**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10 - Q**

 

| **(Mark One)** |   |                                                                                                                                                                                                                                                                                                                                  |
|----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**     |   | **QUARTERLY****REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                  |
|           |   |                                                                                                                                                                                                                                                                                                                                  |
|           |   | **For the quarterly period ended September  30, 2003**                                                                                                                                                                                                                                                                                |
|           |   |                                                                                                                                                                                                                                                                                                                                  |
| **o**          |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) TO THE  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                   |
|           |   |                                                                                                                                                                                                                                                                                                                                  |
|           |   | **For the transition period  from                        to                        ** |

 

**Commission File No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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 office)                                                          |   | (Zip Code)                        |
|                                                                                             |   |                              |
| Registrant’s telephone number, including  area code:    **(404) 659 - 5959** |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý  No o

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 
| 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.** |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.  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.

 

 

----

 

**PART1.****                FINANCIALINFORMATION**

**ITEM 1.                  Financialstatements**

 

**CITIZENS BANCSHARESCORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**SEPTEMBER  30, 2003 AND 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                                                                                       |   | 7,953           |       | 5,823    |       |
|                                                                                               |   |            |       |     |       |
| Total assets                                                                                       |   | $               | 362,072    |     | $          | 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                                                            |   | 2,960           |       | 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                                                                                  |   | 338,001         |       | 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                                                                                  |   | 16,501          |       | 14,921   |       |
| Treasury stock, at cost  (249,518 and 240,996 shares, respectively)                           |   | (2,026          | )          | (2,046   | )          |
| Accumulated other  comprehensive income (loss)                                                     |   | (169            | )          | 402      |       |
|                                                                                               |   |            |       |     |       |
| Total stockholders’ equity                                                                    |   | 24,071          |       | 23,042   |       |
|                                                                                               |   |            |       |     |       |
|                                                                                               |   | $               | 362,072    |     | $          | 279,490 |   |

 

See notes to consolidated financialstatements.

 

2

----

 

**CITIZENS BANCSHARESCORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited - Inthousands, 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 financialstatements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THE NINE MONTHS ENDEDSEPTEMBER 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                                                   |   | 2,461             |   | 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            |   | 10,813 |   |
| Purchases of investment securities held to  maturity                                        |   | (7,229            | )      | (38,359 | ) |
| Purchases of investment securities available for  sale                                      |   | (38,236           | )      | 18,027 |   |
| Net change in other investments                                                             |   | 92                |   | (195 | ) |
| Net change in loans                                                                         |   | 5,195             |   | 861 |   |
| Increase 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 due from banks                                                       |   | 2,195             |   | (4,243 | ) |
|                                                                                        |   |              |   |   |   |
| Cash and due from banks at beginning of period                                              |   | 11,117            |   | 14,437 |   |
|                                                                                        |   |              |   |   |   |
| Cash and due from banks at end of period                                                    |   | $                 | 13,312 |   | $ | 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 to consolidated financial statements.

 

4

----

 

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

 

Theconsolidated financial statements of the Company as of September 30, 2003 andfor the three and nine month periods ended September 30, 2003 and 2002 areunaudited.  In the opinion ofmanagement, all adjustments necessary for a fair presentation of the financialposition and results of operations and cash flows for the three month and 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.

 

5

----

 

**ACQUISITION**

 

On February 28, 2003, the Company acquired CFS Bancshares, Inc., a savingsand 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 the assets acquired andliabilities assumed in the acquisition follows (in thousands):

 

| 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 for the nine months ended September 30, 2003:

 

|       |   | **Citizens  Bancshares** |   | **CFS  Bancshares** |   | **Subtotal** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined** |   |
|------------|--------|--------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|-------------------------|--------|
|       |   |                     |   |                |   |         |   |                       |   |                    |   |
| Revenues   |   | $                        | 18,351 |                | $      | 967          |   | $                          | 19,318 |                    | — |   | $ | 19,318 |   |
| Net Income |   | $                        | 1,971  |                | $      | (3,592       | )      | $                          | (1,621 | )                       | $      | 3,728 |   | $ | 2,107 |   |
| EPS        |   |                     |   |                |   |         |   |                       |   | $                       | 1.01   |   |
|            |        |                          |        |                     |        |              |        |                            |        |                         |        |  |  |  |  |  |

 

##### **INTANGIBLE ASSETS**

 

The following table presents information about ourintangible assets at September 30, 2003 and 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 |   |
|                             |        |                            |           |                               |        |  |  |  |  |  |  |  |  |

 

6

----

 

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. TheCompany’s potential common shares are due to outstanding stock options, whichwere not dilutive during the three and nine month periods ended September 30,2003 and 2002.

 

**RECLASSIFICATIONS**

 

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

 

**OTHER MATTERS**

 

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

 

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

 

**INTRODUCTION**

 

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

 

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

 

Inaddition to historical information, this report on Form 10-Q may containforward-looking statements. For this purpose, any statements contained herein,including documents incorporated by reference, that are not statements ofhistorical fact may be deemed to be forward-looking statements. Forward-lookingstatements are subject to numerous assumptions, risks and uncertainties.Without limiting the foregoing, the words “believe,” “anticipates,” “plan,”expects,” and similar expressions are intended to identify forward-lookingstatements.

 

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

 

The following discussion is of the Company’s financial condition as 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.

 

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

 

Gainsand losses on sales of investment securities are recognized upon disposition,based on the adjusted cost of the specific security.  A decline in market value of any security below cost that isdeemed other than temporary is charged to earnings resulting in theestablishment of a new cost basis for the security.

 

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

 

**Allowancefor Loan Losses** - The Company providesfor estimated losses on loans receivable when any significant and permanentdecline in value occurs.  Theseestimates for losses are based on not only on individual assets and theirrelated cash flow forecasts, sales values, independent appraisals, but also thevolatility of certain real estate markets, and the concern for disposing ofreal estate in distressed markets.  Forloans that are pooled for purposes of determining necessary provisions, estimatesare based on loan types, history of charge-offs, and other delinquencyanalyses.  Therefore, the value used todetermine the provision for losses is subject to the reasonableness of theseestimates.  The adequacy of theallowance for loan losses is reviewed on a monthly basis by management and theBoard of Directors.  On a quarterlybasis a comprehensive review of the adequacy of the allowance for loan lossesis performed.  This assessment is madein the 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.

 

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###### **FINANCIALCONDITION**

 

CitizensBancshares Corporation’s total assets at September 30, 2003 were $362,072,000,an increase of $82,582,000 or 30% compared to $279,490,000 at December 31,2002. This increase is primarily due to the acquisition of CFS Bancshares, Inc.(the “Alabama Division”), a bank holding company in Birmingham, Alabama onFebruary 28, 2003.  The acquisition ofCFS Bancshares, Inc. allows the Company to extend its geographical base andprovides new avenues for the Bank to sell its products and services.Accordingly, many significant changes in the financial condition of the Companyare attributed to this acquisition.

 

AtSeptember 30, 2003, the Company maintained balances of cash and due from banksof $13,312,000 representing an increase of $2,195,000 from December 31,2002.  Investment securities classifiedas 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 decreasein interest-bearing deposits with banks for the period ended September 31, 2003.  The decrease in interest-bearing depositswith banks resulted, in part, from the Company’s decision to redeploy itsexcess cash balances into higher yielding investment securities.  At September 30, 2003, approximately$39,502,000 and $522,000 of investments classified as available for sale andheld to maturity, respectively, are attributed to the acquisition of theAlabama Division.

 

Loans,net increased $27,422,000 for the period ended September 30, 2003.  The acquisition of the Alabama Divisionaccounted for the majority of this increase. The Alabama Division had loans,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.

 

Otherassets increased $2,130,000 to $7,953,000 at September 30, 2003.  This increase is attributed to severalcomponents including an increase in accrued interest receivable of $537,000, anincrease in other real estate owned of $508,000, and an increase in federalincome tax benefit of $1,243,000 obtained in the acquisition of the AlabamaDivision.

 

Totalliabilities increased $81,594,000 to $338,042,000 at September 30, 2003compared to $256,448,000 at December 31, 2002. Total deposits, a component oftotal 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 other liabilities,advances from Federal Home Loan Bank increased $16,211,000 to $34,961,000.  This increase is primarily due to the$18,950,000 in advances from the Federal Home Loan Bank acquired from theAlabama Division at February 28, 2003.

 

**INVESTMENT SECURITIES**

 

TheCompany invests a portion of its assets in U.S. treasury bills and notes, U.S.government sponsored agency securities, mortgage backed bonds, as well ascertain equity securities.  At September30, 2003 and December 31, 2002, the Company’s investment securities portfoliorepresented approximately 32% and 21% of total assets, respectively.

 

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

 
| **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 |   |

 

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

 
| **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 |   |

 

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

 

**LOANS**

 

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

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

 

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

 

Nonperforming assets increased by $2,152,000 to $7,215,000 at September30, 2003 from $5,063,000 at December 31, 2002. A combination of economic factors and a deterioration of specific loanaccounts contributed to this increase. At September 30, 2003, the Bank had a $2.2 million outstanding loan to aborrower experiencing financial difficulty. The bank has recorded a 15% reserve towards the outstanding principalbalance of this borrower.  Nonperformingassets represents 3.58% of loans, net of unearned income, discounts, and realestate acquired through foreclosure at September 30, 2003 as compared to 2.91%at December 31, 2002.

 

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The table below presents a summary of the Company’s nonperformingassets at September 30, 2003 and December 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 losses is primarily available to absorb lossesinherent in the loan portfolio. Credit exposures deemed uncorrectable arecharged against the allowance for loan losses. Recoveries of previouslycharged-off amounts are credited to the allowance for loan losses.

 

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

 

Loans are charged against the allowance when, in theopinion of management, such loans are deemed uncollectible and subsequentrecoveries are added to the allowance. For the nine months ended September 30, 2003, provisions for loan lossestotaled $380,000 compared to $590,000 for

 

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the same period in 2002.

 

The allowance for loan losses at September 30, 2003 was approximately$3,295,000, representing 1.62% of total loans, net of unearned income comparedto approximately $2,630,000 at December 31, 2002, which represented 1.51% oftotal loans, net of unearned income.

 

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

 

Asubstantial portion of the Company’s loan portfolio is secured by real estatein the metropolitan Atlanta market, including a concentration of loans tochurches and convenience stores.  TheCompany’s church loans were approximately $39.5 million at September 30, 2003and $37.7 million at December 31, 2002. The Company’s loans to area convenience stores were approximately $27.1million at September 30, 2003 and $26.3 million at December 31, 2002.  Accordingly, the ultimate collectability ofthe substantial portion of the Company’s loan portfolio is susceptible tochanges in market conditions in the metropolitan Atlanta area.

 

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The following table summarizes loans, changes in the allowance for loanlosses arising from loans charged off, recoveries on loans previously chargedoff by loan category, and additions to the allowance which have been charged tooperating expense as of and for the nine month period ended September 30, 2003and 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**

 

Depositsremain the Company’s primary source of funding loan growth.  Total deposits for the nine month periodended September 30, 2003 increased by 29% or $65,929,000 to $294,540,000.  Noninterest-bearing deposits increased by$1,848,000 or 3%, while interest-bearing deposits increased by $64,081,000 or39%.  The increase in total deposits isprimarily attributed the Company’s Alabama Division, acquired on February 28,2003, and Corporate and Governmental customers who make significant monthlydeposits and withdrawals based on their budgetary needs.

 

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

 

|                               |   | **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 to emphasize funding earning asset growththrough deposits, the Company has relied on other borrowings as a supplementalfunding source.  Other borrowingsconsist of Federal Home Loan Bank (the “FHLB”) advances and short-termborrowings.  The Bank had outstandingadvances from the FHLB of $34,961,000 at September 30, 2003 and $18,750,000 atDecember 31, 2002.   The followingadvances are collateralized by a blanket lien on the Company’s 1-4 familymortgage 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 unsecured note payable of approximately $540,000 atSeptember 30, 2003 and $740,000 at December 31, 2002.  The note bears interest at the lender’s prime rate minus 50 basispoints.

 

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**RESULTSOF OPERATIONS**

 

**Net Interest Income:**

 

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

 

Forthe nine month period ended September 30, 2003, the Company’s net interestincome increased $1,647,000 to $10,580,000 compared to the nine month periodended September 30, 2002.  During thenine month period ended September 30, 2003, total interest income increased$1,259,000 as compared to the same period in 2002, and is attributed to loans,including fee income which increased $1,715,000, partially offset by a decreasein interest-bearing deposits income of $171,000 and a decrease in taxableinterest income of $311,000.  TheCompany reallocated its mix of earning assets by moving excess funds held inlow yielding interest bearing deposits to higher yielding assets, particularlyloans.  However, in June 2003, theFederal Reserve Bank lowered interest rates another 25 basis points whichreduced the overall yields the Company earned on a portion of its earningassets.  Interest expense on depositsdecreased $718,000 as the Company was able to lower its funding cost for thenine month period ended September 30, 2003 compared to same period in2002.  This decrease in interest ondeposits was partially offset by a $330,000 increase in interest paid on otherborrowings due to an increase in the amount of borrowings outstanding duringthe nine month period of 2003 compared with 2002.

 

Netinterest income increased $390,000 for the three month period ended September30, 2003 as compared with the same period of the previous year.  The increase in net interest income resultedfrom the increase in the amount of higher yielding loans, which generatedadditional interest income of $503,000, partially offset by a $193,000 decreasein taxable securities income compared to the same period last year.  The decrease in taxable securities income isattributed to the lower interest income the Company earns from its mortgagebacked investment security portfolio which were negatively impacted by theincrease in mortgage loans refinancing caused by the Federal Reserve Bank June2003 interest rate reduction.  Interestexpense on deposits decreased $146,000 for the three month period ended September30, 2003 as the Company was able to lower its funding cost compared to sameperiod in 2002.  This decrease ininterest on deposits was partially offset by a $57,000 increase in interestpaid on other borrowings due to an increase in the amount of borrowingsoutstanding.

 

**Noninterest income:**

 

Noninterestincome consists of revenues generated from a broad range of financial servicesand activities, including fee-based services, origination fees from MortgageServices, and profits and commissions earned through securities and insurancesales.  In addition, gains and lossesrealized from the sale of investment portfolio securities and sales of assetsare included in noninterest income. Noninterest income totaled $4,378,000 forthe nine month period ended September 30, 2003, an increase of $272,000 or 7%compared with the same period ended September 30, 2002. This increase isprimarily due to a $388,000 increase in gains on the sale of securities, and ispartially offset by adecrease of $202,000 in other operating income attributed to various immaterialcomponents of other operating income including other recoveries.

 

Forthe three month period ended September 30, 2003, noninterest income totaled$1,837,000, an increase of $545,000 or 42% compared to the three month periodended September 30, 2002.  This

 

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increaseis due to a $413,000 increase in gains on sales of securities and an $86,000increase in service charges on deposits. These increases were partially offset by a $59,000 decrease inorigination fees from the Company’s former mortgage subsidiary.

 

**Noninterest expense**:

 

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

 

Salaries and employeebenefits increased slightly by $66,000 or 1% for the nine month period endedSeptember 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 periodwere further 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 equipment expense increased by $312,000 or19% to $1,964,000 for the nine month period ended September 30, 2003compared to the same period in 2002. Similarly, for the three month period ended September 30, 2003, netoccupancy and equipment expense increased by $117,000 over the same period in2002. These increases are primarily the result of the acquisition of theAlabama Division on February 28, 2003, which has three full servicebranches.  In June 2003, the Companyconsolidated two branches into its Cascade branch, located in SouthwestAtlanta, Georgia.  The consolidated brancheswere closed by the Company to control overhead costs.

 

Other operating expenses, increased $399,000 or 9% to$4,612,000 for the nine month period ended September 30, 2003, compared to $4,213,000 for the same period in2002.  This increase is primarily due tothe Company reserving $250,000 to satisfy a non-recurring jury award which theCompany is appealing.  For the threemonth period ended September 30, 2003, other operating expenses increased$497,000 primarily as a result of the $250,000 jury award and operatingactivity of the Alabama Division acquired on February 28, 2003.

 

## ***INTERESTRATE SENSITIVITY MANAGEMENT***

 

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

 

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

 

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repricing of various categories of assetsand liabilities is subject to competitive pressures and the needs of theCompany’s customers.  In addition,various assets and liabilities indicated as repricing within the same periodmay in fact reprice at different times within such period and at differentrates. The following table shows the contractual maturities of all investmentsecurities 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 forth thedistribution of the repricing of the Company’s interest rate sensitive assetsand 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 |   |
| Fed Funds                                                               |   | —                                                                          |     | — |   | — |   | — |   | — |   |
| 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 the Company to convert assets into cash orcash equivalents without significant loss and to raise additional funds byincreasing liabilities. Liquidity management involves maintaining the Company’sability to meet the day-to-day cash flow requirements of its customers, whetherthey are depositors wishing to withdraw funds or borrowers requiring funds tomeet their credit needs.  Without properliquidity management, the Company would not be able to perform the primaryfunction of a financial intermediary and would, therefore, not be able to meetthe needs of the communities it serves. Additionally, the Bank holding company requires cash for variousoperating needs including: dividends paid to shareholders; businesscombinations; capital injections to its subsidiaries; the servicing of debt;and the payment of general corporate expenses.

 

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The primary source of liquidity for the Bank holding company isdividends from the Bank. The amount of dividends paid by the Bank to theCompany is limited by various banking regulatory agencies.  The Georgia Department of Banking andFinance regulates dividend payments and must approve payments that exceed 50%of the Bank’s net income for the prior year. The total dividends that could bepaid by the Bank to the Company in 2003 without prior regulatory approval isapproximately $928,000.  Also, theCompany has access to various capital markets. The Company does not anticipateany liquidity requirements 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 management functions not only serve to assureadequate liquidity in order to meet the needs of the Company’s customers, butalso to maintain an appropriate balance between interest-sensitive assets andinterest-sensitive liabilities so that the Company can earn a return that meetsthe investment requirements of its shareholders.  Daily monitoring of the sources and uses of funds is necessary tomaintain an acceptable cash position that meets both requirements.

 

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

 

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

 

**CAPITAL RESOURCES**

 

Shareholders’ equity increased $988,000 for the nine months endedSeptember 30, 2003, primarily due to the increase in retained earnings.  Retained earnings increased by $1,659,000 to$16,580,000 due to net earnings for the nine month period of $1,971,000,partially offset by dividends paid to shareholders.  On March 15, 2003, the Company paid cash dividends ofapproximately $312,000 to stockholders of record as of March 1, 2003.  The annual dividend rate in 2003 was $0.15per common share.  Also, for the ninemonth period ended September 30, 2003, accumulated other comprehensive incomedecreased $571,000 to an unrealized loss of $169,000, compared with anunrealized gain of $402,000 at December 31, 2002.  The decrease is due to the impact of changing economic conditionsand changes in market interest rates on the Company’s available for saleinvestment portfolio.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total and Tier 1 capital torisk weighted assets, and Tier 1 capital to average assets.  As of September 30, 2003, the Bank’s totaland Tier 1 capital to risk weighted assets and Tier 1 to average assets were15%, 14%, and 8% respectively.  As ofSeptember 30, 2003, the Company met all capital adequacy requirements to whichit is subject.

 

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

 

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

 
|                      |   | **Carrying  Value** |    | **Fair  Value** |   | **% Increase (Decrease) in  Fair Value due to Rate Movement** |   |
|---------------------------|--------|---------------------|---------|-----------------|--------|---------------------------------------------------------------|--------|
|                      |   |                |    | **Down 100bps** |   | **Up 100 bps**                                                |   |
|                      |   |                |    |            |   |                                                          |   |   |   |
| Investments               |   | $                   | 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 Company has adopted an asset/liability management program tomonitor the Company’s interest rate sensitivity and to ensure that the Companyis competitive in the loan and deposit markets.  Management seeks to manage the relationship betweeninterest-sensitive assets and liabilities in order to protect against wideinterest rate fluctuations, including those resulting from inflation.  The Company has not entered into anyderivative financial instruments such as futures, forwards, swaps oroptions.  Additionally, refer to ourinterest sensitive management and liquidity disclosures within Part 1, Item 2,of this Form 10-Q.

 

# **ITEM 4.**  CONTROLSAND PROCEDURES

 

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

 

# **PART II.  OTHER INFORMATION**

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

 

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| **ITEM 4.**                                  |   | **SUBMISSION OF  MATTERS TO VOTE OF SECURITY HOLDERS**                                                                                                                                                                                     |
|----------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |   |                                                                                                                                                                                                                                       |
|                                         |   | None                                                                                                                                                                                                                                       |
|                                         |   |                                                                                                                                                                                                                                       |
| **ITEM 5.**                                  |   | **OTHER INFORMATION**                                                                                                                                                                                                                      |
|                                         |   |                                                                                                                                                                                                                                       |
|                                         |   | None                                                                                                                                                                                                                                       |
|                                         |   |                                                                                                                                                                                                                                       |
| **ITEM 6.**                                  |   | **EXHIBITS AND  REPORTS ON FORM 8-K**                                                                                                                                                                                                      |
|                                         |   |                                                                                                                                                                                                                                       |
| **(a)****  Exhibits:**             |
|                                         |   |                                                                                                                                                                                                                                       |
|                                         |   | **Exhibit 31**                                                                                                                                                                                                                             |
|                                         |   |                                                                                                                                                                                                                                       |
|                                         |   | Section 302 Certification by the Company’s executive officers with  respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003.                                                            |
|                                         |   |                                                                                                                                                                                                                                       |
|                                         |   | **Exhibit 32**                                                                                                                                                                                                                             |
|                                         |   |                                                                                                                                                                                                                                       |
|                                         |   | Section 906 Certification pursuant to Section 1350 of Chapter 63 of  Title 18 U.S.C. by the Company’s executive officers with respect to the  Company’s Quarterly Report on Form 10-Q for the quarter ended September 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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