**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10 – Q/A**

 

**ý**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended**  **March 31, 2003**

** **

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom              to              **

 

**Commission File No:  0- 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrantas 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 mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe 90 days.   Yes  ý      No  o.

 

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

 

APPLICABLE ONLY TOISSUERS

 

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

 

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

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Indicate the number of shares outstanding for each of the issuer’sclasses of common stock as of the latest practicable date: 1,989,069 shares ofCommon Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock,$1.00 par value outstanding on May 15, 2003.

 

**This Form 10Q/A is filed to addcertain footnote disclosures and expand or revise certain data in the financialstatements and in the management, discussion and analysis included in the Form10Q filed May 21, 2003.  All otherdata remains as originally filed in the Form 10Q.  These changes did not impact earnings or earnings per share asreported in the 10Q filing on May 21, 2003.**

 

 

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Part 1.               FINANCIALINFORMATION

 

Item 1.             Financialstatements

 

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**March 31, 2003 AND DECEMBER 31, 2002**

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

 
|                                                                                                |   | **2003**        |       | **2002** |       |
|-----------------------------------------------------------------------------------------------------|--------|-----------------|------------|----------|------------|
|                                                                                                |   | **(Unaudited)** |       |     |       |
| **ASSETS**                                                                                          |   |            |       |     |       |
|                                                                                                |   |            |       |     |       |
| Cash and due from banks                                                                             |   | $               | 16,427     |     | $          | 11,117 |   |
| Federal funds sold                                                                                  |   | 3,265           |       | —   |       |
| Interest-bearing deposits with banks                                                                |   | 1,031           |       | 15,192   |       |
| Certificates of deposit                                                                             |   | 3,095           |       | 3,095    |       |
| Investment securities available for sale,  at fair value                                            |   | 114,714         |       | 53,972   |       |
| Investment securities held to maturity, at  cost                                                    |   | 7,267           |       | 2,376    |       |
| Other investments                                                                                   |   | 2,621           |       | 2,226    |       |
| Loans receivable, net                                                                               |   | 200,934         |       | 172,077  |       |
| Premises and equipment, net                                                                         |   | 9,864           |       | 6,732    |       |
| Cash surrender value of life insurance                                                              |   | 7,203           |       | 6,880    |       |
| Other assets                                                                                        |   | 5,456           |       | 5,823    |       |
|                                                                                                |   |            |       |     |       |
| Total assets                                                                                        |   | $               | 371,877    |     | $          | 279,490 |   |
|                                                                                                |   |            |       |     |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                      |   |            | ** ** |     | ** ** |
|                                                                                                |   |            |       |     |       |
| LIABILITIES:                                                                                        |   |            |       |     |       |
| Noninterest-bearing deposits                                                                        |   | $               | 57,762     |     | $          | 62,394 |   |
| Interest-bearing deposits                                                                           |   | 247,022         |       | 166,217  |       |
|                                                                                                |   |            |       |     |       |
| Total deposits                                                                                      |   | 304,784         |       | 228,611  |       |
|                                                                                                |   |            |       |     |       |
| Accrued expenses and other liabilities                                                              |   | 3,675           |       | 3,347    |       |
| Notes payable                                                                                       |   | 740             |       | 740      |       |
| Trust preferred securities                                                                          |   | 5,000           |       | 5,000    |       |
| Advances from Federal Home Loan Bank                                                                |   | 34,050          |       | 18,750   |       |
|                                                                                                |   |            |       |     |       |
| Total liabilities                                                                                   |   | 348,249         |       | 256,448  |       |
|                                                                                                |   |            |       |     |       |
| COMMITMENTS AND CONTINGENCIES                                                                       |   |            |       |     |       |
|                                                                                                |   |            |       |     |       |
| STOCKHOLDERS’ EQUITY:                                                                          |   |            |       |     |       |
| Common stock - $1 par value; 5,000,000  shares  authorized; 2,230,065 shares issued and outstanding |   | 2,230           |       | 2,230    |       |
| Nonvoting common stock - $1 par value;  5,000,000 shares  authorized; 90,000 issued and outstanding |   | 90              |       | 90       |       |
| Additional paid-in capital                                                                          |   | 7,445           |       | 7,445    |       |
| Retained earnings                                                                                   |   | 15,213          |       | 14,921   |       |
| Treasury stock, 240,996 shares at cost at  March 31, 2003 and December 31, 2002           |   | (2,046          | )          | (2,046   | )          |
| Accumulated other comprehensive income                                                              |   | 696             |       | 402      |       |
|                                                                                                |   |            |       |     |       |
| Total stockholders’ equity                                                                     |   | 23,628          |       | 23,042   |       |
|                                                                                                |   |            |       |     |       |
| Total liabilities and stockholders’ equity                                                     |   | $               | 371,877    |     | $          | 279,490 |   |

 

See notes toconsolidated financial statements.

 

2

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THETHREE MONTHS ENDED MARCH 31, 2003 AND 2002**

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

 
|                                                     |   | **2003** |       | **2002** |       |
|----------------------------------------------------------|--------|----------|------------|----------|------------|
|                                                     |   |     | ** ** |     | ** ** |
| Interest income:                                         |   |     |       |     |       |
| Loans, including fees                                    |   | $        | 3,465      |     | $          | 3,118 |   |
| Investment securities:                                   |   |     |       |     |       |
| Taxable                                                  |   | 653      |       | 709      |       |
| Tax-exempt                                               |   | 235      |       | 213      |       |
| Federal funds sold                                       |   | 2        |       | 10       |       |
| Interest-bearing deposits                                |   | 40       |       | 131      |       |
|                                                     |   |     | ** ** |     | ** ** |
| Total interest income                                    |   | 4,395    |       | 4,181    |       |
|                                                     |   |     | ** ** |     | ** ** |
| Interest expense:                                        |   |     |       |     |       |
| Deposits                                                 |   | 918      |       | 1,336    |       |
| Other borrowings                                         |   | 263      |       | 164      |       |
| Total interest expense                                   |   | 1,181    |       | 1,500    |       |
|                                                     |   |     | ** ** |     | ** ** |
| Net interest income                                      |   | 3,214    |       | 2,681    |       |
|                                                     |   |     | ** ** |     | ** ** |
| Provision for loan losses                                |   | 215      |       | 175      |       |
|                                                     |   |     | ** ** |     | ** ** |
| Net interest income after provision for  loan losses     |   | 2,999    |       | 2,506    |       |
|                                                     |   |     | ** ** |     | ** ** |
| Noninterest income:                                      |   |     |       |     |       |
| Service charges on deposit accounts                      |   | 841      |       | 858      |       |
| Gain on sales of securities                              |   | —   |       | 30       |       |
| Loan origination fees                                    |   | —   |       | 111      |       |
| Other operating income                                   |   | 308      |       | 353      |       |
|                                                     |   |     | ** ** |     | ** ** |
| Total noninterest income                                 |   | 1,149    |       | 1,352    |       |
|                                                     |   |     | ** ** |     | ** ** |
| Noninterest expense:                                     |   |     |       |     |       |
| Salaries and employee benefits                           |   | 1,756    |       | 1,717    |       |
| Net occupancy and equipment                              |   | 562      |       | 556      |       |
| Other operating expenses                                 |   | 1,068    |       | 1,239    |       |
|                                                     |   |     | ** ** |     | ** ** |
| Total noninterest expense                                |   | 3,386    |       | 3,512    |       |
|                                                     |   |     | ** ** |     | ** ** |
| Income before income taxes                               |   | 762      |       | 346      |       |
|                                                     |   |     | ** ** |     | ** ** |
| Income tax expense                                       |   | 158      |       | 25       |       |
|                                                     |   |     | ** ** |     | ** ** |
| Net income                                               |   | $        | 604        |     | $          | 321 |   |
|                                                     |   |     | ** ** |     | ** ** |
| Net income per share - basic and diluted                 |   | $        | 0.29       |     | $          | 0.15 |   |
|                                                     |   |     | ** ** |     | ** ** |
| Weighted average outstanding shares - basic  and diluted |   | 2,079    |       | 2,126    |       |

 

See notes toconsolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002**

**(Unaudited - In thousands)**

 
|                                                                                         |   | **2003** |       | **2002** |       |
|----------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
|                                                                                         |   |     | ** ** |     | ** ** |
| **OPERATING ACTIVITIES:**                                                                    |   |     |       |     |       |
| Net income                                                                                   |   | $        | 604        |     | $          | 321 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |     |       |     |       |
| Provision for loan losses                                                                    |   | 215      |       | 175      |       |
| Depreciation                                                                                 |   | 257      |       | 228      |       |
| Amortization (accretion), net                                                                |   | 36       |       | 45       |       |
| Gain on sale of assets and securities                                                        |   | —   |       | (30      | )          |
| Change in mortgage loans held for sale                                                       |   | —   |       | 422      |       |
| Change in other assets                                                                       |   | 1,402    |       | (536     | )          |
| Change in accrued expenses and other  liabilities                                            |   | 1,434    |       | (921     | )          |
|                                                                                         |   |     |       |     |       |
| Net cash provided by (used in) operating  activities                                         |   | 3,948    |       | (296     | )          |
|                                                                                         |   |     |       |     |       |
| **INVESTING ACTIVITIES:**                                                                    |   |     |       |     |       |
| Proceeds from sale and maturities of  investment securities held to maturity                 |   | 335      |       | 300      |       |
| Proceeds from sale and maturities of  investment securities available for sale               |   | 5,029    |       | 5,247    |       |
| Purchases of investment securities held to  maturity                                         |   | (3,651   | )          | —   |       |
| Purchases of investment securities  available for sale                                       |   | (8,462   | )          | (14,275  | )          |
| Net increase in other investments                                                            |   | (395     | )          | —   |       |
| Net change in loans                                                                          |   | 3,618    |       | 1,893    |       |
| (Increase) decrease in cash surrender value  of life insurance                               |   | (323     | )          | 66       |       |
| Net cash received in acquisition of CFS  Bancshares                                          |   | 2,802    |       | —   |       |
| Purchases of premises and equipment                                                          |   | (113     | )          | (524     | )          |
| Net change in interest bearing deposits with  banks                                          |   | 14,314   |       | 8,707    |       |
|                                                                                         |   |     |       |     |       |
| Net cash provided by investing activities                                                    |   | 13,154   |       | 1,414    |       |
|                                                                                         |   |     |       |     |       |
| **FINANCING ACTIVITIES:**                                                                    |   |     |       |     |       |
| Net change in noninterest-bearing deposits                                                   |   | (4,632   | )          | 2,821    |       |
| Net change in interest-bearing deposits                                                      |   | (18,883  | )          | (3,642   | )          |
| Purchase of treasury stock                                                                   |   | —   |       | (24      | )          |
| Principal payment on debt                                                                    |   | —   |       | (330     | )          |
| Increase in advances from Federal Home Loan  Bank                                            |   | 15,300   |       | —   |       |
| Dividends paid                                                                               |   | (312     | )          | (341     | )          |
|                                                                                         |   |     |       |     |       |
| Net cash used in financing activities                                                        |   | (8,527   | )          | (1,516   | )          |
|                                                                                         |   |     |       |     |       |
| Net change in cash and cash equivalents                                                      |   | 8,575    |       | (398     | )          |
|                                                                                         |   |     |       |     |       |
| Cash and cash equivalents at beginning of  period                                            |   | 11,117   |       | 14,437   |       |
|                                                                                         |   |     |       |     |       |
| Cash and cash equivalents at end of period                                                   |   | $        | 19,692     |     | $          | 14,039 |   |
|                                                                                         |   |     |       |     |       |
| **Supplemental disclosures  of cash paid during the period for:**                            |   |     |       |     |       |
| Interest                                                                                     |   | $        | 1,066      |     | $          | 1,655 |   |
|                                                                                         |   |     |       |     |       |
| Income taxes                                                                                 |   | $        | 181        |     | $          | 145 |   |
|                                                                                         |   |     |       |     |       |
| **Supplemental disclosures  of noncash transactions:**                                       |   |     |       |     |       |
| Change in unrealized gain (loss) on  investment securities available for sale, net of taxes  |   | $        | 294        |     | $          | (285 | ) |

 

See notes toconsolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES****Notes tothe Consolidated Financial Statements****March 31,2003**(Unaudited)

 

**SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation**

 

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

 

The accompanying unaudited consolidated financial statements have beenprepared pursuant to the rules and regulations for reporting on Form10-Q/A.  Accordingly, certaindisclosures required by generally accepted accounting principles are notincluded herein. These interim statements should be read in conjunction withthe financial statements and notes thereto included in the Company’s latestAnnual Report on Form 10-K filed with the Securities and Exchange Commissionfor the year ended December 31, 2002. The results of operations for the interim periods reported herein arenot necessarily representative of the results expected for the full 2003 fiscalyear.

 

The consolidatedfinancial statements of the Company as of March 31, 2003 and for the threemonths ended March 31, 2003 and 2002 are unaudited.  In the opinion of management, alladjustments necessary for a fair presentation of the financial position andresults of operations and cash flows for the three month periods have beenincluded.  All adjustments are of anormal recurring nature.  Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

**ACCOUNTINGPOLICIES**

 

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

 

Cash and cash equivalents- Cash equivalents include cash and due from banks and federal funds sold.

 

5

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# **ACQUISITION**

# ** **

On February 28, 2003, the Company acquired CFS Bancshares, Inc., asavings and loan holding company located in Birmingham, Alabama, whose bankingsubsidiary, Citizens Federal Savings Bank, simultaneously merged into theBank.  The Company has paidapproximately $8,400,000 in cash for all outstanding shares of CFS Bancshares,Inc. tendered through March 31, 2003. This acquisition has resulted in a significant expansion of theCompany’s market area and allows it to begin serving customers in theBirmingham metropolitan area.  Theacquisition of CFS Bancshares, Inc. was accounted for as a purchase.  The fair value of the assets and liabilities

 

6

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acquired were determined bymanagement and independent valuation specialists, and were recorded as of thedate of purchase.  Goodwill was notrecorded as the net fair value of the assets and liabilities acquired exceededthe purchase price.  The Company recorded a finite livedintangible asset related to the value of deposit accounts acquired ofapproximately $373,000 and is amortizing the amount over 7 years.

 

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

 

| Estimated fair values: |   |    |    |
|------------------------|--------|---------|---------|
| Assets acquired        |   | $       | 109,175 |   |
| Liabilities assumed    |   | 100,775 |    |
| Purchase Price         |   | 8,400   |    |
| Less Cash acquired     |   | (11,202 | )       |
| Net cash received      |   | $       | 2,802   |   |

 

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

 

**For the three months ended March 31, 2003:**

 
|       |   | **Citizens  Bancshares** |   | **CFS  Bancshares** |   | **Subtotal** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined** |   |
|------------|--------|--------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|-------------------------|--------|
|       |   |                     |   |                |   |         |   |                       |   |                    |   |
| Revenues   |   | $                        | 5,544  |                | $      | 967          |   | $                          | 6,511  |                    | — |   | $ | 6,511 |   |
| Net Income |   | $                        | 604    |                | $      | (3,592       | )      | $                          | (2,988 | )                       | $      | 3,728 |   | $ | 740 |   |
| EPS        |   |                     |   |                |   |         |   |                       |   | $                       | 0.36   |   |
|            |        |                          |        |                     |        |              |        |                            |        |                         |        |  |  |  |  |  |

 

**For the three months ended March 31, 2002:**

 
|       |   | **Citizens  Bancshares** |   | **CFS  Bancshares** |   | **Subtotal** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined** |   |
|------------|--------|--------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|-------------------------|--------|
|       |   |                     |   |                |   |         |   |                       |   |                    |   |
| Revenues   |   | $                        | 5,533  |                | $      | 1,604        |   | $                          | 7,137  |                    | — |   | $ | 7,137 |   |
| Net Income |   | $                        | 321    |                | $      | 138          |   | $                          | 459    |                    | $      | 56 |   | $ | 515 |   |
| EPS        |   |                     |   |                |   |         |   |                       |   | $                       | 0.24   |   |
|            |        |                          |        |                     |        |              |        |                            |        |                         |        |  |  |  |  |  |

 

##### **INTANGIBLE ASSETS**

 

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

 

7

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|                        |   | **March 31, 2003**    |      | **December 31, 2002**    |   |
|-----------------------------|--------|----------------------------|-----------|-------------------------------|--------|
|                        |   | **Gross Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                        |   |                       |      |                          |   |   |   |   |   |
| Amortized intangible asset: |   |                       |      |                          |   |   |   |   |   |
| Core deposit intangible     |   | $                          | 2,463,665 |                          | $      | 1,085,186 |   | $ | 2,463,665 |   | $ | 997,198 |   |
|                             |        |                            |           |                               |        |  |  |  |  |  |  |  |  |

 

8

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The following table presents information about aggregate amortizationexpense:

 

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

 

# **COMMON STOCK**

# ** **

Basic net income per share (EPS) is computed based on net incomedivided by the weighted average number of common shares outstanding.  Diluted EPS is computed based on net incomedivided by the weighted average number of common and potential common shares.The Company’s potential common shares are due to outstanding stock options,which were not dilutive during the three months ended March 31, 2003 and2002.

 

# **RECENT ACCOUNTING PRONOUNCEMENTS**

# ** **

InOctober 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 147, *Acquisitionsof Certain Financial Institutions*. This statement provides guidanceon the accounting for the acquisition of a financial institution, which hadpreviously been addressed in SFAS No. 72, *Accounting for Certain Acquisitions of Banking orThrift Institutions*. The provisions of SFAS No. 147 are effectivefor acquisitions occurring on or after October 1, 2002.

 

InNovember 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*, which expands the disclosuresa guarantor is required to provide in its annual and interim financialstatements regarding its obligations for certain guarantees.  Disclosures are required to be included infinancial statements issued after December 15, 2002.  FIN 45 also requires the guarantor torecognize a liability for the fair value of the obligation it has assumed forguarantees issued or modified after December 31, 2002.  The adoption of FIN 45 did not have amaterial effect on the Company’s consolidated financial statements.

 

In January 2003, theFASB issued FIN No. 46, *Consolidation of Variable Interest Entities.* FIN No. 46 is an interpretation of AccountingResearch Bulletin No. 51, *Consolidated Financial Statements* andaddresses consolidation by business enterprises of variable interest entities(“VIEs”).  The Interpretation is basedon the theory that an enterprise controlling another entity through interestsother than voting interests should consolidate the controlled entity.  Business enterprises are 

 

9

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required under theprovisions of the Interpretation to identify VIEs, based on specifiedcharacteristics, and then determine whether they should be consolidated.  An enterprise that holds a majority of thevariable interests is considered the primary beneficiary which wouldconsolidate the VIE.  The primarybeneficiary of a VIE is also required to include various disclosures in theinterim and annual financial statements. Additionally, an enterprise that holds a significant variable interestin a VIE, but that is not the primary beneficiary, is also required to makecertain disclosures.  The Interpretationis effective immediately for all enterprises with variable interests in VIEscreated after January 31, 2003. An entity with variable interests in a VIEcreated before February 1, 2003 is required to apply the provisions ofthis Interpretation to that entity by the end of the first interim or annualreporting period beginning after June 15, 2003.  The Company has not identified any VIEs and, accordingly does notexpect the application of this Interpretation to have a material effect on itsfinancial statements.

 

**RECLASSIFICATIONS**

 

Certain 2002 amounts havebeen reclassified to conform to the 2003 presentation.

 

**SUBSEQUENT EVENT**

 

On April 1, 2003,the Company announced a curtailment of its postretirement medical and lifeplans.  The Company expects thiscurtailment to reduce the associated plan liabilities by approximately $255,000during the quarter ending June 2003.

 

10

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**Item 2.****                                                                                   MANAGEMENT’SDISCUSSION 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.

 

**AccountingPolicies**

 

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.  Thecritical policies were determined by considering accounting policies thatinvolve the most complex or subjective decisions or assessments.  The Company’s most critical accountingpolicies relate to:

 

**Investment Securities**– The Company classifies investments in one of three categories based onmanagement’s intent upon purchase: held to maturity securities which arereported at amortized cost, trading securities which are reported at fair valuewith unrealized holding gains and losses included in earnings, and availablefor sale securities which are recorded at fair value with unrealized holdinggains and losses included as a component of accumulated other comprehensiveincome.  The Company had no investmentsecurities classified as trading securities during 2003 or 2002.

 

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 salesof investment 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 amounts outstanding less unearned income andthe allowance for loan losses.  Interestincome on loans is recognized on a level-yield basis. Loan fees and certaindirect origination costs are deferred and amortized over the estimated terms ofthe loans using the level-yield method. Discounts on loans purchased are accreted using the level-yield methodover the estimated remaining life of the loan purchased.

 

**Allowance for Loan Losses**- The Company provides for estimated losses on loans receivable when anysignificant and permanent decline in value occurs.  These estimates for losses are based on not only on individualassets and their related cash flow forecasts, sales values, independentappraisals, but also the volatility of certain real estate markets, and theconcern 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 allowance for loan losses is reviewed on amonthly basis by management and the Board of Directors.  On a quarterly basis a comprehensive reviewof the adequacy of the allowance for loan losses is performed.  This assessment is made in the context ofhistorical losses as well as existing economic conditions, performance trendswithin specific portfolio segments, and individual concentrations ofcredit.  Loans are charged against theallowance when, in the opinion of management, such loans are deemeduncollectible and subsequent recoveries are added 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, 2002.  The Company has followed those policies inpreparing this report.

 

###### **Forward LookingStatements**

###### ** **

In addition to historicalinformation, this report on Form 10-Q may contain forward-looking statements.For this purpose, any statements contained herein, including documentsincorporated by reference, that are not statements of historical fact may bedeemed to be forward-looking statements. Forward-looking statements are subjectto numerous assumptions, risks and uncertainties. Without limiting theforegoing, the words “believe,” “anticipates,” “plan,” expects,” and similarexpressions are intended to identify forward-looking statements.

 

Forward-lookingstatements are based on current management expectations and, by their nature,are subject to risk and uncertainties because of the possibility of changes inunderlying factors and assumptions. Actual conditions, events or results coulddiffer materially from those contained in or implied by such forward-lookingstatements for a variety of reasons, including: sharp and/or rapid changes ininterest rates; significant changes in the economic scenario from the currentanticipated scenario which could materially change anticipated credit quality trendsand the ability to generate loans and gather deposits; significant delay in orinability to execute strategic initiatives designed to grow revenues and/orcontrol expenses; unanticipated issues during the integration of acquisitions;and significant changes in accounting, tax or regulatory practices orrequirements. The Company undertakes no obligation to, nor does it intend to,update forward-looking statements to reflect circumstances or events that occurafter the date hereof or to reflect the occurrence of unanticipated events.

 

The following discussion is of the Company’s financial condition as ofMarch 31, 2003 and the changes in the financial condition and results ofoperations for the three month periods ended March 31, 2003 and 2002.

 

###### **FINANCIALCONDITION**

###### ** **

Citizens BancsharesCorporation’s total assets for the three month period ended March 31, 2003increased by $92,387,000 to $371,877,000 - an increase of 33% compared to$279,490,000 at December 31, 2002. This increase from December 31, 2002 to March 31, 2003 isprimarily due to the acquisition of CFS Bancshares, Inc., a bank holdingcompany in Birmingham, Alabama, for approximately $9,055,000 in cash.  The acquisition of CFS Bancshares, Inc.,allows the Company to extend its geographical base and provides new avenues forthe Bank to sell its products and services.

 

Accordingly, amountsacquired as a result of the purchase of CFS Bancshares, Inc. accounted for$4,826,000 and $3,265,000 of the total increases in the Company’s cash and duefrom banks and federal funds sold balances, respectively, fromDecember 31, 2002 to March 31, 2003. Investment securities available for sale and loans receivable increased$60,742,000 and $28,857,000, respectively, during the three month period endedMarch 31, 2003.  The acquisition 

 

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of CFS Bancshares, Inc.accounted for $46,347,000 of the increase in investments available for sale and$31,592,000 of the increase in net loans. In addition, fixed assets increased $3,132,000 primarily due to theaddition of $3,264,000 in fixed assets related to the acquisition of CFSBancshares, Inc.  The decrease in otherassets of $367,000 includes the recognition of a finite lived intangible assetrelated to the value of deposit accounts acquired of $373,000.

 

Customers depositsincreased $76,173,000 to $304,784,000 at March 31, 2003 fromDecember 31, 2002.  Totalliabilities increased $91,801,000 to $348,249,000 at March 31, 2003 fromDecember 31, 2002 primarily due to acquiring CFS Bancshares, Inc.  Similarly, Federal Home Loan Bank advancesincreased $15,300,000 as a result of paydowns by the Company and $18,950,000 inadvances acquired from CFS Bancshares, Inc.

 

**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.  Other investments includesFederal Home Loan Bank stock and Federal Reserve Bank stock.  At March 31, 2003 and December 31,2002, the Company’s investment securities portfolio represented approximately33% and 20% of total assets, respectively.

 

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

 
| **At March 31, 2003**                  |   | **Amortized  Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|---------------------------------------------|--------|---------------------|---------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                        |   |                |    |                         |   |                          |   |           |   |
| U.S. Treasury and  U.S. Government agencies |   | $                   | 7,850   |                         | $      | 12                            |   | $              | 8      |   | $ | 7,854 |   |
| State, county, and municipal securities     |   | 15,793              |    | 826                          |   | —                        |   | 16,619         |   |
| Mortgage-backed securities                  |   | 78,853              |    | 976                          |   | 189                           |   | 79,640         |   |
| Mutual funds                                |   | 9,279               |    | —                       |   | —                        |   | 9,279          |   |
| Equity securities                           |   | 1,400               |    | —                       |   | 78                            |   | 1,322          |   |
| Totals                                      |   | $                   | 113,175 |                         | $      | 1,814                         |   | $              | 275    |   | $ | 114,714 |   |

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

 

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Investment securitiesheld to maturity are summarized as follows (in thousands):

 
| **At March 31, 2003**                  |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|---------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                        |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and  U.S. Government agencies |   | $                   | 1,000  |                         | $      | 3                             |   | $              | — |   | $ | 1,003 |   |
| Mortgage-backed securities                  |   | 612                 |   | —                       |   | —                        |   | 612            |   |
| State, county, and municipal securities     |   | 5,655               |   | 182                          |   | 3                             |   | 5,834          |   |
|                                        |   |                |   |                         |   |                          |   |           |   |
| Totals                                      |   | $                   | 7,267  |                         | $      | 185                           |   | $              | 3      |   | $ | 7,449 |   |

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

 

**LOANS**

 

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

 
|                                    |                       | **March 31,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------|----------------------------|--------------------------|---------|-----------------------------|--------|
|                                    |                       |                     |    |                        |   |
| Commercial, financial, and agricultural |                       | $                        | 55,264  |                        | $      | 53,940 |   |
| Installment                             |                       | 6,306                    |    | 5,652                       |   |
| Real estate - mortgage                  |                       | 125,259                  |    | 96,999                      |   |
| Real estate - construction              |                       | 14,777                   |    | 14,058                      |   |
| Other                                   |                       | 4,513                    |    | 5,376                       |   |
|                                    |                       | 206,119                  |    | 176,025                     |   |
| Less:                                   | Net deferred loan fees     |                     | 991     |                        | 537    |   |
|                                    | Allowance for loan losses  |                     | 3,461   |                        | 2,630  |   |
|                                    | Discount on loans acquired |                     | 733     |                        | 781    |   |
|                                    |                       |                     |    |                        |   |
| Total Loans                             |                       | $                        | 200,934 |                        | $      | 172,077 |   |

 

**NONPERFORMINGASSETS**

 

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

 

With the exception of the loans included within nonperforming assets inthe table below, management is not aware of any loans classified for regulatorypurposes as loss, doubtful, 

 

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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 assets increased $1,375,000 to $6,438,000 atMarch 31, 2003 from $5,063,000 at December 31, 2002.  This increase includes $1,227,000 of theguaranteed portion of Small Business Administration loans, which is consideredfully recoverable once the Company completes the loan liquidation process.  Nonperforming assets represented 3.17% ofloans, net of unearned income, discounts and real estate acquired throughforeclosure at March 31, 2003 as compared to 2.91% at December 31, 2002.

 

The table below presents a summary of the Company’s nonperformingassets at March 31, 2003 and December 31, 2002.

 
|                                                                                                           |   | **2003**                                             |   | **2002** |   |
|----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|----------|--------|
|                                                                                                           |   | **(Amounts in thousands, except  financial ratios)** |   |
| Nonperforming assets:                                                                                          |   |                                                 |   |     |   |
| Nonperforming loans:                                                                                           |   |                                                 |   |     |   |
| Nonaccrual loans                                                                                               |   | $                                                    | 5,126  |     | $      | 4,333 |   |
| Past-due loans                                                                                                 |   | —                                               |   | —   |   |
| Nonperforming loans                                                                                            |   | 5,126                                                |   | 4,333    |   |
|                                                                                                           |   |                                                 |   |     |   |
| Real estate acquired through foreclosure                                                                       |   | 1,312                                                |   | 730      |   |
| Total nonperforming assets                                                                                     |   | $                                                    | 6,438  |     | $      | 5,063 |   |
|                                                                                                           |   |                                                 |   |     |   |
| Ratios:                                                                                                        |   |                                                 |   |     |   |
| Nonperforming loans to loans, net of  unearned income and discount on loans                                    |   | 2.51                                                 | %      | 2.49     | %      |
|                                                                                                           |   |                                                 |   |     |   |
| Nonperforming assets to loans, net of  unearned income, discounts and real estate acquired through foreclosure |   | 3.17                                                 | %      | 2.91     | %      |
|                                                                                                           |   |                                                 |   |     |   |
| Nonperforming assets to total assets                                                                           |   | 1.73                                                 | %      | 1.81     | %      |
|                                                                                                           |   |                                                 |   |     |   |
| Allowance for loan losses to nonperforming  loans                                                              |   | 67.52                                                | %      | 60.69    | %      |
|                                                                                                           |   |                                                 |   |     |   |
| Allowance for loan losses to nonperforming  assets                                                             |   | 53.76                                                | %      | 51.94    | %      |

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

The Company provides for estimated losses on loans receivable when anysignificant and permanent decline in value occurs.  These estimates for losses are based on individual assets andtheir cash flow forecasts, sales values, independent appraisals, the volatilityof certain real estate markets, and concern for disposing of real estate indistressed markets.  For loans that arepooled for purposes of determining necessary provisions, estimates are based onloan types, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine the 

 

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provision for losses is subject to the reasonableness of theseestimates. The adequacy of the allowance for loan losses is reviewed on amonthly basis by management and the Board of Directors.  On a quarterly basis a comprehensive reviewof the adequacy of the allowance for loan losses is performed.  This assessment is made in the context ofhistorical losses as well as existing economic conditions, performance trendswithin specific portfolio segments, and individual concentrations of credit.

 

Loans are charged against the allowance when, in theopinion of management, such loans are deemed uncollectible and subsequentrecoveries are added to the allowance. For the three months ended March 31, 2003, provisions for loanlosses totaled $215,000 compared to $175,000 for the same period in 2002.

 

The allowance for loan losses as of March 31, 2003 wasapproximately $3,461,000, representing 1.69% of total loans, net of unearnedincome compared to approximately $2,630,000 at December 31, 2001, whichrepresented 1.51% of total loans, net of unearned income.

 

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

 

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

 

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|                                                                                                                   |   | **2003**                                             |       | **2002** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|----------|--------|
|                                                                                                                   |   | **(Amounts in thousands, except  financial ratios)** | ** ** |
|                                                                                                                   |   |                                                 |       |     |   |
| Loans, net of unearned income and discounts                                                                            |   | $                                                    | 204,395    |     | $      | 174,707 |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Average loans, net of unearned income, discounts and the allowance for  loan losses                                    |   | $                                                    | 202,913    |     | $      | 157,867 |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Allowance for loans losses at the beginning of period                                                                  |   | $                                                    | 2,630      |     | $      | 2,003 |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Loans charged off:                                                                                                     |   |                                                 |       |     |   |
| Commercial, financial, and agricultural                                                                                |   | —                                               |       | 840      |   |
| Real estate - loans                                                                                                    |   | 122                                                  |       | 245      |   |
| Installment loans to individuals                                                                                       |   | 56                                                   |       | 751      |   |
| Total loans charged off                                                                                                |   | 178                                                  |       | 1,836    |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Recoveries of loans previously charged off:                                                                            |   |                                                 |       |     |   |
| Commercial, financial, and agricultural                                                                                |   | 22                                                   |       | 503      |   |
| Real estate - loans                                                                                                    |   | 71                                                   |       | 151      |   |
| Installment loans to individuals                                                                                       |   | 19                                                   |       | 149      |   |
| Total loans recovered                                                                                                  |   | 112                                                  |       | 803      |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Net loans charged off                                                                                                  |   | 66                                                   |       | 1,033    |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Allowance transferred from acquired institution                                                                        |   | 682                                                  |       | —   |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Additions to allowance for loan losses charged to operating expense                                                    |   | 215                                                  |       | 1,660    |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Allowance for loan losses at period end                                                                                |   | $                                                    | 3,461      |     | $      | 2,630 |   |
|                                                                                                                   |   |                                                 |       |     |   |
| Ratio of net loans charged off to average loans, net of unearned  income, discounts, and the allowance for loan losses |   | 0.03                                                 | %          | 0.65     | %      |
|                                                                                                                   |   |                                                 |       |     |   |
| Allowance for loan losses to loans, net of unearned income and  discounts                                              |   | 1.69                                                 | %          | 1.51     | %      |

 

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**DEPOSITS**

 

Depositsremain the Company’s primary source of funding loan growth.  Total deposits for the three month periodended March 31, 2003 increased by $76,173,000 to 304,784,000 fromDecember 31, 2002.  The followingis a summary of interest-bearing deposits (in thousands):

 
|                              |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-----------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                              |   |                     |    |                        |   |
| NOW and money market accounts     |   | $                        | 50,331  |                        | $      | 37,485 |   |
| Savings accounts                  |   | 63,312                   |    | 44,061                      |   |
| Time deposits of $100,000 or more |   | 71,652                   |    | 46,387                      |   |
| Other time deposits               |   | 61,727                   |    | 38,284                      |   |
|                              |   |                     |    |                        |   |
|                              |   | $                        | 247,022 |                        | $      | 166,217 |   |

 

**OTHERBORROWED FUNDS**

 

While the Company continues to emphasize funding earning asset growththrough deposits, the Company has relied on other borrowings as a supplementalfunding source.  Other borrowingsconsist of Federal Home Loan Bank (the “FHLB”) advances and short-termborrowings.  The Company’s banksubsidiary had outstanding advances from the FHLB of $34,050,000 atMarch 31, 2003 and $18,750,000 at December 31, 2002.  The following advances are collateralized bya blanket lien on the Company’s 1-4 family mortgage loans.

 
| **Maturity**                |   | **Callable** |   | **Type** |   | **2003** |   | **2002**   |       |
|-----------------------------|--------|--------------|--------|----------|--------|----------|--------|------------|------------|
|                        |   |         |   |     |   |     |   |       |       |   |   |   |   |
| June 2003              |   | —       |   | Fixed    |   | 3.20     | %      | $          | 2,000,000  |   | — | % | $ | — |   |
| June 2003              |   | —       |   | Fixed    |   | 1.59     | %      | 2,000,000  |       | — | % | — |   |
| April 2010             |   | Quarterly    |   | Fixed    |   | 5.82     | %      | 10,000,000 |       | 5.82 | % | 10,000,000 |   |
| July 2003              |   | Daily        |   | Variable |   | 1.42     | %      | 20,050,000 |       | 1.30 | % | 8,750,000 |   |
|                        |   |         |   |     |   |     |   |       |       |   |   |   |   |
| Total Principal Outstanding |   |         |   |     |   |     |   | $          | 34,050,000 |   |   |   | $ | 18,750,000 |   |
| Weighted Average Rate       |   |         |   |     |   | 2.71     | %      |       |       | 3.76 | % |   |   |

 

During the second quarter of 2002, Citizens Bancshares Corporationissued $5 million of pooled trust preferred securities (“Preferred Securities”)through one issuance by a wholly-owned subsidiary grantor trust, Citizens (GA)Statutory Trust I (the “Trust”).  ThePreferred Securities accrue and pay distributions periodically at specifiedannual rates as provided in the indentures, Libor plus 3.45%.  The Trust used the net proceeds from theoffering to purchase a like amount of Junior Subordinated Debentures (the“Debentures”) of the Company.  TheDebentures are the sole assets of the Trust and are eliminated, along with therelated income statement effects, in the consolidated financialstatements.  The Company’s obligationsunder the Debentures and related documents, taken together, constitute a fulland unconditional guarantee by the Company of the obligations of theTrust.  The Preferred Securities aremandatorily redeemable upon the maturity of the Debentures, or upon earlierredemption as provided in the indentures. The Company has the right to redeem the Debentures in whole or in parton or after specific dates, at a redemption price specified in the indenturesplus any accrued but unpaid interest to the redemption date.  At March 31, 2003, the interest rate onthe Preferred Securities was 4.85%.

 

The Company has an unsecured note payable of approximately $740,000 atMarch 31, 2003 and December 31, 2002, respectively.  The note bears interest at the lender’sprime rate minus 50 

 

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basis points and matures annually on May 1.  During 2002, the note payable was refinancedas part of a new unsecured note.

 

**RESULTSOF OPERATIONS**

 

**NetInterest Income:**

 

Net interest income isthe principal component of a financial institution’s income stream andrepresents the difference, or spread, between interest and fee income generatedfrom earning 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.

 

Net interest incomeincreased $533,000 for the three month period ended March 31, 2003.  The increase in net interest income resultedfrom the increase in the amount of earning assets which generated additionalinterest income of $214,000 compared to the same period last year.  In addition, interest expense on depositsdecreased $419,000 as the Company was able to lower its funding cost.  This decrease in interest on deposits waspartially offset by a $100,000 increase in interest paid on other borrowingsdue to an increase in the amount of borrowings outstanding.

 

**Noninterestincome:**

 

Noninterest incomeconsists of revenues generated from a broad range of financial servicesactivities, including fee-based services, loan origination fees, and profitsand commissions earned through securities and insurance sales.  In addition, gains and losses realized fromthe sale of investment portfolio securities and sales of assets are included innoninterest income.  For the three monthperiod ended March 31, 2003, noninterest income decreased $203,000 to$1,149,000 compared to the same period ended March 31, 2002.

 

Fee income from servicecharges on deposit accounts decreased slightly by $16,000 for the first quarterof 2003 compared with the same period in 2002. A large component of the Company’s service charges on deposit accountsis related to insufficient funds, returned check charges, and other customerservice fees.  These fees fluctuate frommonth to month.

 

There were no sales of investments or assets in the first quarter of2003.  Gain on sales of assets andinvestment securities totaled $30,000 for the three month period endedMarch 31, 2002.

 

Commissions and fees from mortgage loan activitiesdecreased $111,000 or 100% for the three month period ended March 31,2003.  In December 2001, theCompany realigned the operations its mortgage subsidiary’s operations to becomea department of the Bank.  InMarch 2002, the mortgage subsidiary’s operations ceased and all mortgageloan activity was reflected within the Bank operations.

 

Other operating incomedecreased slightly by $46,000 compared to the first quarter of 2002.  This decrease is attributed to variousimmaterial components of other operating income including investment servicesand other recoveries.

 

**Noninterestexpense**:

 

Noninterest expense totaled $3,386,000 for the three month period endedMarch 31, 2003, a decrease of $126,000 compared to the same period lastyear.  This decrease is primarily due tomanagement’s efforts to reduce overhead expenses by consolidating and closingseveral under performing branches, and by closing the mortgage subsidiary andrealigning its operations as a 

 

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department of the Bank.

 

Salaries andemployee benefits expense increased slightly by $39,000 for the three monthperiod ended March 31, 2003 compared to the same period in 2002.  In addition, net occupancy and equipmentexpense increased slightly by $6,000 for the first quarter of 2003 compared to 2002.  These increases are the result of acquiringCFS Bancshares, Inc., which had $100,000 in salary expense and $25,000 in netoccupancy and equipment expense for the period ended 2003.

 

Other operating expensesdecreased $171,000 to $1,068,000 for the first quarter of 2003, compared to$1,239,000 for the same period in 2002. This decrease is primarily due to the closure of the Company’s mortgagesubsidiary at the end of March 2002.

 

## ***INTERESTRATE SENSITIVITY MANAGEMENT***

## *** ***

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

 

One method of measuring the impact of interest rate sensitivity is thecumulative gap analysis.  The differencebetween interest rate sensitive assets and interest rate sensitive liabilitiesat various time intervals is referred to as the gap.  The Company is liability sensitive on a short-term basis asreflected in the following table. Generally, a net liability sensitive position indicates that there wouldbe a negative impact on net interest income in an increasing rateenvironment.  However, interest ratesensitivity gap does not necessarily indicate the impact of general interestrate movements on the net interest margin, since all interest rates and yieldsdo not adjust at the same velocity and the repricing of various categories ofassets and liabilities is subject to competitive pressures and the needs of theCompany’s customers.  In addition,various assets and liabilities indicated as repricing within the same periodmay in fact reprice at different times within such period and at differentrates.  For conservative purposes, theCompany has included demand deposits such as NOW, money market and savingsaccounts in the three month category. However, the actual repricing of these accounts may lag beyond twelvemonths.  The interest rate sensitivitygap is only a general indicator of potential effects of interest rate changeson net interest income.

 

The following table sets forth the distribution of the repricing of theCompany’s interest rate sensitive assets and interest rate sensitiveliabilities as of March 31, 2003.

 

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|                                                                    |   | **Cumulative  amounts as of March 31, 2003  Maturing and repricing within** |     |
|-------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|----------|
|                                                                    |   | **3  Months**                                                                    |     | **3 to 12  Months** |   | **1 to 5  Years** |   | **Over  5 Years** |   | **Total** |   |
|                                                                    |   | **(amounts  in thousands, except ratios)**                                       |     |
| Interest-sensitive  assets:                                             |   |                                                                             |     |   |   |   |   |   |   |   |   |
| Investments                                                             |   | $                                                                                | 9,279    |   | $ | 255 |   | $ | 7,070 |   | $ | 105,377 |   | $ | 121,981 |   |
| Certificates of  deposit                                                |   | —                                                                           |     | 95 |   | 3,000 |   | — |   | 3,095 |   |
| Loans                                                                   |   | 11,665                                                                           |     | 18,727 |   | 80,886 |   | 94,841 |   | 206,119 |   |
| Federal funds  sold                                                     |   | 3,265                                                                            |     | — |   | — |   | — |   | 3,265 |   |
| Interest-bearing  deposits with other banks                             |   | 1,031                                                                            |     | — |   | — |   | — |   | 1,031 |   |
| Total  interest-sensitive assets                                        |   | $                                                                                | 25,240   |   | $ | 19,077 |   | $ | 90,956 |   | $ | 200,218 |   | $ | 335,491 |   |
|                                                                    |   |                                                                             |     |   |   |   |   |   |   |   |   |
| Investment-sensitive  liabilities:                                      |   |                                                                             |     |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |   | $                                                                                | 169,455  |   | $ | 56,327 |   | $ | 21,219 |   | $ | 21 |   | $ | 247,022 |   |
| Trust preferred  securities                                             |   | —                                                                           |     | — |   | 5,000 |   | — |   | 5,000 |   |
| Other borrowings                                                        |   | 34,050                                                                           |     | 740 |   | — |   | — |   | 34,790 |   |
| Total  interest-sensitive liabilities                                   |   | $                                                                                | 203,505  |   | $ | 57,067 |   | $ | 26,219 |   | $ | 21 |   | $ | 286,812 |   |
|                                                                    |   |                                                                             |     |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |   | $                                                                                | (178,265 | ) | $ | (37,990 | ) | $ | 64,737 |   | $ | 200,197 |   | $ | 48,679 |   |
|                                                                    |   |                                                                             |     |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |   | (53.14                                                                           | )%       | (64.46 | )% | (45.16 | )% | 14.51 | % | 14.51 | % |

 

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(a)Savings, Now, and money market deposits totaling $113,643 are included in thematuring in 3 months classification. 

 

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**LIQUIDITY**

 

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

 

The primary source of liquidity for the parent holding company isdividends from the Bank. The amount of dividends paid by the Bank to theCompany is limited by various banking regulatory agencies.  The Georgia Department of Banking andFinance regulates dividend payments and must approve dividend payments thatexceed 50% of the Bank’s net income for the prior year. The total dividends thatcould be paid by the Bank to the Company in 2003 without prior regulatoryapproval is approximately $928,000. Also, the Company has access to various capital markets. The Companydoes not anticipate any liquidity requirements in the near future that it willnot be able to meet.  In March 2002,the Bank paid cash dividends totaling $928,000 to the Company.

 

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

 

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

 

The liability portion ofthe balance sheet provides liquidity through various customers’ interestbearing and noninterest bearing deposit accounts. Federal funds purchased,securities sold under agreements to repurchase, and other short-term borrowingsare additional sources of liquidity and, represent the Company’s incrementalborrowing capacity. These sources of liquidity are short-term in nature and areused as necessary to fund asset growth and meet short-term liquidity needs.

 

**CAPITALRESOURCES**

 

Shareholders’ equity increased $586,000 for the three months endedMarch 31, 2003, due to the net change in retained earnings and a decreasein accumulated other comprehensive gain. On March 15, 2003, the Company paid a cash dividend ofapproximately $312,000 to stockholders of record as of March 1, 2003.  The annual dividend rate in 2002 was $0.15per common share.  For the three monthperiod ended March 31, 2003, accumulated other comprehensive gainincreased $294,000 to $696,000 from $402,000 at December 31, 2002.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company 

 

21

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to maintain minimumamounts and ratios of total and Tier 1 capital to risk weighted assets, andTier 1 capital to average assets.  As ofMarch 31, 2003, the Company’s bank subsidiary’s total and Tier 1 capitalto risk weighted assets and Tier 1 to average assets were 13%, 11% and 8%respectively.  As of March 31,2003, the Company meets all capital adequacy requirements to which it issubject.

 

###### **ITEM 3.**     QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

###### ** **

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

 
|                      |   |         |    |      |   | **%****Increase (Decrease) in  Fair Value due to Rate Movement** |   |
|---------------------------|--------|--------------|---------|-----------|--------|------------------------------------------------------------------|--------|
|                      |   | **Carrying** |    | **Fair**  |   |                                                             |
|                      |   | **Value**    |    | **Value** |   | **Down 100bps**                                                  |   | **Up 100 bps** |   |
|                      |   |         |    |      |   |                                                             |   |   |   |
| Investments               |   | $            | 121,981 |      | $      | 122,163                                                          |   | 2.27 | % | (3.40 | )% |
| Loans                     |   | 206,119      |    | 196,019   |   | 4.80                                                             |   | (5.70 | ) |
| Interest-bearing deposits |   | 247,022      |    | 244,799   |   | 1.40                                                             |   | (1.41 | ) |
| Other borrowings          |   | 39,790       |    | 45,162    |   | 5.70                                                             |   | (5.30 | ) |
|                           |        |              |         |           |        |                                                                  |        |  |  |  |  |

 

 

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

 

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

# ** **

Within 90 days prior to the date of this report, the Company carriedout an evaluation, under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Exchange Act Rule13a-14.  Based upon that evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company (including itsconsolidated subsidiaries) that is required to be included in the Company’speriodic filings with the Securities and Exchange Commission.  There have been no significant changes inthe Company’s internal controls or, to the Company’s knowledge, in otherfactors that could significantly affect those internal controls subsequent tothe date the Company carried out its evaluation, and there have been nocorrective actions with respect to significant deficiencies and materialweaknesses

 

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# **PART II.  OTHERINFORMATION**

# ** **

**ITEM1.****           LEGAL PROCEEDINGS**

 

The Company is not aware of any material pending legal proceedings towhich the Company or its subsidiary is a party or to which any of theirproperty is subject.

 

**ITEM2.****           CHANGES IN SECURITIES**

 

None.

 

**ITEM3.****           DEFAULTS UPON SENIORSECURITIES**

 

None

 

**ITEM4.****           SUBMISSION OF MATTERSTO VOTE OF SECURITY HOLDERS**

 

None

 

**ITEM5.****           OTHER INFORMATION**

 

None

 

**ITEM6.****           EXHIBITS AND REPORTS ONFORM 8-K**

 

None

 

**CERTIFICATION**

** **

Each of the undersigned hereby certifies in his capacity as an officerof Citizens Bancshares Corporation and subsidiaries (the “Company”) that theQuarterly Report of the Company on Form 10-Q/A for the period endedMarch 31, 2003 fully complies with the requirements of Section 13(a)of the Securities Exchange Act of 1934 and that the information contained insuch report fairly presents, in all material respects, the financial conditionof the Company at the end of such period and the results of operations of theCompany for such period.

 

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**SIGNATURES**

 

 

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

 
| **CITIZENS BANCSHARES CORPORATION** |
|-------------------------------------|
|                                |   |   |
|                                |   |   |
| Date:   January 14, 2003       |   | By: | /s/ James E. Young |   |
|                                |   | James E. Young |
|                                |   | President and Chief Executive Officer |
|                                |   |   |   |
| Date:   January 14, 2003       |   | By: | /s/ Willard C. Lewis |   |
|                                |   | Willard C. Lewis |
|                                |   | Senior Executive Vice President and  Chief Operating Officer |
|                                |   |   |   |
|                                |   |   |   |
| Date:   January 14, 2003       |   | By: | /s/ Samuel J. Cox |   |
|                                |   | Samuel J. Cox |
|                                |   | Senior Vice President and Chief Financial Officer |

 

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**Exhibit31.1**

 

**Certification Pursuant to 18 U.S.C. Section 1350 asAdopted**

**Pursuant to Section 302 of the Sarbanes-Oxley Act of2002**

 

I, James E. Young, Chief Executive Officer, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q/A of March 31, 2003;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport if there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: January  14, 2003 | /s/ James E. Young      |   |
|-------------------------|-------------------------|--------|
|                    | Chief Executive Officer |

 

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**Exhibit31.2**

 

**Certification Pursuant to 18 U.S.C. Section 1350 asAdopted**

**Pursuant to Section 302 of the Sarbanes-Oxley Act of2002**

 

I, Willard C. Lewis, Chief Operating Officer, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q/A of March 31, 2003;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

d)             designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

e)              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

f)                presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

c)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

d)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport if there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: January  14, 2003 | /s/ Willard C. Lewis    |   |
|-------------------------|-------------------------|--------|
|                    | Chief Operating Officer |

 

26

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**Exhibit31.3**

 

**Certification Pursuant to 18 U.S.C. Section 1350 asAdopted**

**Pursuant to Section 302 of the Sarbanes-Oxley Act of2002**

 

I, Samuel J. Cox, Chief Financial Officer, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q/A of March 31, 2003;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of a datewithin 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport if there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: January  14, 2003 | /s/ Samuel J. Cox       |   |
|-------------------------|-------------------------|--------|
|                    | Chief Financial Officer |

 

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