**UNITED STATES**

**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 September 30, 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**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant asspecified in its charter)

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

 

Registrant’s telephonenumber, 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 anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act)  o Yes    ý No.

 

APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THEPRECEDING FIVE YEARS:

 

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

 

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

 

SEC 1296 (08-03)                    **Potential persons who are torespond to the collection of information contained in this form are notrequired to respond unless the form displays a currently valid OMB controlnumber.**

 

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: 1,998,752 shares ofCommon Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock,$1.00 par value outstanding on October 31, 2005.

 

 

----

 

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

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

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**SEPTEMBER 30, 2005 AND DECEMBER 31, 2004**

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

 
| ** **                                                                                                    | ** ** | **2005**        | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                    | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                    |       |            |       |       |       |
|                                                                                                          |       |            |       |       |       |
| Cash and due from banks                                                                                       |       | $               | 13,366     |       | $          | 10,875 |   |
| Interest-bearing deposits with banks                                                                          |       | 1,314           |       | 734        |       |
| Certificates of deposit                                                                                       |       | 100             |       | 800        |       |
| Investment securities available for sale,  at fair value                                                      |       | 65,825          |       | 74,687     |       |
| Investment securities held to maturity, at  cost                                                              |       | 9,676           |       | 9,980      |       |
| Other investments                                                                                             |       | 2,002           |       | 2,469      |       |
| Loans receivable, net                                                                                         |       | 209,142         |       | 207,354    |       |
| Premises and equipment, net                                                                                   |       | 7,767           |       | 8,379      |       |
| Cash surrender value of life insurance                                                                        |       | 9,028           |       | 8,740      |       |
| Foreclosed real estate, net                                                                                   |       | 648             |       | 1,430      |       |
| Other assets                                                                                                  |       | 5,316           |       | 5,936      |       |
|                                                                                                          |       |            |       |       |       |
| Total assets                                                                                                  |       | $               | 324,184    |       | $          | 331,384 |   |
|                                                                                                          |       |            |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                          |       |            |       |       |       |
| LIABILITIES:                                                                                                  |       |            |       |       |       |
| Noninterest-bearing deposits                                                                                  |       | $               | 59,142     |       | $          | 57,539 |   |
| Interest-bearing deposits                                                                                     |       | 208,344         |       | 208,963    |       |
|                                                                                                          |       |            |       |       |       |
| Total deposits                                                                                                |       | 267,486         |       | 266,502    |       |
|                                                                                                          |       |            |       |       |       |
| Accrued expenses and other liabilities                                                                        |       | 3,017           |       | 3,056      |       |
| Notes payable                                                                                                 |       | 440             |       | 540        |       |
| Junior subordinated debentures                                                                                |       | 5,155           |       | 5,155      |       |
| Advances from Federal Home Loan Bank                                                                          |       | 21,200          |       | 30,250     |       |
|                                                                                                          |       |            |       |       |       |
| Total liabilities                                                                                             |       | 297,298         |       | 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                                                                                    |       | 7,439           |       | 7,442      |       |
| Retained earnings                                                                                             |       | 19,407          |       | 18,108     |       |
| Treasury stock at cost, 233,178 and 240,643  shares at September 30, 2005 and December 31, 2004, respectively |       | (1,896          | )          | (1,955     | )          |
| Accumulated other comprehensive loss, net  of income taxes                                                    |       | (384            | )          | (34        | )          |
|                                                                                                          |       |            |       |       |       |
| Total stockholders’ equity                                                                               |       | 26,886          |       | 25,881     |       |
|                                                                                                          |       |            |       |       |       |
|                                                                                                          |       | $               | 324,184    |       | $          | 331,384 |   |

 

Seenotes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                           | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest income:                                     |       |                                  |       |                                 |       |   |   |   |   |
| Loans, including fees                                |       | $                                     | 4,227      |                                 | $          | 3,691 |   | $ | 12,257 |   | $ | 11,576 |   |
| Investment securities:                               |       |                                  |       |                                 |       |   |   |   |   |
| Taxable                                              |       | 541                                   |       | 668                                  |       | 1,737 |   | 2,115 |   |
| Tax-exempt                                           |       | 200                                   |       | 204                                  |       | 594 |   | 613 |   |
| Interest-bearing deposits                            |       | 15                                    |       | 3                                    |       | 112 |   | 22 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total interest income                                |       | 4,983                                 |       | 4,566                                |       | 14,700 |   | 14,326 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense:                                    |       |                                  |       |                                 |       |   |   |   |   |
| Deposits                                             |       | 1,004                                 |       | 692                                  |       | 2,798 |   | 2,051 |   |
| Other borrowings                                     |       | 400                                   |       | 319                                  |       | 999 |   | 882 |   |
| Total interest expense                               |       | 1,404                                 |       | 1,011                                |       | 3,797 |   | 2,933 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,579                                 |       | 3,555                                |       | 10,903 |   | 11,393 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for loan losses                            |       | 60                                    |       | 225                                  |       | 228 |   | 775 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income after provision for  loan losses |       | 3,519                                 |       | 3,330                                |       | 10,675 |   | 10,618 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest income:                                  |       |                                  |       |                                 |       |   |   |   |   |
| Service charges on deposits                          |       | 881                                   |       | 1,017                                |       | 2,560 |   | 2,794 |   |
| Gain (loss) on sales of securities                   |       | 29                                    |       | —                               |       | (271 | ) | 58 |   |
| Gain (loss) on sales of assets                       |       | 10                                    |       | 75                                   |       | (6 | ) | 149 |   |
| Other operating income                               |       | 407                                   |       | 352                                  |       | 1,518 |   | 1,329 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,327                                 |       | 1,444                                |       | 3,801 |   | 4,330 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest expense:                                 |       |                                  |       |                                 |       |   |   |   |   |
| Salaries and employee benefits                       |       | 2,056                                 |       | 2,026                                |       | 6,209 |   | 6,109 |   |
| Net occupancy and equipment                          |       | 663                                   |       | 689                                  |       | 1,996 |   | 2,005 |   |
| Other operating expenses                             |       | 1,410                                 |       | 1,612                                |       | 4,381 |   | 4,728 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 4,129                                 |       | 4,327                                |       | 12,586 |   | 12,842 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 717                                   |       | 447                                  |       | 1,890 |   | 2,106 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax expense                                   |       | 37                                    |       | 66                                   |       | 278 |   | 448 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                     | 680        |                                 | $          | 381 |   | $ | 1,612 |   | $ | 1,658 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per share - basic                         |       | $                                     | 0.33       |                                 | $          | 0.18 |   | $ | 0.77 |   | $ | 0.80 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per share - diluted                       |       | $                                     | 0.32       |                                 | $          | 0.18 |   | $ | 0.77 |   | $ | 0.80 |   |
| ** **                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average outstanding shares - basic          |       | 2,087                                 |       | 2,075                                |       | 2,085 |   | 2,074 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average outstanding shares -  diluted       |       | 2,098                                 |       | 2,080                                |       | 2,097 |   | 2,080 |   |
| Dividends per common share                           |       | $                                     | —     |                                 | $          | — |   | $ | 0.15 |   | $ | 0.15 |   |

 

See notes to consolidated financialstatements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATION**

**AND SUBSIDIARIES**

 

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

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004**

**(Unaudited  - Inthousands)**

 
| ** **                                                                                           | ** ** | ** **        | ** ** | ** **        | ** ** | ** **    | ** ** | ** **     | ** ** | ** **          | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**    | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|---------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                           | ** ** | ** **        | ** ** | ** **        | ** ** | **Nonvoting** | ** ** | **Additional** | ** ** | ** **          | ** ** | ** **        | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **         | ** ** |
| ** **                                                                                           | ** ** | **Common  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-in**   | ** ** | **Retained**   | ** ** | **Treasury  Stock** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **Shares**        | ** ** | **Amount**        | ** ** | **Shares**    | ** ** | **Amount**     | ** ** | **Capital**         | ** ** | **Earnings**      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income  (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Balance—December  31, 2003                                                                      |       | 2,230             |       | $                 | 2,230      |          | 90         |           | $          | 90                  |       | $                 | 7,445      |       | $          | 16,114     |       | (250               | )          | $          | (2,025     | ) | $ | 90 |   | $ | 23,944 |   |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Net income                                                                                           |       | —            |       | —            |       | —        |       | —         |       | —              |       | 1,658             |       | —     |       | —     |       | —             |       | 1,658      |       |
| Unrealized  holding gains on investment securities available for sale—net of taxes of  $546     |       | —            |       | —            |       | —        |       | —         |       | —              |       | —            |       | —     |       | —     |       | 43                 |       | 43         |       |
| Less  reclassification adjustment for holding gains included in net income—net of  taxes of $20 |       | —            |       | —            |       | —        |       | —         |       | —              |       | —            |       | —     |       | —     |       | (39                | )          | (39        | )          |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Comprehensive  income                                                                                |       | —            |       | —            |       | —        |       | —         |       | —              |       | —            |       | —     |       | —     |       | —             |       | 1,662      |       |
| Sale of treasury  stock                                                                              |       | —            |       | —            |       | —        |       | —         |       | (2                  | )          | —            |       | 5          |       | 38         |       | —             |       | 36         |       |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Dividends  declared                                                                                  |       | —            |       | —            |       | —        |       | —         |       | —              |       | (311              | )          | —     |       | —     |       | —             |       | (311       | )          |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| **Balance—September  30, 2004**                                                                 | ** ** | **2,230**         | ** ** | **$**             | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**              | ** ** | **$**             | **7,443**  | ** ** | **$**      | **17,461** | ** ** | **(245**           | **)**      | **$**      | **(1,987** | **)** | **$** | **94** | ** ** | **$** | **25,331** | ** ** |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Balance—December  31, 2004                                                                      |       | 2,230             |       | $                 | 2,230      |          | 90         |           | $          | 90                  |       | $                 | 7,442      |       | $          | 18,108     |       | (241               | )          | $          | (1,955     | ) | $ | (34 | ) | $ | 25,881 |   |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Net income                                                                                           |       | —            |       | —            |       | —        |       | —         |       | —              |       | 1,612             |       | —     |       | —     |       | —             |       | 1,612      |       |
| Unrealized  holding losses on investment securities available for sale—net of taxes of  $11     |       | —            |       | —            |       | —        |       | —         |       | —              |       | —            |       | —     |       | —     |       | (529               | )          | (529       | )          |
| Less reclassification  adjustment for holding gains included in net income—net of taxes of $16  |       | —            |       | —            |       | —        |       | —         |       | —              |       | —            |       | —     |       | —     |       | 179                |       | 179        |       |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Comprehensive  loss                                                                                  |       | —            |       | —            |       | —        |       | —         |       | —              |       | —            |       | —     |       | —     |       | —             |       | 1,262      |       |
| Sale of treasury  stock                                                                              |       | —            |       | —            |       | —        |       | —         |       | (3                  | )          | —            |       | 8          |       | 59         |       | —             |       | 56         |       |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| Dividends  declared                                                                                  |       | —            |       | —            |       | —        |       | —         |       | —              |       | (313              | )          | —     |       | —     |       | —             |       | (313       | )          |
|                                                                                                 |       |              |       |              |       |          |       |           |       |                |       |              |       |       |       |       |       |               |       |       |       |
| **Balance—September  30, 2005**                                                                 | ** ** | **2,230**         | ** ** | **$**             | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**              | ** ** | **$**             | **7,439**  | ** ** | **$**      | **19,407** | ** ** | **(233**           | **)**      | **$**      | **(1,896** | **)** | **$** | **(384** | **)** | **$** | **26,886** | ** ** |

 

Seenotes to consolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004**

**(Inthousands)**

 
| ** **                                                                                  | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                  | ** ** | **2005**          | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**   | ** ** |
| **OPERATING ACTIVITIES:**                                                                   |       |              |       |   |   |
| Net income                                                                                  |       | $                 | 1,612      |   | $ | 1,658 |   |
| **Adjustments to reconcile net income to net  cash provided by operating activities:**      |       |              |       |   |   |
| Provision for loan losses                                                                   |       | 228               |       | 775 |   |
| Depreciation                                                                                |       | 711               |       | 807 |   |
| Amortization and accretion, net                                                             |       | 761               |       | 860 |   |
| Provision for deferred income taxes  (benefit)                                              |       | (172              | )          | 55 |   |
| Gain on sale of assets and investments                                                      |       | (69               | )          | (207 | ) |
| Write-down of equity securities                                                             |       | 346               |       | — |   |
| Change in other assets                                                                      |       | 529               |       | (350 | ) |
| Change in accrued expenses and other  liabilities                                           |       | (38               | )          | (341 | ) |
|                                                                                        |       |              |       |   |   |
| Net cash provided by operating activities                                                   |       | 3,908             |       | 3,257 |   |
|                                                                                        |       |              |       |   |   |
| **INVESTING ACTIVITIES:**                                                                   |       |              |       |   |   |
| Proceeds from calls and maturities of  investment securities held to maturity               |       | 294               |       | 453 |   |
| Proceeds from sales and maturities of  investment securities available for sale             |       | 14,643            |       | 28,679 |   |
| Purchases of investment securities  available for sale                                      |       | (6,889            | )          | (9,423 | ) |
| Net change in other investments                                                             |       | 466               |       | 886 |   |
| Net change in loans receivable                                                              |       | (2,703            | )          | 7,027 |   |
| Premiums paid on life insurance policy                                                      |       | (70               | )          | (98 | ) |
| Net proceeds from the sale of foreclosed  properties                                        |       | 1,251             |       | 1,543 |   |
| Purchases of premises and equipment, net                                                    |       | (107              | )          | (272 | ) |
| Net change in interest bearing deposits  with banks                                         |       | (580              | )          | (206 | ) |
| Net change in certificates of deposit                                                       |       | 700               |       | 2,183 |   |
|                                                                                        |       |              |       |   |   |
| Net cash provided by investing activities                                                   |       | 7,005             |       | 30,772 |   |
|                                                                                        |       |              |       |   |   |
| **FINANCING ACTIVITIES:**                                                                   |       |              |       |   |   |
| Net change in deposits                                                                      |       | 984               |       | (9,410 | ) |
| Sale of treasury stock                                                                      |       | 59                |       | 38 |   |
| Principal payments on debt                                                                  |       | (100              | )          | — |   |
| Net change in advances from Federal Home  Loan Bank                                         |       | (9,050            | )          | (22,461 | ) |
| Decrease in federal funds sold                                                              |       | —            |       | (4,000 | ) |
| Net change in additional paid-in-capital                                                    |       | (2                | )          | (2 | ) |
| Dividends paid                                                                              |       | (313              | )          | (311 | ) |
|                                                                                        |       |              |       |   |   |
| Net cash provided (used) in financing  activities                                           |       | (8,422            | )          | (36,146 | ) |
|                                                                                        |       |              |       |   |   |
| Net change in cash and cash equivalents                                                     |       | 2,491             |       | (2,117 | ) |
|                                                                                        |       |              |       |   |   |
| Cash and cash equivalents, beginning of  period                                             |       | 10,875            |       | 11,694 |   |
|                                                                                        |       |              |       |   |   |
| Cash and cash equivalents, end of period                                                    |       | $                 | 13,366     |   | $ | 9,577 |   |
|                                                                                        |       |              |       |   |   |
| **Supplemental disclosures of cash paid  during the period for:**                           |       |              |       |   |   |
| Interest                                                                                    |       | $                 | 3,738      |   | $ | 3,039 |   |
|                                                                                        |       |              |       |   |   |
| Income taxes                                                                                |       | $                 | 186        |   | $ | 638 |   |
|                                                                                        |       |              |       |   |   |
| **Supplemental disclosures of noncash  transactions:**                                      |       |              |       |   |   |
| Change in unrealized gain (loss) on  investment securities available for sale, net of taxes |       | $                 | (350       | ) | $ | 4 |   |

 

Seenotes to consolidated financial statements.

 

5

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**CITIZENSBANCSHARES 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, onefull-service branch 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 theinterim periods reported herein are not necessarily representative of theresults expected for the full 2005 fiscal year.

 

The consolidated financial statements of the Company for the three andnine month periods ended September 30, 2005 and 2004 are unaudited.  In the opinion of management, all adjustmentsnecessary for a fair presentation of the financial position and results ofoperations, changes in stockholders’ equity and cash flows for the nine monthperiods have been included.  Alladjustments are of a normal recurring nature. All significant intercompany accounts and transactions have beeneliminated 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**

 

Norecent authoritative pronouncements that affect accounting, reporting, anddisclosure of financial information by us have occurred during the quarterending September 30, 2005, other than the items described below.

 

6

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InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayment” (“SFAS No. 123(R)”).  SFAS No.123(R) will require companies to measure all employee stock-based compensationawards using a fair value method and record such expense in its financialstatements.  In addition, the adoption ofSFAS No. 123(R) requires additional accounting and disclosure related to theincome tax and cash 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 Securitiesand Exchange Commission’s Office of the Chief Accountant and its Division ofCorporation Finance has released Staff Accounting Bulletin (SAB) No.107 toprovide guidance regarding the application of FASB Statement No.123 (revised2004), *Share-Based Payment*.  Statement No.123(R) covers a wide range ofshare-based compensation arrangements including share options, restricted shareplans, performance-based awards, share appreciation rights, and employee sharepurchase plans.  SAB 107 providesinterpretive guidance related to the interaction between Statement No.123R andcertain SEC rules and regulations, as well as the staff’s views regarding thevaluation of share-based payment arrangements for public companies. SAB 107also reminds public companies of the importance of including disclosures withinfilings made with the SEC relating to the accounting for share-based paymenttransactions, particularly during the transition to Statement No.123R.

 

InDecember 2003, the FASB issued FIN No. 46 (revised), “Consolidation of VariableInterest Entities” (“FIN No. 46(R)”), which addresses consolidation by businessenterprises of variable interest entities. FIN No. 46(R) requires a variable interest entity to be consolidated bya company if that company is subject to a majority of the risk of loss from thevariable interest entity’s activities or entitled to receive a majority of theentity’s residual returns, or both.  FINNo. 46(R) also requires disclosures about variable interest entities that acompany is not required to consolidate, but in which it has a significantvariable interest.  FIN No. 46(R)provides guidance for determining whether an entity qualifies as a variableinterest entity by considering, among other considerations, whether the entitylacks sufficient equity or its equity holders lack adequate decision-makingability.  The consolidation requirementsof FIN No. 46(R) applied immediately to variable interest entities createdafter January 31, 2003.  Theconsolidation requirements applied to the Company’s existing variable interestentities in the 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.

 

InNovember 2003, the Emerging Issues Task Force (“EITF”) reached a consensus thatcertain quantitative and qualitative disclosures should be required for debtand marketable equity securities classified as available for sale or held tomaturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balancesheet date but for which other-than-temporary impairment has not beenrecognized.  Accordingly the EITF issuedEITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments.” This issue addresses the meaning of other-than-temporary impairment andits application to investments classified as either available for sale or heldto maturity under SFAS No. 115 and provides guidance on quantitative andqualitative disclosures.  The disclosurerequirements of EITF No. 03-1 are effective for annual financial statements forfiscal years ending after September 15, 2005. The effective date for the measurement and recognition guidance of EITFNo. 03-1 has been delayed.  The FASBstaff has issued a proposed Board-directed FASB Staff Position (“FSP”), FSPEITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 ofIssue No. 03-1.” The proposed FSP would provide implementation

 

7

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guidancewith respect to debt securities that are impaired solely due to interest ratesand/or sector spreads and analyzed for other-than-temporary impairment underthe measurement and recognition requirements of EITF No. 03-1.  The delay of the effective date for themeasurement and recognition requirements of EITF No. 03-1 will be supersededconcurrent with the final issuance of FSP EITF03-1-a.  Citizens Bancshares adopted theguidance of EITF 03-1, effective as of June 30, 2005.

 

Otheraccounting standards that have been issued or proposed by the FASB or otherstandards-setting bodies that do not require adoption until a future date arenot expected to have a material impact on the consolidated financial statementsupon adoption.

 

**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 nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
|                                                                                   |       |                                         |       |   |   |
| As reported net income available to common  stockholders                               |       | $                                            | 1,612      |   | $ | 1,658 |   |
| Less: stock-based compensation expense  determined under fair value method, net of tax |       | (18                                          | )          | (22 | ) |
|                                                                                   |       |                                         |       |   |   |
| Pro forma net income                                                                   |       | $                                            | 1,594      |   | $ | 1,636 |   |
|                                                                                   |       |                                         |       |   |   |
| As reported earnings per share                                                         |       | $                                            | 0.77       |   | $ | 0.80 |   |
| Pro forma earnings per share                                                           |       | $                                            | 0.76       |   | $ | 0.79 |   |
| As reported earnings per diluted share                                                 |       | $                                            | 0.77       |   | $ | 0.80 |   |
| Pro forma earnings per diluted share                                                   |       | $                                            | 0.76       |   | $ | 0.79 |   |

 

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**

 

Finite lived intangible assets of the Company represent depositassumption premiums recorded upon the purchase of certain assets andliabilities from other financial institutions. Deposit assumption premiums are amortized over seven years, theestimated average lives of the deposit bases acquired, using the straight-linemethod and are included within 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.

 

8

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

 
| ** **                    | ** ** | **September 30, 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      |                          | $          | 2,093 |   | $ | 2,836 |   | $ | 1,790 |   |

 

The following table presents informationabout aggregate amortization expense (in thousands):

 
| ** **                                                   | ** ** | **For the 3  months ended  September 30,  2005** | ** ** | **For the 9  months ended  September 30,  2005** | ** ** | **For the 3  months ended  September 30,  2004** | ** ** | **For the 9  months ended  September 30,  2004** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                         |       |                                             |       |                                             |       |                                             |       |                                             |       |
| Aggregate amortization expense of core  deposit intangibles: |       | $                                                | 101        |                                             | $          | 303                                              |       | $                                                | 101        |   | $ | 303 |   |
|                                                              |            |                                                  |            |                                                  |            |                                                  |            |                                                  |            |  |  |  |  |

 
| **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 and nine month periods ended September 30, 2005 and 2004(in thousands):

 
| ** **                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                               |       |                                 |       |                                |       |   |   |   |   |
| Net Income                         |       | $                                    | 680        |                                | $          | 381 |   | $ | 1,612 |   | $ | 1,658 |   |
|                               |       |                                 |       |                                |       |   |   |   |   |
| Other  comprehensive income (loss) |       | (341                                 | )          | 1,102                               |       | (350 | ) | 4 |   |
|                               |       |                                 |       |                                |       |   |   |   |   |
| Comprehensive  income              |       | $                                    | 339        |                                | $          | 1,483 |   | $ | 1,262 |   | $ | 1,662 |   |

 

9

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**5.  NET INCOME PER COMMON AND COMMON EQUIVALENTSHARE**

 

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 and nine month periodsended September 30, 2005 and 2004 (in thousands, except per share data):

 
| ** **                                                        | ** ** | **Net Income**  | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|
| ** **                                                        | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**    | ** ** |
|                                                              |       |            |       |              |       |          |       |
| **Three Months ended September 30, 2005**                         |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share                                          |       | $               | 680        |              | 2,087      |          | $          | 0.33 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | 11                |       | $             | (0.01      | ) |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | 680        |              | 2,098      |          | $          | 0.32 |   |
|                                                              |       |            |       |              |       |          |       |
| **Three Months ended September 30, 2004**                         |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share                                          |       | $               | 381        |              | 2,075      |          | $          | 0.18 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | 5                 |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | 381        |              | 2,080      |          | $          | 0.18 |   |
|                                                              |       |            |       |              |       |          |       |
| **Nine Months ended September 30, 2005**                          |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share                                          |       | $               | 1,612      |              | 2,085      |          | $          | 0.77 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | 12                |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | 1,612      |              | 2,097      |          | $          | 0.77 |   |
|                                                              |       |            |       |              |       |          |       |
| **Nine Months ended September 30, 2004**                          |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share                                          |       | $               | 1,658      |              | 2,074      |          | $          | 0.80 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | 6                 |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | 1,658      |              | 2,080      |          | $          | 0.80 |   |

 

**RECLASSIFICATIONS**

 

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

 

10

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

 

**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 11 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 Looking Statements**

 

In addition to historical information, this report on Form 10-Q maycontain forward-looking statements. For this purpose, any statements containedherein, including documents incorporated by reference, that are not statementsof historical fact may be deemed to be forward-looking statements.Forward-looking statements are subject to numerous assumptions, risks anduncertainties. Without limiting the foregoing, the words “believe,” “anticipates,”“plan,” expects,” and similar expressions are intended 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 ofSeptember 30, 2005 and the changes in the financial condition and results ofoperations for the three and nine month periods ended September 30, 2005 and2004.

 

**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 on management’s intent upon purchase: held to maturitysecurities which are reported at

 

11

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amortized cost, trading securities which arereported at fair value with unrealized holding gains and losses included inearnings, and available for sale securities which are recorded at fair valuewith unrealized holding gains and losses included as a component of accumulatedother comprehensive income.  The Companyhad no investment securities classified as trading securities during 2005 or2004.

 

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 deferredand amortized 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 individual concentrationsof credit.  Loans are charged against theallowance when, in the opinion of management, such loans are deemeduncollectible 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.

 

**FINANCIAL CONDITION**

 

Citizens Bancshares Corporation’s total assets at September 30, 2005were $324,184,000, a decrease of $7,200,000 or 2% compared to $331,384,000 atDecember 31, 2004.   This decrease isprimarily due to the Company reducing the leverage of its balance sheet byusing paydowns and maturities from its investment portfolio to reduce itsoutstanding advances with the Federal Home Loan Bank (FHLB).   At September 30, 2005, FHLB advancesdecreased by $9,050,000 and were offset by decreases of $8,862,000 and $304,000in investment securities classified as available for sale and held to maturity,respectively, since December 31, 2004.

 

At September 30, 2005, the Company maintained a balance of cash and duefrom banks of

 

12

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$13,366,000 representing an increase of $2,491,000 from December 31,2004.  Interest bearing deposits withbanks increased $580,000 to $1,314,000 and was offset by a $700,000 decrease inCertificates of deposits.

 

Loans receivable, net increased $1,788,000 to $209,142,000 for theperiod ended September 30, 2005 compared to $207,354,000 at December 31, 2004.

 

Total liabilities decreased $8,205,000 to $297,298,000 at September 30,2005 compared to $305,503,000 at December 31, 2004.  This decrease is primarily due to a$9,050,000 decrease in FHLB advances. Total deposits, another significant component of total liabilities,increased $984,000 to $267,486,000 at September 30, 2005.

 

**INVESTMENT SECURITIES**

 

The Company invests a portion of its assets in U.S. governmentsponsored agency securities, state, county and municipal securities,mortgage-backed bonds, as well as certain equity securities.  At September 30, 2005 and December 31, 2004,the Company’s investment securities portfolio represented approximately 23% and26% of total assets, respectively.

 

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

 
| **At September 30, 2005**                | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                     |       |                |       |                         |       |                          |       |           |       |
| U.S.  Government agencies                |       | $                   | 9,337      |                         | $          | 10                            |       | $              | 103        |   | $ | 9,244 |   |
| State,  county, and municipal securities |       | 14,006              |       | 223                          |       | 39                            |       | $              | 14,190     |   |
| Mortgage-backed  securities              |       | 42,011              |       | 15                           |       | 722                           |       | $              | 41,304     |   |
| Equity  securities (1)                   |       | 1,054               |       | 33                           |       | —                        |       | 1,087          |       |
| Totals                                   |       | $                   | 66,408     |                         | $          | 281                           |       | $              | 864        |   | $ | 65,825 |   |

 
| **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 |   |

 

----

(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 interestearned on these equity securities is 70 percent tax free.

 

13

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

 
| **At September 30, 2005**                | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                     |       |                |       |                         |       |                          |       |           |       |
| U.S.  Government agencies                |       | $                   | 3,000      |                         | $          | —                        |       | $              | 48         |   | $ | 2,952 |   |
| State,  county, and municipal securities |       | 5,391               |       | 125                          |       | —                        |       | 5,516          |       |
| Mortgage-backed  securities              |       | 1,285               |       | 3                            |       | 36                            |       | 1,252          |       |
|                                     |       |                |       |                         |       |                          |       |           |       |
| Totals                                   |       | $                   | 9,676      |                         | $          | 128                           |       | $              | 84         |   | $ | 9,720 |   |

 
| **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          |       |
|                                     |       |                |       |                         |       |                          |       |           |       |
| Totals                                   |       | $                   | 9,980      |                         | $          | 194                           |       | $              | 48         |   | $ | 10,126 |   |

 

**LOANS**

 

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

 
| ** **                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **2005**          | ** ** | **2004**         | ** ** |
|                                                                         |       |              |       |             |       |
| Commercial, financial, and agricultural                                      |       | $                 | 14,145     |             | $          | 22,327 |   |
| Installment                                                                  |       | 9,984             |       | 7,666            |       |
| Real estate - mortgage                                                       |       | 167,762           |       | 174,335          |       |
| Real estate - construction                                                   |       | 18,879            |       | 4,510            |       |
| Other                                                                        |       | 2,274             |       | 2,609            |       |
| Loans receivable                                                             |       | 213,044           |       | 211,447          |       |
| Less:        Net  deferred loan fees |       | 413               |       | 554              |       |
| Allowance for loan losses                                                    |       | 3,294             |       | 3,183            |       |
| Discount on loans acquired                                                   |       | 195               |       | 356              |       |
|                                                                         |       |              |       |             |       |
| Loans receivable, net                                                        |       | $                 | 209,142    |             | $          | 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 nonaccrualstatus.

 

With the exception of the loans included within nonperforming assets inthe table below, management is not aware of any loans classified for regulatorypurposes as loss, doubtful, substandard, or special mention that have not beendisclosed which (1) represent or result from trends or uncertainties which

 

14

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management reasonably expects will materially impact future operatingresults, liquidity, or capital resources, or (2) represent any information onmaterial credits which management is aware that causes management to haveserious doubts as to the abilities of such borrowers to comply with the loanrepayment terms.

 

Nonperforming assets decreased by $107,000 to $3,976,000 at September30, 2005 from $4,083,000 at December 31, 2004. Nonperforming assets represents 1.87% of loans, net of unearned income, discounts,and real estate acquired through foreclosure at September 30, 2005 as comparedto 1.93% at December 31, 2004.  AtSeptember 30, 2005, $2,066,000 of the $3,975,000 nonperforming assets waspartially guaranteed by the U.S. Government.

 

The table below presents a summary of the Company’s nonperformingassets at September 30, 2005 and December 31, 2004.

 
| ** **                                                                                                      | ** ** | **Setpember 30,**         | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                  | ** ** | **2004**         | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                                      | ** ** | **financial ratios)**     | ** ** |
| Nonperforming assets:                                                                                           |       |                      |       |             |       |
| Nonperforming loans:                                                                                            |       |                      |       |             |       |
| Nonaccrual loans                                                                                                |       | $                         | 3,328      |             | $          | 2,652 |   |
| Past-due loans of 90 days or more                                                                               |       | —                    |       | —           |       |
| Nonperforming loans                                                                                             |       | 3,328                     |       | 2,652            |       |
|                                                                                                            |       |                      |       |             |       |
| Real estate acquired through foreclosure                                                                        |       | 648                       |       | 1,431            |       |
| Total nonperforming assets                                                                                      |       | $                         | 3,976      |             | $          | 4,083 |   |
|                                                                                                            |       |                      |       |             |       |
| Ratios:                                                                                                         |       |                      |       |             |       |
| Nonperforming loans to loans, net of  unearned income and discount on loans                                     |       | 1.57                      | %          | 1.26             | %          |
|                                                                                                            |       |                      |       |             |       |
| Nonperforming assets to loans, net of  unearned income, discounts, and real estate acquired through foreclosure |       | 1.87                      | %          | 1.93             | %          |
|                                                                                                            |       |                      |       |             |       |
| Nonperforming assets to total assets                                                                            |       | 1.23                      | %          | 1.23             | %          |
|                                                                                                            |       |                      |       |             |       |
| Allowance for loan losses to nonperforming  loans                                                               |       | 98.98                     | %          | 120.02           | %          |
|                                                                                                            |       |                      |       |             |       |
| Allowance for loan losses to nonperforming  assets                                                              |       | 82.85                     | %          | 77.95            | %          |

 

15

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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 ninemonth period ended September 30, 2005 provisions for loan losses totaled$228,000 compared to $775,000 for the same period in 2004.

 

The allowance for loan losses at September 30, 2005 was approximately$3,294,000, representing 1.55% of total loans, net of unearned income anddiscounts compared to approximately $3,183,000 at December 31, 2004, whichrepresented 1.51% of total loans, net of unearned income and discounts.

 

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

 

A substantial portion of the Company’s loan portfolio is secured byreal estate in the metropolitan Atlanta market, including a concentration ofloans to churches and convenience stores. The Company’s outstanding church loans were approximately $37.6 millionat September 30, 2005 and $46.1 million at December 31, 2004.  The Company’s loans to area conveniencestores were approximately $21.1 million at September 30, 2005 and $23.6 millionat December 31, 2004.  Accordingly, theultimate collectability of the substantial portion of the Company’s loanportfolio is susceptible to changes in market conditions in the metropolitanAtlanta area.

 

16

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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 nine month periods ended September 30, 2005and 2004 (amount in thousands, except financial ratios):

 
| ** **                                                                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| Loans, net of unearned income and discounts                                                                            |       | $        | 212,436    |     | $          | 203,150 |   |
|                                                                                                                   |       |     |       |     |       |
| Average loans, net of unearned income,  discounts and the allowance for loan losses                                    |       | $        | 207,284    |     | $          | 209,425 |   |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at the beginning  of period                                                                  |       | $        | 3,183      |     | $          | 3,240 |   |
|                                                                                                                   |       |     |       |     |       |
| Loans charged off:                                                                                                     |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                |       | 40       |       | 919      |       |
| Real estate - loans                                                                                                    |       | 55       |       | 324      |       |
| Installment loans to individuals                                                                                       |       | 264      |       | 151      |       |
| Total loans charged off                                                                                                |       | 359      |       | 1,394    |       |
|                                                                                                                   |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                            |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                |       | 119      |       | 166      |       |
| Real estate - loans                                                                                                    |       | 70       |       | 94       |       |
| Installment loans to individuals                                                                                       |       | 53       |       | 227      |       |
| Total loans recovered                                                                                                  |       | 242      |       | 487      |       |
|                                                                                                                   |       |     |       |     |       |
| Net loans charged off                                                                                                  |       | 117      |       | 907      |       |
|                                                                                                                   |       |     |       |     |       |
| Additions to allowance for loan losses charged  to operating expense                                                   |       | 228      |       | 775      |       |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at period end                                                                                |       | $        | 3,294      |     | $          | 3,108 |   |
|                                                                                                                   |       |     |       |     |       |
| Ratio of net loans charged off to average  loans, net of unearned income, discounts, and the allowance for loan losses |       | 0.06     | %          | 0.43     | %          |
|                                                                                                                   |       |     |       |     |       |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                                     |       | 1.55     | %          | 1.53     | %          |

 

17

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**DEPOSITS**

 

Deposits are the Company’s primary source of funding loan growth.  Total deposits at September 30, 2005increased by $984,000 to $267,486,000 from $266,502,000 at December 31,2004.  Noninterest-bearing depositsincreased by $1,603,000 or 3%, while interest-bearing deposits decreased by$619,000 or less than 1%.  The increasein noninterest bearing deposits is the result of the Company’s new salesprogram in 2005 which places specific emphasis on noninterest deposit growth aswell as the continued success of the bank’s new free checking accountproduct.   The decrease in interestbearing deposits is primarily attributed to Corporate and Governmentalcustomers who make significant monthly deposits and withdrawals based on theirbudgetary needs.

 

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

 
| ** **                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                         | ** ** | **2005**          | ** ** | **2004**         | ** ** |
|                               |       |              |       |             |       |
| NOW and  money market accounts     |       | $                 | 59,446     |             | $          | 55,748 |   |
| Savings  accounts                  |       | 42,333            |       | 43,620           |       |
| Time  deposits of $100,000 or more |       | 50,115            |       | 65,039           |       |
| Other time deposits                |       | 56,450            |       | 44,556           |       |
|                               |       | $                 | 208,344    |             | $          | 208,963 |   |

 

**OTHER BORROWED FUNDS**

 

While the Company continues to emphasize funding earning asset growththrough deposits, the Company has relied on other borrowings as a supplementalfunding source.  Other borrowings consistof Federal Home Loan Bank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from theFHLB of $21,200,000 at September 30, 2005 and $30,250,000 at December 31,2004.   The following advances arecollateralized by a blanket lien on the Company’s 1-4 family mortgage loans.

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type** | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------|------------|--------------|------------|----------|------------|------------------------|------------|-----------------------|------------|
|                                |       |         |       |     |       |                   |       |                  |       |   |   |   |   |
| April 2010                          |       | Quarterly    |       | Fixed    |       | 5.82                   | %          | $                     | 10,000,000 |   | 5.82 | % | $ | 10,000,000 |   |
| July 2006                           |       | Daily        |       | Variable |       | 4.16                   | %          | 11,200,000            |       | 2.44 | % | 15,250,000 |   |
| September  2006                     |       | Monthly      |       | Variable |       |                   |       | —                |       | 2.45 | % | 5,000,000 |   |
|                                |       |         |       |     |       |                   |       |                  |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |     |       |                   |       | $                     | 21,200,000 |   |   |   | $ | 30,250,000 |   |
|                                |       |         |       |     |       |                   |       |                  |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |     |       | 4.94                   | %          |                  |       | 3.56 | % |   |   |

 

The Company had an unsecured note payable of approximately $440,000 atSeptember 30, 2005 and $540,000 at December 31, 2004.  The note bears interest at the lender’s primerate minus 50 basis points.   AtSeptember 30, 2005 the interest rate on the unsecured note payable was 6.00%

 

During2002, the Company issued $5 million of pooled trust preferred securitiesthrough one issuance by a wholly owned subsidiary grantor trust, Citizens (GA)Statutory Trust I (the “Trust”). The trust preferred securities accrue and paydistributions periodically at an annual rate as provided in the

 

18

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indenturesof the London Interbank Offered Rate plus 3.45%. The Trust used the netproceeds from the offering to purchase a like amount of Junior SubordinatedDebentures (the “Debentures”) of the Company. These securities are reported inour consolidated balance sheet as Junior Subordinated Debentures.  The trust preferred securities aremandatorily redeemable upon the maturity of the Debentures on June 26, 2032, orupon earlier redemption as provided in the indentures beginning June 26,2007.  The Company has the right toredeem the Debentures in whole or in part or after specific dates, at aredemption price specified in the indentures plus any accrued but unpaidinterest to the redemption date.  AtSeptember 30, 2005, the interest rate on the junior subordinated debenture was7.41%.

 

**RESULTS OF OPERATIONS**

 

**Net Interest Income:**

 

Net interest income is the principal componentof a financial institution’s income stream and represents the difference, orspread, between interest and fee income generated from earning assets and theinterest expense paid on deposits and borrowed funds.  Fluctuations in interest rates as well asvolume and mix changes in earning assets and interest bearing liabilities canmaterially impact net interest income.

 

While net interest income was consistent withthe three month period ended September 30, 2005 as compared with the same periodof the previous year, increasing by $24,000, interest income earned on loans,including fees increased $536,000. Average net loans outstanding for the third quarter of 2005 increased by$6,429,000 to $207,450,000 compared to $201,021,000 for the comparative threemonth period ending September 30, 2004. Investment interest income decreased $131,000 as the average investmentin available for sale securities decreased $15,368,000 to $64,022,000 comparedto $79,390,000 for the comparative three month period ending September 30, 2005and 2004, respectively.  For the thirdquarter of 2005, total interest income increased $417,000 compared to the sameperiod in 2004, offset by a $393,000 increase in total interest expenseresulting from rising interest rates.

 

Net Interest income decreased $490,000 or 4% forthe nine month comparative periods ending September 30, 2005 and 2004.  Whereas interest income on loans, netincluding fees increased $681,000, interest income on securities decreased $397,000as the nine month average balance of the Company’s investment portfoliodeclined $15,797,000 to $76,023,000 at September 30, 2005 compared to$91,820,000 million at September 30, 2004. In addition, interest expense on earning liabilities increased $864,000due to increases in the average interest rates.

 

**Provision for loan losses**

 

The provision for loan loss for the third quarter of 2005 is $60,000compared to $225,000 for the same period of 2004, representing a decline of 73percent.  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 nine month period ended September 30, 2005, the provision for loan losseswas $228,000 compared to $775,000 for the same period ended September 30, 2004,representing a decline of 71 percent. The allowance for loan losses was $3,294,000 at September 30, 2005,compared to $3,183,000 at

 

19

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December31, 2004. At September 30, 2005, the allowance for loan losses was 83 percentof the nonperforming assets compared to 78 percent at December 31, 2004.  At September 30, 2005, the Company consideredits allowance for loan losses to be adequate.

 

**Noninterest income:**

 

Noninterest income consists of revenuesgenerated from a broad range of financial services and activities, includingfee-based services, and profits and commissions earned through securities andinsurance sales.  In addition, gains andlosses realized from the sale of investment portfolio securities and sales ofassets are included in noninterest income.

 

Noninterest income totaled $1,327,000 for thethree month period ended September 30, 2005, a decrease of $117,000 or 8%compared with the same period ended September 30, 2004.  The decrease is attributed to a $136,000 declinein service charges on deposits and a $65,000 decline in gains on sales ofassets partially offset by a $29,000 gain on sales of securities and a $55,000increase in other operating income.

 

For the nine month period ended September 30,2005, noninterest income totaled $3,801,000 representing a decrease of $529,000or 12% compared with the same period ended September 30, 2004.  The decrease is primarily attributed to a$234,000 decline in service charges on deposits as customers incurred fewer NFStransactions and has embraced the Company’s free checking account product, anda $484,000 decline in the gains on the sale of securities and otherassets.  During the second quarter 2005,the Company realized a $346,000 loss on sale of securities for other-than-temporaryimpairment of investments in Federal National Mortgage Association (FNMA) andFederal Home Loan Mortgage Corporation (FHLMC) perpetual preferred stocks.  These decreases were partially offset by an$189,000 increase in other operating income as the bank realized increases indebit card and ATM income, servicing fee and credit card income.  In 2005, the Company won a reversal of a$250,000 jury verdict in a lawsuit against the bank on appeal, and reversed thecontingent liability accrual.  During thesame period in 2004, the bank recovered approximately $260,000 in fraudulentlosses.

 

**Noninterest expense**:

 

Noninterest expense includes compensation and benefits, occupancyexpenses, advertising and marketing, professional fees, office supply, dataprocessing, telephone expenses, miscellaneous items and other losses.

 

Noninterest expense totaled $4,129,000 for thethree month period ended September 30, 2005, a decrease of $198,000 or 5%compared to the same period last year. This decrease is primarily due to a $250,000 jury verdict that wasaccrued in the third quarter of 2004, and expense control by the Company.  Partially offsetting this decline was a$30,000 increase in salaries and employee benefits, offset by a $26,000decrease in net occupancy and equipment.  The Company realized savings from the June 2005 consolidation of abranch located in Birmingham, Alabama.

 

Noninterest expense totaled $12,586,000 for the nine month period endedSeptember 30, 2005, a decline of $256,000 compared to the same period lastyear.  Salaries and employee benefitsincreased $100,000.  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 as opposed to beingspread over twelve months, as was the case in 2004.  The

 

20

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Company anticipates this change will improve staff morale andretention.  In addition, the Companystarted accruing for anticipated bonuses in 2005 in anticipation of expectedperformance levels.  No bonuses wereaccrued in 2004.

 

Other operating expenses decreased $347,000 overthe nine month period ended September 30, 2005. The decrease is primarily attributable to expense control by theCompany.  Advertising and marketingexpenses decreased $169,000 and professional services decreased $259,000compared to the same nine month period in 2004. Also, the Company accrued $100,000 as a contingency reserve due to ajury verdict against its subsidiary bank in a lawsuit in 2005 as compared to a$250,000 contingency reserve in 2004.

 

**INTEREST RATE SENSITIVITYMANAGEMENT**

 

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 financialinstitution’s interest rate risk.  TheCompany’s ability to reprice assets and liabilities in the same dollar amountsand at the same time minimizes interest rate risk.

 

One method of measuring the impact of interest rate sensitivity is thecumulative gap analysis.  The differencebetween interest rate sensitive assets and interest rate sensitive liabilitiesat various time intervals is referred to as the gap.  The Company is liability sensitive on 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 thecontractual maturities of all investment securities at September 30, 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.

 

The following table sets forth the distribution of the repricing of theCompany’s interest rate sensitive assets and interest rate sensitiveliabilities as of September 30, 2005.

 

21

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| ** **                                                              | ** ** | **Cumulative amounts as of September 30, 2005** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                              | ** ** | **Maturing and repricing within**               | ** ** |
| ** **                                                              | ** ** | **3**                                           | ** ** | **3 to 12** | ** ** | **1 to 5** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Months**                                      | ** ** | **Months** | ** ** | **Years** | ** ** | **5 Years** | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **(amounts in thousands, except ratios)**       | ** ** |
| Interest-sensitive assets:                                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Investments                                                             |       | $                                               | 488        |   | $ | 2,366 |   | $ | 26,979 |   | $ | 45,668 |   | $ | 75,501 |   |
| Certificates of deposit                                                 |       | —                                          |       | 100 |   | — |   | — |   | 100 |   |
| Loans                                                                   |       | 85,464                                          |       | 9,298 |   | 65,850 |   | 52,432 |   | 213,044 |   |
| Interest-bearing deposits with other banks                              |       | 1,314                                           |       | — |   | — |   | — |   | 1,314 |   |
| Total interest-sensitive assets                                         |       | $                                               | 87,266     |   | $ | 11,764 |   | $ | 92,829 |   | $ | 98,100 |   | $ | 289,959 |   |
|                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                               | 131,437    |   | $ | 60,109 |   | $ | 16,795 |   | $ | 3 |   | $ | 208,344 |   |
| Notes payable                                                           |       | 440                                             |       | — |   | — |   | — |   | 440 |   |
| Junior subordinated debentures                                          |       | —                                          |       | — |   | 5,155 |   | — |   | 5,155 |   |
| Other borrowings                                                        |       | 11,200                                          |       | — |   | — |   | 10,000 |   | 21,200 |   |
| Total interest-sensitive liabilities                                    |       | $                                               | 143,077    |   | $ | 60,109 |   | $ | 21,950 |   | $ | 10,003 |   | $ | 235,139 |   |
|                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |       | $                                               | (55,811    | ) | $ | (48,345 | ) | $ | 70,879 |   | $ | 88,097 |   | $ | 54,820 |   |
|                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to  total interest-sensitive assets |       | (19.25                                          | )%         | (35.92 | )% | (11.48 | )% | 18.91 | % | 18.91 | % |

 

----

(a) Savings, Now, and moneymarket deposits totaling  $101,779,000are included in the maturing in 3 months 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 and must approve dividend paymentsthat exceed 50 percent of the Bank’s prior year net income.  In 2005, the amount that can be paid by theBank to the Company without prior regulatory approval is approximately$1,357,000 of which the bank paid $313,000 in April 2005. The payment ofdividends may also be affected or limited by other factors, such as therequirement to maintain adequate capital above regulatory guidelines.  The Company does not anticipate any liquidityrequirements 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 

 

22

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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 pay-downs of investment securitiesavailable for sale and held to maturity. Other short-term investments such as federal funds sold and maturing interestbearing deposits with other banks are additional sources of liquidity funding.

 

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 liquidity,and 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-term liquidityneeds.

 

**CAPITAL RESOURCES**

 

Stockholders’ equity increased $1,005,000 for the nine months endedSeptember 30, 2005, primarily due to earnings, partially offset by accumulatedother comprehensive losses on available for sale securities of $384,000.  Retained earnings increased by $1,299,000 to$19,407,000 for the nine month period due to net earnings of $1,612,000 reducedby dividend payments of $313,000. Accumulated other comprehensive loss, net of taxes increased by $350,000to $384,000 during the nine month period ending September 30, 2005.  These losses are due to the impact ofchanging economic conditions and changes in market interest rates on theCompany’s available for sale securities.

 

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 September 30, 2005, theBank’s total and Tier 1 capital to risk weighted assets and Tier 1 to averageassets were 15%, 14% and 10% respectively, compared with 14%, 13% and 9%respectively, at December 31, 2004.  Asof September 30, 2005, the Company met all capital adequacy requirements towhich it is subject.

 

23

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

 

Market risk is the risk of loss from adverse changes in market pricesand interest rates.  Our market riskarises principally from interest rate risk inherent in our lending, deposit,and borrowing activities.  Although wemanage certain other risks, such as credit quality and liquidity risk, in thenormal course 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 September30, 2005 is as follows (in thousands):

 
| ** **                           | ** ** | **2005**     | ** ** |
|--------------------------------------|------------|--------------|------------|
| ** **                           | ** ** | **Carrying** | ** ** | **Estimated** | ** ** | **Down** | ** ** | **Up** | ** ** |
| ** **                           | ** ** | **Value**    | ** ** | **Fair Value** | ** ** | **100 bp** | ** ** | **100 bp** | ** ** |
|                                 |       |         |       |   |   |   |   |   |   |
| Financial assets:                    |       |         |       |   |   |   |   |   |   |
| Interest-bearing deposits with banks |       | $            | 1,314      |   | $ | 1,314 |   | — | % | — | % |
| Certificates of deposit              |       | 100          |       | 100 |   | — |   | — |   |
| Investment securities                |       | 75,501       |       | 75,545 |   | 2.35 |   | (3.19 | ) |
| Loans receivable                     |       | 213,044      |       | 208,472 |   | 1.04 |   | (1.39 | ) |
|                                 |       |         |       |   |   |   |   |   |   |
| Financial liabilities:               |       |         |       |   |   |   |   |   |   |
| Interest-bearing deposits            |       | 208,344      |       | 198,362 |   | 1.37 |   | (1.26 | ) |
| Notes payable                        |       | 440          |       | 440 |   | — |   | — |   |
| Junior subordinated debentures       |       | 5,155        |       | 5,213 |   | — |   | — |   |
| Advances from Federal Home Loan Bank |       | 21,200       |       | 21,667 |   | 2.02 |   | (1.93 | ) |
|                                      |            |              |            |  |  |  |  |  |  |  |  |

 

The Company has adopted an asset/liability management program tomonitor the Company’s interest rate sensitivity and to ensure that the Companyis competitive 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**

 

As of the end of the period covered by this report, we conducted, underthe supervision of and with the participation of our management, including theCompany’s Chief Executive Officer, Chief Operating Officerand Chief Financial Officer, an evaluation ofthe effectiveness of our disclosure controls and procedures as defined inExchange Act Rule 13a-15(e). Based on this evaluation, the Company’s ChiefExecutive Officer, Chief Operating Officer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective as of September 30, 2005 in timely alerting themto material information required to be included in our reports filed with orfurnished to the Securities and 

 

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Exchange Commission.  There havebeen no changes in the Company’s internal controls over financial reportingthat occurred during the quarter ended September 30, 2005 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.****      ****LEGAL PROCEEDINGS**

 

None

 

**ITEM 2.****      ****UNREGISTERED SALE OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3.****      ****DEFAULTS UPON SENIORSECURITIES**

 

None

** **

**ITEM 4.****      ****SUBMISSION OF MATTERS TOVOTE OF SECURITY HOLDERS**

 

None

 

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

 

None

 

**ITEM 6.****      ****EXHIBITS**

 

**Exhibit 31**

 

Certification pursuant to 18 U.S.C. Section 1350 asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

**Exhibit 32**

 

Certification pursuant to 18 U.S.C. Section 1350 asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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: November 14, 2005 | By:                                   | /s/ James E. Young |   |
|                    | James E. Young                        |
|                    | President and Chief Executive Officer |
|                    |                                  |
|                    |                                  |
| Date: November 14, 2005 | By:                                   | /s/ Cynthia N. Day |   |
|                    | Cynthia N. Day                        |
|                    | Senior Executive Vice President and   |
|                    | Chief Operating Officer               |
|                    |                                  |
|                    |                                  |
| Date: November 14, 2005 | By:                                   | /s/ Samuel J. Cox |   |
|                    | Samuel J. Cox                         |
|                    | Senior Vice President and             |
|                    | Chief Financial Officer               |
|                         |                                       |  |  |  |  |  |

 

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