**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10 – Q**

**(Mark One)**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                       |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | **For the quarterly period ended March 31, 2005**                                                                                                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                |
| **OR**     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **For the transition period from                                to                            ** |

 

**CommissionFile No:  0 - 14535**

 

**CITIZENSBANCSHARES CORPORATION**

(Exact name of registrant asspecified in its charter)

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 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 past 90 days.                                                                          ý  Yes  o  No.

 

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

 

APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDINGFIVE YEARS:

 

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

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

 

APPLICABLE ONLY TO CORPORATEISSUERS:

 

Indicate the number of shares outstanding for each of the issuer’sclasses of common stock as of the latest practicable date: 1,995,631 shares ofCommon Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock,$1.00 par value outstanding on March 31, 2005.

 

 

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| **PART 1.** | **FINANCIAL INFORMATION** |
|-------------|---------------------------|
| **ITEM 1.** | **Financial statements**  |

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2005 AND DECEMBER 31, 2004**

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

 
| ** **                                                                                                | ** ** | **2005**        | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash and due from banks                                                                                   |       | $               | 11,992     |       | $          | 10,875 |   |
| Interest-bearing deposits with banks                                                                      |       | 3,706           |       | 734        |       |
| Certificates of deposit                                                                                   |       | 700             |       | 800        |       |
| Investment securities available for sale,  at fair value                                                  |       | 67,347          |       | 74,687     |       |
| Investment securities held to maturity, at  cost                                                          |       | 9,892           |       | 9,980      |       |
| Other investments                                                                                         |       | 1,820           |       | 2,469      |       |
| Loans receivable, net                                                                                     |       | 207,745         |       | 207,354    |       |
| Premises and equipment, net                                                                               |       | 8,151           |       | 8,379      |       |
| Cash surrender value of life insurance                                                                    |       | 8,811           |       | 8,740      |       |
| Foreclosed real estate, net                                                                               |       | 401             |       | 1,430      |       |
| Other assets                                                                                              |       | 6,172           |       | 5,936      |       |
|                                                                                                      |       |            |       |       |       |
| Total assets                                                                                              |       | $               | 326,737    |       | $          | 331,384 |   |
|                                                                                                      |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                             | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                      |       |            |       |       |       |
| LIABILITIES:                                                                                              |       |            |       |       |       |
| Noninterest-bearing deposits                                                                              |       | $               | 66,070     |       | $          | 57,539 |   |
| Interest-bearing deposits                                                                                 |       | 211,401         |       | 208,963    |       |
|                                                                                                      |       |            |       |       |       |
| Total deposits                                                                                            |       | 277,471         |       | 266,502    |       |
|                                                                                                      |       |            |       |       |       |
| Accrued expenses and other liabilities                                                                    |       | 2,744           |       | 3,056      |       |
| Notes payable                                                                                             |       | 540             |       | 540        |       |
| Junior subordinated debentures                                                                            |       | 5,155           |       | 5,155      |       |
| Advances from Federal Home Loan Bank                                                                      |       | 15,000          |       | 30,250     |       |
|                                                                                                      |       |            |       |       |       |
| Total liabilities                                                                                         |       | 300,910         |       | 305,503    |       |
|                                                                                                      |       |            |       |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                             |       |            |       |       |       |
|                                                                                                      |       |            |       |       |       |
| STOCKHOLDERS’ EQUITY:                                                                                |       |            |       |       |       |
| Common stock - $1 par value; 15,000,000  shares authorized; 2,230,065 shares issued                       |       | 2,230           |       | 2,230      |       |
| Nonvoting common stock - $1 par value;  5,000,000 shares authorized; 90,000 issued and outstanding        |       | 90              |       | 90         |       |
| Additional paid-in capital                                                                                |       | 7,441           |       | 7,442      |       |
| Retained earnings                                                                                         |       | 18,568          |       | 18,108     |       |
| Treasury stock at cost, 234,434 and 240,643  shares at March 31, 2005 and December 31, 2004, respectively |       | (1,906          | )          | (1,955     | )          |
| Accumulated other comprehensive loss, net  of income taxes                                                |       | (596            | )          | (34        | )          |
|                                                                                                      |       |            |       |       |       |
| Total stockholders’ equity                                                                           |       | 25,827          |       | 25,881     |       |
|                                                                                                      |       |            |       |       |       |
|                                                                                                      |       | $               | 326,737    |       | $          | 331,384 |   |

 

See notes to consolidated financial statements.

 

2

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                           | ** ** | **Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Interest income:                                     |       |                              |       |   |   |
| Loans, including fees                                |       | $                                 | 3,932      |   | $ | 3,941 |   |
| Investment securities:                               |       |                              |       |   |   |
| Taxable                                              |       | 618                               |       | 819 |   |
| Tax-exempt                                           |       | 199                               |       | 207 |   |
| Interest-bearing deposits                            |       | 11                                |       | 13 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Total interest income                                |       | 4,760                             |       | 4,980 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Interest expense:                                    |       |                              |       |   |   |
| Deposits                                             |       | 845                               |       | 700 |   |
| Other borrowings                                     |       | 319                               |       | 281 |   |
| Total interest expense                               |       | 1,164                             |       | 981 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,596                             |       | 3,999 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Provision for loan losses                            |       | 105                               |       | 300 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net interest income after provision for  loan losses |       | 3,491                             |       | 3,699 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Noninterest income:                                  |       |                              |       |   |   |
| Service charges on deposits                          |       | 827                               |       | 843 |   |
| Gain on sales of securities                          |       | 46                                |       | 58 |   |
| Gain (loss) on sales of assets                       |       | (25                               | )          | 7 |   |
| Other operating income                               |       | 408                               |       | 290 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,256                             |       | 1,198 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Noninterest expense:                                 |       |                              |       |   |   |
| Salaries and employee benefits                       |       | 2,120                             |       | 1,954 |   |
| Net occupancy and equipment                          |       | 664                               |       | 651 |   |
| Other operating expenses                             |       | 1,385                             |       | 1,432 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 4,169                             |       | 4,037 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 578                               |       | 860 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Income tax expense                                   |       | 118                               |       | 198 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                 | 460        |   | $ | 662 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net income per share - basic and diluted             |       | $                                 | 0.22       |   | $ | 0.32 |   |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Weighted average outstanding shares - basic          |       | 2,081                             |       | 2,072 |   |
|                                                 |       |                              |       |   |   |
| Weighted average outstanding shares -  diluted       |       | 2,093                             |       | 2,082 |   |

 

See notes to consolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**

**FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**

**(Unaudited  - Inthousands)**

 
| ** **                                                                                              | ** ** | **Common Stock** | ** ** | **Nonvoting  Common Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|------------------------------------------------------|------------|------------|------------|
| **Shares**                                                                                              | ** ** | **Amount**       | **Shares** | ** **                  | **Amount** | **Shares**                       | ** ** | **Amount**             |
| ** **                                                                                              | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance—December  31, 2003                                                                         |       | 2,230            |       | $                           | 2,230      |                             | 90         |                   | $          | 90                  |       | $                                                    | 7,445      |       | $          | 16,114 |   | (250 | ) | $ | (2,025 | ) | $ | 90 |   | $ | 23,944 |   |
|                                                                                                    |       |             |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Net income                                                                                              |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | 662                                                  |       | —     |       | — |   | — |   | 662 |   |
| Unrealized  holding gains on investment securities available for sale—net of taxes of  $43,882     |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | 633 |   | 633 |   |
| Less reclassification  adjustment for holding loss included in net income—net of taxes of $19,878  |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | (39 | ) | (39 | ) |
|                                                                                                    |       |             |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Comprehensive income                                                                                    |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | — |   | 1,256 |   |
| Sale of treasury  stock                                                                                 |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | 3          |       | 27 |   | — |   | 27 |   |
|                                                                                                    |       |             |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| **Balance—March  31, 2004**                                                                        | ** ** | **2,230**        | ** ** | **$**                       | **2,230**  | ** **                       | **90**     | ** **             | **$**      | **90**              | ** ** | **$**                                                | **7,445**  | ** ** | **$**      | **16,776** | ** ** | **(247** | **)** | **$** | **(1,998** | **)** | **$** | **684** | ** ** | **$** | **25,227** | ** ** |
|                                                                                                    |       |             |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Balance—December  31, 2004                                                                         |       | 2,230            |       | $                           | 2,230      |                             | 90         |                   | $          | 90                  |       | $                                                    | 7,442      |       | $          | 18,108 |   | (241 | ) | $ | (1,955 | ) | $ | (34 | ) | $ | 25,881 |   |
|                                                                                                    |       |             |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Net income                                                                                              |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | 460                                                  |       | —     |       | — |   | — |   | 460 |   |
| Unrealized  holding losses on investment securities available for sale—net of taxes of  $273,934   |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | (532 | ) | (532 | ) |
| Less  reclassification adjustment for holding loss included in net income—net of  taxes of $15,541 |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | (30 | ) | (30 | ) |
|                                                                                                    |       |             |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Comprehensive  loss                                                                                     |       | —           |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | — |   | (102 | ) |
| Sale of treasury  stock                                                                                 |       | —           |       | —                      |       | —                           |       | —                 |       | (1                  | )          | —                                               |       | 6          |       | 49 |   | — |   | 48 |   |
|                                                                                                    |       |             |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| **Balance—March  31, 2005**                                                                        | ** ** | **2,230**        | ** ** | **$**                       | **2,230**  | ** **                       | **90**     | ** **             | **$**      | **90**              | ** ** | **$**                                                | **7,441**  | ** ** | **$**      | **18,568** | ** ** | **(235** | **)** | **$** | **(1,906** | **)** | **$** | **(596** | **)** | **$** | **25,827** | ** ** |

 

See notes to consolidated financial statements.

 

4

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**

**(In thousands)**

 
| ** **                                                                                  | ** ** | **March 31,**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                                  | ** ** | **2005**        | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                   |       |            |       |   |   |
| Net income                                                                                  |       | $               | 460        |   | $ | 662 |   |
| **Adjustments to reconcile net income to net  cash provided by operating activities:**      |       |            |       |   |   |
| Provision for loan losses                                                                   |       | 105             |       | 300 |   |
| Depreciation                                                                                |       | 248             |       | 261 |   |
| Amortization and accretion, net                                                             |       | 178             |       | 111 |   |
| Provision for deferred income taxes  (benefit)                                              |       | (15             | )          | 114 |   |
| Gain on sale of assets and investments                                                      |       | (71             | )          | (65 | ) |
| Change in other assets                                                                      |       | (24             | )          | (426 | ) |
| Change in accrued expenses and other  liabilities                                           |       | (312            | )          | (171 | ) |
|                                                                                        |       |            |       |   |   |
| Net cash provided by operating activities                                                   |       | 569             |       | 786 |   |
|                                                                                        |       |            |       |   |   |
| **INVESTING ACTIVITIES:**                                                                   |       |            |       |   |   |
| Proceeds from calls and maturities of  investment securities held to maturity               |       | 84              |       | 217 |   |
| Proceeds from sales and maturities of  investment securities available for sale             |       | 6,426           |       | 17,397 |   |
| Purchases of investment securities  available for sale                                      |       | —          |       | (1,016 | ) |
| Net change in other investments                                                             |       | 649             |       | 887 |   |
| Net change in loans receivable                                                              |       | (539            | )          | (2,576 | ) |
| Net proceeds from the sale of foreclosed  properties                                        |       | 1,053           |       | 18 |   |
| Purchases of premises and equipment, net                                                    |       | (20             | )          | (95 | ) |
| Net change in interest bearing deposits  with banks                                         |       | (2,972          | )          | (1,511 | ) |
| Net change in certificates of deposit                                                       |       | 100             |       | 1,300 |   |
|                                                                                        |       |            |       |   |   |
| Net cash provided by investing activities                                                   |       | 4,781           |       | 14,621 |   |
|                                                                                        |       |            |       |   |   |
| **FINANCING ACTIVITIES:**                                                                   |       |            |       |   |   |
| Net change in deposits                                                                      |       | 10,969          |       | 17,663 |   |
| Sale of treasury stock                                                                      |       | 48              |       | 26 |   |
| Net change in advances from Federal Home  Loan Bank                                         |       | (15,250         | )          | (30,000 | ) |
| Decrease in federal funds sold                                                              |       | —          |       | (4,000 | ) |
|                                                                                        |       |            |       |   |   |
| Net cash used in financing activities                                                       |       | (4,233          | )          | (16,311 | ) |
|                                                                                        |       |            |       |   |   |
| Net change in cash and cash equivalents                                                     |       | 1,117           |       | (904 | ) |
|                                                                                        |       |            |       |   |   |
| Cash and and cash equivalents, beginning of  period                                         |       | 10,875          |       | 11,694 |   |
|                                                                                        |       |            |       |   |   |
| Cash and and cash equivalents at end of  period                                             |       | $               | 11,992     |   | $ | 10,790 |   |
|                                                                                        |       |            |       |   |   |
| **Supplemental disclosures of cash paid  during the period for:**                           |       |            |       |   |   |
| Interest                                                                                    |       | $               | 1,101      |   | $ | 1,017 |   |
|                                                                                        |       |            |       |   |   |
| Income taxes                                                                                |       | $               | —     |   | $ | 150 |   |
|                                                                                        |       |            |       |   |   |
| **Supplemental disclosures of noncash  transactions:**                                      |       |            |       |   |   |
| Change in unrealized gain (loss) on  investment securities available for sale, net of taxes |       | $               | (562       | ) | $ | 594 |   |

 

See notes to consolidated financial statements.

 

5

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

**Notes tothe Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial banking and mortgage brokerageservices to individual and corporate customers in metropolitan Atlanta andColumbus, Georgia, and in Birmingham and Eutaw, Alabama, through its whollyowned 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 Company also ownsand operates a wholly owned subsidiary grantor trust, Citizens (GA) StatutoryTrust I (the “Trust”) through the issuance of pooled trust preferredsecurities.  However, in accordance withcurrent accounting guidance, the Trust has not been consolidated in thefinancial statements.

 

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, 2004.  The results of operations for the interimperiods reported herein are not necessarily representative of the resultsexpected for the full 2005 fiscal year.

 

The consolidated financial statements of the Company for the three monthperiod ended March 31, 2005 are unaudited. In the opinion of management, all adjustments necessary for a fairpresentation of the financial position and results of operations and cash flowsfor the three month period have been included. All adjustments are of a normal recurring nature.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**Accounting Policies**

 

The Company’s consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”), which often require the judgment of management in theselection and application of certain accounting principles and methods.  Reference is made to the accounting policiesof the Company described in the notes to the consolidated financial statementscontained in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2004.  The Company hasfollowed those policies in preparing this report.  Management believes that the quality andreasonableness of its most critical policies enable the fair presentation ofits financial position and of its results of operations.

 

**Recently Issued Accounting Standards**

 

No recent authoritative pronouncements thataffect accounting, reporting, and disclosure of financial information by ushave occurred during the quarter ending March 31, 2005, other than the itemsdescribed below.

 

6

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In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”).  SFAS No. 123(R) will require companies tomeasure all employee stock-based compensation awards using a fair value methodand record such expense in its financial statements.  In addition, the adoption of SFAS No. 123(R)requires additional accounting and disclosure related to the income tax andcash flow effects resulting from share-based payment arrangements.  SFAS No. 123(R) is effective beginning as ofthe first annual reporting period beginning after June 15, 2005.*** ***TheCompany is currently evaluating the impact that the adoption of SFAS No. 123(R)will have on its financial position, results of operations and cash flows.

 

In April 2005, the Securities and Exchange Commission’s Office of theChief Accountant and its Division of Corporation Finance has released StaffAccounting Bulletin (SAB) No.107 to provide guidance regarding the applicationof FASB Statement No.123 (revised 2004), *Share-BasedPayment*.  Statement No.123(R)covers a wide range of share-based compensation arrangements including shareoptions, restricted share plans, performance-based awards, share appreciationrights, and employee share purchase plans. SAB 107 provides interpretive guidance related to the interactionbetween Statement No.123R and certain SEC rules and regulations, as well as thestaff’s views regarding the valuation of share-based payment arrangements forpublic companies. SAB 107 also reminds public companies of the importance ofincluding disclosures within filings made with the SEC relating to theaccounting for share-based payment transactions, particularly during thetransition to Statement No.123R.

 

In December 2003, the FASB issued FIN No. 46(revised), “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”),which addresses consolidation by business enterprises of variable interestentities.  FIN No. 46(R) requires avariable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or entitled to receive a majority of the entity’s residual returns,or both.  FIN No. 46(R) also requiresdisclosures about variable interest entities that a company is not required toconsolidate, but in which it has a significant variable interest.  FIN No. 46(R) provides guidance fordetermining whether an entity qualifies as a variable interest entity byconsidering, among other considerations, whether the entity lacks sufficientequity or its equity holders lack adequate decision-making ability.  The consolidation requirements of FIN No.46(R) applied immediately to variable interest entities created afterJanuary 31, 2003.  The consolidationrequirements applied to the Company’s existing variable interest entities inthe first reporting period ending after March 15, 2004. Certain of the disclosure requirements appliedto all financial statements issued after December 31, 2003, regardless of whenthe variable interest entity was established. The adoption of FIN No. 46(R) did not have a material impact on theCompany’s financial position or results of operations.

 

In November 2003, the Emerging Issues TaskForce (“EITF”) reached a consensus that certain quantitative and qualitativedisclosures should be required for debt and marketable equity securitiesclassified as available for sale or held to maturity under SFAS No. 115 andSFAS No. 124 that are impaired at the balance sheet date but for whichother-than-temporary impairment has not been recognized.  Accordingly the EITF issued EITF No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.”  This issue addresses themeaning of other-than-temporary impairment and its application to investmentsclassified as either available for sale or held to maturity under SFAS No. 115and provides guidance on quantitative and qualitative disclosures.  The disclosure requirements of EITF No. 03-1are effective for annual financial statements for fiscal years ending afterJune 15, 2004.  The effective date forthe measurement and recognition guidance of EITF No. 03-1 has beendelayed.  The FASB staff has issued aproposed Board-directed FASB Staff Position (“FSP”), FSP EITF 03-1-a, “ImplementationGuidance for the

 

7

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Application of Paragraph 16 of Issue No.03-1.” The proposed FSP would provide implementation guidance with respect todebt securities that are impaired solely due to interest rates and/or sectorspreads and analyzed for other-than-temporary impairment under the measurementand recognition requirements of EITF No. 03-1. The delay of the effective date for the measurement and recognitionrequirements of EITF No. 03-1 will be superseded concurrent with the finalissuance of FSP EITF 03-1-a.  Adoptingthe disclosure provisions of EITF No. 03-1 did not have any impact on theCompany’s financial position or results of operations.

 

Other accounting standards that have beenissued or proposed by the FASB or other standards-setting bodies that do notrequire adoption until a future date are not expected to have a material impacton the consolidated financial statements upon adoption.

 

8

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**2.  STOCK BASEDCOMPENSATION**

 

The Company’s as reported and pro forma information, includingstock-based compensation expense as if the fair-value based method had beenapplied, is illustrated in the following table (in thousands, except per sharedata):

 
| ** **                                                                             | ** ** | **For the three months  ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                                                                   |       |                                      |       |   |   |
| As reported net income available to common  stockholders                               |       | $                                         | 460        |   | $ | 662 |   |
| Less: stock-based compensation expense  determined under fair value method, net of tax |       | (4                                        | )          | (7 | ) |
|                                                                                   |       |                                      |       |   |   |
| Pro forma net income                                                                   |       | $                                         | 456        |   | $ | 655 |   |
|                                                                                   |       |                                      |       |   |   |
| As reported earnings per share                                                         |       | $                                         | 0.22       |   | $ | 0.32 |   |
| Pro forma earnings per share                                                           |       | $                                         | 0.22       |   | $ | 0.32 |   |
| As reported earnings per diluted share                                                 |       | $                                         | 0.22       |   | $ | 0.32 |   |
| Pro forma earnings per diluted share                                                   |       | $                                         | 0.22       |   | $ | 0.31 |   |

 

Compensation expense in the pro forma disclosures is not indicative offuture amounts, as options vest over several years and additional grants couldbe made each year.

 

**3.  INTANGIBLEASSETS**

 

Finitelived intangible assets of the Company represent deposit assumption premiumsrecorded upon the purchase of certain assets and liabilities from otherfinancial institutions.  Depositassumption premiums are amortized over seven years, the estimated average livesof the deposit bases acquired, using the straight-line method and are includedwithin other assets on the Consolidated Balance Sheets.

 

The Company applies a fair value-based impairment test to the carryingvalue of goodwill on an annual basis and on an interim basis if certain eventsor circumstances indicate that an impairment loss may have been incurred.

 

9

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The following table presents information about the Company’s intangibleassets at (in thousands):

 
| ** **                    | ** ** | **March 31, 2005**         | ** ** | **December 31, 2004**         | ** ** |
|-------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Unamortized intangible asset: |       |                       |       |                          |       |   |   |   |   |
| Goodwill                      |       | $                          | 362        |                          | $          | — |   | $ | 362 |   | $ | — |   |
|                          |       |                       |       |                          |       |   |   |   |   |
| Amortized intangible assets:  |       |                       |       |                          |       |   |   |   |   |
| Core deposit intangibles      |       | $                          | 2,836      |                          | $          | 1,891 |   | $ | 2,836 |   | $ | 1,790 |   |

 

Thefollowing table presents information about aggregate amortization expense (inthousands):

 
| ** **                                                                                               | ** ** | **For the 3  months ended  March 31, 2005** | ** ** | **For the 3  months ended  March 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Aggregate amortization expense of core  deposit intangibles:                                             |       | $                                           | 101        |                                        | $          | 101 |   |
|                                                                                                     |       |                                        |       |                                        |       |   |   |
| Estimated aggregate  amortization expense of core deposit intangibles for the years ending  December 31: |       |                                        |       |                                        |       |   |   |
|                                                                                                     |       |                                        |       |                                        |       |   |   |
| 2005                                                                                                     |       | $                                           | 405        |                                        |       |   |   |
| 2006                                                                                                     |       | $                                           | 405        |                                        |       |   |   |
| 2007                                                                                                     |       | $                                           | 112        |                                        |       |   |   |
| 2008                                                                                                     |       | $                                           | 53         |                                        |       |   |   |
| 2009                                                                                                     |       | $                                           | 53         |                                        |       |   |   |

 

**4.  COMPREHENSIVE INCOME**

 

Comprehensive income includes: (1) reported net income and (2)unrealized gains and losses on marketable securities.  The following table shows our comprehensiveincome for the three month periods ended March 31, 2005 and 2004 (in thousands):

 
| ** **                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net Income                        |       | $                                | 460        |   | $ | 662 |   |
|                              |       |                             |       |   |   |
| Other comprehensive income (loss) |       | (562                             | )          | 594 |   |
|                              |       |                             |       |   |   |
| Comprehensive income              |       | $                                | (102       | ) | $ | 1,256 |   |

 

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

 

Basic and diluted net income per common and potential common share hasbeen calculated based on the weighted average number of sharesoutstanding.  The following schedulereconciles the numerator and denominator of the basic and diluted net incomeper common and potential common share for the three months ended March 31, 2005and 2004 (in thousands, except per share data):

 

| ** **                                                        | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------|------------|
|                                                              |       |                        |       |                      |       |                  |       |
| **Three Months ended March 31, 2005**                             |       |                        |       |                      |       |                  |       |
|                                                              |       |                        |       |                      |       |                  |       |
| Basic earnings per share                                          |       | $                           | 460        |                      | 2,081      |                  | $          | 0.22 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —                      |       | 12                        |       | $                     | —     |   |
|                                                              |       |                        |       |                      |       |                  |       |
| Diluted earnings per share                                        |       | $                           | 460        |                      | 2,093      |                  | $          | 0.22 |   |
|                                                              |       |                        |       |                      |       |                  |       |
| **Three Months ended March 31, 2004**                             |       |                        |       |                      |       |                  |       |
|                                                              |       |                        |       |                      |       |                  |       |
| Basic earnings per share                                          |       | $                           | 662        |                      | 2,072      |                  | $          | 0.32 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —                      |       | 10                        |       | —                |       |
|                                                              |       |                        |       |                      |       |                  |       |
| Diluted earnings per share                                        |       | $                           | 662        |                      | 2,082      |                  | $          | 0.32 |   |

 

**RECLASSIFICATIONS**

 

Certain 2004 amounts have been reclassifiedto conform to the 2005 presentation.

 

11

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

 

**INTRODUCTION**

 

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial banking and mortgage brokerageservices to individuals and corporate customers in its primary market areas,metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabamathrough its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 12 full-service branches inGeorgia and Alabama.  The Company alsoowns and operates a wholly owned subsidiary grantor trust, Citizens (GA)Statutory Trust I (the “Trust”) through the issuance of pooled trust preferredsecurities. However, in accordance with current accounting guidance, the Trusthas not been consolidated in the financial statements.

 

**Forward LookingStatements**

 

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 to identifyforward-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;unanticipated issues during the integration of acquisitions; and significantchanges in accounting, tax or regulatory practices or requirements. The Companyundertakes no obligation to, nor does it intend to, update forward-lookingstatements to reflect circumstances or events that occur after the date hereofor to reflect the occurrence of unanticipated events.

 

The following discussion is of the Company’s financial condition as of March31, 2005 and the changes in the financial condition and results of operationsfor the three month periods ended March 31, 2005 and 2004.

 

**Critical Accounting Policies**

 

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

 

**Investment Securities**- The Company classifies investments in one ofthree categories based

 

12

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on management’s intent upon purchase: held tomaturity securities which are reported at amortized cost, trading securitieswhich are reported at fair value with unrealized holding gains and lossesincluded in earnings, and available for sale securities which are recorded atfair value with unrealized holding gains and losses included as a component ofaccumulated other comprehensive income. The Company had no investment securities classified as tradingsecurities during 2005 or 2004.

 

Premiums and discounts on available for sale andheld to maturity securities are amortized or accreted using a method whichapproximates a level yield.

 

Gains and losses on sales of investment securitiesare recognized upon disposition, based on the adjusted cost of the specificsecurity.  A decline in market value ofany security below cost that is deemed other than temporary is charged toearnings resulting in the establishment of a new cost basis 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 are deferred andamortized over the estimated terms of the loans using the level-yieldmethod.  Discounts on loans purchased areaccreted using the level-yield method over the estimated remaining life of theloan purchased.

 

**Allowance for Loan Losses** - The Company provides for estimated losseson loans receivable when any significant and permanent decline in valueoccurs.  These estimates for losses arebased, not only on individual assets and their related cash flow forecasts,sales values, and independent appraisals, but also on the volatility of certainreal estate markets, and the concern for disposing of real estate in distressedmarkets.  For loans that are pooled forpurposes of determining the necessary provisions, estimates are based on loantypes, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine theprovision for losses is subject to the reasonableness of these estimates.  The adequacy of the allowance for loan lossesis reviewed on a monthly basis by management and the Board of Directors.  On a quarterly basis a comprehensive reviewof the adequacy of the allowance for loan losses is performed.  This assessment is made in the context ofhistorical losses as well as existing economic conditions, and individualconcentrations of credit.  Loans arecharged against the allowance when, in the opinion of management, such loansare deemed uncollectible and subsequent recoveries are added to the allowance.

 

A description of 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, 2004.  The Company hasfollowed those policies in preparing this report.

 

**FINANCIALCONDITION**

 

Citizens Bancshares Corporation’s total assets at March 31, 2005 were $326,737,000,a decrease of $4,647,000 or 1% compared to $331,384,000 at December 31, 2004.

 

At March 31, 2005, the Company maintained a balance of cash and duefrom banks of $11,992,000 representing an increase of $1,117,000 from December31, 2004.  Interest bearing deposits withbanks increased $2,972,000 to $3,706,000 at March 31, 2005 from $734,000 atDecember 31, 2004.

 

13

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Investment securities classified as availablefor sale and held to maturity decreased $7,340,000 and $88,000, respectively,since December 31, 2004.  In February2005, the Company took advantage of an opportunity to increase its averageyield on earning assets through the sale of $1.8 million in available forsecurities to fund loan growth. The remaining decrease in investments availablefor sale is attributed to called securities and pay-downs of mortgage-backed securitiesin the investment portfolio.

 

Loans receivable, net increased $391,000 to $207,745,000 for the periodended March 31, 2005 compared to $207,354,000 at December 31, 2004.  Loan growth evened out for the first quarterof 2005 as a significant outstanding loan in the amount of $2.5 millionpaid-off in March 2005.

 

Total liabilities decreased $4,593,000 to $300,910,000 at March 31,2005 compared to $305,503,000 at December 31, 2004. Total deposits, a componentof total liabilities, increased $10,969,000 to $277,471,000 at March 31, 2005.  The increase in deposits is partiallyattributable to the Company’s implementation of a new sales culture whichplaces specific emphasis on deposit growth. Another significant component of total liabilities, advances fromFederal Home Loan Bank (FHLB) decreased $15,250,000 to $15,000,000 at March 31,2005 compared to $30,250,000 at December 31, 2004.  The Company used the liquidity generated fromits deposit growth, and loan and investment pay-downs to reduce its outstandingdebt with the FHLB, while improving its yield.

 

**INVESTMENT SECURITIES**

 

The Company invests a portion of its assets in U.S. governmentsponsored agency securities, state, county and municipal securities, mortgagebacked bonds, as well as certain equity securities.  At March 31, 2005 and December 31, 2004, theCompany’s investment securities portfolio represented approximately 24% and 26%of total assets, respectively.

 

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

 
| **At March 31, 2005**                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| U.S. Government agencies                |       | $                   | 8,358      |                         | $          | —                        |       | $              | 119        |   | $ | 8,239 |   |
| State, county, and municipal securities |       | 12,333              |       | 285                          |       | 35                            |       | $              | 12,583     |   |
| Mortgage-backed securities              |       | 46,158              |       | 48                           |       | 781                           |       | $              | 45,425     |   |
| Equity securities(1)                    |       | 1,400               |       | —                       |       | 300                           |       | 1,100          |       |
| Totals                                  |       | $                   | 68,249     |                         | $          | 333                           |       | $              | 1,235      |   | $ | 67,347 |   |

 

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| **At December 31, 2004**                | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| U.S. Government agencies                |       | $                   | 9,880      |                         | $          | 12                            |       | $              | 26         |   | $ | 9,866 |   |
| State, county, and municipal securities |       | 14,074              |       | 424                          |       | 7                             |       | 14,491         |       |
| Mortgage-backed securities              |       | 49,384              |       | 145                          |       | 249                           |       | 49,280         |       |
| Equity securities(1)                    |       | 1,400               |       | —                       |       | 350                           |       | 1,050          |       |
| Totals                                  |       | $                   | 74,738     |                         | $          | 581                           |       | $              | 632        |   | $ | 74,687 |   |

 

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(1) The equity securities represent agencydividends received deduction (DRD) preferred stock issued by Fannie MaeCorporation (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).  These securities are callable at par andreprice every two years.  The interest earnedon these equity securities is 70 percent tax free.

 

Management evaluates its investment portfolio periodically to identifyany impairment that is other than temporary. At March 31, 2005, the Company had several debt securities that havebeen in an unrealized loss position for more than twelve months.  Management believes these losses aretemporary and a result of the current interest rate environment.

 

The fair values of equity securities are highly correlated to the levelof short term interest rates and the shape of the yield curve.  Management believes these securities are notimpaired and the Company has the intent and ability to hold the securities fora reasonable period of time for a forecasted recovery of the fair values up toand beyond the cost of the investments or until the securities are called atpar.

 

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

 
| **At March 31, 2005**                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| U.S. Government agencies                |       | $                   | 3,000      |                         | $          | —                        |       | $              | 60         |   | $ | 2,940 |   |
| State, county, and municipal securities |       | 5,390               |       | 136                          |       | 1                             |       | 5,525          |       |
| Mortgage-backed securities              |       | 1,502               |       | 4                            |       | 39                            |       | 1,467          |       |
|                                    |       |                |       |                         |       |                          |       |           |       |
| Total                                   |       | $                   | 9,892      |                         | $          | 140                           |       | $              | 100        |   | $ | 9,932 |   |
|                                    |       |                |       |                         |       |                          |       |           |       |

 
| **At December 31, 2004**                | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| U.S. Government agencies                |       | $                   | 3,000      |                         | $          | —                        |       | $              | 21         |   | $ | 2,979 |   |
| State, county, and municipal securities |       | 5,390               |       | 190                          |       | —                        |       | 5,580          |       |
| Mortgage-backed securities              |       | 1,590               |       | 4                            |       | 27                            |       | 1,567          |       |
|                                    |       |                |       |                         |       |                          |       |           |       |
| Total                                   |       | $                   | 9,980      |                         | $          | 194                           |       | $              | 48         |   | $ | 10,126 |   |

 

15

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**LOANS**

 

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

 
| ** **                                      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------|------------|
|                                            |       |                |       |                   |       |
| Commercial, financial, and agricultural         |       | $                   | 20,621     |                   | $          | 22,327 |   |
| Installment                                     |       | 8,780               |       | 7,666                  |       |
| Real estate - mortgage                          |       | 169,159             |       | 174,335                |       |
| Real estate - construction                      |       | 10,826              |       | 4,510                  |       |
| Other                                           |       | 2,511               |       | 2,609                  |       |
| Loans receivable                                |       | 211,897             |       | 211,447                |       |
| Less:     Net deferred loan fees |       | 489                 |       | 554                    |       |
| Allowance for loan losses                       |       | 3,360               |       | 3,183                  |       |
| Discount on loans acquired                      |       | 303                 |       | 356                    |       |
|                                            |       |                |       |                   |       |
| Loans receivable, net                           |       | $                   | 207,745    |                   | $          | 207,354 |   |

 

**NONPERFORMING ASSETS**

 

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

 

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

 

Nonperforming assets decreased by $810,000 to $3,273,000 at March 31,2005 from $4,083,000 at December 31, 2004. Nonperforming assets represents 1.55% of loans, net of unearned income,discounts, and real estate acquired through foreclosure at March 31, 2005 ascompared to 1.93% at December 31, 2004.

 

16

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The table below presents a summary of the Company’s nonperformingassets at March 31, 2005 and December 31, 2004.

 
| ** **                                                                                                      | ** ** | **March 31,  2005**                             | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                      | ** ** | **(in thousands, except****financial  ratios)** | ** ** |
|                                                                                                            |       |                                            |       |                   |       |
| Nonperforming assets:                                                                                           |       |                                            |       |                   |       |
| Nonperforming loans:                                                                                            |       |                                            |       |                   |       |
| Nonaccrual loans                                                                                                |       | $                                               | 2,872      |                   | $          | 2,652 |   |
| Past-due loans of 90 days or more                                                                               |       | —                                          |       | —                 |       |
| Nonperforming loans                                                                                             |       | 2,872                                           |       | 2,652                  |       |
|                                                                                                            |       |                                            |       |                   |       |
| Real estate acquired through foreclosure                                                                        |       | 401                                             |       | 1,431                  |       |
| Total nonperforming assets                                                                                      |       | $                                               | 3,273      |                   | $          | 4,083 |   |
|                                                                                                            |       |                                            |       |                   |       |
| Ratios:                                                                                                         |       |                                            |       |                   |       |
| Nonperforming loans to loans, net of  unearned income and discount on loans                                     |       | 1.36                                            | %          | 1.26                   | %          |
|                                                                                                            |       |                                            |       |                   |       |
| Nonperforming assets to loans, net of  unearned income, discounts, and real estate acquired through foreclosure |       | 1.55                                            | %          | 1.93                   | %          |
|                                                                                                            |       |                                            |       |                   |       |
| Nonperforming assets to total assets                                                                            |       | 1.00                                            | %          | 1.23                   | %          |
|                                                                                                            |       |                                            |       |                   |       |
| Allowance for loan losses to nonperforming  loans                                                               |       | 116.99                                          | %          | 120.02                 | %          |
|                                                                                                            |       |                                            |       |                   |       |
| Allowance for loan losses to nonperforming  assets                                                              |       | 102.66                                          | %          | 77.95                  | %          |

 

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**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 onindividual assets and their cash flow forecasts, sales values, independentappraisals, the volatility of certain real estate markets, and concern fordisposing of real estate in distressed markets. For loans that are pooled for purposes of determining the 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. The adequacy of the allowance for loanlosses is reviewed on a monthly basis by management and the Board ofDirectors.  On a quarterly basis acomprehensive review of the adequacy of allowance for loan losses isperformed.  This assessment is made inthe context of historical losses as well as existing economic conditions, andindividual 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 threemonth period ended March 31, 2005 provisions for loan losses totaled $105,000compared to $300,000 for the same period in 2004.

 

The allowance for loan losses at March 31, 2005 was approximately $3,360,000,representing 1.59% of total loans, net of unearned income and discounts comparedto approximately $3,183,000 at December 31, 2004, which also represented 1.51%of total loans, net of unearned income and discounts.

 

Managementbelieves the allowance for loan losses is adequate. While management usesavailable information to recognize losses on loans, future additions to theallowance may be necessary based on changes in economic conditions,particularly in the metropolitan Atlanta area. In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewthe Company’s allowance for loan losses. Such agencies may require the Companyto recognize additions to the allowance based on their judgments aboutinformation available to them at the time of their examination.

 

A substantial portion of theCompany’s loan portfolio is secured by real estate in the metropolitan Atlantamarket, including a concentration of loans to churches and conveniencestores.  The Company’s outstanding churchloans were approximately $44.7 million at March 31, 2005 and $46.1 million atDecember 31, 2004.  The Company’s loansto area convenience stores were approximately $23.4 million at March 31, 2005and $23.6 million at December 31, 2004. Accordingly, the ultimate collectability of the substantial portion ofthe Company’s loan portfolio is susceptible to changes in market conditions inthe metropolitan Atlanta area.

 

18

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The following table summarizes loans, changes in the allowance for loanlosses arising from loans charged off, recoveries on loans previously chargedoff by loan category, and additions to the allowance which have been charged tooperating expense as of and for the three month periods ended March 31, 2005and 2004 (amount in thousands, except financial ratios):

 
| ** **                                                                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| Loans, net of unearned income and discounts                                                                            |       | $        | 211,105    |     | $          | 214,333 |   |
|                                                                                                                   |       |     |       |     |       |
| Average loans, net of unearned income,  discounts and the allowance for loan losses                                    |       | $        | 212,062    |     | $          | 210,542 |   |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at the beginning  of period                                                                  |       | $        | 3,183      |     | $          | 3,240 |   |
|                                                                                                                   |       |     |       |     |       |
| Loans charged off:                                                                                                     |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                |       | 36       |       | —   |       |
| Real estate - loans                                                                                                    |       | 3        |       | 114      |       |
| Installment loans to individuals                                                                                       |       | 27       |       | 72       |       |
| Total loans charged off                                                                                                |       | 66       |       | 186      |       |
|                                                                                                                   |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                            |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                |       | 76       |       | 69       |       |
| Real estate - loans                                                                                                    |       | 43       |       | 21       |       |
| Installment loans to individuals                                                                                       |       | 19       |       | 27       |       |
| Total loans recovered                                                                                                  |       | 138      |       | 117      |       |
|                                                                                                                   |       |     |       |     |       |
| Net loans recovered (charged off)                                                                                      |       | (72      | )          | 69       |       |
|                                                                                                                   |       |     |       |     |       |
| Additions to allowance for loan losses charged  to operating expense                                                   |       | 105      |       | 300      |       |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at period end                                                                                |       | $        | 3,360      |     | $          | 3,471 |   |
|                                                                                                                   |       |     |       |     |       |
| Ratio of net loans charged off to average  loans, net of unearned income, discounts, and the allowance for loan losses |       | (0.03    | )%         | 0.03     | %          |
|                                                                                                                   |       |     |       |     |       |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                                     |       | 1.59     | %          | 1.62     | %          |

 

19

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**DEPOSITS**

 

Deposits are the Company’s primary source of funding loan growth.  Total deposits at March 31, 2005 increased by4.12% or $10,969,000 to $277,471,000 from December 31, 2004.  Noninterest-bearing deposits increased by $8,531,000or 14.83%, while interest-bearing deposits increased by $2,438,000 or 1.17%.  The increase in total deposits is primarilyattributed to Corporate and Governmental customers who make significant monthlydeposits and withdrawals based on their budgetary needs.  In addition, the Company implemented a newsales program in 2005 which places specific emphasis on deposit growth.

 

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

 
| ** **                        | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|---------------------|------------|------------------------|------------|
|                              |       |                |       |                   |       |
| NOW and money market accounts     |       | $                   | 56,754     |                   | $          | 55,748 |   |
| Savings accounts                  |       | 45,921              |       | 43,620                 |       |
| Time deposits of $100,000 or more |       | 64,487              |       | 65,039                 |       |
| Other time deposits               |       | 44,239              |       | 44,556                 |       |
|                              |       | $                   | 211,401    |                   | $          | 208,963 |   |

 

**OTHER BORROWED FUNDS**

 

Whilethe Company continues to emphasize funding earning asset growth throughdeposits, the Company has relied on other borrowings as a supplemental fundingsource.  Other borrowings consist ofFederal Home Loan Bank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from theFHLB of $15,000,000 at March 31, 2005 and $30,250,000 at December 31, 2004.   The following advances are collateralized bya blanket lien on the Company’s 1-4 family mortgage loans.

 

| **Maturity**                        | ** ** | **Callable** | ** ** | **Type** | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------|------------|--------------|------------|----------|------------|--------------------|------------|-----------------------|------------|
|                                |       |         |       |     |       |               |       |                  |       |   |   |   |   |
| April 2010                          |       | Quarterly    |       | Fixed    |       | 5.82               | %          | $                     | 10,000,000 |   | 5.82 | % | $ | 10,000,000 |   |
| July 2005                           |       | Daily        |       | Variable |       | —             |       | —                |       | 2.44 | % | 15,250,000 |   |
| September 2006                      |       | Monthly      |       | Variable |       | 2.85               | %          | 5,000,000             |       | 2.45 | % | 5,000,000 |   |
|                                |       |         |       |     |       |               |       |                  |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |     |       |               |       | $                     | 15,000,000 |   |   |   | $ | 30,250,000 |   |
|                                |       |         |       |     |       |               |       |                  |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |     |       | 4.83               | %          |                  |       | 3.56 | % |   |   |

 

The Company had an unsecured note payable of approximately $540,000 at March31, 2005 and December 31, 2004.  The notebears interest at the lender’s prime rate minus 50 basis points.

 

During 2002, the Companyissued $5 million of pooled trust preferred securities through one issuance bya wholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the “Trust”).The trust preferred securities accrue and pay distributions periodically at anannual rate as provided in the indentures of the London Interbank Offered Rateplus 3.45%. The Trust used the net proceeds from the

 

20

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offering to purchase alike amount of Junior Subordinated Debentures (the “Debentures”) of the Company.These securities are reported in our consolidated balance sheet as JuniorSubordinated Debentures.  The trustpreferred securities are mandatorily redeemable upon the maturity of theDebentures on June 26, 2032, or upon earlier redemption as provided in theindentures beginning June 26, 2007.  TheCompany has the right to redeem the Debentures in whole or in part or afterspecific dates, at a redemption price specified in the indentures plus anyaccrued but unpaid interest to the redemption date.  At March 31, 2005, the interest rate on thejunior subordinated debenture was 6.00%.

 

**RESULTS OF OPERATIONS**

 

**NetInterest Income:**

 

Net interest income is the principal componentof a financial institution’s income stream and represents the difference, or spread,between interest and fee income generated from earning assets and the interestexpense paid 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.

 

Net interest income decreased $403,000 or 10%for the three month period ended March 31, 2005 as compared with the sameperiod of the previous year.  The decreasein net interest income resulted primarily from the decrease in investmentinterest income as average investments declined coupled with increases in totalinterest expense resulting from increased interest rates.  For the three month period ending March 31,2005, the average investment in available for sale securities decreased$22,571,000 to $71,668,000 compared to $94,240,000 for the comparative threemonth period ending March 31, 2004.  During2004, the Company sold securities from its investment portfolio in order repositionits portfolio, reduce investment duration risk, benefit from increased interestrates and fund withdrawals of public funds that it elected not to renew.  Interest expense on earning liabilitiesincreased $183,000 due to increases in the average interest rate as the economymoved into a rising rate environment.

 

**Provisionfor loan losses**

 

The allowance for loan lossesand the resulting provision for loan losses are based on changes in the sizeand character of the Company’s loan portfolio, changes in nonperforming andpast due loans, the existing risk of individual loans, concentrations of loansto specific borrowers or industries, and economic conditions.  Forthe first quarter of 2005, the provision for loan losses was $105,000 comparedto $300,000 for the same period in 2004, representing a decline of 65percent.  The allowance for loanlosses was $3,360,000 in the first quarter of 2005, compared to $3,183,000 atDecember 31, 2004. At March 31, 2005, the allowance for loan losses was 103 percent of the nonperformingassets compared to 78 percent at December 31, 2004.  At March 31, 2005, the Company considered itsallowance for loan losses to be adequate.

 

**Noninterestincome:**

 

Noninterest income consists of revenuesgenerated from a broad range of financial services and activities, including fee-basedservices, and profits and commissions earned through securities and insurancesales.  In addition, gains and lossesrealized from the sale of investment portfolio securities

 

21

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and sales of assets are included in noninterestincome.

 

Noninterest income totaled $1,256,000 for thethree month period ended March 31, 2005, an increase of $58,000 or 5% comparedwith the same period ended March 31, 2004. This increase is attributed to a $118,000 rise in other noninterestincome, partially offset by a $16,000 decrease in deposit and service feeincome, a $12,000 decrease in gains on the sale of securities and a $32,000 decreasein gains from the sale of assets.

 

**Noninterestexpense**:

 

Noninterest expense totaled $4,169,000for the three month period ended March 31, 2005, an increase of $132,000 or 3.27%compared to the same period last year. The increase, in large part, is due to salaries and employees benefits,and is partially reduced by other operating expenses.

 

Salaries and employee benefits increased $166,000or 8.50% for the three month period ended March 31, 2005 compared to the sameperiod in 2004.  In January 2005, theCompany adopted a common review and salary adjustment date for allemployees.  Consequently, all salaryadjustments became effective in January on a prorated basis.  The Company anticipates this change willimprove staff morale and retention.   In addition, the Company started accruing foranticipated bonuses in 2005 in anticipation of expected performance levels.

 

22

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**INTERESTRATE SENSITIVITY MANAGEMENT**

 

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

 

One method of measuring the impact of interest rate sensitivity is thecumulative gap analysis.  The differencebetween interest rate sensitive assets and interest rate sensitive liabilitiesat various time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitivepressures 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. The following table shows the contractualmaturities of all investment securities at March 31, 2005.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market, and savings accounts in thethree month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

 

23

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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, 2005.

 
| ** **                                                              | ** ** | **Cumulative amounts as of March 31, 2005  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                                                             |       | $                                                                          | 511        |   | $ | 1,673 |   | $ | 25,059 |   | $ | 49,996 |   | $ | 77,239 |   |
| Certificates of deposit                                                 |       | 500                                                                        |       | 200 |   | — |   | — |   | 700 |   |
| Loans                                                                   |       | 86,769                                                                     |       | 6,771 |   | 67,326 |   | 51,031 |   | 211,897 |   |
| Interest-bearing deposits with other banks                              |       | 3,706                                                                      |       | — |   | — |   | — |   | 3,706 |   |
| Total interest-sensitive assets                                         |       | $                                                                          | 91,486     |   | $ | 8,644 |   | $ | 92,385 |   | $ | 101,027 |   | $ | 293,542 |   |
|                                                                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                          | 139,762    |   | $ | 52,442 |   | $ | 19,194 |   | $ | 3 |   | $ | 211,401 |   |
| Notes payable                                                           |       | 540                                                                        |       | — |   | — |   | — |   | 540 |   |
| Junior subordinated debentures                                          |       | —                                                                     |       | — |   | 5,155 |   | — |   | 5,155 |   |
| Other borrowings                                                        |       | —                                                                     |       | — |   | 5,000 |   | 10,000 |   | 15,000 |   |
| Total interest-sensitive liabilities                                    |       | $                                                                          | 140,302    |   | $ | 52,442 |   | $ | 29,349 |   | $ | 10,003 |   | $ | 232,096 |   |
|                                                                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |       | $                                                                          | (48,816    | ) | $ | (43,798 | ) | $ | 63,036 |   | $ | 91,024 |   | $ | 61,446 |   |
|                                                                    |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to  total interest-sensitive assets |       | (16.63                                                                     | )%         | (31.55 | )% | (10.08 | )% | 20.93 | % | 20.93 | % |

 

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(a) Savings, Now, and money market deposits totaling  $102,675 are included in the maturing in 3months classification. 

 

**LIQUIDITY**

 

Liquidity is the ability of the Company toconvert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities.  Liquidity management involves maintaining theCompany’s ability to meet the day-to-day cash flow requirements of itscustomers, whether they are depositors wishing to withdraw funds or borrowersrequiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able toperform the primary function of a financial intermediary and would, therefore,not be able to meet the needs of the communities it serves. Additionally, theCompany requires cash for various operating needs including: dividends toshareholders; business combinations; capital injections to its subsidiaries;the servicing of debt; and the payment of general corporate expenses. TheCompany has access to various capital markets. However, the primary source of liquidity for the Company is dividendsfrom its bank subsidiary.  The GeorgiaDepartment of Banking and Finance regulates the dividend payments and mustapprove dividend payments that exceed 50 percent of the Bank’s prior year netincome.  As of March 31, 2005, thisamount was approximately $1,357,000.  Thepayment of dividends may also be affected or limited by other factors, such asthe requirement to maintain adequate capital above regulatory guidelines.  Currently, the payment of dividends by theBank requires the prior approval of the Georgia Department of Banking andFinance.  The Company does not anticipateany liquidity requirements in the near future that it will not be able to meet.

 

Asset and liability management functions notonly serve to assure adequate liquidity in order to meet the needs of theCompany’s customers, but also to maintain an appropriate balance betweeninterest-sensitive assets and interest-sensitive liabilities so that theCompany can earn a return that meets the investment requirements of itsshareholders.  Daily monitoring of thesources and uses of funds is

 

24

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necessary to maintain an acceptable cashposition that meets both requirements.

 

The asset portion of the balance sheet providesliquidity primarily through loan principal repayments, maturities of investmentsecurities and, to a lesser extent, sales or paydowns of investment securitiesavailable for sale and held to maturity. Other short-term investments such as federal funds sold and maturinginterest bearing deposits with other banks, are additional sources of liquidityfunding.

 

The liability portion of the balance sheetprovides liquidity through various customers’ interest bearing and noninterestbearing deposit accounts.  Federal fundspurchased and other short-term borrowings are additional sources of liquidityand, basically, represent the Company’s incremental borrowing capacity.  These sources of liquidity are short-term innature and are used as necessary to fund asset growth and meet short-termliquidity needs.

 

**CAPITAL RESOURCES**

 

Stockholders’ equity decreased $54,000 for the three months ended March31, 2005, primarily due to the changes in other comprehensive loss.  Accumulated other comprehensive loss, net oftaxes increased by $562,000 to $596,000 during the three month period reduced.  These losses are due to the impact ofchanging economic conditions and changes in market interest rates on theCompany’s available for sale securities. Retained earnings increased by $460,000 to $18,568,000 due to the firstquarter’s net earnings, partially offsetting the decreases in stockholders’equity

 

Quantitative measures established by regulation to ensure capitaladequacy require the Company to maintain minimum amounts and ratios of totaland Tier 1 capital to risk weighted assets, and Tier 1 capital to averageassets.  As of March 31, 2005, the Bank’stotal and Tier 1 capital to risk weighted assets and Tier 1 to average assetswere 14.76%, 13.50% and 9.03% respectively, compared with 14.47%, 13.22% and 8.80%respectively, at December 31, 2004.  Asof March 31, 2005, the Company met all capital adequacy requirements to whichit is subject.

 

25

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**ITEM 3.                  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Marketrisk is the risk of loss from adverse changes in market prices and interestrates.  Our market risk arisesprincipally from interest rate risk inherent in our lending, deposit, andborrowing activities.  Although we managecertain other risks, such as credit quality and liquidity risk, in the normalcourse of business we consider interest rate risk to be our most significantmarket risk and the risk that could potentially have the largest materialeffect on our financial condition and results of operations.  We do not maintain a trading portfolio ordeal in international instruments, and therefore, other types of market risks,such as foreign currency risk and commodity price risk, do not arise in thenormal course of our business activities.

 

Quantitative information about the Company’s market risk at March 31,2005 is as follows (in thousands):

 
| ** **                           | ** ** | **2005**            | ** ** |
|--------------------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** | **Down  100 bp** | ** ** | **Up  100 bp** | ** ** |
| ** **                           | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Financial assets:                    |       |                |       |   |   |   |   |   |   |
| Interest-bearing deposits with banks |       | $                   | 3,706      |   | $ | 3,706 |   | — | % | — | % |
| Certificates of deposit              |       | 700                 |       | 700 |   | — |   | — |   |
| Investment securities                |       | 77,239              |       | 77,279 |   | 2.55 |   | (3.41 | ) |
| Loans receivable                     |       | 211,897             |       | 208,689 |   | 0.98 |   | (1.39 | ) |
|                                 |       |                |       |   |   |   |   |   |   |
| Financial liabilities:               |       |                |       |   |   |   |   |   |   |
| Interest-bearing deposits            |       | 211,401             |       | 200,580 |   | 1.42 |   | (1.30 | ) |
| Notes payable                        |       | 540                 |       | 540 |   | — |   | — |   |
| Junior subordinated debentures       |       | 5,155               |       | 5,200 |   | — |   | — |   |
| Advances from Federal Home Loan Bank |       | 15,000              |       | 15,484 |   | 3.10 |   | (2.95 | ) |
|                                      |            |                     |            |  |  |  |  |  |  |  |  |

 

TheCompany has adopted an asset/liability management program to monitor theCompany’s interest rate sensitivity and to ensure that the Company iscompetitive in the loan and deposit markets. Management seeks to manage the relationship between interest-sensitiveassets and liabilities in order to protect against wide interest ratefluctuations, including those resulting from inflation.  The Company has not entered into anyderivative financial instruments such as futures, forwards, swaps oroptions.  Additionally, refer to ourinterest rate sensitivity management and liquidity disclosures within Part 1,Item 2, of this Form 10-Q.

 

**ITEM 4.                  CONTROLS AND PROCEDURES**

 

Asof the end of the period covered by this report, we conducted, under thesupervision of and with the participation of our management, including theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer, an evaluation of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13g-15(e). Based on this evaluation,the Company’s Chief Executive Officer, Chief Operating Officer, and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere effective as of March 31, 2005 in timely alerting them to materialinformation required to be included in our reports filed with or furnished tothe Securities and

 

26

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ExchangeCommission.  There have been no changesin the Company’s internal controls over financial reporting that occurredduring the quarter ended March 31, 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.  OTHER INFORMATION**

 
| **ITEM 1.** | **LEGAL  PROCEEDINGS**                                                                                                                                               |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** **                                                                                                                                                           |
| ** **  | The Company is not aware  of any material pending legal proceedings to which the Company or its  subsidiary is a party or to which any of their property is subject. |
| ** **  | ** **                                                                                                                                                           |
| **ITEM 2.** | **UNREGISTERED  SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                      |
| ** **  | ** **                                                                                                                                                           |
| ** **  | 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**                                                                                                                                                         |
| ** **  |                                                                                                                                                                 |
| ** **  | **Exhibit  31**                                                                                                                                                      |
| ** **  |                                                                                                                                                                 |
| ** **  | Certification pursuant to  18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2003.                                             |
| ** **  |                                                                                                                                                                 |
| ** **  | **Exhibit  32**                                                                                                                                                      |
| ** **  | ** **                                                                                                                                                           |
| ** **  | Certification pursuant to  18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2003.                                             |

 

27

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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 13, 2005             | By: | /s/ James E. Young |   |
|                                 | James E. Young |
|                                 | President and Chief Executive Officer |
|                                 |   |
| Date:  May 13, 2005             | By: | /s/ Willard C. Lewis |   |
|                                 | Willard C. Lewis |
|                                 | Senior Executive Vice President and |
|                                 | Chief Operating Officer |
|                                 |   |
| Date:  May 13, 2005             | By: | /s/ Samuel J. Cox |   |
|                                 | Samuel J. Cox |
|                                 | Senior Vice President and Chief Financial Officer |
|                                      |  |  |  |  |  |

 

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