**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10 - Q**

 

|                                                                                                                                                   | **ý****QUARTERLY REPORT  UNDER SECTION 13 OR 15 (d) TO THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                              |            |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |   |   |
|                                                                                                                                                   | **For the quarterly period ended  June 30, 2003**                                                                                                                                                                         |            |
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |   |   |
|                                                                                                                                                   | **o****TRANSITION REPORT  UNDER SECTION 13 OR 15 (d) TO THE EXCHANGE ACT**                                                                                                                                                     |            |
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |   |   |
|                                                                                                                                                   | **For the transition period from                   to                 ** |            |
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |   |   |
|                                                                                                                                                   | **Commission File No:  0 - 14535**                                                                                                                                                                                        |            |
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |
| **CITIZENS  BANCSHARES CORPORATION**                                                                                                                   |
| (Name of small business issuer in its  charter)                                                                                                        |
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |
| **Georgia**                                                                                                                                            |                                                                                                                                                                                                                           |            | **58 - 1631302** |
| (State or other jurisdiction of  incorporation or organization)                                                                                        |                                                                                                                                                                                                                           |            | (IRS Employer Identification No.) |
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |
| **175 John Wesley  Dobbs Avenue, N.E., Atlanta, Georgia**                                                                                              |                                                                                                                                                                                                                           | **30303 ** |   |
| (Address of principal executive office)                                                                                                                |                                                                                                                                                                                                                           | (Zip Code)      |   |
|                                                                                                                                                   |                                                                                                                                                                                                                           |            |
| Registrant’s telephone number, including area  code:            **(404) 659  - 5959** |
|                                                                                                                                                        |                                                                                                                                                                                                                                |                 |  |  |  |  |  |  |  |  |  |

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15 (d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the 90 days.  Yes ý             No o.

 

State the number of shares outstanding for each of the issuer’s classesof common equity as of the latest practicable date: 2,070,547 shares of CommonStock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 parvalue outstanding on July 31, 2003.

 

 

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**PART1.****                         FINANCIALINFORMATION**

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

 

**CITIZENS BANCSHARESCORPORATION AND SUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETSJUNE 30, 2003 AND DECEMBER 31, 2002(In thousands, except share data)**

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

 

See notes to consolidated financial statements.

 

2

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

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

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

 

See notes to consolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THE SIX MONTHS ENDEDJUNE 30, 2003 AND 2002**

**(In thousands)**

 
|                                                                                        |   | **2003**        |   | **2002** |   |
|---------------------------------------------------------------------------------------------|--------|-----------------|--------|----------|--------|
|                                                                                        |   | **(Unaudited)** |   |
| **OPERATING ACTIVITIES:**                                                                   |   |            |   |     |   |
| Net income                                                                                  |   | $               | 1,323  |     | $      | 750 |   |
| **Adjustments to reconcile net  income to net cash provided by operating activities:**      |   |            |   |     |   |
| Provision for loan losses                                                                   |   | 280             |   | 400      |   |
| Depreciation                                                                                |   | 257             |   | 478      |   |
| Amortization (accretion), net                                                               |   | 22              |   | (4       | )      |
| Gain on sale of assets and investments                                                      |   | —          |   | (242     | )      |
| Change in mortgage loans held for sale                                                      |   | —          |   | 422      |   |
| Change in other assets                                                                      |   | 273             |   | 99       |   |
| Change in accrued expenses and other liabilities                                            |   | (464            | )      | (850     | )      |
| Net cash provided by operating activities                                                   |   | 1,691           |   | 1,053    |   |
|                                                                                        |   |            |   |     |   |
| **INVESTING ACTIVITIES:**                                                                   |   |            |   |     |   |
| Proceeds from sale and maturities of investment  securities held to maturity                |   | 397             |   | 300      |   |
| Proceeds from sale and maturities of investment  securities available for sale              |   | 21,482          |   | 17,022   |   |
| Purchases of investment securities held to  maturity                                        |   | (3,688          | )      | —   |   |
| Purchases of investment securities available for  sale                                      |   | (15,132         | )      | (35,360  | )      |
| Net change in other investments                                                             |   | (361            | )      | —   |   |
| Net change in loans                                                                         |   | 3,473           |   | 3,587    |   |
| Increase in cash surrender value of life  insurance                                         |   | (468            | )      | (37      | )      |
| Net cash paid in acquisition                                                                |   | (1,085          | )      | —   |   |
| Purchases (sales), net of premises and equipment                                            |   | 104             |   | (763     | )      |
| Net change in interest bearing deposits with  banks                                         |   | 14,212          |   | 34,514   |   |
| Net change in federal funds sold                                                            |   | 3,120           |   | 1,560    |   |
|                                                                                        |   |            |   |     |   |
| Net cash provided by investing activities                                                   |   | 22,054          |   | 20,823   |   |
|                                                                                        |   |            |   |     |   |
| **FINANCING ACTIVITIES:**                                                                   |   |            |   |     |   |
| Net change in noninterest-bearing deposits                                                  |   | (986            | )      | 1,697    |   |
| Net change in interest-bearing deposits                                                     |   | (19,283         | )      | (30,136  | )      |
| Purchase of treasury stock                                                                  |   | —          |   | (225     | )      |
| Proceeds from issuance of trust preferred  securities                                       |   | —          |   | 5,000    |   |
| Principal payments on debt                                                                  |   | (197            | )      | (530     | )      |
| Increase in advances from Federal Home Loan Bank                                            |   | 3,320           |   | —   |   |
| Dividends paid                                                                              |   | (312            | )      | (341     | )      |
|                                                                                        |   |            |   |     |   |
| Net cash used in financing activities                                                       |   | (17,458         | )      | (24,535  | )      |
|                                                                                        |   |            |   |     |   |
| Net change in cash and due from banks                                                       |   | 6,287           |   | (2,659   | )      |
|                                                                                        |   |            |   |     |   |
| Cash and due from banks at beginning of period                                              |   | 11,117          |   | 12,877   |   |
|                                                                                        |   |            |   |     |   |
| Cash and due from banks at end of period                                                    |   | $               | 17,404 |     | $      | 10,218 |   |
|                                                                                        |   |            |   |     |   |
| **Supplemental disclosures of cash  paid during the period for:**                           |   |            |   |     |   |
| Interest                                                                                    |   | $               | 1,066  |     | $      | 3,191 |   |
|                                                                                        |   |            |   |     |   |
| Income taxes                                                                                |   | $               | 181    |     | $      | 290 |   |
|                                                                                        |   |            |   |     |   |
| **Supplemental disclosures of  noncash transactions:**                                      |   |            |   |     |   |
| Change in unrealized gain (loss) on investment  securities available for sale, net of taxes |   | $               | 753    |     | $      | 700 |   |

 

See notes to consolidated financial statements.

 

4

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

**Notesto the Consolidated Financial Statements**

**June 30,2003 and 2002**

(Unaudited)

 

**SUMMARY OF SIGNIFICANTACCOUNTING 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 endedDecember 31, 2002.  The results ofoperations for the interim periods reported herein are not necessarilyrepresentative of the results expected for the full 2003 fiscal year.

 

The consolidatedfinancial statements of the Company as of June 30, 2003 and for the threeand six month periods ended June 30, 2003 and 2002 are unaudited.  In the opinion of management, alladjustments necessary for a fair presentation of the financial position andresults of operations and cash flows for the three month and six month periodshave been included.  All adjustments areof a normal recurring nature.  All significantintercompany accounts and transactions have been eliminated 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.

 

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

 

5

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policies relate to:

 

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

 

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

 

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

 

**Loans**  - Loans are reportedat principal amounts outstanding less unearned income and the allowance forloan losses.  Interest income on loansis recognized on a level-yield basis. Loan fees and certain direct originationcosts are deferred and amortized over the estimated terms of the loans usingthe level-yield method.  Discounts onloans purchased are accreted using the level-yield method over the estimatedremaining life of the loan purchased.

 

**Allowance for Loan Losses**- The Company provides for estimated losses on loans receivable when anysignificant and permanent decline in value occurs.  These estimates for losses are based on not only on individualassets and their related cash flow forecasts, sales values, independentappraisals, but also the volatility of certain real estate markets, and theconcern for disposing of real estate in distressed markets.  For loans that are pooled for purposes ofdetermining necessary provisions, estimates are based on loan types, history ofcharge-offs, and other delinquency analyses. Therefore, the value used to determine the provision for losses issubject to the reasonableness of these estimates.  The adequacy of the allowance for loan losses is reviewed on amonthly basis by management and the Board of Directors.  On a quarterly basis a comprehensive reviewof the adequacy of the allowance for loan losses is performed.  This assessment is made in the context ofhistorical losses as well as existing economic conditions, performance trendswithin specific portfolio segments, and individual concentrations of credit.  Loans are charged against the allowance when,in the opinion of management, such loans are deemed uncollectible andsubsequent 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.  TheCompany has followed those policies in preparing this report.

 

6

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**ACQUISITION**

 

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

 

The following table presents the Company’s results of operations on apro forma basis for the six months ended June 30, 2003:

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

 

##### **INTANGIBLE ASSETS**

 

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

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

 

7

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The following table presents information about aggregate amortizationexpense:

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

 

# **COMMON STOCK**

# ** **

Basic net income per share (EPS) is computed based on net incomedivided by the weighted average number of common shares outstanding.  Diluted EPS is computed based on net incomedivided by the weighted average number of common and potential common shares.The Company’s potential common shares are due to outstanding stock options,which were not dilutive during the six months ended June 30, 2003 and2002.

 

# **RECENT ACCOUNTING PRONOUNCEMENTS**

# ** **

In April 2003, the FASB issued Statement of Financial AccountingStandards (“SFAS”) No. 149, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities (“SFAS No. 149”) which is effective forhedging relationships entered into or modified after June 30, 2003. SFASNo. 149 amends and clarifies financial accounting and reporting for derivativeinstruments including certain derivative instruments embedded in othercontracts and for hedging activities. The adoption of SFAS No. 149 had noimpact on the Company Consolidated Financial Statements.

 

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

 

**RECLASSIFICATIONS**

 

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

 

8

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**OTHER MATTERS**

 

On April 1, 2003,the Company announced a curtailment of its postretirement medical and lifeplans.  The curtailment reduced theCompany’s associated plan liabilities by approximately $255,000 during thequarter ending June 2003.

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

 

**INTRODUCTION**

 

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

 

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

###### ** **

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

 

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

 

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

 

###### **FINANCIALCONDITION**

###### ** **

Citizens BancsharesCorporation’s total assets at June 30, 2003 were $364,390,000, an increaseof $84,900,000 or 30% compared to $279,490,000 at December 31, 2002. Thisincrease is primarily due to the acquisition of CFS Bancshares, Inc. (the“Alabama Division”), a bank holding

 

9

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company in Birmingham,Alabama, for approximately $8,444,000 in cash on February 28, 2003.  The acquisition of CFS Bancshares, Inc.allows the Company to extend its geographical base and provides new avenues forthe Bank to sell its products and services. Accordingly, many significantchanges in the financial condition of the Company are attributed to thisacquisition.

 

At June 30, 2003,the Company maintained balances of cash and due from banks and federal fundssold of $17,404,000 and $725,000, respectively.  The increase in the Company’s cash and due from banks and federalfunds sold balances by $6,287,000 and $725,000, respectively, were partiallyoffset by a $14,212,000 decrease in interest bearing deposits with banks.   Similarly, the increases in investments of$52,023,000 for available for sale and $4,856,000 for held to maturity werepartially offset by the $14,212,000 decrease in interest bearing deposits withbanks.  At June 30, 2003,approximately $44,650,000 and $410,000 of investments classified as availablefor sale and held for maturity, respectively, are attributed to the AlabamaDivision.

 

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

 

Other assets increased $2,229,000to $8,052,000 at June 30, 2003. This increase is attributed to several components including an increasein accrued interest receivables of $786,000, an increase in other real estateowned of $595,000 and an increase in federal income tax benefit of $1,243,000obtained in the acquisition of the Alabama Division.  The increases in other assets were partially offset by deferredincome taxes of $996,000.

 

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

 

**INVESTMENT SECURITIES**

 

The Company invests aportion of its assets in U.S. treasury bills and notes, U.S. governmentsponsored agency securities, mortgage backed bonds, as well as certain equitysecurities.  At June 30, 2003 andDecember 31, 2002, the Company’s investment securities portfolio representedapproximately 31% and 20% of total assets, respectively.

 

10

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

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

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

 

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

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

 

11

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

 

**LOANS**

 

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

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

 

**NONPERFORMING ASSETS**

 

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

 

With the exception of the loans included within nonperforming assets inthe table below, management is not aware of any loans classified for regulatorypurposes as loss, doubtful, substandard, or special mention that have not beendisclosed which (1) represent or result from trends or uncertainties 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 $1,747,000 to $6,810,000 atJune 30, 2003 from $5,063,000 at December 31, 2002.  Nonperforming assets represented 3.35% ofloans, net of unearned income, discounts and real estate acquired throughforeclosure at June 30, 2003 as compared to 2.91% at December 31,2002.

 

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

 

12

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and December 31, 2002.

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

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

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

 

Loans are charged against the allowance when, in theopinion of management, such loans are deemed uncollectible and subsequentrecoveries are added to the allowance. For the six months

 

13

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ended June 30, 2003, provisions for loan lossestotaled $280,000 compared to $400,000 for the same period in 2002.

 

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

 

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

 

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

 

14

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

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

 

15

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**DEPOSITS**

 

Deposits remain theCompany’s primary source of funding loan growth.  Total deposits for the six month period ended June 30, 2003increased by 26.4% or $60,312,000 to $288,923,000.  Noninterest-bearing deposits decreased by $986,000 or 1.6%, whileinterest-bearing deposits increased by $61,298,000 or 36.9%.  The increase in total deposits is primarilyattributed the Company’s Alabama Division acquired on February 28, 2003and Corporate and Governmental customers who make significant monthly depositsand withdrawals based on their budgetary needs.

 

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

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

 

**OTHER BORROWED FUNDS**

 

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

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

 

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

 

16

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**RESULTSOF OPERATIONS**

 

**Net Interest Income:**

 

Net interest income isthe principal component of a financial institution’s income stream andrepresents the difference, or spread, between interest and fee income generatedfrom earning assets and the interest expense paid on deposits and borrowedfunds.  Fluctuations in interest ratesas well as volume and mix changes in earning assets and interest bearing liabilitiescan materially impact net interest income.

 

For the six months endedJune 30, 2003, the Company’s net interest income increased $1,247,000 to$6,892,000 compared to June 30, 2002. Total interest income increased $957,000 and is attributed to loans,including fees income which increased $1,211,000 partially offset by a decreasein interest-bearing deposits income of $161,000.  The Company reallocated its mix of earning assets by movingexcess funds held in low yielding interest bearing deposits to higher yieldingloans assets.  In addition, interestexpense on deposits decreased $564,000 as the Company was able to lower itsfunding cost for the six month period ended June 30, 2003 compared to sameperiod in 2002.  This decrease ininterest on deposits was partially offset by a $274,000 increase in interestpaid on other borrowings due to an increase in the amount of borrowingsoutstanding during the six month period of 2003 compared with 2002.

 

Net interest incomeincreased $713,000 for the three month period ended June 30, 2003 ascompared with the same period of the previous year.  The increase in net interest income resulted from the increase inthe amount of higher yielding loans assets which generated additional interestincome of $864,000, partially offset by a $70,000 decrease in interest bearingdeposits compared to the same period last year.  In addition, interest expense on deposits decreased $146,000 forthe three month period ended June 30, 2003 as the Company was able tolower its funding cost compared to same period in 2002.  This decrease in interest on deposits waspartially offset by a $175,000 increase in interest paid on other borrowingsdue to an increase in the amount of borrowings outstanding.

 

**Noninterest income:**

 

Noninterest incomeconsists of revenues generated from a broad range of financial services andactivities, 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 $2,540,000 forthe six month period ended June 30, 2003, a decrease of $274,000 or 9.7%compared with the same period ended June 30, 2002. This decrease isattributed to a $120,000 decrease in origination fees from the Company’smortgage subsidiary and a $121,000 decrease in other operating income.   In March 2002, the Company’s mortgagesubsidiary’s operations ceased and all mortgage loan activities are presentedas a component of the Bank’s operations within other operating income.  The decrease in other operating income isattributed to various immaterial components of other operating income includingother recoveries.

 

For the three month periodended June 30, 2003, noninterest income totaled $1,392,000, a decrease of$70,000 or 4.8% compared to the three month period ended June 30,2002.  This decrease is attributed to a$84,000 decrease in other operating income, partially offset by an $8,000 increasein service charges fees and a $6,000 increase in gains on the sale ofsecurities.

 

17

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**Noninterest expense**:

 

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

 

Salaries and employee benefits increased $120,000or 3.4% for the six month period ended June 30, 2003 compared to the sameperiod in 2002.  This increase isattributed to approximately 32 employees at the Alabama Division acquiredduring the purchase of CFS Bancshares, Inc. As of June 30, 2003, the company completed it conversion of theAlabama Division’s computer system to the Company’s computer system.  As a result, the Company plans to eliminateany overlapping functions to reduce salaries expense.  For the three month period ended June 30, 2003, salaries andemployee benefits increased $381,000 primarily as a result of the acquisitionof the Alabama Division and an early retirement program offered during thethree month period ended June 30, 2003. The additional salary and benefit costs were partially offset by a$251,000 gains realized on the curtailment of the Company’s postretirementmedical and life plans on April 1, 2003.

 

Net occupancy and equipment expense increased by $195,000 or17.6% to $1,302,000 for the six month period ended June 30, 2003compared to the same period in 2002. Similarly, for the three month period ended June 30, 2003, netoccupancy and equipment expense increased by $189,000. These increases areprimarily the results of the acquisition of the Alabama Division onFebruary 28, 2003, which has three full service branches.  In June 2003, the Company consolidatedtwo branches into its Cascade branch, located in Southwest Atlanta, Georgia.  The consolidated branches were closed by theCompany to control overhead cost.

 

Other operating expenses, decreased $108,000 or 4.1%to $2,519,000 for the six month period ended June 30, 2003, compared to$2,627,000 for the same period in 2002. This decrease is primarily due to also due to management’s efforts tocontrol overhead costs.   For the threemonth period ended June 30, 2003, other operating expenses increased$63,000 primarily as a result of the acquisition of the Alabama Division onFebruary 28, 2003.

 

## ***INTEREST RATE SENSITIVITY MANAGEMENT***

## *** ***

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

 

One method of measuring the impact of interest rate sensitivity is thecumulative gap analysis.  The differencebetween interest rate sensitive assets and interest rate sensitive liabilitiesat various time intervals is referred to as the gap.  The Company is liability sensitive on a short-term basis asreflected in the following table. Generally, a net liability sensitive position indicates that there wouldbe a negative impact on net interest income in an increasing rateenvironment.  However, interest ratesensitivity gap does not necessarily indicate the impact of general interestrate movements on the net interest margin, since all interest rates and yieldsdo not adjust at the same 

 

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velocity and the repricing of various categories of assets andliabilities is subject to competitive pressures and the needs of the Company’scustomers.  In addition, various assetsand liabilities indicated as repricing within the same period may in factreprice at different times within such period and at different rates.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market and savings accounts in thethree month category.  However, theactual repricing of these accounts may lag beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

 

The following table sets forth the distribution of the repricing of theCompany’s interest rate sensitive assets and interest rate sensitiveliabilities as of June 30, 2003.

 
|                                                                    |   | **Cumulative amounts as of  June 30, 2003  Maturing and repricing within** |     |
|-------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|----------|
|                                                                    |   | **3  Months**                                                                   |     | **3 to 12  Months** |   | **1 to 5  Years** |   | **Over  5 Years** |   | **Total** |   |
|                                                                    |   | **(amounts in thousands, except  ratios)**                                      |     |
| Interest-sensitive  assets:                                             |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Investments                                                             |   | $                                                                               | 100      |   | $ | 157 |   | $ | 5,237 |   | $ | 107,733 |   | $ | 113,227 |   |
| Certificates  of deposit                                                |   | 1,095                                                                           |     | 1,900 |   | 253 |   | — |   | 3,248 |   |
| Loans                                                                   |   | 9,601                                                                           |     | 16,833 |   | 85,916 |   | 88,875 |   | 201,225 |   |
| Fed  Funds                                                              |   | 725                                                                             |     | — |   | — |   | — |   | 725 |   |
| Interest-bearing  deposits with other banks                             |   | 980                                                                             |     | — |   | — |   | — |   | 980 |   |
| Total  interest-sensitive assets                                        |   | $                                                                               | 12,501   |   | $ | 18,890 |   | $ | 91,406 |   | $ | 196,608 |   | $ | 319,405 |   |
|                                                                    |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Deposits  (a)                                                           |   | $                                                                               | 207,930  |   | $ | 57,816 |   | $ | 18,277 |   | $ | 4,900 |   | $ | 288,923 |   |
| Notes  payable                                                          |   | 543                                                                             |     | — |   | — |   | — |   | 543 |   |
| Trust  preferred securities                                             |   | —                                                                          |     | — |   | 5,000 |   | — |   | 5,000 |   |
| Other  borrowings                                                       |   | 41,018                                                                          |     | — |   | — |   | — |   | 41,018 |   |
| Total  interest-sensitive liabilities                                   |   | $                                                                               | 249,491  |   | $ | 57,816 |   | $ | 23,277 |   | $ | 4,900 |   | $ | 335,484 |   |
|                                                                    |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |   | $                                                                               | (236,990 | ) | $ | (38,926 | ) | $ | 68,129 |   | $ | 191,708 |   | $ | (16,079 | ) |
|                                                                    |   |                                                                            |     |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |   | (74.20                                                                          | )%       | (86.38 | )% | (65.05 | )% | -5.03 | % | -5.03 | % |

 

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

 

**LIQUIDITY**

 

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

 

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injections to its subsidiaries; the servicing of debt; and the paymentof general corporate expenses.

 

The primary source of liquidity for the parent holding company isdividends from the Bank. The amount of dividends paid by the Bank to the Companyis limited by various banking regulatory agencies.  The Georgia Department of Banking and Finance regulates thedividend payments and must approve dividend payments that exceed 50% of theBank’s net income for the prior year. The total dividends that could be paid bythe 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 tomeet.  In March 2003, the Bank paidcash dividends totaling $928,000 to the Company.

 

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

 

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

 

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

 

**CAPITAL RESOURCES**

 

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

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company tomaintain minimum amounts and ratios of total and Tier 1 capital to riskweighted assets, and Tier 1 capital to average assets.  As of June 30, 2003, the Company’s banksubsidiary’s total and Tier 1 capital to risk weighted assets and Tier 1 toaverage assets were 13%, 12% and 8% respectively.  As of June 30, 2003, the Company meets all capital adequacyrequirements to which it is subject.

 

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# **ITEM 4.**                                  CONTROLS ANDPROCEDURES

# ** **

Based on the evaluation of our disclosure controls and procedures, theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective as of June 30, 2003 in timely alerting them to 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 June 30, 2003that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

# **PART II.  OTHERINFORMATION**

# ** **

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

 

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

 

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

 

None

 

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

 

None

 

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

 

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

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

 

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

 

None

 

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

 

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

 

**Exhibit31**

 

Section 302 Certification by the Company’s executive officers withrespect to the 

 

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Company’s Quarterly Report on Form 10-Q for the quarter endedJune 30, 2003.

 

**Exhibit32**

 

Section 906 Certification pursuant to Section 1350 of Chapter63 of Title 18 U.S.C. by the Company’s executive officers with respect to theCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30,2003.

 

**(b)****               Reportson Form 8-K:**

 

On May 15, 2003, the Company filed aCurrent Report on Form 8-K reporting under Item 2, Acquisition of Assets, theacquisition of CFS Bancshares on February 28, 2003.

 

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