19 UNITED STATES SECURITIES AND EXCHANGE COMMSSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 Commission file number 0-12425 Citizens Bancshares, Inc. (Exact name of small business issuer as specified in its charter) Louisiana 72-0759135 (State of other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 841 West Main Street, Ville Platte, LA 70586 (Address of principal executive offices) Issuer's telephone number, including area code: 337-363-5643 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Class of Number of Shares Common Equity Outstanding As of Common stock, 114,855 March 31, 2003 $5 Par Value CITIZENS BANCSHARES, INC. AND SUBSIDIARY CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet - March 31, 2003 Condensed Consolidated Statements of Income and Comprehensive Income - Three months ended March 31, 2003 and 2002 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2003 and 2002 Note to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Controls and Procedures PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K OTHER Signature Page Certification by Chief Executive Officer Certification by Chief Financial Officer PART I. FINANCIAL INFORMATION Item 1. Financial Statements CITIZENS BANCSHARES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) MARCH 31, 2003 (In thousands of dollars) ASSETS Cash and due from banks $4,050 Federal funds sold 13,650 Cash & cash equivalents 17,700 Interest-bearing deposits with banks 3,859 Securities available for sale, at fair values 50,604 Securities held to maturity 5,380 Loans receivable, net of allowance for loan losses of $1,289 67,900 Premises and equipment 2,649 Other assets 1,241 Total assets $149,333 LIABILITIES Demand deposits $16,355 Savings, NOW and money-market deposits 23,791 Time deposits $100,000 and more 39,068 Other time deposits 53,780 Total deposits 132,994 Accrued expenses and other liabilities 879 Total liabilities 133,873 SHAREHOLDERS' EQUITY Common Stock $5 par value, 300,000 shares authorized, 115,000 shares issued and Outstanding 575 Additional paid-in capital 825 Treasury stock at cost, 145 shares (6) Retained earnings 13,493 Accumulated other comprehensive income 573 Total shareholders' equity 15,460 Total liabilities and shareholders' equity $149,333 CITIZENS BANCSHARES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 & 2002 (In thousands of dollars, except per share data) 2003 2002 Interest income Loans receivable $1,369 $1,382 Taxable securities 460 503 Tax-exempt securities 68 78 Federal funds sold 37 36 Deposits with banks 28 44 Total interest income 1,962 2,043 Interest expense Savings, NOW & money-market deposits 103 121 Time deposit $100,000 and more 326 378 Other time deposits 426 540 Total interest expense 855 1,039 Net interest income 1,107 1,004 Provision for loan losses 30 20 Net interest income after provision for loan losses 1,077 984 Non-interest income Gain on securities called 16 1 Other non-interest income 196 192 Total non-interest income 212 193 Non-interest expense Salaries and employee benefits 418 381 Other expense 363 330 Total non-interest expense 781 711 Income before income taxes 508 466 Income tax expense 156 138 Net income $352 $328 Other comprehensive income, net of tax (70) (214) Comprehensive income $282 $114 Basic and diluted net income per share of common stock $3.06 $2.86 CITIZENS BANCSHARES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (In thousands of dollars) 2003 2002 Cash flows from operating activities Net income $352 $ 328 Adjustments to reconcile net income to net cash provided by operating activities 381 (14) Net cash provided by operating activities 733 314 Cash flows from investing activities Maturities and calls of securities 7,880 4,662 Purchases of securities (10,270) (9,497) Net decrease/(increase) in interest- bearing deposits with banks (396) 598 Net (increase)/decrease in loans 126 (167) Purchases of premises and equipment (58) (15) Net cash (used) by investing activities (2,718) (4,419) Cash flows from financing activities Net increase in deposits 6,675 3,376 Net cash provided by financing activities 6,675 3,376 Net increase (decrease)in cash and cash equivalents 4,690 (729) Cash and cash equivalents at beginning of year 13,010 11,187 Cash and cash equivalents at end of period $17,700 $10,458 Income taxes paid $ - $ - Interest paid $926 $ 1,237 Foreclosed real estate acquired in satisfaction of loans $ - $ - CITIZENS BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The interim financial statements are prepared pursuant to the requirements for reporting on Form 10-QSB. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company's latest annual report on Form 10-KSB. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full year ending December 31, 2003. No potential dilutive common stock is outstanding; therefore, basic and diluted net income per share are the same and are based on net income divided by 114,855 shares outstanding. CITIZENS BANCSHARES, INC. AND SUBSIDIARY Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL STATEMENT For a comprehensive review of financial condition and results of operations of Citizens Bancshares, Inc. (the Company), this discussion and analysis should be reviewed along with the information and financial statements presented elsewhere in this report. The Company is a one-bank holding company whose sole subsidiary is Citizens Bank, Ville Platte, Louisiana (the Bank). Citizens Bank, Ville Platte, Louisiana is a commercial banking institution formed in 1975 under the banking laws of the State of Louisiana. The bank operates a main office located in the City of Ville Platte, Louisiana and also operates branch facilities in the Town of Mamou, Louisiana and the Village of Pine Prairie, Louisiana. The Bank offers a full range of traditional commercial banking services, including demand, savings, and time deposits, consumer, commercial, agriculture, and real estate loans, safe-deposit boxes, two credit card plans, VISA and MASTERCARD. Drive-in facilities are located at all banking locations with ATM service at the main office and Mamou branch. FINANCIAL CONDITION Total assets of the Company increased by $6,966,000 or 4.89%, from $142,367,000 at December 31, 2002 to $149,333,000 at March 31, 2003. The primary increase in total assets is attributed to the increase in both demand and time deposit liabilities. The deposit increase is mainly due to several public entities that increased their deposits in the first quarter of 2003 by approximately $2,700,000. Several new commercial accounts, as well as existing personal accounts, make up the difference in the increase of deposits. With the funds from this increase in deposits, the bank purchased an additional $2,300,000 in available for sale investment securities. The remainder was placed in federal funds sold. Earning assets, which include loans, investment securities, federal funds sold, and deposits in other banks were 94.68% of total assets at March 31, 2003. The Bank maintains an allowance for loan losses against which impaired or uncollectible loans are charged. The balance in the allowance for loan losses was $1,289,000 at March 31, 2003, which represents 1.86% of total loans outstanding on that date. Provisions to the allowance for loan losses which were charged to net income for the periods ended March 31, 2003 and 2002 were $30,000 and $20,000, respectively. Management has determined that the level of the allowance for loan losses should be within an acceptable range at any reporting date. The allowance is evaluated on losses and provided accordingly. The low end of the range is based on specific allocations from loans on the Company's Watch List (which includes loans classified at our most recent examination by regulators, loans past due 90 days or more, loans for which the accrual of interest has been discontinued, and any other loans which in the judgment of management warrant special attention), plus an unallocated allowance of 1% of the loans not included on the Watch List, and an unallocated allowance of 10% of the accrued interest on all loans. The sum of these amounts represents the minimum required level in the allowance. The high end of the range is determined by applying fixed percentages to total loans and accrued interest, less loans secured by deposits (the "percentage base" or "base"). The percentages applied to the base are a function of the level of past due loans. If past due loans are less than 3% of total loans, the base is multiplied by 2%; for past dues of 3 to 5% of total loans, the base is multiplied by 2.25%; and for past dues over 5% of total loans, the base is multiplied by 2.5%. The product of this calculation represents the maximum required level in the allowance. Once the acceptable range is determined, a provision for loan losses, if necessary, is recorded. Based on this evaluation at March 31, 2003, management believes that the $1,289,000 in the allowance for loan losses is sufficient to cover potential losses in the loan portfolio. All available information has been used in this evaluation. However, future additions to the allowance may be necessary based on changes in the local economic conditions, which depends heavily on the agricultural industry. In addition, individual borrower's financial condition are subject to change, and regulatory agencies, as part of their examination process, could require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. No significant changes or trends occurred or are anticipated that could affect the allowance, including changes in loan concentrations, quality, or terms or changes in the methods and assumptions used in its estimate. With interest earned on investment securities being one of the primary sources of income, investment securities increased by $2,272,000 or 4.23% at March 31, 2003 as discussed above. The following chart lists the percentage makeup of the portfolio as of March 31, 2003: U.S. Government Agencies 61.20% Mortgage-Backed Securities 26.80% Municipal Securities 12.00% As of March 31, 2003, securities classified as "held to maturity" had an amortized cost/recorded value of $5,380,000 and a fair value of $5,646,000; securities classified as "available for sale" had a fair value of $50,604,000 and an amortized cost of $49,736,000. Customer deposits are the Bank's primary source of funds. Total deposits increased $6,675,000 or 5.28% from $126,319,000 at December 31, 2002 to $132,994,000 at March 31, 2003 as discussed above. RESULTS OF OPERATIONS For the first quarter of 2003, the Company reported net income of $352,000 or $3.06 per basic and diluted net income per share of common stock. Net return on assets was 0.95% and net return on equity was 9.42%. Net interest income is the Company's principal source of revenue and is measured by the difference between interest income earned on loans and investments and interest expense incurred on deposits. At March 31, 2003, the Bank's net interest margin was 3.03%, a slight increase from the March 31, 2002 margin of 2.97%. Net interest income increased $103,000, or 10.26% in 2003 to $1,107,000 compared to $1,004,000 at March 31, 2002. The reason for such increase was $81,000 or 3.96% decrease in interest income which was offset by a $184,000 or 17.71% decrease in interest expense. The average yield on loans decreased 45 basis points in quarterly comparisons from 8.55% to 8.10% at March 31, 2003. The decrease in loan yields resulted primarily from the decrease in prime lending (prime) rate during 2002. 2002's first quarter prime rate was 4.75% as compared to 2003's first quarter prime rate of 4.25%. Although the average loans for the first quarter 2003 increased by 4.51% or $2,919,000 when compared to first quarter 2002, the impact of declining rates more than exceeded the impact of volume increase in the loan portfolio, resulting in a $13,000 decrease in interest income on loans. Average other investments, which include securities, fed funds sold and interest bearing deposits with banks, increased from $62,643,000 at March 31, 2002 to $71,000,000 at March 31, 2003. However, the yield on these investments has declined 88 basis points from 4.22% at March 31, 2002 down to 3.34% at March 31, 2003. Again, this decline is attributable to the decrease in interest rates, and resulted in a decrease in other investment income of $68,000 at March 31, 2003. An 88 basis point decrease in the average rate paid on interest- bearing deposits, partially offset by an average volume increase of $7,000,000 contributed to a $184,000 decrease in interest expense for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002. Non-interest income increased by $19,000 or 9.84% due primarily to an increase in called securities for the quarter ended March 31, 2003 as compared to March 31, 2002. $16,000 in premiums were paid to the Bank on these called securities in the first quarter of 2003. Non-interest expense includes salaries and employee benefits, occupancy and equipment expense, and other expense. Non-interest expense amounted to $781,000 at March 31, 2003, a $70,000 or 9.85% increase from March 31, 2002. Of this $70,000 increase of non-interest expense, $32,000 is attributable to an increase in employee salaries and deferred compensation expense. A salary adjustment that went into effect in the latter part of May 2002 is reflected in the quarter ended March 31, 2003 expense. Income tax expense for the quarter ended March 31, 2003 as compared to quarter ended March 31, 2002 increased by $18,000. This increase is directly attributable to higher earnings in 2003. LIQUIDITY The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate spread between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Major elements of the Bank's overall liquidity management capabilities and financial resources are (1) core deposits, (2) closely managed maturity structure of loans and deposits, (3) sale and maturity of assets (primarily investment securities), and, if necessary, (4) extensions of credit which include federal funds purchased. Under current agreements, the Company has unused lines of credit with other banks which total $6,500,000. These lines are unsecured and have variable interest rates based on the lending bank's daily federal fund rate. Liquidity management is both a daily and long-term function of business management. The Company uses its primary liquidity to meet its ongoing commitments, to pay maturing certificates of deposit and deposit withdrawals, and to fund loan commitments. The Company's excess liquidity and borrowing capacity provide added readiness to meet ongoing commitments and growth. At March 31, 2003, the total approved unused commitments to extend credit to customers amounted to $10,793,000. In addition, standby letters of credit totaled $617,000. The Company's certificate of deposits with a remaining maturity of one year or less at March 31, 2003 totaled $80,204,000. Management believes that a significant portion of maturing deposits will remain with the Company. The Company anticipates it will continue to have sufficient funds together with available borrowings to meet its current commitments. At March 31, 2003, the Bank's liquidity ratio was 51.42%. CAPITAL ADEQUACY Primary capital (shareholders' equity plus a portion of the allowance for loan losses) as a percent of adjusted total assets is one of the standard measures of capital adequacy used by bank regulators. This and other measurement ratios serve as the underlying basis for evaluating the Bank's capital adequacy and for determining the Bank's insurance fund deposit assessment charges. At March 31, 2003, the Bank's ratios were as follows: Risk Based Capital 21.80% Tier 1 Capital 20.54% Leverage Ratio 9.75% To be categorized as well capitalized, the Bank must maintain a total risk-based capital ratio of 10% or higher, Tier 1 risk- based capital ratio of 6% or higher, and leverage capital ratio of 5% or higher. OFF-BALANCE SHEET ARRANGEMENTS As discussed above under "Liquidity," the Bank's only off-balance sheet arrangements consist of commitments to extend credit to customers, standby letters of credit issued on behalf of customers, and unused federal funds lines of credit that are available for borrowing. Such arrangements are in the normal course of a commercial banking business and are necessary to meet customers' needs and provide for adequate liquidity of the Bank. Item 3. Controls and Procedures Based on their evaluation conducted within 90 days of filing this report on Form 10-QSB, our chief financial officer and chief executive officer have concluded that our disclosure controls and procedures (as defined in rule 13a-14c promulgated under the Securities Exchange Act of 1934, as amended) are effective and designed to alert them to material information relating to the Company. There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent of the date of our most recent evaluation. PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings involving the Bank are limited to proceedings arising from normal business activities, none of which are considered material. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None. (b) The Company has not filed any reports on Form 8-K during the quarter ended March 31, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS BANCSHARES, INC. CARL W. FONTENOT PRESIDENT & CEO WAYNE VIDRINE EXECUTIVE VICE PRESIDENT-TREASURER CERTIFICATIONS* I, Carl W. Fontenot, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Citizens Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operations of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 __________________________ CARL W. FONTENOT PRESIDENT/CEO CERTIFICATIONS* I, Wayne Vidrine, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Citizens Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operations of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 __________________________ WAYNE VIDRINE EXECUTIVE VICE PRESIDENT-TREASURER