**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10 – Q**

 

| **(Mark  One)** |
|-----------------|
|            |   |
| ý          | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|            |   |
|            | **For the  quarterly period ended June 30, 2004** |
|            |   |
|            | **OR** |
|            |   |
| o               | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|            |   |
|            | **For the  transition period from              to                ** |
|            |   |
|            | **Commission File No:   0 - 14535** |

 

**CITIZENS BANCSHARES CORPORATION**

(Exactname of registrant as specified in its charter)

 
| **Georgia**                                                      |   | **58 – 1631302**              |
|------------------------------------------------------------------|--------|------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (IRS  Employer Identification No.) |
|                                                             |   |                               |
| **175 John Wesley Dobbs Avenue, N.E., Atlanta, Georgia**         |   | **30303**                          |
| (Address  of principal executive offices)                        |   | (Zip  Code)                        |

 

Registrant’stelephone number, including area code:        **(404) 659 - 5959**

 

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

ýYes  o No.

 

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

 

APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

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

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate the number ofshares outstanding for each of the issuer’s classes of common stock as of thelatest practicable date: 1,985,276 shares of Common Stock, $1.00 par value and90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding onJuly 30, 2004.

 

 

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**PART 1.****               ****FINANCIAL INFORMATION**

**ITEM 1.****                ****Financial statements**

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**JUNE 30, 2004 AND DECEMBER 31, 2003**

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

 
|                                                                                                               |   | **2004**        |    | **2003** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------------|---------|----------|--------|
|                                                                                                               |   | **(Unaudited)** |    |     |   |
| **ASSETS**                                                                                                         |   |            |    |     |   |
|                                                                                                               |   |            |    |     |   |
| Cash and due from banks                                                                                            |   | $               | 11,830  |     | $      | 11,694 |   |
| Interest-bearing deposits with banks                                                                               |   | 914             |    | 108      |   |
| Certificates of deposit                                                                                            |   | 995             |    | 2,983    |   |
| Investment securities available for sale,  at fair value                                                           |   | 80,353          |    | 97,301   |   |
| Investment securities held to maturity, at  cost                                                                   |   | 10,193          |    | 10,553   |   |
| Other investments                                                                                                  |   | 2,260           |    | 2,734    |   |
| Loans receivable, net                                                                                              |   | 203,689         |    | 208,814  |   |
| Premises and equipment, net                                                                                        |   | 8,760           |    | 9,161    |   |
| Cash surrender value of life insurance                                                                             |   | 8,373           |    | 8,150    |   |
| Foreclosed real estate, net                                                                                        |   | 2,149           |    | 2,053    |   |
| Other assets                                                                                                       |   | 7,344           |    | 6,892    |   |
|                                                                                                               |   |            |    |     |   |
| Total assets                                                                                                       |   | $               | 336,860 |     | $      | 360,443 |   |
|                                                                                                               |   |            |    |     |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                     |   |            |    |     |   |
|                                                                                                               |   |            |    |     |   |
| LIABILITIES:                                                                                                       |   |            |    |     |   |
| Noninterest-bearing deposits                                                                                       |   | $               | 63,978  |     | $      | 55,832 |   |
| Interest-bearing deposits                                                                                          |   | 205,936         |    | 220,947  |   |
|                                                                                                               |   |            |    |     |   |
| Total deposits                                                                                                     |   | 269,914         |    | 276,779  |   |
|                                                                                                               |   |            |    |     |   |
| Accrued expenses and other liabilities                                                                             |   | 2,598           |    | 3,219    |   |
| Federal funds purchased                                                                                            |   | —          |    | 4,000    |   |
| Notes payable                                                                                                      |   | 540             |    | 540      |   |
| Trust preferred securities                                                                                         |   | 5,000           |    | 5,000    |   |
| Advances from Federal Home Loan Bank                                                                               |   | 34,961          |    | 46,961   |   |
|                                                                                                               |   |            |    |     |   |
| Total liabilities                                                                                                  |   | 313,013         |    | 336,499  |   |
|                                                                                                               |   |            |    |     |   |
| COMMITMENTS AND CONTINGENCIES                                                                                      |   |            |    |     |   |
|                                                                                                               |   |            |    |     |   |
| STOCKHOLDERS’ EQUITY:                                                                                         |   |            |    |     |   |
| Common stock - $1 par value; 15,000,000  shares authorized; 2,230,065 shares issued                                |   | 2,230           |    | 2,230    |   |
| Nonvoting common stock - $1 par value;  5,000,000 shares authorized; 90,000 issued and outstanding                 |   | 90              |    | 90       |   |
| Additional paid-in capital                                                                                         |   | 7,443           |    | 7,445    |   |
| Retained earnings                                                                                                  |   | 17,079          |    | 16,114   |   |
| Treasury stock at cost, 244,789 and 249,518  shares at June 30, 2004 and December 31, 2003, respectively |   | (1,987          | )       | (2,025   | )      |
| Accumulated other comprehensive income  (loss), net of income taxes                                                |   | (1,008          | )       | 90       |   |
|                                                                                                               |   |            |    |     |   |
| Total stockholders’ equity                                                                                    |   | 23,847          |    | 23,944   |   |
|                                                                                                               |   |            |    |     |   |
|                                                                                                               |   | $               | 336,860 |     | $      | 360,443 |   |

 

See notes toconsolidated financial statements.

 

2

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited  - Inthousands, except per share data)**

 
|                                                 |   | **Three  Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------|--------|
|                                                 |   | **2004**                               |   | **2003**                            |   | **2004** |   | **2003** |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Interest income:                                     |   |                                   |   |                                |   |   |   |   |   |
| Loans, including fees                                |   | $                                      | 3,944  |                                | $      | 3,958 |   | $ | 7,885 |   | $ | 7,423 |   |
| Investment securities:                               |   |                                   |   |                                |   |   |   |   |   |
| Taxable                                              |   | 628                                    |   | 775                                 |   | 1,447 |   | 1,428 |   |
| Tax-exempt                                           |   | 202                                    |   | 246                                 |   | 409 |   | 481 |   |
| Federal funds sold                                   |   | —                                 |   | 7                                   |   | — |   | 10 |   |
| Interest-bearing deposits                            |   | 5                                      |   | 37                                  |   | 18 |   | 77 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Total interest income                                |   | 4,779                                  |   | 5,023                               |   | 9,759 |   | 9,419 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Interest expense:                                    |   |                                   |   |                                |   |   |   |   |   |
| Deposits                                             |   | 658                                    |   | 1,011                               |   | 1,358 |   | 1,929 |   |
| Other borrowings                                     |   | 282                                    |   | 335                                 |   | 563 |   | 598 |   |
| Total interest expense                               |   | 940                                    |   | 1,346                               |   | 1,921 |   | 2,527 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Net interest income                                  |   | 3,839                                  |   | 3,677                               |   | 7,838 |   | 6,892 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Provision for loan losses                            |   | 250                                    |   | 65                                  |   | 550 |   | 280 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Net interest income after provision for  loan losses |   | 3,589                                  |   | 3,612                               |   | 7,288 |   | 6,612 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Noninterest income:                                  |   |                                   |   |                                |   |   |   |   |   |
| Service charges on deposits                          |   | 935                                    |   | 895                                 |   | 1,777 |   | 1,736 |   |
| Gain on sales of securities                          |   |                                   |   | 218                                 |   | 58 |   | 218 |   |
| Gain on sales of assets                              |   | 66                                     |   | —                              |   | 74 |   | — |   |
| Other operating income                               |   | 687                                    |   | 279                                 |   | 977 |   | 586 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Total noninterest income                             |   | 1,688                                  |   | 1,392                               |   | 2,886 |   | 2,540 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Noninterest expense:                                 |   |                                   |   |                                |   |   |   |   |   |
| Salaries and employee benefits                       |   | 2,129                                  |   | 1,875                               |   | 4,083 |   | 3,631 |   |
| Net occupancy and equipment                          |   | 666                                    |   | 740                                 |   | 1,316 |   | 1,302 |   |
| Other operating expenses                             |   | 1,683                                  |   | 1,451                               |   | 3,116 |   | 2,519 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Total noninterest expense                            |   | 4,478                                  |   | 4,066                               |   | 8,515 |   | 7,452 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Income before income taxes                           |   | 799                                    |   | 938                                 |   | 1,659 |   | 1,700 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Income tax expense                                   |   | 185                                    |   | 219                                 |   | 383 |   | 377 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Net income                                           |   | $                                      | 614    |                                | $      | 719 |   | $ | 1,276 |   | $ | 1,323 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Net income per share - basic                         |   | $                                      | 0.30   |                                | $      | 0.35 |   | $ | 0.62 |   | $ | 0.64 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Net income per share - diluted                       |   | $                                      | 0.30   |                                | $      | 0.35 |   | $ | 0.61 |   | $ | 0.64 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Weighted average outstanding shares - basic          |   | 2,074                                  |   | 2,079                               |   | 2,073 |   | 2,079 |   |
|                                                 |   |                                   |   |                                |   |   |   |   |   |
| Weighted average outstanding shares -  diluted       |   | 2,079                                  |   | 2,079                               |   | 2,080 |   | 2,079 |   |
| Dividends per common share                           |   | $                                      | 0.15   |                                | $      | — |   | $ | 0.15 |   | $ | 0.15 |   |

 

See notes toconsolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003**

**(In thousands)**

 
|                                                                                        |   | **June 30,** |   |
|---------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                        |   | **2004**          |   | **2003** |   |
|                                                                                        |   | **(Unaudited)**   |   |
| **OPERATING  ACTIVITIES:**                                                                  |   |              |   |   |   |
| Net income                                                                                  |   | $                 | 1,276  |   | $ | 1,323 |   |
| **Adjustments to  reconcile net income to net cash provided by operating activities:**      |   |              |   |   |   |
| Provision for loan losses                                                                   |   | 550               |   | 280 |   |
| Depreciation                                                                                |   | 523               |   | 257 |   |
| Amortization and accretion, net                                                             |   | 607               |   | 22 |   |
| Provision for deferred income taxes                                                         |   | 87                |   | — |   |
| Gain on sale of assets and investments                                                      |   | (133              | )      | 218 |   |
| Change in other assets                                                                      |   | (279              | )      | 273 |   |
| Change in accrued expenses and other  liabilities                                           |   | (621              | )      | (464 | ) |
|                                                                                        |   |              |   |   |   |
| Net cash provided by operating activities                                                   |   | 2,010             |   | 1,909 |   |
|                                                                                        |   |              |   |   |   |
| **INVESTING  ACTIVITIES:**                                                                  |   |              |   |   |   |
| Proceeds from calls and maturities of  investment securities held to maturity               |   | 346               |   | 398 |   |
| Proceeds from sales and maturities of  investment securities available for sale             |   | 24,376            |   | 21,264 |   |
| Purchases of investment securities held to  maturity                                        |   | —            |   | (3,688 | ) |
| Purchases of investment securities  available for sale                                      |   | (9,423            | )      | (15,132 | ) |
| Net change in other investments                                                             |   | 474               |   | (361 | ) |
| Net change in loans receivable                                                              |   | 3,668             |   | 3,473 |   |
| Increase in cash surrender value of life  insurance                                         |   | (70               | )      | (468 | ) |
| Net cash and cash equivalents acquired from  CFS Bancshares                                 |   | —            |   | 2,759 |   |
| Net proceeds from the sale of foreclosed  properties                                        |   | 825               |   | — |   |
| Purchases of premises and equipment, net                                                    |   | (112              | )      | 104 |   |
| Net change in interest bearing deposits  with banks                                         |   | (806              | )      | 14,212 |   |
| Net change in certificates of deposit                                                       |   | 1,988             |   | — |   |
|                                                                                        |   |              |   |   |   |
| Net cash provided by investing activities                                                   |   | 21,266            |   | 22,561 |   |
|                                                                                        |   |              |   |   |   |
| **FINANCING  ACTIVITIES:**                                                                  |   |              |   |   |   |
| Net change in deposits                                                                      |   | (6,865            | )      | (20,269 | ) |
| Sale of treasury stock                                                                      |   | 38                |   | — |   |
| Principal payments on debt                                                                  |   | —            |   | (197 | ) |
| Net change in advances from Federal Home  Loan Bank                                         |   | (12,000           | )      | 3,320 |   |
| Decrease in federal funds sold                                                              |   | (4,000            | )      | — |   |
| Net change in additional paid-in-capital                                                    |   | (2                | )      | — |   |
| Dividends paid                                                                              |   | (311              | )      | (312 | ) |
|                                                                                        |   |              |   |   |   |
| Net cash used in financing activities                                                       |   | (23,140           | )      | (17,458 | ) |
|                                                                                        |   |              |   |   |   |
| Net change in cash and cash equivalents                                                     |   | 136               |   | 7,012 |   |
|                                                                                        |   |              |   |   |   |
| Cash and and cash equivalents, beginning of  period                                         |   | 11,694            |   | 11,117 |   |
|                                                                                        |   |              |   |   |   |
| Cash and and cash equivalents, end of  period                                               |   | $                 | 11,830 |   | $ | 18,129 |   |
|                                                                                        |   |              |   |   |   |
| **Supplemental  disclosures of cash paid during the period for:**                           |   |              |   |   |   |
| Interest                                                                                    |   | $                 | 2,070  |   | $ | 1,066 |   |
|                                                                                        |   |              |   |   |   |
| Income taxes                                                                                |   | $                 | 410    |   | $ | 181 |   |
|                                                                                        |   |              |   |   |   |
| **Supplemental  disclosures of noncash transactions:**                                      |   |              |   |   |   |
| Change in unrealized gain (loss) on  investment securities available for sale, net of taxes |   | $                 | (1,098 | ) | $ | 753 |   |

 

See notes toconsolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

**Notes to the Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation**

 

Citizens BancsharesCorporation (the “Company”) is a holding company that provides a full range ofcommercial banking and mortgage brokerage services to individual and corporatecustomers in metropolitan Atlanta and Columbus, Georgia, and in Birmingham andEutaw, Alabama, through its wholly owned subsidiary, Citizens Trust Bank (the“Bank”).  The Bank operates under astate charter and serves its customers through eight full-service branches inmetropolitan Atlanta, Georgia, one full-service branch in Columbus, Georgia,two full-service branches in Birmingham, Alabama, and one full-service branchin Eutaw, Alabama.

 

The accompanying unauditedconsolidated financial statements have been prepared pursuant to the rules andregulations for reporting on Form 10-Q. Accordingly, certain disclosures required by generally acceptedaccounting principles are not included herein. These interim statements shouldbe read in conjunction with the financial statements and notes thereto includedin the Company’s latest Annual Report on Form 10-K filed with the Securitiesand Exchange Commission for the year ended December 31, 2003.  The results of operations for the interimperiods reported herein are not necessarily representative of the resultsexpected for the full 2004 fiscal year.

 

The consolidated financialstatements of the Company for the three and six month periods endedJune 30, 2004 and 2003 are unaudited. In the opinion of management, all adjustments necessary for a fairpresentation of the financial position and results of operations and cash flowsfor the six month periods have been included. All adjustments are of a normal recurring nature.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**AccountingPolicies**

 

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

 

**RecentlyIssued Accounting Standards**

 

In March 2004, theSecurities and Exchange Commission staff released Staff Accounting Bulletin(SAB) No. 105, “Application of Accounting Principles to Loan Commitments.” ThisSAB disallows the inclusion of expected future cash flows related to theservicing of a loan in the determination of the fair value of a loancommitment. Further, no other internally developed intangible asset should berecorded as part of the loan commitment derivative. Recognition of intangibleassets would only be appropriate in a third-party transaction, such as a purchaseof a loan commitment or in a business combination. The SAB is effective for allloan commitments entered into after March 31, 2004, but

 

5

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does not require retroactiveadoption for loan commitments entered into on or before March 31, 2004.Adoption of this SAB did not have a material effect on the Company’s CondensedConsolidated Financial Statements.

 

In December 2002, theFinancial Accounting Standards Board (FASB) issued Statements of AccountingStandards (SFAS) No. 148, *“Accounting forStock-Based Compensation-Transition and Disclosure—an Amendment of FASBStatement No. 123.”* This Statement amends SFAS No. 123*, “Accounting for Stock-Based Compensation,”*to provide alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based employee compensation. In addition,this Statement amends the disclosure requirements of SFAS No. 123 to requiremore prominent disclosures about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results inboth annual and interim financial statements. This Statement was effective forfinancial statements for fiscal years ending after December 15, 2002. Aspermitted by SFAS No. 148, during 2004 the Company continued to apply theprovisions of Accounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees,”*for all employee stock option grants and has elected to disclose pro forma netincome and earnings per share amounts as if the fair-value based method hadbeen applied in measuring compensation costs.

 

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

 
|                                                                                   |   | **For the  six months ended June 30,** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                   |   | **2004**                                    |   | **2003** |   |
|                                                                                   |   |                                        |   |   |   |
| As reported net income available to common  stockholders                               |   | $                                           | 1,276  |   | $ | 1,323 |   |
| Less: stock-based compensation expense  determined under fair value method, net of tax |   | (8                                          | )      | (4 | ) |
|                                                                                   |   |                                        |   |   |   |
| Pro forma net income                                                                   |   | $                                           | 1,268  |   | $ | 1,319 |   |
|                                                                                   |   |                                        |   |   |   |
| As reported earnings per share                                                         |   | $                                           | 0.62   |   | $ | 0.64 |   |
| Pro forma earnings per share                                                           |   | $                                           | 0.61   |   | $ | 0.63 |   |
| As reported earnings per diluted share                                                 |   | $                                           | 0.61   |   | $ | 0.64 |   |
| Pro forma earnings per diluted share                                                   |   | $                                           | 0.61   |   | $ | 0.63 |   |

 

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

 

In March 2004, the FASBapproved certain additional provisions of the Emerging Issues Task Force (EITF)Issue No. 03-1, “*The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*”,including measurement guidance for evaluating whether an “other than temporaryimpairment” has occurred for marketable securities and cost methodinvestments.  Additional disclosures arealso required for cost method investments, effective at the end of the currentfiscal year. The new impairment evaluation and recognition guidance iseffective for reporting periods beginning after June 15, 2004.  The adoption of this EITF is not expected tohave a material effect on the Company’s Consolidated Financial Statements.

 

6

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**2.  INTANGIBLE ASSETS**

 

Finite lived intangibleassets of the Company represent deposit assumption premiums recorded upon thepurchase of certain assets and liabilities from other financialinstitutions.  Deposit assumptionpremiums are amortized over seven years, the estimated average lives of thedeposit bases acquired, using the straight-line method and are included withinother assets on the Consolidated Balance Sheets.

 

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

 

The following table presentsinformation about our intangible assets at (in thousands):

 
|                          |   | **June 30,  2004**     |   | **December 31,  2003**   |   |
|-------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
|                          |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Unamortized intangible asset: |   |                        |   |                          |   |   |   |   |   |
| Goodwill                      |   | $                           | 362    |                          | $      | — |   | $ | 362 |   | $ | — |   |
|                          |   |                        |   |                          |   |   |   |   |   |
| Amortized intangible assets:  |   |                        |   |                          |   |   |   |   |   |
| Core deposit intangibles      |   | $                           | 2,836  |                          | $      | 1,587 |   | $ | 2,836 |   | $ | 1,385 |   |

 

The following table presentsinformation about aggregate amortization expense (in thousands):

 
|                                                                                                         |   | **For the 3  months ended  June 30, 2004** |   | **For the 6  months ended  June 30, 2004** |   | **For the 3  months ended  June 30, 2003** |   | **For the 6  months ended  June 30, 2003** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|
| Aggregate amortization expense of core deposit intangibles:                                                  |   | $                                               | 101    |                                            | $      | 202                                             |   | $                                               | 97     |   | $ | 185 |   |
|                                                                                                         |   |                                            |   |                                            |   |                                            |   |                                            |   |
| Estimated aggregate amortization expense of core deposit intangibles  for the years ending December 31: |   |                                            |   |                                            |   |                                            |   |                                            |   |
|                                                                                                         |   |                                            |   |                                            |   |                                            |   |                                            |   |
| 2004                                                                                                         |   | $                                               | 405    |                                            |   |                                            |   |                                            |   |   |
| 2005                                                                                                         |   | $                                               | 405    |                                            |   |                                            |   |                                            |   |   |
| 2006                                                                                                         |   | $                                               | 405    |                                            |   |                                            |   |                                            |   |   |
| 2007                                                                                                         |   | $                                               | 112    |                                            |   |                                            |   |                                            |   |   |
| 2008                                                                                                         |   | $                                               | 53     |                                            |   |                                            |   |                                            |   |   |
|                                                                                                              |        |                                                 |        |                                                 |        |                                                 |        |                                                 |        |  |  |  |  |

 

**3.  COMPREHENSIVE INCOME**

 

Comprehensive incomeincludes: (1) reported net income and (2) unrealized gains and losses onmarketable securities.  The followingtable shows our comprehensive income for the three and six month periods endedJune 30, 2004 and 2003 (in thousands):

 

7

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|                       |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |       |
|----------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                       |   | **2004**                              |       | **2003**                            |       | **2004** |   | **2003** |   |
|                       |   |                                  | ** ** |                                | ** ** |   | ** ** |   | ** ** |
| Net Income                 |   | $                                     | 614        |                                | $          | 719 |   | $ | 1,276 |   | $ | 1,323 |   |
|                       |   |                                  |       |                                |       |   |   |   |   |
| Other comprehensive income |   | (1,692                                | )          | 460                                 |       | (1,098 | ) | 754 |   |
|                       |   |                                  |       |                                |       |   |   |   |   |
| Comprehensive income       |   | $                                     | (1,078     | )                                   | $          | 1,179 |   | $ | 178 |   | $ | 2,077 |   |

 

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

 

Basic and diluted net incomeper common and potential common share has been calculated based on the weightedaverage number of shares outstanding. The following schedule reconciles the numerator and denominator ofthe basic and diluted net income per common and potential common share for thesix months ended June 30, 2004 and 2003 (in thousands, except per sharedata):

 
|                                                              |   | **Net Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|-------------------------------------------------------------------|--------|-----------------------------|--------|---------------------------|--------|-----------------------|--------|
|                                                              |   |                        |   |                      |   |                  |   |
| **Three Months ended  June 30, 2004**                        |   |                        |   |                      |   |                  |   |
|                                                              |   |                        |   |                      |   |                  |   |
| Basic earnings per share                                          |   | $                           | 614    |                      | 2,074  |                  | $      | 0.30 |   |
| Effect of dilutive securities: options to  purchase common shares |   | —                      |   | 5                         |   | $                     | — |   |
|                                                              |   |                        |   |                      |   |                  |   |
| Diluted earnings per share                                        |   | $                           | 614    |                      | 2,079  |                  | $      | 0.30 |   |
|                                                              |   |                        |   |                      |   |                  |   |
| **Three Months ended  June 30, 2003**                        |   |                        |   |                      |   |                  |   |
|                                                              |   |                        |   |                      |   |                  |   |
| Basic earnings per share                                          |   | $                           | 719    |                      | 2,079  |                  | $      | 0.35 |   |
| Effect of dilutive securities: options to  purchase common shares |   | —                      |   | —                    |   | —                |   |
|                                                              |   |                        |   |                      |   |                  |   |
| Diluted earnings per share                                        |   | $                           | 719    |                      | 2,079  |                  | $      | 0.35 |   |
|                                                              |   |                        |   |                      |   |                  |   |
| **Six Months ended  June 30, 2004**                          |   |                        |   |                      |   |                  |   |
|                                                              |   |                        |   |                      |   |                  |   |
| Basic earnings per share                                          |   | $                           | 1,276  |                      | 2,073  |                  | $      | 0.62 |   |
| Effect of dilutive securities: options to  purchase common shares |   | —                      |   | 7                         |   | (0.01                 | )      |
|                                                              |   |                        |   |                      |   |                  |   |
| Diluted earnings per share                                        |   | $                           | 1,276  |                      | 2,080  |                  | $      | 0.61 |   |
|                                                              |   |                        |   |                      |   |                  |   |
| **Six Months ended  June 30, 2003**                          |   |                        |   |                      |   |                  |   |
|                                                              |   |                        |   |                      |   |                  |   |
| Basic earnings per share                                          |   | $                           | 1,323  |                      | 2,079  |                  | $      | 0.64 |   |
| Effect of dilutive securities: options to  purchase common shares |   | —                      |   | —                    |   | —                |   |
|                                                              |   |                        |   |                      |   |                  |   |
| Diluted earnings per share                                        |   | $                           | 1,323  |                      | 2,079  |                  | $      | 0.64 |   |

 

8

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**RECLASSIFICATIONS**

 

Certain 2003 amounts havebeen reclassified to conform to the 2004 presentation.

 

9

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**ITEM 2.****                                                                 ****MANAGEMENT’S DISCUSSION ANDANALYSIS**

 

**INTRODUCTION**

 

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

 

**ForwardLooking Statements**

 

In addition to historicalinformation, this report on Form 10-Q may contain forward-looking statements.For this purpose, any statements contained herein, including 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-looking statementsare based on current management expectations and, by their nature, are subjectto risk and uncertainties because of the possibility of changes in underlyingfactors and assumptions. Actual conditions, events or results could differmaterially from those contained in or implied by such forward-lookingstatements for a variety of reasons, including: sharp and/or rapid changes ininterest rates; significant changes in the economic scenario from the currentanticipated scenario which could materially change anticipated credit qualitytrends and the ability to generate loans and gather deposits; significant delayin or inability to execute strategic initiatives designed to grow revenuesand/or control expenses; unanticipated issues during the integration ofacquisitions; and significant changes in accounting, tax or regulatorypractices or requirements. The Company undertakes no obligation to, nor does itintend to, update forward-looking statements to reflect circumstances or eventsthat occur after the date hereof or to reflect the occurrence of unanticipatedevents.

 

The following discussion isof the Company’s financial condition as of June 30, 2004 and the changesin the financial condition and results of operations for the three and sixmonth periods ended June 30, 2004 and 2003.

 

**CriticalAccounting Policies**

 

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

 

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

 

10

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securities during 2004 or2003.

 

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

 

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

 

**Loans  –**Loans are reported at principal amounts outstanding less unearnedincome and the allowance for loan losses. Interest income on loans is recognized on a level-yield basis. Loan feesand certain direct origination costs are deferred and amortized over theestimated terms of the loans using the level-yield method.  Discounts on loans purchased are accretedusing the level-yield method over the estimated remaining life of the loanpurchased.

 

**Allowancefor Loan Losses** - TheCompany provides for estimated losses on loans receivable when any significantand permanent decline in value occurs. These estimates for losses are based, not only on individual assets andtheir related cash flow forecasts, sales values, and independent appraisals,but also on the volatility of certain real estate markets, and the concern fordisposing of real estate in distressed markets.  For loans that are pooled for purposes of determining thenecessary 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, and individualconcentrations of credit.  Loans arecharged against the allowance when, in the opinion of management, such loansare deemed uncollectible and subsequent recoveries are added to the allowance.

 

A description of otheraccounting policies are summarized in Note 1, Summary of Significant AccountingPolicies in the Notes to Consolidated Financial Statements of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.  The Company has followed those policies inpreparing this report.

 

**FINANCIALCONDITION**

 

Citizens BancsharesCorporation’s total assets at June 30, 2004 were $336,860,000, a decreaseof $23,583,000 or 7% compared to $360,443,000 at December 31, 2003. Thisdecrease is due to the planned effort of the Company’s management to repositionthe Company’s balance sheet, reduce its exposure to interest rate risk andbenefit from continuing interest rate increases.  The Company may take advantage of additional opportunities asthey arise to further improve asset yields and/or reduce long-term fundingcosts during the fiscal year.

 

At June 30, 2004, theCompany maintained a balance of cash and due from banks of $11,830,000representing an increase of $136,000 from December 31, 2003.  Interest bearing deposits with banksincreased to $914,000 from $108,000 at December 31, 2003.  Certificates of Deposit decreased $1,988,000as the Company’s commitment in the Community Development Financial InstitutionProgram (the CDFI) expires.  The CDFIprogram required the Company to place certificates of deposit in other CDFIinstitutions to fund economic development in local communities.  The Company is not renewing thesecertificates of deposit as they mature.

 

11

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Investment securitiesclassified as available for sale and held to maturity also decreased$16,948,000 and $360,000, respectively, since December 31, 2003.  In March 2004, the Company soldapproximately $11,400,000 of investments available for sale for a gain of$58,000 to restructure and reduce the interest rate risk of its investmentportfolio.  The remaining decrease ininvestments available for sale is attributed to called securities and pay-downsof mortgage-backed securities in the investment portfolio.

 

Loans receivable, net decreased$5,125,000 to $203,689,000 for the period ended June 30, 2004 compared to$208,814,000 at December 31, 2003. In June 2004, the Company sold approximately $2,400,000 of itsmortgage loan portfolio in its effort to reduce the interest rate risk and improveasset quality.  The Company broke evenon the sale of those mortgage loans.

 

Total liabilities decreased$23,486,000 to $313,013,000 at June 30, 2004 compared to $336,499,000 atDecember 31, 2003. Total deposits, a component of total liabilities, decreased$6,865,000 from $276,779,000 at December 31, 2003 to $269,914,000 atJune 30, 2004.  The decrease indeposits is partially attributed to a planned decline in interest-bearingdeposits with governmental customers. The Company elected not to renew several certificates of deposit due tothe required collateralization of the deposits in the form of pledgedinvestment securities.  By not renewingsome of its governmental deposits, the Company mitigated its exposure to risinginterest rates by reducing its investment portfolio and effectively it’s costof funds by relying more on deposits acquired through the open market.  Another significant component of totalliabilities, advances from Federal Home Loan Bank decreased $12,000,000 to$34,961,000.

 

**INVESTMENTSECURITIES**

 

The Company invests aportion of its assets in U.S. treasury bills and notes, U.S. governmentsponsored agency securities, mortgage backed bonds, as well as certain equitysecurities.  At June 30, 2004 andDecember 31, 2003, the Company’s investment securities portfoliorepresented approximately 28% and 31% of total assets, respectively.

 

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

 
| **At June 30, 2004**                  |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|--------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                       |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S. Government agencies |   | $                   | 9,924  |                         |   |                          | $      | 144            |   | $ | 9,780 |   |
| State, county, and municipal securities    |   | 13,097              |   | 250                          |   | 149                           |   | 13,198         |   |
| Mortgage-backed securities                 |   | 57,459              |   | 53                           |   | 1,292                         |   | 56,220         |   |
| Equity securities                          |   | 1,400               |   | —                       |   | 245                           |   | 1,155          |   |
| Totals                                     |   | $                   | 81,880 |                         | $      | 303                           |   | $              | 1,830  |   | $ | 80,353 |   |
|                                            |        |                     |        |                              |        |                               |        |                |        |  |  |  |  |

 

12

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

 

----

(1) The equity securitiesrepresent agency dividends received deduction (DRD) preferred stock issued byFNMA and FHLMC.  These securities arecallable at par, the interest rates reprice periodically and the interestearned is 70 percent tax free.

 

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

 
| **At June 30, 2004**                  |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|--------------------------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                       |   |                |   |                         |   |                          |   |           |   |
| U.S. Treasury and U.S. Government agencies |   | $                   | 3,000  |                         |   |                          | $      | 98             |   | $ | 2,902 |   |
| State, county, and municipal securities    |   | 5,391               |   | 14                           |   | 40                            |   | 5,365          |   |
| Mortgage-backed securities                 |   | 1,802               |   | 5                            |   | 61                            |   | 1,746          |   |
|                                       |   |                |   |                         |   |                          |   |           |   |
| Totals                                     |   | $                   | 10,193 |                         | $      | 19                            |   | $              | 199    |   | $ | 10,013 |   |
|                                            |        |                     |        |                              |        |                               |        |                |        |  |  |  |  |

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

 

13

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**LOANS**

 

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

 
|                                            |   | **June 30,  2004** |    | **December 31,  2003** |   |
|-------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                            |   |                    |    |                        |   |
| Commercial, financial, and agricultural         |   | $                       | 15,321  |                        | $      | 16,919 |   |
| Installment                                     |   | 6,218                   |    | 13,342                      |   |
| Real estate - mortgage                          |   | 140,414                 |    | 135,194                     |   |
| Real estate - construction                      |   | 16,816                  |    | 15,381                      |   |
| Other                                           |   | 29,307                  |    | 32,379                      |   |
|                                            |   | 208,076                 |    | 213,215                     |   |
| Less:     Net deferred loan fees |   | 590                     |    | 589                         |   |
| Allowance for loan losses                       |   | 3,333                   |    | 3,240                       |   |
| Discount on loans acquired                      |   | 464                     |    | 572                         |   |
|                                            |   |                    |    |                        |   |
| Loans receivable, net                           |   | $                       | 203,689 |                        | $      | 208,814 |   |

 

14

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**NONPERFORMINGASSETS**

 

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

 

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

 

Nonperforming assetsdecreased by $3,641,000 to $4,889,000 at June 30, 2004 from $8,530,000 atDecember 31, 2003.  Nonperformingassets represents 2.34% of loans, net of unearned income, discounts, and realestate acquired through foreclosure at June 30, 2004 as compared to 3.98%at December 31, 2003.  Improvedmonitoring and oversight of loans have contributed to this decline.

 

The table below presents asummary of the Company’s nonperforming assets at June 30, 2004 andDecember 31, 2003.

 
|                                                                                                            |   | **June 30,  2004**                       |   | **December 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------|--------|
|                                                                                                            |   | **(in  thousands, except  financial ratios)** |   |
| Nonperforming assets:                                                                                           |   |                                          |   |                        |   |
| Nonperforming loans:                                                                                            |   |                                          |   |                        |   |
| Nonaccrual loans                                                                                                |   | $                                             | 2,739  |                        | $      | 6,477 |   |
| Past-due loans                                                                                                  |   | —                                        |   | —                      |   |
| Nonperforming loans                                                                                             |   | 2,739                                         |   | 6,477                       |   |
|                                                                                                            |   |                                          |   |                        |   |
| Real estate acquired through foreclosure                                                                        |   | 2,150                                         |   | 2,053                       |   |
| Total nonperforming assets                                                                                      |   | $                                             | 4,889  |                        | $      | 8,530 |   |
|                                                                                                            |   |                                          |   |                        |   |
| Ratios:                                                                                                         |   |                                          |   |                        |   |
| Nonperforming loans to loans, net of  unearned income and discount on loans                                     |   | 1.32                                          | %      | 3.05                        | %      |
|                                                                                                            |   |                                          |   |                        |   |
| Nonperforming assets to loans, net of  unearned income, discounts, and real estate acquired through foreclosure |   | 2.34                                          | %      | 3.98                        | %      |
|                                                                                                            |   |                                          |   |                        |   |
| Nonperforming assets to total assets                                                                            |   | 1.45                                          | %      | 2.37                        | %      |
|                                                                                                            |   |                                          |   |                        |   |
| Allowance for loan losses to nonperforming  loans                                                               |   | 121.69                                        | %      | 50.02                       | %      |
|                                                                                                            |   |                                          |   |                        |   |
| Allowance for loan losses to nonperforming  assets                                                              |   | 68.17                                         | %      | 37.98                       | %      |

 

15

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**ALLOWANCEFOR LOAN LOSSES**

 

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

 

The Company provides forestimated losses on loans receivable when any significant and permanent declinein value occurs.  These estimates forlosses are based on individual assets and their cash flow forecasts, salesvalues, independent appraisals, the volatility of certain real estate markets,and concern for disposing of real estate in distressed markets.  For loans that are pooled for purposes ofdetermining the necessary provisions, estimates are based on loan 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, and individual concentrations of credit.

 

Loans are charged againstthe allowance when, in the opinion of management, such loans are deemeduncollectible and subsequent recoveries are added to the allowance.  For the six month period ended June 30,2004 provisions for loan losses totaled $550,000 compared to $280,000 for thesame period in 2003.

 

The allowance for loanlosses at June 30, 2004 was approximately $3,333,000, representing 1.61%of total loans, net of unearned income and discounts compared to approximately$3,240,000 at December 31, 2003, which represented 1.53% of total loans,net of unearned income and discounts.

 

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

 

A substantial portion of theCompany’s loan portfolio is secured by real estate in the metropolitan Atlantamarket, including a concentration of loans to churches and conveniencestores.  The Company’s outstandingchurch loans were approximately $51.1 million at June 30, 2004 and $36.6million at December 31, 2003.  TheCompany’s loans to area convenience stores were approximately $26.3 million atJune 30, 2004 and $27.3 million at December 31, 2003.  Accordingly, the ultimate collectability ofthe substantial portion of the Company’s loan portfolio is susceptible tochanges in market conditions in the metropolitan Atlanta area.

 

16

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The following tablesummarizes loans, changes in the allowance for loan losses arising from loanscharged off, recoveries on loans previously charged off by loan category, andadditions to the allowance which have been charged to operating expense as ofand for the six month period ended June 30, 2004 (amount in thousands,except financial ratios):

 
|                                                                                                                   |   | **2004** |    |
|------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|
|                                                                                                                   |   |     |    |
| Loans, net of unearned income and discounts                                                                            |   | $        | 207,022 |   |
|                                                                                                                   |   |     |    |
| Average loans, net of unearned income,  discounts and the allowance for loan losses                                    |   | $        | 206,795 |   |
|                                                                                                                   |   |     |    |
| Allowance for loans losses at the beginning  of period                                                                 |   | $        | 3,240   |   |
|                                                                                                                   |   |     |    |
| Loans charged off:                                                                                                     |   |     |    |
| Commercial, financial, and agricultural                                                                                |   | 400      |    |
| Real estate - loans                                                                                                    |   | 324      |    |
| Installment loans to individuals                                                                                       |   | 118      |    |
| Total loans charged off                                                                                                |   | 842      |    |
|                                                                                                                   |   |     |    |
| Recoveries of loans previously charged off:                                                                            |   |     |    |
| Commercial, financial, and agricultural                                                                                |   | 145      |    |
| Real estate - loans                                                                                                    |   | 47       |    |
| Installment loans to individuals                                                                                       |   | 193      |    |
| Total loans recovered                                                                                                  |   | 385      |    |
|                                                                                                                   |   |     |    |
| Net loans charged off                                                                                                  |   | 457      |    |
|                                                                                                                   |   |     |    |
| Additions to allowance for loan losses  charged to operating expense                                                   |   | 550      |    |
|                                                                                                                   |   |     |    |
| Allowance for loan losses at period end                                                                                |   | $        | 3,333   |   |
|                                                                                                                   |   |     |    |
| Ratio of net loans charged off to average  loans, net of unearned income, discounts, and the allowance for loan losses |   | 0.22     | %       |
|                                                                                                                   |   |     |    |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                                     |   | 1.61     | %       |

 

17

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**DEPOSITS**

 

Deposits are the Company’sprimary source of funding loan growth. Total deposits for the six month period ended June 30, 2004decreased by 2% or $6,865,000 to $269,914,000. Noninterest-bearing deposits increased by $8,146,000 or 15%, whileinterest-bearing deposits decreased by $15,011,000 or 7%.  The decrease in total deposits is primarilyattributed to Corporate and Governmental customers who make significant monthlydeposits and withdrawals based on their budgetary needs and the Company’sdecision to not renew several governmental customer deposits.  Approximately $12,500,000 of the decrease ininterest bearing deposits is attributable to a maturing certificate of a singlegovernmental customer.

 

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

 
|                              |   | **June 30,  2004** |    | **December 31,  2003** |   |
|-----------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                              |   |                    |    |                        |   |
| NOW and money market accounts     |   | $                       | 58,092  |                        | $      | 54,840 |   |
| Savings accounts                  |   | 45,616                  |    | 43,524                      |   |
| Time deposits of $100,000 or more |   | 56,904                  |    | 77,187                      |   |
| Other time deposits               |   | 45,324                  |    | 45,396                      |   |
|                              |   |                    |    |                        |   |
|                              |   | $                       | 205,936 |                        | $      | 220,947 |   |

 

**OTHERBORROWED FUNDS**

 

While the Company continuesto emphasize funding earning asset growth through deposits, the Company hasrelied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal HomeLoan Bank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from theFHLB of $34,961,000 at June 30, 2004 and $46,961,000 at December 31,2003.   The following advances arecollateralized by a blanket lien on the Company’s 1-4 family mortgage loans.

 
| **Maturity**                        |   | **Callable** |   | **Type** |   | **June 30,  2004** |   | **December 31,  2003** |       |
|-------------------------------------|--------|--------------|--------|----------|--------|-------------------------|--------|-----------------------------|------------|
|                                |   |         |   |     |   |                    |   |                        |       |   |   |   |   |
| April 2010                     |   | Quarterly    |   | Fixed    |   | 5.82                    | %      | $                           | 10,000,000 |   | 5.82 | % | $ | 10,000,000 |   |
| July 2004                      |   | Daily        |   | Variable |   | 1.70                    | %      | 24,961,000                  |       | 1.15 | % | 36,961,000 |   |
|                                |   |         |   |     |   |                    |   |                        |       |   |   |   |   |
| Total Principal Outstanding         |   |         |   |     |   |                    |   | $                           | 34,961,000 |   |   |   | $ | 46,961,000 |   |
|                                |   |         |   |     |   |                    |   |                        |       |   |   |   |   |
| Weighted Average Rate at Period End |   |         |   |     |   | 2.88                    | %      |                        |       | 2.14 | % |   |   |

 

The Company had an unsecurednote payable of approximately $540,000 at June 30, 2004 andDecember 31, 2003.  The note bearsinterest at the lender’s prime rate minus 50 basis points.

 

18

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**RESULTS OF OPERATIONS**

 

**NetInterest Income:**

 

Net interest income is theprincipal component of a financial institution’s income stream and representsthe difference, or spread, between interest and fee income generated fromearning assets and the interest expense paid on deposits and borrowed funds.  Fluctuations in interest rates as well asvolume and mix changes in earning assets and interest bearing liabilities canmaterially impact net interest income.

 

For the six months endedJune 30, 2004, the Company’s net interest income increased 14% or $946,000to $7,838,000 compared to June 30, 2003. Total interest income increased $340,000 or 4% and is attributed toloans, which increased $462,000 partially offset by a decrease in investmentincome of $53,000 as a result of repositioning the investment portfolio.  Interest Income on federal funds sold andinterest bearing deposits decreased by $10,000 and $59,000 respectively.  In addition, total interest expensedecreased $606,000 as the Company lowered its funding cost by reducing theoutstanding balances of interest-bearing deposits and other borrowings over thesix month comparative periods ended June 30, 2004 and 2003.

 

Net interest incomeincreased $162,000 or 4% for the three month period ended June 30, 2004 ascompared with the same period of the previous year.  The increase in net interest income resulted primarily from thedecrease of $353,000 or 35% in interest expense on deposits for the three monthcomparative periods ended June 30, 2004 and 2003.  The Company was able to lower its fundingcost compared to same period in 2003 by reducing the level of interest-bearingdeposits from governmental customers during the second quarter of 2004.  For the three month period endingJune 30, 2004, average interest-bearing deposits decreased $11,638,000 to$213,731,000 compared to $220,244,000 at June 30, 2003.  Also, interest expense paid on otherborrowings decreased $53,000 due to a decrease in other borrowings outstandingfor the three month period ended June 30, 2004.  As a result of repositioning its investment portfolio to reduceinterest rate risk and to benefit from the increase in interest rates, interestincome on investment securities decreased $191,000 for the three month periodended June 30, 2004.  Average investmentsdecreased $12,665,000 to $94,548,000 at June 30, 2004 compared to$107,213,000 at June 30, 2003.

 

**Provisionfor loan losses**

 

The provision for loanlosses for the three months ended June 30, 2004 was $250,000 compared to$65,000 for the same period in 2003. The allowance for loan losses and the resulting provision for loanlosses were based on changes in the size and character of the Company’s loanportfolio, changes in nonperforming and past due loans, historical loan lossexperience, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions.  The increase in the loan loss provision wasprimarily due to weaknesses experienced in the Company’s commercial real estatesector during the quarter which includes churches and convenient stores.  Management believes that the allowance forloans at June 30, 2004 is adequate.

 

**Noninterestincome:**

 

Noninterest income consistsof revenues generated from a broad range of financial services and activities,including fee-based services, and profits and commissions earned throughsecurities and insurance sales.  Inaddition, gains and losses realized from the sale of investment portfoliosecurities and sales of assets are included in noninterest income. For the sixmonth period ended June 30,

 

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2004, noninterest incometotaled $2,886,000, an increase of $346,000 or 14% compared to the six monthperiod ended June 30, 2003.  Thisincrease is attributed to a $391,000 increase in other operating income, a$74,000 increase in gains on sale of assets and an increase of 41,000 indeposits and service fees, partially offset by a $160,000 decrease in gains onsale of securities.

 

Noninterest income totaled$1,688,000 for the three month period ended June 30, 2004, an increase of$296,000 or 21% compared with the same period ended June 30, 2003.  This increase is attributed to a $408,000increase in other operating income which includes a $262,000 recovery offraudulent items written off in 2001.

 

**Noninterestexpense**:

 

Noninterest expense totaled$8,515,000 for the six month period ended June 30, 2004, an increase of$1,063,000 or 14% compared to the same period last year.  The increase, in large part, is due tosalaries and employee benefits, and other operating expenses.

 

Salaries and employeebenefits increased $452,000 or 12% for the six month period ended June 30,2004 compared to the same period in 2003. Average full-time equivalent employees for the six month period were 168at June 30, 2004 compared to 159 at June 30 2003.  This increase in full-time equivalentemployees is primarily the result of the acquisition of CFS BancsharesCorporation in February 2003.  As aresult, there is an additional two months of salaries and employee benefitsexpenses recorded in operations due to this acquisition.  For the three month period endingJune 30, 2004, salaries and employee benefits increased $254,000 or14%.  This increase is due to the hiringof several loan officers to market commercial loans in the AlabamaDivision.  The commercial product is newto the Company’s customers in the Alabama market.  As a result of the additional staffing in the Alabama and retaildivisions, the average full-time equivalent employees for the three monthending June 30, 2004 was 170 compared to 163 at June 30 2003.

 

Other operating expensesincreased $597,000 or 24% to $3,116,000 for the six month period endedJune 30, 2004 compared to $2,519,000 for the six month period endingJune 30, 2003.   This increase isdue in large part to the acquisition of CFS Bancshares on February 28,2003 and the recognition of two additional months of operating expenses duringthe six month period ended June 30, 2004. In contrast, during the sixmonth period ended June 30, 2003 the Company recognized four months ofoperating expenses.  For the three monthperiod ended June 30, 2004, other operating expenses increased $232,000primarily as a result of increased audit fees, professional services, collectionscost, amortization of intangible assets, writes downs of other real estate andother components of other operating expenses.

 

**INTERESTRATE SENSITIVITY MANAGEMENT**

 

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

 

One method of measuring theimpact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest ratesensitive assets and interest rate sensitive liabilities at various time

 

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intervals is referred to asthe gap.  The Company is liabilitysensitive on a short-term basis as reflected in the following table.  Generally, a net liability sensitiveposition indicates that there would be a negative impact on net interest incomein an increasing rate environment. However, interest rate sensitivity gap does not necessarily indicate theimpact of general interest rate movements on the net interest margin, since allinterest rates and yields do not adjust at the same velocity and the repricingof various categories of assets and liabilities is subject to competitivepressures and the needs of the Company’s customers.  In addition, various assets and liabilities indicated asrepricing within the same period may in fact reprice at different times withinsuch period and at different rates. The following table shows the contractualmaturities of all investment securities at June 30, 2004.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market, and savings accounts in thethree month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

 

The following table setsforth the distribution of the repricing of the Company’s interest ratesensitive assets and interest rate sensitive liabilities as ofJune 30,2004.

 
|                                                                    |   | **Cumulative  amounts as of June 30, 2004  Maturing and repricing within** |    |
|-------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|---------|
|                                                                    |   | **3  Months**                                                                   |    | **3 to 12  Months** |   | **1 to 5  Years** |   | **Over  5 Years** |   | **Total** |   |
|                                                                    |   | **(amounts  in thousands, except ratios)**                                      |    |
| Interest-sensitive assets:                                              |   |                                                                            |    |   |   |   |   |   |   |   |   |
| Investments                                                             |   | $                                                                               | 119     |   | $ | 1,906 |   | $ | 20,236 |   | $ | 68,285 |   | $ | 90,546 |   |
| Certificates of deposit                                                 |   | 95                                                                              |    | 100 |   | 800 |   | — |   | 995 |   |
| Loans                                                                   |   | 67,839                                                                          |    | 9,311 |   | 71,449 |   | 59,477 |   | 208,076 |   |
| Interest-bearing deposits with other banks                              |   | 914                                                                             |    | — |   | — |   | — |   | 914 |   |
| Total interest-sensitive assets                                         |   | $                                                                               | 68,967  |   | $ | 11,317 |   | $ | 92,485 |   | $ | 127,762 |   | $ | 300,531 |   |
|                                                                    |   |                                                                            |    |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |   |                                                                            |    |   |   |   |   |   |   |   |   |
| Deposits   (a)                                                     |   | $                                                                               | 137,612 |   | $ | 18,838 |   | $ | 49,337 |   | 149 |   | $ | 205,936 |   |
| Notes payable                                                           |   | 540                                                                             |    | — |   | — |   | — |   | 540 |   |
| Trust preferred securities                                              |   | —                                                                          |    | — |   | 5,000 |   | — |   | 5,000 |   |
| Other borrowings                                                        |   | 24,961                                                                          |    | — |   | — |   | 10,000 |   | 34,961 |   |
| Total interest-sensitive liabilities                                    |   | $                                                                               | 163,113 |   | $ | 18,838 |   | $ | 54,337 |   | $ | 10,149 |   | $ | 246,437 |   |
|                                                                    |   |                                                                            |    |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |   | $                                                                               | (94,146 | ) | $ | (7,521 | ) | $ | 38,148 |   | $ | 117,613 |   | $ | 54,094 |   |
|                                                                    |   |                                                                            |    |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to  total interest-sensitive assets |   | (31.33                                                                          | )%      | (33.83 | )% | (21.14 | )% | 18.00 | % | 18.00 | % |

 

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(a) Savings,Now, and money market deposits totaling $103,707 are included in the maturing in 3 months classification.

 

**LIQUIDITY**

 

Liquidity is the ability ofthe Company to convert assets into cash or cash equivalents without significantloss and to raise additional funds by increasing liabilities. Liquiditymanagement involves maintaining the Company’s ability to meet the day-to-daycash flow requirements of its customers, whether they are depositors wishing towithdraw funds or borrowers requiring funds to meet their

 

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credit needs.  Without proper liquidity management, theCompany would not be able to perform the primary function of a financialintermediary and would, therefore, not be able to meet the needs of thecommunities it serves.  Additionally, theBank holding company requires cash for various operating needs including:dividends paid to shareholders; business combinations; capital injections toits subsidiaries; the servicing of debt; and the payment of general corporateexpenses.

 

The primary source ofliquidity for the Bank holding company is dividends from the Bank. The amountof dividends paid by the Bank to the Company is limited by various bankingregulatory agencies.  The GeorgiaDepartment of Banking and Finance regulates dividend payments and must approvepayments that exceed 50% of the Bank’s net income for the prior year. The totaldividends that could be paid by the Bank to the Company in 2004 without priorregulatory approval is approximately $753,000, of which it paid $311,000 duringthe second quarter.  Also, the Companyhas access to various capital markets. The Company does not anticipate anyliquidity requirements in the near future that it will not be able to meet.

 

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

 

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

 

The liability portion of thebalance sheet provides liquidity through various customers’ interest bearingand noninterest bearing deposit accounts. Federal funds purchased and othershort-term borrowings are additional sources of liquidity and, basically,represent the Company’s incremental borrowing capacity. These sources ofliquidity are short-term in nature and are used as necessary to fund assetgrowth and meet short-term liquidity needs.

 

**CAPITALRESOURCES**

 

Stockholders’ equitydecreased $97,000 for the six months ended June 30, 2004, primarily due tothe changes in retained earnings and unrealized losses on investmentsecurities.  Retained earnings increasedby $965,000 to $17,079,000 due to net earnings of $1,276,000 during the sixmonth period, reduced by dividends of $311,000 paid in the second quarter.  In May 2004, the Company approved cashdividends of $0.15 per share to be paid to shareholders on record as ofApril 12, 2004.  Also, for the sixmonth period ended June 30, 2004, accumulated other comprehensive income(loss) decreased $1,098,000 to $1,008,000 loss, compared with $90,000 gain atDecember 31, 2003.  The decrease isdue to the impact of changing economic conditions and changes in marketinterest rates on the Company’s available for sale investment portfolio.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company tomaintain minimum amounts and ratios of total and Tier 1 capital to riskweighted assets, and Tier 1 capital to average assets.  As of June 30, 2004, the Bank’s totaland Tier 1 capital to risk weighted assets and Tier 1 to average assets were15%, 13%, and 8% respectively, compared with 14%, 13% and 8% respectively, atDecember 31, 2003.  As ofJune 30, 2004, the Company met all capital adequacy requirements to whichit is subject.

 

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

** **

Market risk is the risk ofloss from adverse changes in market prices and interest rates. Our market riskarises principally from interest rate risk inherent in our lending, deposit,and borrowing activities. Although we manage certain other risks, such ascredit quality and liquidity risk, in the normal course of business we considerinterest rate risk to be our most significant market risk and the risk thatcould potentially have the largest material effect on our financial conditionand results of operations. We do not maintain a trading portfolio or deal in internationalinstruments, and therefore, other types of market risks, such as foreigncurrency risk and commodity price risk, do not arise in the normal course ofour business activities.

 

Quantitative informationabout the Company’s market risk at June 30, 2004 is as follows (inthousands):

 
|                                 |   | **2004**            |   |
|--------------------------------------|--------|---------------------|--------|
|                                 |   | **Carrying  Value** |   | **Estimated  Fair Value** |   | **Down  100 bp** |   | **Up  100 bp** |   |
|                                 |   |                |   |   |   |   |   |   |   |
| Financial assets:                    |   |                |   |   |   |   |   |   |   |
| Interest-bearing deposits with banks |   | $                   | 914    |   | $ | 914 |   | — | % | — | % |
| Certificates of deposit              |   | 995                 |   | 995 |   | — |   | — |   |
| Investment securities                |   | 90,546              |   | 90,366 |   | 2.94 |   | (3.81 | ) |
| Loans receivable, net                |   | 208,076             |   | 207,160 |   | 1.51 |   | (1.74 | ) |
|                                 |   |                |   |   |   |   |   |   |   |
| Financial liabilities:               |   |                |   |   |   |   |   |   |   |
| Interest-bearing deposits            |   | 205,936             |   | 195,624 |   | 1.41 |   | (1.31 | ) |
| Notes payable                        |   | 540                 |   | 540 |   | — |   | — |   |
| Advances from Federal Home Loan Bank |   | 34,961              |   | 35,938 |   | 1.56 |   | (1.47 | ) |
| Trust preferred securities           |   | 5,000               |   | 5,030 |   | — |   | — |   |
|                                      |        |                     |        |  |  |  |  |  |  |  |  |

 

The Company has adopted anasset/liability management program to monitor the Company’s interest ratesensitivity and to ensure that the Company is competitive in the loan anddeposit markets.  Management seeks tomanage the relationship between interest-sensitive assets and liabilities inorder to protect against wide interest rate fluctuations, including those resultingfrom inflation.  The Company has notentered into any derivative financial instruments such as futures, forwards,swaps or options.  Additionally, referto our interest rate sensitivity management and liquidity disclosures withinPart 1, Item 2, of this Form 10-Q.

 

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

 

Based on the evaluation ofour disclosure controls and procedures conducted at the end of the periodcovered by this report,  the Company’sChief Executive Officer, Chief Operating Officer, and Chief Financial Officerhave concluded that our disclosure controls and procedures were effective as ofJune 30, 2004 in timely alerting them to material information required tobe included in our reports filed with or furnished to the Securities andExchange Commission.  There have been nochanges in the Company’s internal controls over financial reporting thatoccurred during the quarter ended June 30, 2004 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PARTII.  OTHER INFORMATION**

 

**ITEM1.****          LEGALPROCEEDINGS**

 

The Company is not aware ofany material pending legal proceedings to which the Company or its subsidiaryis a party or to which any of their property is subject.

 

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**ITEM2.****          CHANGESIN SECURITIES**

 

None

 

**ITEM3.****          DEFAULTSUPON SENIOR SECURITIES**

 

None

 

**ITEM4.****          SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS**

 

The Company held its AnnualShareholders’ Meeting on Wednesday, May 25, 2004, at 10:00 a.m., at the AtlantaLife Insurance Company, Herndon Plaza, 100 Auburn Avenue, N.E., Atlanta,Georgia.  The purpose of the AnnualShareholders’ Meeting was to elect four (4) Class I directors who will serve athree year term expiring at the 2007 annual meeting.  The following table presents the results of the shareholdersvote:

 
| **Directors**     |   | **For**   |   | **Withhold** |   |
|-------------------|--------|-----------|--------|--------------|--------|
|              |   |      |   |         |   |
| Robert L. Brown   |   | 1,137,452 |   | 1,652        |   |
| C. David Moody    |   | 1,137,452 |   | 1,662        |   |
| Mercy P. Owens    |   | 1,137,452 |   | 1,662        |   |
| James E. Williams |   | 1,137,452 |   | 1,652        |   |

 

**ITEM 5.****          OTHER INFORMATION**

 

None

 

**ITEM 6.****          EXHIBITS AND REPORTS ONFORM 8-K**

 

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

 

**Exhibit 31**

 

Section 302Certification by the Company’s executive officers with respect to the Company’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2004.

 

**Exhibit 32**

 

Section 906Certification pursuant to Section 1350 of Chapter 63 of Title 18 U.S.C. bythe Company’s executive officers with respect to the Company’s Quarterly Reporton Form 10-Q for the quarter ended June 30, 2004.

 

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

 

Press Release of Registrant,dated August 11, 2004, announcing 2004 second quarter results.

 

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**SIGNATURES**

 

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

 

 
|   |                 | **CITIZENS  BANCSHARES CORPORATION** |
|--------|----------------------|--------------------------------------|
|   |                 |                                 |   |   |
|   |                 |                                 |   |   |
| Date:  | August 13, 2004 |                                 | By: | /s/ James E. Young |   |
|   |                 |                                 | James E. Young |
|   |                 |                                 | President and Chief  Executive Officer |
|   |                 |                                 |   |   |
| Date:  | August 13, 2004 |                                 | By: | /s/ Willard C. Lewis |   |
|   |                 |                                 | Willard C. Lewis |
|   |                 |                                 | Senior Executive Vice  President and  Chief Operating Officer |
|   |                 |                                 |   |   |
| Date:  | August 13, 2004 |                                 | By: | /s/ Samuel J. Cox |   |
|   |                 |                                 | Samuel J. Cox |
|   |                 |                                 | Senior Vice President and  Chief Financial Officer |
|        |                      |                                      |  |  |  |  |  |

 

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