bank to the Company is limited by various bankingregulatory agencies.  The GeorgiaDepartment of Banking and Finance regulates dividend payments and must approvepayments that exceed 50% of the Bank’s net income for the prior year. The totaldividends that could be paid by the Bank to the Company in 2004 without priorregulatory approval is approximately $970,000. 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.

 

Asset and liabilitymanagement functions not only serve to assure adequate liquidity in order tomeet the needs of the Company’s customers, but also to maintain an appropriatebalance between interest-sensitive assets and interest-sensitive liabilities sothat the Company can earn a return that meets the investment requirements ofits shareholders.  Daily monitoring ofthe sources and uses of funds is necessary to maintain an acceptable cashposition that meets both requirements.

 

19

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The asset portion of thebalance sheet provides liquidity primarily through loan principal repayments,maturities of investment securities and, to a lesser extent, sales ofinvestment securities available for sale. Other short-term investments such as federal funds sold and maturinginterest bearing deposits with other banks are additional sources of liquidityfunding.

 

The liability portion of thebalance sheet provides liquidity through various customers’ interest bearingand noninterest bearing deposit accounts. Federal funds purchased 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.

 

**CAPITALRESOURCES**

 

Stockholders’ equityincreased $1,283,000 for the three months ended March 31, 2004, primarily dueto the increase in retained earnings and unrealized gains on investmentsecurities.  Retained earnings increasedby $662,000 to $16,777,000 due to net earnings for the three month period.  Also, for the three month period ended March31, 2004, accumulated other comprehensive income increased $594,000 to$684,000, compared with $90,000 at December 31, 2003.  The increase is due to the impact of changing economic conditionsand changes in market interest rates on the Company’s available for saleinvestment portfolio.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company tomaintain minimum amounts and ratios of total and Tier 1 capital to riskweighted assets, and Tier 1 capital to average assets.  As of March 31, 2004, the Bank’s total andTier 1 capital to risk weighted assets and Tier 1 to average assets were 15%,13%, and 8% respectively, compared with 14%, 13% and 8% respectively, atDecember 31, 2003.  As of March 31,2004, the Company met all capital adequacy requirements to which it is subject.

 

20

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**ITEM 3.**** ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Quantitative informationabout the Company’s market risk at March 31, 2004 is as follows (in thousands):

 
|                                 |   | **2004**            |   |
|--------------------------------------|--------|---------------------|--------|
|                                 |   | **Carrying  Value** |   | **Estimated  Fair Value** |   | **Down  100 bp** |   | **Up  100 bp** |   |
|                                 |   |                |   |   |   |   |   |   |   |
| Financial assets:                    |   |                |   |   |   |   |   |   |   |
| Interest-bearing deposits with banks |   | $                   | 1,619  |   | $ | 1,619 |   | — | % | — | % |
| Certificates of deposit              |   | 1,683               |   | 1,683 |   | — |   | — |   |
| Investment securities                |   | 92,036              |   | 92,375 |   | 1.76 |   | (3.67 | ) |
| Loans receivable, net                |   | 215,450             |   | 212,525 |   | 1.63 |   | (1.64 | ) |
|                                 |   |                |   |   |   |   |   |   |   |
| Financial liabilities:               |   |                |   |   |   |   |   |   |   |
| Interest-bearing deposits            |   | 219,972             |   | 216,854 |   | 1.38 |   | (1.29 | ) |
| Notes payable                        |   | 540                 |   | 540 |   | — |   | — |   |
| Advances from Federal Home Loan Bank |   | 16,961              |   | 18,212 |   |   |   |   |   |
| Trust preferred securities           |   | 5,000               |   | 5,036 |   | 3.71 |   | (3.51 | ) |
|                                      |        |                     |        |  |  |  |  |  |  |  |  |

 

The Company has adopted anasset/liability management program to monitor the Company’s interest ratesensitivity and to ensure that the Company is competitive in the loan anddeposit markets.  Management seeks to managethe relationship between interest-sensitive assets and liabilities in order toprotect against wide interest rate fluctuations, including those resulting frominflation.  The Company has not enteredinto any derivative financial instruments such as futures, forwards, swaps oroptions.  Additionally, refer to ourinterest rate sensitivity management and liquidity disclosures within Part 1,Item 2, of this Form 10-Q.

 

**ITEM 4.**** ****CONTROLS AND PROCEDURES**

 

Based on the evaluation ofour disclosure controls and procedures, the Company’s Chief Executive Officer,Chief Operating Officer, and Chief Financial Officer have concluded that ourdisclosure controls and procedures were effective as of March 31, 2004 intimely alerting them to material information required to be included in our reportsfiled with or furnished to the Securities and Exchange Commission.  There have been no changes in the Company’sinternal controls over financial reporting that occurred during the quarterended March 31, 2004 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PARTII.  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. |

 

21

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| **ITEM 2.** |                     | **CHANGES  IN SECURITIES**                                                                                                                                                                                                             |
|-------------|--------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                     |                                                                                                                                                                                                                                   |
|        |                     | None                                                                                                                                                                                                                                   |
|        |                     |                                                                                                                                                                                                                                   |
| **ITEM 3.** |                     | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                                                                                                   |
|        |                     |                                                                                                                                                                                                                                   |
|        |                     | None                                                                                                                                                                                                                                   |
|        |                     |                                                                                                                                                                                                                                   |
| **ITEM 4.** |                     | **SUBMISSION  OF MATTERS TO VOTE OF SECURITY HOLDERS**                                                                                                                                                                                 |
|        |                     |                                                                                                                                                                                                                                   |
|        |                     | None.                                                                                                                                                                                                                                  |
|        |                     |                                                                                                                                                                                                                                   |
| **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 for the quarter ended March 31, 2004.                                                            |
|        |                     |                                                                                                                                                                                                                                   |
|        |                     | **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 for the quarter ended March 31, 2004. |
|        |                     |                                                                                                                                                                                                                                   |
| **(b)**     | **Reports on Form 8-K:** |
|        |                     |                                                                                                                                                                                                                                   |
|        |                     | Press Release of  Registrant, dated May 14, 2004, announcing 2004 first quarter results.                                                                                                                                               |

 

22

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**SIGNATURES**

 

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

**CITIZENS BANCSHARES CORPORATION**

 

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

 

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