**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 -Q/A**

 

**(Mark One)**

 
| **ý**                               | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                  |
|------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                                                                                                                                                                                                                                                                           |   |
|                                     | **For the quarterly period ended  September 30, 2003**                                                                                                                                                                                                                                                                                                                                         |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                           |
| **or**                                   |
|                                     |
| **o**                                    | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                 |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                           |   |
|                                     | **For the transition period  from                              to                              ** |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                           |   |
| **Commission  File No:  0 - 14535** |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                |  |  |

 

**CITIZENSBANCSHARES CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Georgia**                                                                   |   | **58 –  1631302**            |
|-------------------------------------------------------------------------------|--------|-----------------------------------|
| (State  or other jurisdiction of  incorporation or organization)              |   | (IRS Employer Identification No.) |
|                                                                          |   |                              |
| **175 John  Wesley Dobbs Avenue, N.E., Atlanta, Georgia**                     |   | **30303**                         |
| (Address of principal executive offices)                                      |   | (Zip Code)                        |
|                                                                          |   |                              |
| Registrant’s telephone number, including area code:**(404) 659  - 5959** |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                                                                                                    ý Yes     o No.

 

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

 

APPLICABLE ONLY TO ISSUERS

 

Indicateby check mark whether registrant has filed all documents and reports requiredto be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by acourt.            o Yes     o No.

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding for each of the issuer’s classes of commonstock as of the latest practicable date: 1,980,547 shares of Common Stock,$1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par valueoutstanding on October 31, 2003.

 

**This Form10Q/A is filed to add certain footnote disclosures, and expand or revisecertain data in the financial statements and in the management, discussion andanalysis included in the Form 10Q filed September 14, 2003.  All other data remains as originally filedin the Form 10Q.   These changes did notimpact earnings or earnings per share as reported in the 10Q filing onSeptember 14, 2003.**

 

 

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

**ITEM 1.****                                                     Financialstatements**

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

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

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

 
|                                                                                                |   | **2003**        |       | **2002** |       |
|-----------------------------------------------------------------------------------------------------|--------|-----------------|------------|----------|------------|
|                                                                                                |   | **(Unaudited)** |       |     |       |
| **ASSETS**                                                                                          |   |            |       |     |       |
| Cash and due from banks                                                                             |   | $               | 13,312     |     | $          | 11,117 |   |
| Interest-bearing deposits with banks                                                                |   | 4,493           |       | 15,192   |       |
| Certificates of deposit                                                                             |   | 3,049           |       | 3,095    |       |
| Investment securities available for sale,  at fair value                                            |   | 103,536         |       | 53,972   |       |
| Investment securities held to maturity, at  cost                                                    |   | 10,634          |       | 2,376    |       |
| Other investments                                                                                   |   | 2,134           |       | 2,226    |       |
| Loans receivable, net                                                                               |   | 199,499         |       | 172,077  |       |
| Premises and equipment, net                                                                         |   | 9,576           |       | 6,732    |       |
| Cash surrender value of life insurance                                                              |   | 7,886           |       | 6,880    |       |
| Other assets                                                                                        |   | 7,995           |       | 5,823    |       |
|                                                                                                |   |            |       |     |       |
| Total assets                                                                                        |   | $               | 362,114    |     | $          | 279,490 |   |
|                                                                                                |   |            |       |     |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                      |   |            | ** ** |     | ** ** |
|                                                                                                |   |            |       |     |       |
| LIABILITIES:                                                                                        |   |            |       |     |       |
| Noninterest-bearing deposits                                                                        |   | $               | 64,242     |     | $          | 62,394 |   |
| Interest-bearing deposits                                                                           |   | 230,298         |       | 166,217  |       |
|                                                                                                |   |            |       |     |       |
| Total deposits                                                                                      |   | 294,540         |       | 228,611  |       |
|                                                                                                |   |            |       |     |       |
| Accrued expenses and other liabilities                                                              |   | 3,002           |       | 3,347    |       |
| Notes payable                                                                                       |   | 540             |       | 740      |       |
| Trust preferred securities                                                                          |   | 5,000           |       | 5,000    |       |
| Advances from Federal Home Loan Bank                                                                |   | 34,961          |       | 18,750   |       |
|                                                                                                |   |            |       |     |       |
| Total liabilities                                                                                   |   | 338,043         |       | 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                                                                                   |   | 16,500          |       | 14,921   |       |
| Treasury stock, at cost  (249,518 and 240,996 shares, respectively)                            |   | (2,025          | )          | (2,046   | )          |
| Accumulated other comprehensive income  (loss)                                                      |   | (169            | )          | 402      |       |
|                                                                                                |   |            |       |     |       |
| Total stockholders’ equity                                                                     |   | 24,071          |       | 23,042   |       |
|                                                                                                |   | $               | 362,114    |     | $          | 279,490 |   |

 

See notes to consolidated financial statements.

 

2

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
|                                                     |   | **Three Months  Ended September 30,** |       | **Nine Months  Ended September 30,** |       |
|----------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|------------|
|                                                     |   | **2003**                              |       | **2002**                             |       | **2003** |   | **2002** |   |
|                                                     |   |                                  |       |                                 |       |   |   |   |   |
| Interest income:                                         |   |                                  |       |                                 |       |   |   |   |   |
| Loans, including fees                                    |   | $                                     | 3,681      |                                 | $          | 3,178 |   | $ | 11,104 |   | $ | 9,389 |   |
| Investment securities:                                   |   |                                  |       |                                 |       |   |   |   |   |
| Taxable                                                  |   | 592                                   |       | 785                                  |       | 2,020 |   | 2,331 |   |
| Tax-exempt                                               |   | 244                                   |       | 247                                  |       | 725 |   | 702 |   |
| Federal funds sold                                       |   | 1                                     |       | —                               |       | 10 |   | 7 |   |
| Interest-bearing deposits                                |   | 36                                    |       | 43                                   |       | 114 |   | 285 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Total interest income                                    |   | 4,554                                 |       | 4,253                                |       | 13,973 |   | 12,714 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Interest expense:                                        |   |                                  |       |                                 |       |   |   |   |   |
| Deposits                                                 |   | 747                                   |       | 893                                  |       | 2,491 |   | 3,209 |   |
| Other borrowings                                         |   | 304                                   |       | 247                                  |       | 902 |   | 572 |   |
| Total interest expense                                   |   | 1,051                                 |       | 1,140                                |       | 3,393 |   | 3,781 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Net interest income                                      |   | 3,503                                 |       | 3,113                                |       | 10,580 |   | 8,933 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Provision for loan losses                                |   | 100                                   |       | 190                                  |       | 380 |   | 590 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Net interest income after provision for  loan losses     |   | 3,403                                 |       | 2,923                                |       | 10,200 |   | 8,343 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Noninterest income:                                      |   |                                  |       |                                 |       |   |   |   |   |
| Service charges on deposits                              |   | 965                                   |       | 879                                  |       | 2,702 |   | 2,624 |   |
| Gain on sales of securities                              |   | 489                                   |       | 76                                   |       | 707 |   | 319 |   |
| Gain on sales of assets                                  |   | 10                                    |       | 2                                    |       | 10 |   | 2 |   |
| Other operating income                                   |   | 253                                   |       | 335                                  |       | 839 |   | 1,161 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Total noninterest income                                 |   | 1,717                                 |       | 1,292                                |       | 4,258 |   | 4,106 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Noninterest expense:                                     |   |                                  |       |                                 |       |   |   |   |   |
| Salaries and employee benefits                           |   | 1,847                                 |       | 1,902                                |       | 5,478 |   | 5,412 |   |
| Net occupancy and equipment                              |   | 662                                   |       | 545                                  |       | 1,964 |   | 1,652 |   |
| Other operating expenses                                 |   | 1,907                                 |       | 1,410                                |       | 4,612 |   | 4,213 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Total noninterest expense                                |   | 4,416                                 |       | 3,857                                |       | 12,054 |   | 11,277 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Income before income taxes                               |   | 704                                   |       | 358                                  |       | 2,404 |   | 1,172 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Income tax expense                                       |   | 135                                   |       | 27                                   |       | 512 |   | 90 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Net income                                               |   | $                                     | 569        |                                 | $          | 331 |   | $ | 1,892 |   | $ | 1,082 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Net income per share - basic and diluted                 |   | $                                     | 0.27       |                                 | $          | 0.16 |   | $ | 0.91 |   | $ | 0.51 |   |
|                                                     |   |                                  | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Weighted average outstanding shares -  basic and diluted |   | 2,073                                 |       | 2,092                                |       | 2,077 |   | 2,109 |   |
|                                                     |   |                                  |       |                                 |       |   |   |   |   |
| Dividends per common share                               |   | $                                     | —     |                                 | $          | — |   | $ | 0.15 |   | $ | 0.15 |   |

 

See notes to consolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002**

**(In thousands)**

 
|                                                                                        |   | **September  30,** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                                        |   | **2003**           |   | **2002** |   |
|                                                                                        |   | **(Unaudited)**    |   |
| **OPERATING ACTIVITIES:**                                                                   |   |               |   |   |   |
| Net income                                                                                  |   | $                  | 1,851  |   | $ | 1,082 |   |
| **Adjustments to reconcile  net income to net cash provided by operating activities:**      |   |               |   |   |   |
| Provision for loan losses                                                                   |   | 380                |   | 590 |   |
| Provision for losses on foreclosed real  estate                                             |   | 134                |   | — |   |
| Depreciation                                                                                |   | 836                |   | 706 |   |
| Amortization (accretion), net                                                               |   | 1,126              |   | 12 |   |
| Provision for deferred income taxes                                                         |   | (125               | )      | — |   |
| Gain on sale of assets and investments                                                      |   | (717               | )      | (321 | ) |
| Change in mortgage loans held for sale                                                      |   | —             |   | 422 |   |
| Change in other assets                                                                      |   | 538                |   | (164 | ) |
| Change in accrued expenses and other  liabilities                                           |   | (1,562             | )      | (707 | ) |
|                                                                                        |   |               |   |   |   |
| Net cash provided by operating activities                                                   |   | 2,612              |   | 1,620 |   |
| **INVESTING ACTIVITIES:**                                                                   |   |               |   |   |   |
| Proceeds from sales and maturities of  investment securities held to maturity               |   | 530                |   | 300 |   |
| Proceeds from sales and maturities of  investment securities available for sale             |   | 45,247             |   | 28,840 |   |
| Purchases of investment securities held to  maturity                                        |   | (7,229             | )      | (38,359 | ) |
| Purchases of investment securities  available for sale                                      |   | (38,236            | )      | — |   |
| Net change in other investments                                                             |   | 92                 |   | (195 | ) |
| Net change in loans                                                                         |   | 5,195              |   | 861 |   |
| (Increase) decrease in cash surrender value  of life insurance                              |   | (1,006             | )      | 222 |   |
| Net cash received in acquisition of CFS  Bancshares                                         |   | 2,612              |   | — |   |
| Purchases of premises and equipment                                                         |   | (457               | )      | (763 | ) |
| Net change in interest bearing deposits  with banks                                         |   | 10,852             |   | 32,018 |   |
| Net change in certificates of deposit                                                       |   | 46                 |   | — |   |
|                                                                                        |   |               |   |   |   |
| Net cash provided by investing activities                                                   |   | 17,646             |   | 22,924 |   |
| **FINANCING ACTIVITIES:**                                                                   |   |               |   |   |   |
| Net change in noninterest-bearing deposits                                                  |   | 1,848              |   | (2,175 | ) |
| Net change in interest-bearing deposits                                                     |   | (16,529            | )      | (30,360 | ) |
| Sale (purchase) of treasury stock                                                           |   | 20                 |   | (381 | ) |
| Proceeds from issuance of trust preferred  securities                                       |   | —             |   | 5,000 |   |
| Principal payments on debt                                                                  |   | (200               | )      | (530 | ) |
| Decrease in advances from Federal Home Loan  Bank                                           |   | (2,739             | )      | — |   |
| Dividends paid                                                                              |   | (312               | )      | (341 | ) |
|                                                                                        |   |               |   |   |   |
| Net cash used in financing activities                                                       |   | (17,912            | )      | (28,787 | ) |
| Net change in cash and cash equivalents                                                     |   | 2,346              |   | (4,243 | ) |
|                                                                                        |   |               |   |   |   |
| Cash and cash equivalents, beginning of  period                                             |   | 11,117             |   | 14,437 |   |
|                                                                                        |   |               |   |   |   |
| Cash and cash equivalents at end of period                                                  |   | $                  | 13,463 |   | $ | 10,194 |   |
| **Supplemental disclosures  of cash paid during the period for:**                           |   |               |   |   |   |
| Interest                                                                                    |   | $                  | 3,384  |   | $ | 4,714 |   |
| Income taxes                                                                                |   | $                  | 628    |   | $ | 290 |   |
| **Supplemental disclosures  of noncash transactions:**                                      |   |               |   |   |   |
| Change in unrealized gain (loss) on  investment securities available for sale, net of taxes |   | $                  | (571   | ) | $ | 1,481 |   |

 

See notes toconsolidated financial statements.

 

4

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

**Notesto the Consolidated Financial Statements**

**September30, 2003**

(Unaudited)

 

**SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

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

 

The accompanying unaudited consolidated financial statements have beenprepared pursuant to the rules and regulations for reporting on 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 consolidated financial statements of the Company as of September30, 2003 and for the three and nine month periods ended September 30, 2003 and2002 are unaudited.  In the opinion ofmanagement, all adjustments necessary for a fair presentation of the financialposition and results of operations and cash flows for the three month and ninemonth periods have been included.  Alladjustments are of a normal recurring nature. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

**Accounting Policies**

 

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

 

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

 

5

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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 $8,591,000 in cash for all outstanding shares of CFS Bancshares,Inc. tendered through September 30, 2003. This acquisition has resulted in a significant expansion of theCompany’s market area and allows it to begin serving customers in theBirmingham metropolitan area.  Theacquisition of CFS Bancshares, Inc. was accounted for as a purchase.  The fair value of the assets and liabilitiesacquired were determined by management and independent valuation specialists,and were recorded as of the date of purchase. Goodwill was not recorded as the net fair value of the assets andliabilities acquired exceeded the purchase price.  The Company recorded a finite lived intangible asset related tothe value of deposit accounts acquired of approximately $373,000 and isamortizing the amount over 7 years.

 

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

 

 

| Estimated fair values: |                |    |    |
|------------------------|---------------------|---------|---------|
|                   | Assets acquired     |    | $       | 109,366 |   |
|                   | Liabilities assumed |    | 100,775 |   |
| Purchase Price         |                | 8,591   |    |
| Less Cash acquired     |                | (11,203 | )       |
| Net cash received      |                | $       | 2,612   |   |

 

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

 

**Forthe nine months ended September 30, 2003:**

 
|       |   | **Citizens  Bancshares** |   | **CFS  Bancshares** |   | **Subtotal** |   | **Pro Forma  Adjustments** |   | **Pro Forma Combined** |   |
|------------|--------|--------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|------------------------|--------|
|       |   |                     |   |                |   |         |   |                       |   |                   |   |
| Revenues   |   | $                        | 18,231 |                | $      | 967          |   | $                          | 19,198 |                   | — |   | $ | 19,198 |   |
| Net Income |   | $                        | 1,892  |                | $      | (3,592       | )      | $                          | (1,700 | )                      | $      | 3,728 |   | $ | 2,028 |   |
| EPS        |   |                     |   |                |   |         |   |                       |   | $                      | 0.98   |   |
|            |        |                          |        |                     |        |              |        |                            |        |                        |        |  |  |  |  |  |

 

**Forthe nine months ended September 30, 2002:**

 
|       |   | **Citizens  Bancshares** |   | **CFS  Bancshares** |   | **Subtotal** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined** |   |
|------------|--------|--------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|-------------------------|--------|
|       |   |                     |   |                |   |         |   |                       |   |                    |   |
| Revenues   |   | $                        | 16,820 |                | $      | 4,960        |   | $                          | 21,780 |                    | — |   | $ | 21,780 |   |
| Net Income |   | $                        | 1,082  |                | $      | 396          |   | $                          | 1,478  |                    | $      | 200 |   | $ | 1,678 |   |
| EPS        |   |                     |   |                |   |         |   |                       |   | $                       | 0.80   |   |
|            |        |                          |        |                     |        |              |        |                            |        |                         |        |  |  |  |  |  |

 

##### **INTANGIBLE ASSETS**

 

The following table presents information about our intangible assets atSeptember 30, 2003 and

 

6

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December 31, 2002:

 
|                        |   | **September 30, 2003**     |      | **December 31, 2002**         |   |
|-----------------------------|--------|----------------------------|-----------|-------------------------------|--------|
|                        |   | **Gross Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized intangible asset: |   |                       |      |                          |   |   |   |   |   |
| Core deposit intangible     |   | $                          | 2,836,345 |                          | $      | 1,283,346 |   | $ | 2,463,665 |   | $ | 997,198 |   |
|                             |        |                            |           |                               |        |  |  |  |  |  |  |  |  |

 

7

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The following table presents information about aggregate amortizationexpense:

 
|                                                            |   | **For the 3 months  ended September 30,  2003** |    | **For the 9 months  ended September 30,  2003** |   | **For the 3 months  ended September 30,  2002** |   | **For the 9 months  ended September 30,  2002** |   |
|-----------------------------------------------------------------|--------|-------------------------------------------------|---------|-------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|
| Aggregate amortization expense of  amortized intangible assets  |   | $                                               | 101,298 |                                            | $      | 286,147                                         |   | $                                               | 87,988 |   | $ | 263,964 |   |
|                                                            |   |                                            |    |                                            |   |                                            |   |                                            |   |
| 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                                         |   | $                                               | 17,747  |                                            |   |                                            |   |                                            |   |   |
|                                                                 |        |                                                 |         |                                                 |        |                                                 |        |                                                 |        |  |  |  |  |

 

# **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 and nine month periods ended September30, 2003 and 2002.

 

**RECLASSIFICATIONS**

 

Certain 2002 amounts have been reclassified to conform to the 2003presentation.

 

**OTHER MATTERS**

 

On April 1, 2003, the Company announced a curtailment of its postretirementmedical and life plans. The curtailment reduced the Company’s associated planliabilities by approximately $255,000 during the nine month period endingSeptember 2003.

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

 

**INTRODUCTION**

 

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial banking and mortgage brokerageservices to individuals and corporate customers in its primary market areas,metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabamathrough its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 11 full-service branches inGeorgia and Alabama.

 

8

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###### **ForwardLooking Statements**

 

In addition to historical information, this report on Form 10-Q maycontain forward-looking statements. For this purpose, any statements containedherein, including documents incorporated by reference, that are not statementsof historical fact may be deemed to be forward-looking statements.Forward-looking statements are subject to numerous assumptions, risks anduncertainties. Without limiting the foregoing, the words “believe,”“anticipates,” “plan,” expects,” and similar expressions are intended toidentify forward-looking statements.

 

Forward-looking statements are based on current management expectationsand, by their nature, are subject to risk and uncertainties because of thepossibility of changes in underlying factors and assumptions. Actualconditions, events or results could differ materially from those contained inor implied by such forward-looking statements for a variety of reasons, including:sharp and/or rapid changes in interest rates; significant changes in theeconomic scenario from the current anticipated scenario which could materiallychange anticipated credit quality trends and the ability to generate loans andgather deposits; significant delay in or inability to execute strategicinitiatives designed to grow revenues and/or control expenses; unanticipatedissues during the integration of acquisitions; and significant changes inaccounting, tax or regulatory practices or requirements. The Company undertakesno obligation to, nor does it intend to, update forward-looking statements toreflect circumstances or events that occur after the date hereof or to reflectthe occurrence of unanticipated events.

 

The following discussion is of the Company’s financial condition as ofSeptember 30, 2003 and the changes in the financial condition and results ofoperations for the three and nine month periods ended September 30, 2003 and2002.

 

**Accounting Policies**

 

In response to the Securities and Exchange Commission’s (“SEC”) ReleaseNo. 33-8040, Cautionary Advice Regarding Disclosure About Critical AccountingPolicies, the Company has identified the following as the most criticalaccounting policies upon which its financial status depends.  The critical policies were determined byconsidering accounting policies that involve the most complex or subjectivedecisions or assessments.  The Company’smost critical accounting policies relate to:

 

**InvestmentSecurities**- The Companyclassifies investments in one of three categories based on management’s intentupon purchase: held to maturity securities which are reported at amortizedcost, trading securities which are reported at fair value with unrealizedholding gains and losses included in earnings, and available for salesecurities which are recorded at fair value with unrealized holding gains andlosses included as a component of accumulated other comprehensive income.  The Company had no investment securitiesclassified as trading securities during 2003 or 2002.

 

Premiums and discounts on available for sale and held to maturitysecurities are amortized or accreted using a method which approximates a levelyield.

 

Gains and losses on sales of investment securities are recognized upondisposition, based on the adjusted cost of the specific security.  A decline in market value of any securitybelow cost that is deemed other than temporary is charged to earnings resultingin the establishment of a new cost basis for the security.

 

**Loans**  - Loans are reportedat principal amounts outstanding less unearned income and the allowance forloan losses.  Interest income on loansis recognized on a level-yield basis. Loan fees 

 

9

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and certain direct origination costs are deferred and amortized overthe estimated terms of the loans using the level-yield method.  Discounts on loans purchased are accretedusing the level-yield method over the estimated remaining life of the loanpurchased.

 

**Allowancefor Loan Losses** - The Company provides for estimatedlosses on loans receivable when any significant and permanent decline in valueoccurs.  These estimates for losses arebased on not only on individual assets and their related cash flow forecasts,sales values, independent appraisals, but also the volatility of certain realestate markets, and the concern for disposing of real estate in distressedmarkets.  For loans that are pooled forpurposes of determining necessary provisions, estimates are based on loantypes, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine theprovision for losses is subject to the reasonableness of these estimates.  The adequacy of the allowance for loanlosses is reviewed on a monthly basis by management and the Board ofDirectors.  On a quarterly basis acomprehensive review of the adequacy of the allowance for loan losses isperformed.  This assessment is made inthe context of historical losses as well as existing economic conditions,performance trends within specific portfolio segments, and individualconcentrations of credit.  Loans arecharged against the allowance when, in the opinion of management, such loansare deemed uncollectible and subsequent recoveries are added to the allowance.

 

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

 

###### **FINANCIALCONDITION**

 

Citizens Bancshares Corporation’s total assets at September 30, 2003were $362,072,000, an increase of $82,582,000 or 30% compared to $279,490,000at December 31, 2002. This increase is primarily due to the acquisition of CFSBancshares, Inc. (the “Alabama Division”), a bank holding company inBirmingham, Alabama on February 28, 2003. The acquisition of CFS Bancshares, Inc. allows the Company to extend itsgeographical base and provides new avenues for the Bank to sell its productsand services. Accordingly, many significant changes in the financial conditionof the Company are attributed to this acquisition.

 

At September 30, 2003, the Company maintained balances of cash and duefrom banks of $13,312,000 representing an increase of $2,195,000 from December31, 2002.  Investment securitiesclassified as available for sale and held to maturity also increased$49,564,000 and $8,258,000, respectively, since December 31, 2002.  These increases were partially offset by a$10,699,000 decrease in interest-bearing deposits with banks for the periodended September 31, 2003.  The decreasein interest-bearing deposits with banks resulted, in part, from the Company’sdecision to redeploy its excess cash balances into higher yielding investmentsecurities.  At September 30, 2003,approximately $39,502,000 and $522,000 of investments classified as availablefor sale and held to maturity, respectively, are attributed to the acquisitionof the Alabama Division.

 

Loans, net increased $27,422,000 for the period ended September 30,2003.  The acquisition of the AlabamaDivision accounted for the majority of this increase. The Alabama Division hadloans, net of approximately $27,063,000 at September 30, 2003.  Additionally, fixed assets increased$2,844,000 primarily due to the addition of $3,165,000 in fixed assets relatedto the Alabama division.

 

Other assets increased $2,130,000 to $7,953,000 at September 30,2003.  This increase is attributed toseveral components including an increase in accrued interest receivable of$537,000, an increase in other real estate owned of $508,000, and an increasein federal income tax benefit of $1,243,000 obtained in the acquisition of theAlabama Division.

 

10

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Total liabilities increased $81,594,000 to $338,042,000 at September30, 2003 compared to $256,448,000 at December 31, 2002. Total deposits, acomponent of total liabilities, increased $65,929,000 to $294,540,000.  Approximately $69,908,000 of the increase isattributed to the Alabama Division at September 30, 2003.  Another significant component of otherliabilities, advances from Federal Home Loan Bank increased $16,211,000 to$34,961,000.  This increase is primarilydue to the $18,950,000 in advances from the Federal Home Loan Bank acquiredfrom the Alabama Division at February 28, 2003.

 

**INVESTMENT SECURITIES**

 

The Company invests a portion of its assets in U.S. treasury bills andnotes, U.S. government sponsored agency securities, mortgage backed bonds, aswell as certain equity securities.  AtSeptember 30, 2003 and December 31, 2002, the Company’s investment securitiesportfolio represented approximately 32% and 21% of total assets, respectively.

 

11

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Investment securities available for sale are summarized as follows (inthousands):

 
| **At September 30, 2003**               |   | **Amortized  Cost** |       | **Gross  Unrealized  Gains** |       | **Gross  Unrealized  Losses** |       | **Fair Value** |       |
|-----------------------------------------|--------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |   |                | ** ** |                         | ** ** |                          | ** ** |           | ** ** |
| U.S. Treasury and                       |   |                |       |                         |       |                          |       |           |       |
| U.S. Government agencies                |   | $                   | 16,838     |                         | $          | 36                            |       | $              | —     |   | $ | 16,874 |   |
| State, county, and municipal securities |   | 12,218              |       | 432                          |       |                          |       | 12,650         |       |
| Mortgage-backed securities              |   | 73,330              |       |                         |       | 568                           |       | 72,762         |       |
| Mutual funds                            |   |                |       |                         |       |                          |       | —         |       |
| Equity securities                       |   | 1,400               |       | —                       |       | 150                           |       | 1,250          |       |
| Totals                                  |   | $                   | 103,786    |                         | $          | 468                           |       | $              | 718        |   | $ | 103,536 |   |

 
| **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 |   |

 

Investment securities held to maturity are summarized as follows (inthousands):

 
| **At September 30, 2003**               |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|-----------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                    |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and                       |   |                |   |                         |   |                          |   |           |   |
| U.S. Government agencies                |   | $                   | 3,000  |                         | $      | —                        |   | $              | 6      |   | $ | 2,994 |   |
| Mortgage-backed securities              |   | 2,084               |   | —                       |   | 37                            |   | 2,047          |   |
| State, county, and municipal securities |   | 5,550               |   | 157                          |   | —                        |   | 5,707          |   |
|                                    |   |                |   |                         |   |                          |   |           |   |
| Totals                                  |   | $                   | 10,634 |                         | $      | 157                           |   | $              | 43     |   | $ | 10,748 |   |

 

12

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

 

 

**LOANS**

 

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

 
|                                                 |   | **September 30,  2003** |    | **December 31,  2002** |   |
|------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                 |   |                    |    |                   |   |
| Commercial, financial, and agricultural              |   | $                       | 20,415  |                   | $      | 53,940 |   |
| Installment                                          |   | 5,845                   |    | 5,652                  |   |
| Real estate - mortgage                               |   | 132,759                 |    | 96,999                 |   |
| Real estate - construction                           |   | 15,995                  |    | 14,058                 |   |
| Other                                                |   | 28,963                  |    | 5,376                  |   |
|                                                 |   | 203,977                 |    | 176,025                |   |
| Less:    Net deferred  loan fees |   | 558                     |    | 537                    |   |
| Allowance for loan losses                            |   | 3,295                   |    | 2,630                  |   |
| Discount on loans acquired from FDIC                 |   | 625                     |    | 781                    |   |
|                                                 |   |                    |    |                   |   |
| Loans receivable, net                                |   | $                       | 199,499 |                   | $      | 172,077 |   |

 

 

**NONPERFORMING ASSETS**

 

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

 

With the exception of the loansincluded within nonperforming assets in the table below, management is notaware of any loans classified for regulatory purposes as loss, doubtful, substandard,or special mention that have not been disclosed which (1) represent or resultfrom trends or uncertainties which management reasonably expects willmaterially impact future operating results, liquidity, or capital resources, or(2) represent any information on material credits which management is awarethat causes management to have serious doubts as to the abilities of suchborrowers to comply with the loan repayment terms.

 

Nonperforming assets increasedby $2,152,000 to $7,215,000 at September 30, 2003 from $5,063,000 at December31, 2002.  A combination of economicfactors and a deterioration of specific loan accounts contributed to thisincrease.  At September 30, 2003, theBank had a $2.2 million outstanding loan to a borrower experiencing financialdifficulty.  The bank has recorded a 15%reserve towards the outstanding principal balance of this borrower.  Nonperforming assets represents 3.58% ofloans, net of unearned income, discounts, and real estate acquired throughforeclosure at September 30, 2003 as compared to 2.91% at December 31, 2002.

 

13

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The table below presents asummary of the Company’s nonperforming assets at September 30, 2003 andDecember 31, 2002.

 
|                                                                                                            |   | **September 30,  2003**                      |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------|--------|
|                                                                                                            |   | **(in thousands, except  financial ratios)** |   |
|                                                                                                            |   |                                         |   |                   |   |
| Nonperforming assets:                                                                                           |   |                                         |   |                   |   |
| Nonperforming loans:                                                                                            |   |                                         |   |                   |   |
| Nonaccrual loans                                                                                                |   | $                                            | 5,977  |                   | $      | 4,333 |   |
| Past-due loans                                                                                                  |   | —                                       |   | —                 |   |
| Nonperforming loans                                                                                             |   | 5,977                                        |   | 4,333                  |   |
|                                                                                                            |   |                                         |   |                   |   |
| Real estate acquired through foreclosure                                                                        |   | 1,238                                        |   | 730                    |   |
| Total nonperforming assets                                                                                      |   | $                                            | 7,215  |                   | $      | 5,063 |   |
|                                                                                                            |   |                                         |   |                   |   |
| Ratios:                                                                                                         |   |                                         |   |                   |   |
| Nonperforming loans to loans, net of  unearned income and discount on loans                                     |   | 2.95                                         | %      | 2.49                   | %      |
|                                                                                                            |   |                                         |   |                   |   |
| Nonperforming assets to loans, net of unearned  income, discounts, and real estate acquired through foreclosure |   | 3.58                                         | %      | 2.91                   | %      |
|                                                                                                            |   |                                         |   |                   |   |
| Nonperforming assets to total assets                                                                            |   | 1.99                                         | %      | 1.81                   | %      |
|                                                                                                            |   |                                         |   |                   |   |
| Allowance for loan losses to nonperforming  loans                                                               |   | 55.13                                        | %      | 60.69                  | %      |
|                                                                                                            |   |                                         |   |                   |   |
| Allowance for loan losses to nonperforming  assets                                                              |   | 45.67                                        | %      | 51.94                  | %      |

 

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

The Company provides forestimated losses on loans receivable when any significant and permanent declinein value occurs.  These estimates forlosses are based on individual assets and their cash flow forecasts, salesvalues, independent appraisals, the volatility of certain real estate markets,and concern for disposing of real estate in distressed markets.  For loans that are pooled for purposes ofdetermining necessary provisions, estimates are based on loan types, history ofcharge-offs, and other delinquency analyses. Therefore, the value used to determine the provision for losses issubject to the reasonableness of these estimates. The adequacy of the allowancefor loan losses is reviewed on a monthly basis by management and the Board ofDirectors.  On a quarterly basis acomprehensive review of the adequacy of allowance for loan losses 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 the opinion ofmanagement, such loans are deemed uncollectible and subsequent recoveries areadded to the allowance.  For the ninemonths ended September 30, 2003, provisions for loan losses totaled $380,000compared to $590,000 for the same 

 

14

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period in 2002.

 

The allowance for loan lossesat September 30, 2003 was approximately $3,295,000, representing 1.62% of totalloans, net of unearned income compared to approximately $2,630,000 at December31, 2002, which represented 1.51% of total loans, net of unearned income.

 

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

 

A substantial portion of the Company’s loanportfolio is secured by real estate in the metropolitan Atlanta market,including a concentration of loans to churches and convenience stores.  The Company’s church loans wereapproximately $39.5 million at September 30, 2003 and $37.7 million at December31, 2002.  The Company’s loans to areaconvenience stores were approximately $27.1 million at September 30, 2003 and$26.3 million at December 31, 2002. Accordingly, the ultimate collectability of the substantial portion ofthe Company’s loan portfolio is susceptible to changes in market conditions inthe metropolitan Atlanta area.

 

15

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The following table summarizesloans, changes in the allowance for loan losses arising from loans charged off,recoveries on loans previously charged off by loan category, and additions tothe allowance which have been charged to operating expense as of and for thenine month period ended September 30, 2003 and year ended December 31, 2002,respectively.

 
|                                                                                                                   |   | **2003**                                             |    | **2002** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|---------|----------|--------|
|                                                                                                                   |   | **(Amounts in thousands, except  financial ratios)** |    |
|                                                                                                                   |   |                                                 |    |     |   |
| Loans, net of unearned income and  discounts                                                                           |   | $                                                    | 202,794 |     | $      | 174,707 |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Average loans, net of unearned income,  discounts and the allowance for loan losses                                    |   | $                                                    | 203,103 |     | $      | 157,867 |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Allowance for loans losses at the  beginning of period                                                                 |   | $                                                    | 2,630   |     | $      | 2,003 |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Loans charged off:                                                                                                     |   |                                                 |    |     |   |
| Commercial, financial, and agricultural                                                                                |   | 100                                                  |    | 840      |   |
| Real estate - loans                                                                                                    |   | 640                                                  |    | 245      |   |
| Installment loans to individuals                                                                                       |   | 254                                                  |    | 751      |   |
| Total loans charged off                                                                                                |   | 994                                                  |    | 1,836    |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Recoveries of loans previously charged  off:                                                                           |   |                                                 |    |     |   |
| Commercial, financial, and agricultural                                                                                |   | 198                                                  |    | 503      |   |
| Real estate - loans                                                                                                    |   | 327                                                  |    | 151      |   |
| Installment loans to individuals                                                                                       |   | 146                                                  |    | 149      |   |
| Total loans recovered                                                                                                  |   | 671                                                  |    | 803      |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Net loans charged off                                                                                                  |   | 323                                                  |    | 1,033    |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Allowance for loan losses transferred from  acquired institution                                                       |   | 608                                                  |    | —   |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Additions to allowance for loan losses  charged to operating expense                                                   |   | 380                                                  |    | 1,660    |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Allowance for loan losses at period end                                                                                |   | $                                                    | 3,295   |     | $      | 2,630 |   |
|                                                                                                                   |   |                                                 |    |     |   |
| Ratio of net loans charged off to average  loans, net of unearned income, discounts, and the allowance for loan losses |   | 0.16                                                 | %       | 0.65     | %      |
|                                                                                                                   |   |                                                 |    |     |   |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                                     |   | 1.62                                                 | %       | 1.51     | %      |

 

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**DEPOSITS**

 

Deposits remain the Company’sprimary source of funding loan growth. Total deposits for the nine month period ended September 30, 2003increased by 29% or $65,929,000 to $294,540,000.  Noninterest-bearing deposits increased by $1,848,000 or 3%, whileinterest-bearing deposits increased by $64,081,000 or 39%.  The increase in total deposits is primarilyattributed the Company’s Alabama Division, acquired on February 28, 2003, andCorporate and Governmental customers who make significant monthly deposits andwithdrawals based on their budgetary needs.

 

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

 
|                              |   | **September 30,  2003** |    | **December 31,  2002** |   |
|-----------------------------------|--------|-------------------------|---------|------------------------|--------|
|                              |   |                    |    |                   |   |
| NOW and money market accounts     |   | $                       | 41,805  |                   | $      | 37,485 |   |
| Savings accounts                  |   | 62,253                  |    | 44,061                 |   |
| Time deposits of $100,000 or more |   | 81,202                  |    | 46,387                 |   |
| Other time deposits               |   | 45,038                  |    | 38,284                 |   |
|                              |   |                    |    |                   |   |
|                              |   | $                       | 230,298 |                   | $      | 166,217 |   |

 

 

**OTHER BORROWED FUNDS**

 

While the Company continues toemphasize funding earning asset growth through deposits, the Company has reliedon other borrowings as a supplemental funding source.  Other borrowings consist of Federal Home Loan Bank (the “FHLB”)advances and short-term borrowings.  TheBank had outstanding advances from the FHLB of $34,961,000 at September 30,2003 and $18,750,000 at December 31, 2002.  The following advances are collateralized by a blanket lien on theCompany’s 1-4 family mortgage loans.

 
| **Maturity**                 |   | **Callable** |   | **Type** |   | **September 30, 2003** |   | **December 31, 2002** |             |
|------------------------------|--------|--------------|--------|----------|--------|------------------------|--------|-----------------------|------------------|
|                         |   |         |   |     |   |                   |   |                  |             |
| April 2010                   |   | Quarterly    |   | Fixed    |   | 5.82                   | %      | $                     | 10,000,000       |   | 5.82 | % | $ | 10,000,000 |   |
| July 2004                    |   | Daily        |   | Variable |   | 1.30                   | %      | 24,961,000            |             | 1.30 | % | 8,750,000 |   |
|                         |   |         |   |     |   |                   |   |                  |             |   |   |   |   |
| Total  Principal Outstanding |   |         |   |     |   |                   |   | $                     |  34,961,000 |   |   |   | $ |  18,750,000 |   |
|                         |   |         |   |     |   |                   |   |                  |             |   |   |   |   |
| Weighted Average Rate        |   |         |   |     |   | 2.63                   | %      |                  |             | 3.76 | % |   |   |
|                              |        |              |        |          |        |                        |        |                       |                  |  |  |  |  |  |  |  |  |

 

The Company had an unsecurednote payable of approximately $540,000 at September 30, 2003 and $740,000 atDecember 31, 2002.  The note bearsinterest at the lender’s prime rate minus 50 basis points.

 

17

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**RESULTS OF OPERATIONS**

 

**Net Interest Income:**

 

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

 

For the nine month period endedSeptember 30, 2003, the Company’s net interest income increased $1,647,000 to$10,580,000 compared to the nine month period ended September 30, 2002.  During the nine month period ended September30, 2003, total interest income increased $1,259,000 as compared to the sameperiod in 2002, and is attributed to loans, including fee income whichincreased $1,715,000, partially offset by a decrease in interest-bearingdeposits income of $171,000 and a decrease in taxable interest income of$311,000.  The Company reallocated itsmix of earning assets by moving excess funds held in low yielding interestbearing deposits to higher yielding assets, particularly loans.  However, in June 2003, the Federal ReserveBank lowered interest rates another 25 basis points which reduced the overallyields the Company earned on a portion of its earning assets.  Interest expense on deposits decreased$718,000 as the Company was able to lower its funding cost for the nine monthperiod ended September 30, 2003 compared to same period in 2002.  This decrease in interest on deposits waspartially offset by a $330,000 increase in interest paid on other borrowingsdue to an increase in the amount of borrowings outstanding during the ninemonth period of 2003 compared with 2002.

 

Net interest income increased$390,000 for the three month period ended September 30, 2003 as compared withthe same period of the previous year. The increase in net interest income resulted from the increase in theamount of higher yielding loans, which generated additional interest income of$503,000, partially offset by a $193,000 decrease in taxable securities incomecompared to the same period last year. The decrease in taxable securities income is attributed to the lowerinterest income the Company earns from its mortgage backed investment securityportfolio which were negatively impacted by the increase in mortgage loansrefinancing caused by the Federal Reserve Bank June 2003 interest ratereduction.  Interest expense on depositsdecreased $146,000 for the three month period ended September 30, 2003 as theCompany was able to lower its funding cost compared to same period in2002.  This decrease in interest ondeposits was partially offset by a $57,000 increase in interest paid on otherborrowings due to an increase in the amount of borrowings outstanding.

 

**Noninterest income:**

 

Noninterest income consists ofrevenues generated from a broad range of financial services and activities,including fee-based services, origination fees from Mortgage Services, andprofits and 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. Noninterest income totaled $4,378,000 for the nine monthperiod ended September 30, 2003, an increase of $272,000 or 7% compared withthe same period ended September 30, 2002. This increase is primarily due to a$388,000 increase in gains on the sale of securities, and is partially offsetby a decrease of$202,000 in other operating income attributed to various immaterial componentsof other operating income including other recoveries.

 

For the three month periodended September 30, 2003, noninterest income totaled $1,837,000, an increase of$545,000 or 42% compared to the three month period ended September 30,2002.  This increase is due to a$413,000 increase in gains on sales of securities and an $86,000 increase inservice

 

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charges on deposits.  These increases were partially offset by a$59,000 decrease in origination fees from the Company’s former mortgagesubsidiary.

 

**Noninterest expense**:

 

Noninterest expense totaled$12,054,000 for the nine month period ended September 30, 2003, an increase of$777,000 or 7% compared to the same period in 2002.  The increase, in large part, is due to the acquisition of CFSBancshares, Inc. on February 28, 2003.

 

Salaries andemployee benefits increased slightly by $66,000 or 1% for the nine month periodended September 30, 2003 compared to the same period in 2002.  The Company completed the conversion of itsAlabama Division’s data processing system in the second quarter of 2003 andeliminated overlapping functions to reduce salary expenses.  Salary expenses for the nine month period werefurther reduced by an early retirement program offered during the secondquarter 2003. The additional salary and benefit costs were partially offset bya $251,000 gain realized on the curtailment of the Company’s postretirementmedical and life plans on April 1, 2003. For the three month period ended September 30, 2003, salaries andemployee benefits decreased $55,000 due to the planned staff reduction bymanagement.

 

Net occupancy and equipmentexpense increased by $312,000 or 19% to $1,964,000 for the nine monthperiod ended September 30, 2003 compared to the same period in 2002.  Similarly, for the three month period endedSeptember 30, 2003, net occupancy and equipment expense increased by $117,000over the same period in 2002. These increases are primarily the result of theacquisition of the Alabama Division on February 28, 2003, which has three fullservice branches.  In June 2003, theCompany consolidated two branches into its Cascade branch, located in SouthwestAtlanta, Georgia.  The consolidatedbranches were closed by the Company to control overhead costs.

 

Other operating expenses, increased $399,000 or 9% to $4,612,000 forthe nine month period ended September 30, 2003, compared to $4,213,000 for thesame period in 2002.  This increase is primarilydue to the Company reserving $250,000 to satisfy a jury award which the Companyis appealing.  For the three monthperiod ended September 30, 2003, other operating expenses increased $497,000primarily as a result of the $250,000 jury award and operating activity of theAlabama Division acquired on February 28, 2003.

 

## ***INTERESTRATE SENSITIVITY MANAGEMENT***

 

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

 

One method of measuring theimpact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest ratesensitive assets and interest rate sensitive liabilities at various timeintervals is referred to as the gap. The Company is liability sensitive on a short-term basis as reflected inthe following table.  Generally, a netliability sensitive position indicates that there would be a negative impact onnet interest income in an increasing rate environment.  However, interest rate sensitivity gap doesnot necessarily indicate the impact of general interest rate movements on thenet interest margin, since all interest rates and yields do not adjust at thesame velocity and the repricing of various categories of assets and liabilitiesis subject to competitive pressures and the needs of the Company’scustomers.  In addition, various assetsand liabilities indicated as repricing within the same period may in factreprice at different times within such period and at different rates. Thefollowing table shows the

 

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contractual maturities of allinvestment securities at September 30, 2003. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations with or without callor prepayment penalties.  Forconservative purposes, the Company has included demand deposits such as NOW,money market, and savings accounts in the three month category.  However, the actual repricing of theseaccounts may extend beyond twelve months. The interest rate sensitivity gap is only a general indicator ofpotential effects of interest rate changes on net interest income.

 

The following table sets forththe distribution of the repricing of the Company’s interest rate sensitiveassets and interest rate sensitive liabilities as of September 30, 2003.

 
|                                                                    |   | **Cumulative  amounts as of September 30, 2003  Maturing and repricing within** |     |
|-------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|----------|
|                                                                    |   | **3  Months**                                                                   |     | **3 to 12  Months** |   | **1 to 5  Years** |   | **Over  5 Years** |   | **Total** |   |
|                                                                    |   | **(amounts  in thousands, except ratios)**                                      |     |
| Interest-sensitive assets:                                              |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Investments                                                             |   | $                                                                               | 835      |   | $ | 4,431 |   | $ | 20,942 |   | $ | 87,962 |   | $ | 114,170 |   |
| Certificates of deposit                                                 |   | 66                                                                              |     | 2,188 |   | 795 |   | — |   | 3,049 |   |
| Loans                                                                   |   | 12,485                                                                          |     | 16,456 |   | 89,653 |   | 85,383 |   | 203,977 |   |
| Interest-bearing deposits with other banks                              |   | 4,493                                                                           |     | — |   | — |   | — |   | 4,493 |   |
| Total interest-sensitive assets                                         |   | $                                                                               | 17,879   |   | $ | 23,075 |   | $ | 111,390 |   | $ | 173,345 |   | $ | 325,689 |   |
| Interest-sensitive liabilities:                                         |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |   | $                                                                               | 142,668  |   | $ | 68,277 |   | $ | 14,453 |   | 4,900 |   | $ | 230,298 |   |
| Notes payable                                                           |   | 540                                                                             |     | — |   | — |   | — |   | 540 |   |
| Trust preferred securities                                              |   | —                                                                          |     | — |   | 5,000 |   | — |   | 5,000 |   |
| Other borrowings                                                        |   | 24,961                                                                          |     | — |   | — |   | 10,000 |   | 34,961 |   |
| Total interest-sensitive liabilities                                    |   | $                                                                               | 168,169  |   | $ | 68,277 |   | $ | 19,453 |   | $ | 14,900 |   | $ | 270,799 |   |
|                                                                    |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |   | $                                                                               | (150,290 | ) | $ | (45,202 | ) | $ | 91,937 |   | $ | 158,445 |   | $ | 54,890 |   |
| Cumulative interest-sensitivity gap to total interest-sensitive  assets |   | (46.15                                                                          | )%       | (60.02 | )% | (31.80 | )% | 16.85 | % | 16.85 | % |

 

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

 

**LIQUIDITY**

 

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

 

The primary source of liquidityfor the Bank holding company is dividends from the Bank. The amount ofdividends paid by the Bank to the Company is limited by various bankingregulatory agencies.  The GeorgiaDepartment of Banking and Finance regulates dividend payments and must approvepayments

 

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that exceed 50% of the Bank’snet income for the prior year. The total dividends that could be paid by theBank to the Company in 2003 without prior regulatory approval is approximately$928,000.  Also, the Company has accessto various capital markets. The Company does not anticipate any liquidityrequirements in the near future that it will not be able to meet.  In March 2003, the Bank paid cash dividendstotaling $928,000 to the Company.

 

Asset and liability managementfunctions not only serve to assure adequate liquidity in order to meet theneeds of the Company’s customers, but also to maintain an appropriate balancebetween interest-sensitive assets and interest-sensitive liabilities so thatthe Company can earn a return that meets the investment requirements of itsshareholders.  Daily monitoring of thesources and uses of funds is necessary to maintain an acceptable cash positionthat meets both requirements.

 

The asset portion of thebalance sheet provides liquidity primarily through loan principal repayments,maturities of investment securities and, to a lesser extent, sales ofinvestment securities available for sale and trading account securities. Othershort-term investments such as federal funds sold, securities purchased underagreements to resell, and maturing interest bearing deposits with other banksare additional sources of liquidity funding.

 

The liability portion of thebalance sheet provides liquidity through various customers’ interest bearingand noninterest bearing deposit accounts. Federal funds purchased, securitiessold under agreements to repurchase, and other short-term borrowings areadditional sources of liquidity and, basically, represent the Company’sincremental borrowing capacity. These sources of liquidity are short-term innature and are used as necessary to fund asset growth and meet short-termliquidity needs.

 

 

**CAPITAL RESOURCES**

 

Shareholders’ equity increased$988,000 for the nine months ended September 30, 2003, primarily due to theincrease in retained earnings.  Retainedearnings increased by $1,659,000 to $16,580,000 due to net earnings for thenine month period of $1,971,000, partially offset by dividends paid toshareholders.  On March 15, 2003, theCompany paid cash dividends of approximately $312,000 to stockholders of recordas of March 1, 2003.  The annualdividend rate in 2003 was $0.15 per common share.  Also, for the nine month period ended September 30, 2003,accumulated other comprehensive income decreased $571,000 to an unrealized lossof $169,000, compared with an unrealized gain of $402,000 at December 31,2002.  The decrease is due to the impactof changing economic conditions and changes in market interest rates on theCompany’s available for sale investment portfolio.

 

Quantitative measures establishedby regulation to ensure capital adequacy require the Company to maintainminimum amounts and ratios of total and Tier 1 capital to risk weighted assets,and Tier 1 capital to average assets. As of September 30, 2003, the Bank’s total and Tier 1 capital to riskweighted assets and Tier 1 to average assets were 15%, 14%, and 8%respectively.  As of September 30, 2003,the Company met all capital adequacy requirements to which it is subject.

 

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###### **ITEM3.**     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Quantitative information about market risk is as follows (inthousands):

 
|                      |   |                |    |            |   | **% Increase (Decrease) in  Fair Value due to Rate Movement** |   |
|---------------------------|--------|---------------------|---------|-----------------|--------|---------------------------------------------------------------|--------|
|                      |   | **Carrying  Value** |    | **Fair  Value** |   | **Down 100bps**                                               |   | **Up 100 bps** |   |
|                      |   |                |    |            |   |                                                          |   |   |   |
| Investments               |   | $                   | 114,170 |            | $      | 114,284                                                       |   | 2.65 | % | (4.59 | )% |
| Loans                     |   | 203,977             |    | 200,412         |   | 3.15                                                          |   | (2.83 | ) |
| Interest-bearing deposits |   | 230,298             |    | 223,901         |   | 1.35                                                          |   | (1.27 | ) |
| Other borrowings          |   | 40,501              |    | 41,807          |   | 2.57                                                          |   | (2.45 | ) |
|                           |        |                     |         |                 |        |                                                               |        |  |  |  |  |

 

 

The Companyhas adopted an asset/liability management program to monitor the Company’sinterest rate sensitivity and to ensure that the Company is competitive in theloan and deposit markets.  Managementseeks to manage the relationship between interest-sensitive assets and liabilitiesin order to protect against wide interest rate fluctuations, including thoseresulting from inflation.  The Companyhas not entered into any derivative financial instruments such as futures,forwards, swaps or options. Additionally, refer to our interest sensitive management and liquiditydisclosures within Part 1, Item 2, of this Form 10-Q/A.

# ** **

 

# **ITEM 4.**     CONTROLSAND PROCEDURES

 

Based on theevaluation of our disclosure controls and procedures, the Company’s ChiefExecutive Officer, Chief Operating Officer, and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2003 in timely alerting them to material information required tobe included in our reports filed with or furnished to the Securities andExchange Commission.  There have been nochanges in the Company’s internal controls over financial reporting thatoccurred during the quarter ended September 30, 2003 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

 

# **PART II.  OTHER INFORMATION**

 

**ITEM 1.**                              **LEGALPROCEEDINGS**

 

On September 24, 2003, a jury awarded$250,000 in a court case against the Company. The Company is appealing the case and is seeking to have the jury awardreversed.

 

**ITEM 2.****                              CHANGESIN SECURITIES**

 

None

 

**ITEM 3.****                              DEFAULTSUPON SENIOR SECURITIES**

 

None

 

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**ITEM 4.****                              SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.****                              OTHERINFORMATION**

 

None

 

**ITEM 6.****                              EXHIBITSAND REPORTS ON FORM 8-K**

 

**(a)**          **Exhibits:**

 

**Exhibit31**

 

Section 302 Certification by the Company’sexecutive officers with respect to the Company’s Quarterly Report on Form10-Q/A for the quarter ended September 30, 2003.

 

**Exhibit32**

 

Section 906 Certification pursuant to Section1350 of Chapter 63 of Title 18 U.S.C. by the Company’s executive officers withrespect to the Company’s Quarterly Report on Form 10-Q/A for the quarter endedSeptember 30, 2003.

 

**(b)**          **Reports on Form 8-K:**

 

Press Release of Registrant, dated August 22,2003, announcing 2003 second quarter results.

 

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**SIGNATURES**

** **

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

 

**CITIZENS BANCSHARES CORPORATION**

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

 

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