**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10 - Q**

 

| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) TO THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                  |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |
|       | **For the quarterly period ended  March 31, 2003**                                                                                                                                                                                       |
|       |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15 (d) TO THE  EXCHANGE ACT**                                                                                                                                                                    |
|       |
|       | **For the transition period from                  to                  ** |

 

**CommissionFile No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Name of small businessissuer in its charter)

 

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

 

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

 

State the number of shares outstanding for each of the issuer’s classesof common equity as of the latest practicable date: 1,989,069 shares of CommonStock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 parvalue outstanding on May 15, 2003.

 

 

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Part 1.     FINANCIAL INFORMATION

 

Item 1.    Financial statements

 

**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

 

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

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

 

See notes to consolidated financialstatements.

 

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

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

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

 

See notes to consolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THE THREE MONTHS ENDED MARCH31, 2003 AND 2002**

**(Unaudited****–****In thousands)**

 
|                                                                                         |   | **2003** |   | **2002** |   |
|----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                         |   |     |   |     |   |
| **OPERATING ACTIVITIES:**                                                                    |   |     |   |     |   |
| Net income                                                                                   |   | $        | 604    |     | $      | 321 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |   |     |   |     |   |
| Provision for loan losses                                                                    |   | 215      |   | 175      |   |
| Depreciation                                                                                 |   | 257      |   | 228      |   |
| Amortization (accretion), net                                                                |   | 36       |   | 45       |   |
| Gain on sale of assets and securities                                                        |   | —   |   | (30      | )      |
| Change in mortgage loans held for sale                                                       |   | —   |   | 422      |   |
| Change in other assets                                                                       |   | 1,402    |   | (536     | )      |
| Change in accrued expenses and other liabilities                                             |   | 1,434    |   | (921     | )      |
|                                                                                         |   |     |   |     |   |
| Net cash provided by (used in) operating  activities                                         |   | 3,948    |   | (296     | )      |
|                                                                                         |   |     |   |     |   |
| **INVESTING ACTIVITIES:**                                                                    |   |     |   |     |   |
| Proceeds from sale and maturities of investment  securities held to maturity                 |   | 335      |   | 300      |   |
| Proceeds from sale and maturities of investment  securities available for sale               |   | 5,029    |   | 5,247    |   |
| Purchases of investment securities held to  maturity                                         |   | (3,651   | )      | —   |   |
| Purchases of investment securities available for  sale                                       |   | (8,462   | )      | (14,275  | )      |
| Net increase in other investments                                                            |   | (395     | )      | —   |   |
| Net change in loans                                                                          |   | 3,618    |   | 1,893    |   |
| Increase in cash surrender value of life  insurance                                          |   | (323     | )      | 66       |   |
| Net cash paid in acquisition                                                                 |   | (1,043   | )      | —   |   |
| Purchases of premises and equipment                                                          |   | (113     | )      | (524     | )      |
| Net change in interest bearing deposits with  banks                                          |   | 14,314   |   | 8,707    |   |
| Net change in federal funds sold                                                             |   | 580      |   | 1,005    |   |
|                                                                                         |   |     |   |     |   |
| Net cash provided by investing activities                                                    |   | 9,889    |   | 2,419    |   |
|                                                                                         |   |     |   |     |   |
| **FINANCING ACTIVITIES:**                                                                    |   |     |   |     |   |
| Net change in noninterest-bearing deposits                                                   |   | (4,632   | )      | 2,821    |   |
| Net change in interest-bearing deposits                                                      |   | (18,883  | )      | (3,642   | )      |
| Purchase of treasury stock                                                                   |   | —   |   | (24      | )      |
| Principal payment on debt                                                                    |   | —   |   | (330     | )      |
| Increase in advances from Federal Home Loan Bank                                             |   | 15,300   |   | —   |   |
| Dividends paid                                                                               |   | (312     | )      | (341     | )      |
|                                                                                         |   |     |   |     |   |
| Net cash used in financing activities                                                        |   | (8,527   | )      | (1,516   | )      |
|                                                                                         |   |     |   |     |   |
| Net change in cash and due from banks                                                        |   | 5,310    |   | 607      |   |
|                                                                                         |   |     |   |     |   |
| Cash and due from banks at beginning of period                                               |   | 11,117   |   | 12,877   |   |
|                                                                                         |   |     |   |     |   |
| Cash and due from banks at end of period                                                     |   | $        | 16,427 |     | $      | 13,484 |   |
|                                                                                         |   |     |   |     |   |
| **Supplemental disclosures  of cash paid during the period for:**                            |   |     |   |     |   |
| Interest                                                                                     |   | $        | 1,066  |     | $      | 1,655 |   |
|                                                                                         |   |     |   |     |   |
| Income taxes                                                                                 |   | $        | 181    |     | $      | 145 |   |
|                                                                                         |   |     |   |     |   |
| **Supplemental disclosures  of noncash transactions:**                                       |   |     |   |     |   |
| Change in unrealized gain (loss) on investment  securities available for sale, net of taxes  |   | $        | 294    |     | $      | (285 | ) |

 

See notes to consolidated financial statements.

 

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

**Notes to the Consolidated Financial Statements**

**March 31, 2003**

(Unaudited)

 

**SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation**

 

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

 

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

 

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

 

**ACCOUNTINGPOLICIES**

 

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

 

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

 

5

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

 

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

 

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

 

**Loans** - Loans are reported at principal amountsoutstanding less unearned income and the allowance for loan losses.  Interest income on loans is recognized on alevel-yield basis. Loan fees and certain direct origination costs aredeferred and amortized over the estimated terms of the loans using thelevel-yield method.  Discounts on loanspurchased are accreted using the level-yield method over the estimatedremaining life of the loan purchased.

 

**Allowance for Loan Losses** - The Companyprovides for estimated losses on loans receivable when any significant andpermanent decline in value occurs. These estimates for losses are based on not only on individual assetsand their related cash flow forecasts, sales values, independent appraisals,but also 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 necessaryprovisions, estimates are based on loan types, history of charge-offs, andother delinquency analyses.  Therefore,the value used to determine the provision for losses is subject to thereasonableness 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 theallowance for loan losses is performed. This assessment is made in the context of historical losses as well asexisting economic conditions, performance trends within specific portfoliosegments, and individual concentrations of credit.  Loans are charged against the allowance when, in the opinion ofmanagement, such loans are deemed uncollectible and subsequent recoveries areadded to the allowance.

 

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

 

**ACQUISITION**

 

On February 28, 2003, theCompany acquired CFS Bancshares, Inc., a savings and loan holding companylocated in Birmingham, Alabama, whose banking subsidiary, Citizens FederalSavings Bank, simultaneously merged into the Bank.   The Company has paid approximately $8,400,000 in cash for alloutstanding shares of CFS Bancshares, Inc. tendered through March 31,2003.  This acquisition has resulted ina significant expansion of the Company’s market area and allows it to beginserving customers in the Birmingham metropolitan area.  The acquisition of CFS Bancshares, Inc. wasaccounted for as a purchase.  The fair valueof the assets and liabilities

 

6

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

 

**COMMON STOCK**

 

Basic net income per share (EPS) is computed based on net incomedivided by the weighted average number of common shares outstanding.  Diluted EPS is computed based on net incomedivided by the weighted average number of common and potential common shares.The Company’s potential common shares are due to outstanding stock options,which were not dilutive during the three months ended March 31, 2003 and 2002.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*, which expands the disclosuresa guarantor is required to provide in its annual and interim financialstatements regarding its obligations for certain guarantees.  Disclosures are required to be included in financialstatements issued after December 15, 2002. FIN 45 also requires the guarantor to recognize a liability for the fairvalue of the obligation it has assumed for guarantees issued or modified afterDecember 31, 2002.  The adoption of FIN45 did not have a material effect on the Company’s consolidated financialstatements.

 

In January 2003, the FASB issued FIN No. 46, *Consolidation of Variable InterestEntities.* FIN No. 46 is aninterpretation of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*and addresses consolidation by business enterprises of variable interestentities (“VIEs”).  The Interpretationis based on the theory that an enterprise controlling another entity throughinterests other than voting interests should consolidate the controlledentity.  Business enterprises arerequired under the provisions of the Interpretation to identify VIEs, based onspecified characteristics, and then determine whether they should be consolidated.  An enterprise that holds a majority of thevariable interests is considered the primary beneficiary which wouldconsolidate the VIE.  The primarybeneficiary of a VIE is also required to include various disclosures in theinterim and annual financial statements. Additionally, an enterprise that holds a significant variable interestin a VIE, but that is not the primary beneficiary, is also required to makecertain disclosures.  The Interpretationis effective immediately for all enterprises with variable interests in VIEscreated after January 31, 2003. An entity with variable interests in a VIEcreated before February 1, 2003 is required to apply the provisions of thisInterpretation to that entity by the end of the first interim or annualreporting period beginning after June 15, 2003.  The Company has not identified any VIEs and, accordingly does notexpect the application of this Interpretation to have a material effect on itsfinancial statements.

 

**RECLASSIFICATIONS**

 

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

 

7

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**SUBSEQUENT EVENT**

 

On April 1, 2003, the Company announced a curtailment of itspostretirement medical and life plans. The Company expects this curtailment to reduce the associated planliabilities by approximately $255,000 during the quarter ending June 2003.

 

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**Item2.                                                             MANAGEMENT’SDISCUSSION AND ANALYSIS**

 

**INTRODUCTION**

 

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

 

**Forward Looking Statements**

 

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

 

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

 

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

 

**FINANCIAL CONDITION**

 

Citizens Bancshares Corporation’s total assets for the three monthperiod ended March 31, 2003 increased by $92,387,000 to $371,877,000 - anincrease of 33% compared to $279,490,000 at December 31, 2002.  This increase from December 31, 2002 toMarch 31, 2003 is primarily due to the acquisition of CFS Bancshares, Inc., abank holding company in Birmingham, Alabama, for approximately $9,055,000 incash.  The acquisition of CFSBancshares, Inc., allows the Company to extend its geographical base andprovides new avenues for the Bank to sell its products and services.

 

Accordingly, amounts acquired as a result of the purchase of CFSBancshares, Inc. accounted for $4,826,000 and $3,265,000 of the total increasesin the Company’s cash and due from banks and federal funds sold balances,respectively, from December 31, 2002 to March 31, 2003.  Investment securities available for sale andloans receivable increased $60,742,000 and $28,857,000, respectively, duringthe three month period ended March 31, 2003. The acquisition

 

9

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of CFS Bancshares, Inc. accounted for $46,347,000 of the increase ininvestments available for sale and $31,592,000 of the increase in netloans.  In addition, fixed assetsincreased $3,132,000 primarily due to the addition of $3,264,000 in fixedassets related to the acquisition of CFS Bancshares, Inc.  The decrease in other assets of $367,000includes the recognition of a finite lived intangible asset related to thevalue of deposit accounts acquired of $373,000.

 

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

 

**INVESTMENTSECURITIES**

 

The Company invests a portion of its assets in U.S. treasury bills andnotes, U.S. government sponsored agency securities, mortgage backed bonds, aswell as certain equity securities. Other investments includes Federal Home Loan Bank stock and FederalReserve Bank stock.  At March 31, 2003and December 31, 2002, the Company’s investment securities portfoliorepresented approximately 33% and 20% of total assets, respectively.

 

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

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

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

 

10

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

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

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

 

**LOANS**

 

Loans outstanding by classification are summarized as follows (inthousands):

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

 

**NONPERFORMINGASSETS**

 

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

 

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

 

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substandard, or special mention that have not been disclosed which (1)represent or result from trends or uncertainties which management reasonablyexpects will materially impact future operating results, liquidity, or capitalresources, or (2) represent any information on material credits which managementis aware that causes management to have serious doubts as to the abilities ofsuch borrowers to comply with the loan repayment terms.

 

Nonperforming assets increased $1,375,000 to $6,438,000 at March 31,2003 from $5,063,000 at December 31, 2002. This increase includes $1,227,000 of the guaranteed portion of SmallBusiness Administration loans, which is considered fully recoverable once theCompany completes the loan liquidation process.  Nonperforming assets represented 3.17% of loans, net of unearnedincome, discounts and real estate acquired through foreclosure at March 31,2003 as compared to 2.91% at December 31, 2002.

 

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

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

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

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

 

12

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

 

Loans are charged against the allowance when, in the opinion ofmanagement, such loans are deemed uncollectible and subsequent recoveries areadded to the allowance.  For the threemonths ended March 31, 2003, provisions for loan losses totaled $215,000compared to $175,000 for the same period in 2002.

 

The allowance for loan losses as of March 31, 2003 was approximately$3,461,000, representing 1.69% of total loans, net of unearned income comparedto approximately $2,630,000 at December 31, 2001, which represented 1.51% oftotal loans, net of unearned income.

 

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

 

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

 

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

 

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**DEPOSITS**

 

Deposits remain the Company’s primary sourceof funding loan growth.  Total depositsfor the three month period ended March 31, 2003 increased by $76,173,000 to304,784,000 from December 31, 2002.  Thefollowing is a summary of interest-bearing deposits (in thousands):

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

 

**OTHERBORROWED FUNDS**

 

While the Companycontinues to emphasize funding earning asset growth through deposits, theCompany has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal HomeLoan Bank (the “FHLB”) advances and short-term borrowings.  The Company’s bank subsidiary hadoutstanding advances from the FHLB of $34,050,000 at March 31, 2003 and$18,750,000 at December 31, 2002.  Thefollowing advances are collateralized by a blanket lien on the Company’s 1-4family mortgage loans.

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

 

During the second quarterof 2002, Citizens Bancshares Corporation issued $5 million of pooled trustpreferred securities (“Preferred Securities”) through one issuance by awholly-owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the“Trust”).  The Preferred Securitiesaccrue and pay distributions periodically at specified annual rates as providedin the indentures, Libor plus 3.45%. The Trust used the net proceeds from the offering to purchase a likeamount of Junior Subordinated Debentures (the “Debentures”) of theCompany.  The Debentures are the soleassets of the Trust and are eliminated, along with the related income statementeffects, in the consolidated financial statements.  The Company’s obligations under the Debentures and relateddocuments, taken together, constitute a full and unconditional guarantee by theCompany of the obligations of the Trust. The Preferred Securities are mandatorily redeemable upon the maturity ofthe Debentures, or upon earlier redemption as provided in the indentures.  The Company has the right to redeem theDebentures in whole or in part on or after specific dates, at a redemptionprice specified in the indentures plus any accrued but unpaid interest to theredemption date.  At March 31, 2003, theinterest rate on the Preferred Securities was 4.85%.

 

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

 

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basis points and matures annually on May 1.  During 2002, the note payable was refinanced as part of a newunsecured note.

 

**RESULTSOF OPERATIONS**

 

**NetInterest Income:**

 

Net interest income is the principal component of a financialinstitution’s income stream and represents the difference, or spread, betweeninterest and fee income generated from earning assets and the interest expensepaid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes inearning assets and interest bearing liabilities can materially impact netinterest income.

 

Netinterest income increased $533,000 for the three month period ended March 31,2003.  The increase in net interestincome resulted from the increase in the amount of earning assets whichgenerated additional interest income of $214,000 compared to the same periodlast year.  In addition, interestexpense on deposits decreased $419,000 as the Company was able to lower itsfunding cost.  This decrease in intereston deposits was partially offset by a $100,000 increase in interest paid onother borrowings due to an increase in the amount of borrowings outstanding.

 

**Noninterestincome:**

 

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

 

Feeincome from service charges on deposit accounts decreased slightly by $16,000for the first quarter of 2003 compared with the same period in 2002.  A large component of the Company’s servicecharges on deposit accounts is related to insufficient funds, returned checkcharges, and other customer service fees. These fees fluctuate from month to month.

 

There were nosales of investments or assets in the first quarter of 2003.  Gain on sales of assets and investmentsecurities totaled $30,000 for the three month period ended March 31, 2002.

 

Commissions and fees from mortgage loan activities decreased $111,000or 100% for the three month period ended March 31, 2003.  In December 2001, the Company realigned theoperations its mortgage subsidiary’s operations to become a department of theBank.  In March 2002, the mortgagesubsidiary’s operations ceased and all mortgage loan activity was reflectedwithin the Bank operations.

 

Other operating income decreased slightly by $46,000 compared to thefirst quarter of 2002.  This decrease isattributed to various immaterial components of other operating income includinginvestment services and other recoveries.

 

**Noninterestexpense**:

 

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

 

16

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Salaries andemployee benefits expense increased slightly by $39,000 for the three monthperiod ended March 31, 2003 compared to the same period in 2002.   In addition, net occupancy and equipmentexpense increased slightly by $6,000 for the first quarter of 2003 compared to2002.  These increases are the result ofacquiring CFS Bancshares, Inc., which had $100,000 in salary expense and$25,000 in net occupancy and equipment expense for the period ended 2003.

 

Otheroperating expenses decreased $171,000 to $1,068,000 for the first quarter of2003, compared to $1,239,000 for the same period in 2002.  This decrease is primarily due to theclosure of the Company’s mortgage subsidiary at the end of March 2002.

 

## ***INTERESTRATE SENSITIVITY MANAGEMENT***

 

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

 

One method of measuring the impact ofinterest rate sensitivity is the cumulative gap analysis.  The difference between interest ratesensitive assets and interest rate sensitive liabilities at various timeintervals is referred to as the gap. The Company is liability sensitive on a short-term basis as reflected inthe following table.  Generally, a netliability sensitive position indicates that there would be a negative impact onnet interest income in an increasing rate environment.  However, interest rate sensitivity gap doesnot necessarily indicate the impact of general interest rate movements on thenet interest margin, since all interest rates and yields do not adjust at thesame velocity and the repricing of various categories of assets and liabilitiesis subject to competitive pressures and the needs of the Company’s customers.  In addition, various assets and liabilitiesindicated as repricing within the same period may in fact reprice at differenttimes within such period and at different rates.  For conservative purposes, the Company has included demanddeposits such as NOW, money market and savings accounts in the three monthcategory.  However, the actual repricingof these accounts may lag beyond twelve months.  The interest rate sensitivity gap is only a general indicator ofpotential effects of interest rate changes on net interest income.

 

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

 

17

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|                                                                    |   | **Cumulative amounts as of March 31, 2003  Maturing and repricing within** |       |
|-------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|------------|
|                                                                    |   | **3  Months**                                                              | ** ** | **3 to 12  Months** | ** ** | **1 to 5  Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
|                                                                    |   | **(amounts in thousands, except ratios****)**                              |       |
| Interest-sensitive  assets:                                             |   |                                                                       |       |   |   |   |   |   |   |   |   |
| Investments                                                             |   | $                                                                          | 9,279      |   | $ | 255 |   | $ | 7,070 |   | $ | 105,377 |   | $ | 121,981 |   |
| Certificates of  deposit                                                |   | —                                                                     |       | 95 |   | 3,000 |   | — |   | 3,095 |   |
| Loans                                                                   |   | 54,785                                                                     |       | 14,303 |   | 63,824 |   | 73,207 |   | 206,119 |   |
| Federal fund s  sold                                                    |   | 3,265                                                                      |       | — |   | — |   | — |   | 3,265 |   |
| Interest-bearing  deposits with other banks                             |   | 1,031                                                                      |       | — |   | — |   | — |   | 1,031 |   |
| Total  interest-sensitive assets                                        |   | $                                                                          | 68,360     |   | $ | 14,653 |   | $ | 73,894 |   | $ | 178,584 |   | $ | 335,491 |   |
|                                                                    |   |                                                                       |       |   |   |   |   |   |   |   |   |
| Investment-sensitive  liabilities:                                      |   |                                                                       |       |   |   |   |   |   |   |   |   |
| Deposits(a)                                                             |   | $                                                                          | 169,455    |   | $ | 56,327 |   | $ | 21,219 |   | $ | 21 |   | $ | 247,022 |   |
| Trust preferred  securities                                             |   | —                                                                     |       | — |   | 5,000 |   | — |   | 5,000 |   |
| Other borrowings                                                        |   | 34,050                                                                     |       | 740 |   | — |   | — |   | 34,790 |   |
| Total  interest-sensitive liabilities                                   |   | $                                                                          | 203,505    |   | $ | 57,067 |   | $ | 26,219 |   | $ | 21 |   | $ | 286,812 |   |
|                                                                    |   |                                                                       |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |   | $                                                                          | (135,145   | ) | $ | (42,414 | ) | $ | 47,675 |   | $ | 178,563 |   | $ | 48,679 |   |
|                                                                    |   |                                                                       |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |   | (40.28                                                                     | )%         | (52.93 | )% | (38.71 | )% | 14.51 | % | 14.51 | % |

 

18

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**LIQUIDITY**

 

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

 

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

 

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

 

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

 

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

 

**CAPITALRESOURCES**

 

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

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany

 

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tomaintain minimum amounts and ratios of total and Tier 1 capital to riskweighted assets, and Tier 1 capital to average assets.  As of March 31, 2003, the Company’s banksubsidiary’s total and Tier 1 capital to risk weighted assets and Tier 1 toaverage assets were 13%, 11% and 8% respectively.  As of March 31, 2003, the Company meets all capital adequacyrequirements to which it is subject.

 

# **ITEM 4.**                                                     CONTROLSAND PROCEDURES

 

Within 90 daysprior to the date of this report, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including itsconsolidated subsidiaries) that is required to be included in the Company’speriodic filings with the Securities and Exchange Commission.  There have been no significant changes inthe Company’s internal controls or, to the Company’s knowledge, in otherfactors that could significantly affect those internal controls subsequent tothe date the Company carried out its evaluation, and there have been nocorrective actions with respect to significant deficiencies and materialweaknesses

 

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# **PARTII.  OTHER INFORMATION**

 
| **ITEM  1.**      | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              | The Company is not aware of any  material pending legal proceedings to which the Company or its subsidiary is  a party or to which any of their property is subject.                                                                                                                                                                                                                                                                                                                                                                                                           |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **ITEM  2.**      | **CHANGES  IN SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **ITEM  3.**      | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **ITEM  4.**      | **SUBMISSION  OF MATTERS TO VOTE OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **ITEM  5.**      | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **ITEM  6.**      | **EXHIBITS  AND REPORTS ON FORM 8-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **CERTIFICATION** |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|              | Each of the undersigned hereby certifies  in his capacity as an officer of Citizens Bancshares Corporation and  subsidiaries (the “Company”) that the Quarterly Report of the Company on Form  10-Q for the period ended March 31, 2003 fully complies with the requirements  of Section 13(a) of the Securities Exchange Act of 1934 and that the  information contained in such report fairly presents, in all material  respects, the financial condition of the Company at the end of such period  and the results of operations of the Company for such period. |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

21

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**SIGNATURES**

 

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

 

 
| **CITIZENS BANCSHARES CORPORATION** |
|-------------------------------------|
|                                |
|                                |
| Date:  May  19, 2003           | By: | /s/ James E. Young |   |
|                                | James E. Young |
|                                | President and Chief Executive Officer |
|                                |   |
| Date: May 19, 2003                  | By: | /s/ Willard C. Lewis |   |
|                                | Willard C. Lewis |
|                                | Senior Executive Vice President and |
|                                | Chief Operating Officer |
|                                |   |
|                                |   |
| Date: May 19, 2003                  | By: | /s/ Samuel J. Cox |   |
|                                | Samuel J. Cox |
|                                | Senior Vice President and Chief Financial Officer |
|                                     |  |  |  |  |  |

 

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**Certification Pursuant to 18 U.S.C. Section 1350 as Adopted**

**Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
| Date: May 19, 2003 |   | /s/ James E. Young      |   |
|--------------------|--------|-------------------------|--------|
|               |   | Chief Executive Officer |

 

23

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**Certification Pursuant to 18 U.S.C. Section 1350 as Adopted**

**Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
| Date: May 19, 2003 |   | /s/ Willard C. Lewis    |   |
|--------------------|--------|-------------------------|--------|
|               |   | Chief Operating Officer |

 

24

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**Certification Pursuant to 18 U.S.C. Section 1350 as Adopted**

**Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
| Date: May 19, 2003 |   | /s/ Samuel J. Cox       |   |
|--------------------|--------|-------------------------|--------|
|               |   | Chief Financial Officer |

 

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