**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 March 31, 2006**                                                                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                              |
|       |       | **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 ofregistrant as specified 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’stelephone number, including area code:       **(404) 659 - 5959**

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                                                   ýYes      oNo.

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act)

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated  filer ý |
|---------------------------|--------|---------------------|--------|-------------------------------|

 

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act)           o Yes    ýNo

 

APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGSDURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether registrant hasfiled all documents and reports required to be filed by Sections 12, 13, or 15(d) ofthe Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court.            oYes    oNo.

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

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding foreach of the issuer’s classes of common stock as of the latest practicable date:2,002,542 shares of Common Stock, $1.00 par value and 90,000 shares ofNon-Voting Common Stock, $1.00 par value outstanding on April 17, 2006.

 

 

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**PART 1.****                FINANCIALINFORMATION**

**ITEM 1.****  Financialstatements**

 

**CITIZENS BANCSHARESCORPORATION AND SUBSIDIARIES**

** **

**CONSOLIDATEDBALANCE SHEETS**

**MARCH 31,2006 AND DECEMBER 31, 2005**

**(Inthousands, except share data)**

 
| ** **                                                                                              | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                              | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                              |       |            |       |       |       |
|                                                                                                    |       |            |       |       |       |
| Cash and due from banks                                                                                 |       | $               | 12,740     |       | $          | 11,289 |   |
| Interest-bearing deposits with banks                                                                    |       | 1,198           |       | 398        |       |
| Certificates of deposit                                                                                 |       | 200             |       | 100        |       |
| Investment securities available for sale,  at fair value                                                |       | 69,696          |       | 65,766     |       |
| Investment securities held to maturity, at  cost                                                        |       | 9,305           |       | 9,411      |       |
| Other investments                                                                                       |       | 2,375           |       | 2,835      |       |
| Loans receivable, net                                                                                   |       | 216,228         |       | 215,645    |       |
| Premises and equipment, net                                                                             |       | 7,554           |       | 7,625      |       |
| Cash surrender value of life insurance                                                                  |       | 9,189           |       | 9,105      |       |
| Foreclosed real estate, net                                                                             |       | 293             |       | 570        |       |
| Other assets                                                                                            |       | 5,666           |       | 5,837      |       |
|                                                                                                    |       |            |       |       |       |
| Total assets                                                                                            |       | $               | 334,444    |       | $          | 328,581 |   |
|                                                                                                    |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                           | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                    |       |            |       |       |       |
| LIABILITIES:                                                                                            |       |            |       |       |       |
| Noninterest-bearing deposits                                                                            |       | $               | 65,265     |       | $          | 60,087 |   |
| Interest-bearing deposits                                                                               |       | 202,876         |       | 194,582    |       |
|                                                                                                    |       |            |       |       |       |
| Total deposits                                                                                          |       | 268,141         |       | 254,669    |       |
|                                                                                                    |       |            |       |       |       |
| Accrued expenses and other liabilities                                                                  |       | 3,177           |       | 3,403      |       |
| Notes payable                                                                                           |       | 440             |       | 440        |       |
| Junior subordinated debentures                                                                          |       | 5,155           |       | 5,155      |       |
| Advances from Federal Home Loan Bank                                                                    |       | 29,600          |       | 37,700     |       |
|                                                                                                    |       |            |       |       |       |
| Total liabilities                                                                                       |       | 306,513         |       | 301,367    |       |
|                                                                                                    |       |            |       |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                           |       |            |       |       |       |
|                                                                                                    |       |            |       |       |       |
| STOCKHOLDERS’ EQUITY:                                                                              |       |            |       |       |       |
| Common stock - $1 par value; 20,000,000  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                                                                              |       | 7,455           |       | 7,439      |       |
| Retained earnings                                                                                       |       | 20,818          |       | 20,138     |       |
| Treasury stock at cost, 231,313 shares at March 31,  2006 and December 31, 2005, respectively |       | (1,882          | )          | (1,896     | )          |
| Accumulated other comprehensive loss, net  of income taxes                                              |       | (780            | )          | (787       | )          |
|                                                                                                    |       |            |       |       |       |
| Total stockholders’ equity                                                                         |       | 27,931          |       | 27,214     |       |
|                                                                                                    |       |            |       |       |       |
|                                                                                                    |       | $               | 334,444    |       | $          | 328,581 |   |

 

See notes to consolidated financialstatements.

 

2

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**CITIZENS BANCSHARESCORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

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

 
| ** **                                           | ** ** | **Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Interest income:                                     |       |                                   |       |   |   |
| Loans, including fees                                |       | $                                      | 4,356      |   | $ | 3,932 |   |
| Investment securities:                               |       |                                   |       |   |   |
| Taxable                                              |       | 621                                    |       | 618 |   |
| Tax-exempt                                           |       | 215                                    |       | 199 |   |
| Interest-bearing deposits                            |       | 12                                     |       | 11 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Total interest income                                |       | 5,204                                  |       | 4,760 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Interest expense:                                    |       |                                   |       |   |   |
| Deposits                                             |       | 1,240                                  |       | 845 |   |
| Other borrowings                                     |       | 439                                    |       | 319 |   |
| Total interest expense                               |       | 1,679                                  |       | 1,164 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,525                                  |       | 3,596 |   |
| Provision for loan losses                            |       | 30                                     |       | 105 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net interest income after provision for  loan losses |       | 3,495                                  |       | 3,491 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Noninterest income:                                  |       |                                   |       |   |   |
| Service charges on deposits                          |       | 775                                    |       | 827 |   |
| Gain on sales of securities                          |       | 3                                      |       | 46 |   |
| Gain (loss) on sales of assets                       |       | 31                                     |       | (25 | ) |
| Other operating income                               |       | 487                                    |       | 408 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,296                                  |       | 1,256 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Noninterest expense:                                 |       |                                   |       |   |   |
| Salaries and employee benefits                       |       | 2,000                                  |       | 2,120 |   |
| Net occupancy and equipment                          |       | 614                                    |       | 664 |   |
| Other operating expenses                             |       | 1,321                                  |       | 1,385 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 3,935                                  |       | 4,169 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 856                                    |       | 578 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Income tax expense                                   |       | 176                                    |       | 118 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                      | 680        |   | $ | 460 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income per share - basic                         |       | $                                      | 0.33       |   | $ | 0.22 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income per share - diluted                       |       | $                                      | 0.32       |   | $ | 0.22 |   |
| ** **                                           | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Weighted average outstanding shares - basic          |       | 2,089                                  |       | 2,081 |   |
|                                                 |       |                                   |       |   |   |
| Weighted average outstanding shares -  diluted       |       | 2,100                                  |       | 2,093 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**CITIZENS BANCSHARES CORPORATION**

**AND SUBSIDIARIES**

** **

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

**FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**

**(Unaudited - In thousands, except parentheticalfootnotes)**

 
| ** **                                                                                               | ** ** | **Common  Stock** | ** ** | **Nonvoting  Common Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|------------------------------------------------------|------------|------------|------------|
| **Shares**                                                                                               | ** ** | **Amount**        | ** ** | **Shares**                  | ** ** | **Amount**                       | **Shares** | ** **             | **Amount** |
| ** **                                                                                               | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance—December 31,  2004                                                                     |       | 2,230             |       | $                           | 2,230      |                             | 90         |                   | $          | 90                  |       | $                                                    | 7,442      |       | $          | 18,108 |   | (241 | ) | $ | (1,955 | ) | $ | (34 | ) | $ | 25,881 |   |
|                                                                                                     |       |              |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Net income                                                                                               |       | —            |       | —                      |       | —                           |       | —                 |       | —              |       | 460                                                  |       | —     |       | — |   | — |   | 460 |   |
| Unrealized  holding losses on investment securities available for sale—net of taxes of  $273,934    |       | —            |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | (532 | ) | (532 | ) |
| Less  reclassification adjustment for holding gains included in net income—net of  taxes of $15,541 |       | —            |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | (30 | ) | (30 | ) |
|                                                                                                     |       |              |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Comprehensive  loss                                                                                      |       | —            |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | — |   | (102 | ) |
| Sale of treasury stock                                                                                   |       | —            |       | —                      |       | —                           |       | —                 |       | (1                  | )          | —                                               |       | 6          |       | 49 |   | — |   | 48 |   |
|                                                                                                     |       |              |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| **Balance—March   31, 2005**                                                                   | ** ** | **2,230**         | ** ** | **$**                       | **2,230**  | ** **                       | **90**     | ** **             | **$**      | **90**              | ** ** | **$**                                                | **7,441**  | ** ** | **$**      | **18,568** | ** ** | **(235** | **)** | **$** | **(1,906** | **)** | **$** | **(596** | **)** | **$** | **25,827** | ** ** |
| ** **                                                                                               | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance—December 31,  2005                                                                     |       | 2,230             |       | $                           | 2,230      |                             | 90         |                   | $          | 90                  |       | $                                                    | 7,439      |       | $          | 20,138 |   | (231 | ) | $ | (1,896 | ) | $ | (787 | ) | $ | 27,214 |   |
|                                                                                                     |       |              |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Net income                                                                                               |       | —            |       | —                      |       | —                           |       | —                 |       | —              |       | 680                                                  |       | —     |       | — |   | — |   | 680 |   |
| Unrealized  holding losses on investment securities available for sale—net of taxes of  $4,787      |       | —            |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | 9 |   | 9 |   |
| Less  reclassification adjustment for holding gains included in net income—net of  taxes of $1,129  |       | —            |       | —                      |       | —                           |       | —                 |       | —              |       | —                                               |       | —     |       | — |   | (2 | ) | (2 | ) |
|                                                                                                     |       |              |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| Comprehensive  loss                                                                                      |       |              |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   | 687 |   |
| Stock based  compensation expense                                                                        |       | —            |       | —                      |       | —                           |       | —                 |       | 11                  |       | —                                               |       | —     |       | — |   | — |   | 11 |   |
| Reclassification  adjustment of treasury stock                                                           |       | —            |       | —                      |       | —                           |       | —                 |       | 5                   |       | —                                               |       | —     |       | 14 |   | — |   | 19 |   |
|                                                                                                     |       |              |       |                        |       |                             |       |                   |       |                |       |                                                 |       |       |       |   |   |   |   |   |   |
| **Balance—March   31, 2006**                                                                   | ** ** | **2,230**         | ** ** | **$**                       | **2,230**  | ** **                       | **90**     | ** **             | **$**      | **90**              | ** ** | **$**                                                | **7,455**  | ** ** | **$**      | **20,818** | ** ** | **(231** | **)** | **$** | **(1,882** | **)** | **$** | **(780** | **)** | **$** | **27,931** | ** ** |

 

See notes to consolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THETHREE MONTHS ENDED MARCH 31, 2006 AND 2005**

**(Inthousands)**

 
| ** **                                                                                  | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                  | ** ** | **2006**           | ** ** | **2005** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**    | ** ** |
| **OPERATING ACTIVITIES:**                                                                   | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net income                                                                                  |       | $                  | 680        |   | $ | 460 |   |
| **Adjustments to reconcile net income to net  cash provided by operating activities:**      | ** ** | ** **         | ** ** | ** ** | ** ** |
| Provision for loan losses                                                                   |       | 30                 |       | 105 |   |
| Depreciation                                                                                |       | 179                |       | 248 |   |
| Amortization and accretion, net                                                             |       | 81                 |       | 178 |   |
| Provision for deferred income taxes  (benefit)                                              |       | (25                | )          | (15 | ) |
| Gain on sale of assets and investments                                                      |       | (26                | )          | (71 | ) |
| Stock based compensation expense                                                            |       | 11                 |       | — |   |
| Change in other assets                                                                      |       | 109                |       | (24 | ) |
| Change in accrued expenses and other  liabilities                                           |       | (207               | )          | (312 | ) |
| Net cash provided by operating activities                                                   |       | 832                |       | 569 |   |
|                                                                                        |       |               |       |   |   |
| **INVESTING ACTIVITIES:**                                                                   | ** ** | ** **         | ** ** | ** ** | ** ** |
| Proceeds from calls and maturities of  investment securities held to maturity               |       | 102                |       | 84 |   |
| Proceeds from sales and maturities of  investment securities available for sale             |       | 3,421              |       | 6,426 |   |
| Purchases of investment securities  available for sale                                      |       | (7,403             | )          | — |   |
| Net change in other investments                                                             |       | 460                |       | 649 |   |
| Net change in loans receivable                                                              |       | (719               | )          | (539 | ) |
| Net proceeds from the sale of foreclosed  properties                                        |       | 394                |       | 1,053 |   |
| Purchases of premises and equipment, net                                                    |       | (108               | )          | (20 | ) |
| Net change in interest bearing deposits  with banks                                         |       | (800               | )          | (2,972 | ) |
| Net change in certificates of deposit                                                       |       | (100               | )          | 100 |   |
| Net cash provided (used) by investing  activities                                           |       | (4,753             | )          | 4,781 |   |
|                                                                                        |       |               |       |   |   |
| **FINANCING ACTIVITIES:**                                                                   | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net change in deposits                                                                      |       | 13,472             |       | 10,969 |   |
| Sale of treasury stock activity                                                             |       | —             |       | 48 |   |
| Net change in advances from Federal Home  Loan Bank                                         |       | (8,100             | )          | (15,250 | ) |
| Decrease in federal funds sold                                                              |       | —             |       | — |   |
| Net cash provided by (used in) financing  activities                                        |       | 5,372              |       | (4,233 | ) |
| Net change in cash and cash equivalents                                                     |       | 1,451              |       | 1,117 |   |
| Cash and and cash equivalents, beginning of  period                                         |       | 11,289             |       | 10,875 |   |
| Cash and and cash equivalents at end of  period                                             |       | $                  | 12,740     |   | $ | 11,992 |   |
| **Supplemental disclosures of cash paid  during the period for:**                           | ** ** | ** **         | ** ** | ** ** | ** ** |
| Interest                                                                                    |       | $                  | 1,770      |   | $ | 1,101 |   |
| Income taxes                                                                                |       | $                  | 95,000     |   | $ | — |   |
| **Supplemental disclosures of noncash  transactions:**                                      | ** ** | ** **         | ** ** | ** ** | ** ** |
| Change in unrealized gain (loss) on  investment securities available for sale, net of taxes |       |               |       |   |   |
|                                                                                        |       | $                  | 7          |   | $ | (562 | ) |

 

See notes to consolidated financialstatements.

 

5

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

**Notes tothe Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**Basis of Presentation**

 

Citizens Bancshares Corporation (the “Company”)is a holding company that provides a full range of commercial banking andmortgage brokerage services to individual and corporate customers inmetropolitan Atlanta and Columbus, Georgia, and in Birmingham and Eutaw,Alabama, through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).The Bank operates under a state charter and serves its customers through sevenfull-service branches in metropolitan Atlanta, Georgia, one full-service branchin Columbus, Georgia, one full-service branches in Birmingham, Alabama, and onefull-service branch in Eutaw, Alabama. The Company also owns and operates awholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the “Trust”)through the issuance of pooled trust preferred securities. However, in accordancewith current accounting guidance, the Trust has not been consolidated in thefinancial statements.

 

The accompanying unaudited consolidatedfinancial statements have been prepared pursuant to the rules andregulations for reporting on Form 10-Q. Accordingly, certain disclosuresrequired by generally accepted accounting principles are not included herein.These interim statements should be read in conjunction with the financialstatements and notes thereto included in the Company’s latest Annual Report on Form 10-Kfiled with the Securities and Exchange Commission for the year ended December 31,2005. The results of operations for the interim periods reported herein are notnecessarily representative of the results expected for the full 2006 fiscal year.

 

The consolidated financial statements of theCompany for the three month period ended March 31, 2006 are unaudited. Inthe opinion of management, all adjustments necessary for a fair presentation ofthe financial position and results of operations and cash flows for the threemonth period have been included. All adjustments are of a normal recurringnature. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

**Accounting Policies**

 

The Company’s consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”), which oftenrequire the judgment of management in the selection and application of certainaccounting 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 ended December 31,2005. The Company has followed those policies in preparing this report. Managementbelieves that the quality and reasonableness of its most critical policiesenable the fair presentation of its financial position and of its results ofoperations.

 

**Recently Issued Accounting Standards**

 

The following is a summary of recent authoritative pronouncements thatcould affect the accounting, reporting, and disclosure of financial informationby the Company:

 

6

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In February 2006, the FASBissued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140.” ThisStatement amends SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicingof Financial Assets and Extinguishments of Liabilities.” This Statementresolves issues addressed in SFAS No. 133 Implementation Issue No. D1,“Application of Statement 133 to Beneficial Interests in Securitized FinancialAssets.” SFAS No. 155 is effective for all financial instruments acquiredor issued after the beginning of an entity’s first fiscal year that beginsafter September 15, 2006. The Company does not believe that the adoptionof SFAS No. 155 will have a material impact on its financial position,results of operations and cash flows.

 

In March 2006, the FASB issued SFAS No. 156, “**Accounting for Servicingof Financial Assets—an amendment of FASB Statement No. 140.” **This Statement amendsFASB No. 140, “Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities,” with respect to the accounting forseparately recognized servicing assets and servicing liabilities. SFAS No. 156requires an entity to recognize a servicing asset or servicing liability eachtime it undertakes an obligation to service a financial asset by entering intoa servicing contract; requires all separately recognized servicing assets andservicing liabilities to be initially measured at fair value, if practicable;permits an entity to choose its subsequent measurement methods for each class ofseparately recognized servicing assets and servicing liabilities; at itsinitial adoption, permits a one-time reclassification of available-for-salesecurities to trading securities by entities with recognized servicing rights,without calling into question the treatment of other available-for-salesecurities under Statement 115, provided that the available-for-sale securitiesare identified in some manner as offsetting the entity’s exposure to changes infair value of servicing assets or servicing liabilities that a servicer electsto subsequently measure at fair value; and requires separate presentation ofservicing assets and servicing liabilities subsequently measured at fair valuein the statement of financial position and additional disclosures for allseparately recognized servicing assets and servicing liabilities. An entityshould adopt SFAS No. 156 as of the beginning of its first fiscal yearthat begins after September 15, 2006. The Company does not believe theadoption of SFAS No. 156 will have a material impact on its financialposition, results of operations and cash flows.

 

Other accounting standards that have been issued or proposed by theFASB or other standards-setting bodies are not expected to have a materialimpact on the Company’s financial position, results of operations and cashflows.

 

**2.  STOCK BASED COMPENSATION**

 

On January 1, 2006, theCompany adopted the fair value recognition provisions of Financial AccountingStandards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R),*Accounting for Stock-Based Compensation*,to account for compensation costs under its stock option plans. The Companypreviously utilized the intrinsic value method under Accounting PrinciplesBoard Opinion No. 25, *Accounting for StockIssued to Employees (as amended)* (“APB 25”). Under the intrinsicvalue method prescribed by APB 25, no compensation costs were recognized forthe Company’s stock options because the option exercise price in its plansequals the market price on the date of grant. Prior to January 1, 2006,the Company only disclosed the pro forma effects on net income and earnings pershare as if the fair value recognition provisions of SFAS 123(R) had beenutilized.

 

In adopting SFAS No. 123,the Company elected to use the modified prospective method to account for thetransition from the intrinsic value method to the fair value recognition method.Under the

 

7

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modified prospective method,compensation cost is recognized from the adoption date forward for all newstock options granted and for any outstanding unvested awards as if the fairvalue method had been applied to those awards as of the date of grant. Thefollowing table illustrates the effect on net income and earnings per share asif the fair value based method had been applied to all outstanding and unvestedawards in each period (in thousands, except per share amounts):

 
| ** **                                                                                                  | ** ** | **For the three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
|                                                                                                        |       |                                           |       |   |   |
| Net income as reported                                                                                      |       | $                                              | 680        |   | $ | 460 |   |
| Add: stock-based compensation expense  included in reported net income, net of tax                          |       | 6                                              |       | — |   |
| Less: total stock-based compensation  expense determined under fair value method for all awards, net of tax |       | (6                                             | )          | (4 | ) |
|                                                                                                        |       |                                           |       |   |   |
| Pro forma net income                                                                                        |       | $                                              | 680        |   | $ | 456 |   |
|                                                                                                        |       |                                           |       |   |   |
| Earnings per share:                                                                                         |       |                                           |       |   |   |
| Basic -as reported                                                                                          |       | $                                              | 0.33       |   | $ | 0.22 |   |
| Basic—pro forma                                                                                        |       | $                                              | 0.33       |   | $ | 0.22 |   |
|                                                                                                        |       |                                           |       |   |   |
| Diluted—as reported                                                                                    |       | $                                              | 0.32       |   | $ | 0.22 |   |
| Diluted—pro forma                                                                                      |       | $                                              | 0.32       |   | $ | 0.22 |   |

 

Compensation expense in the pro formadisclosures is not indicative of future amounts, as options vest over severalyears and additional grants could be made each year.

 

**3.  INTANGIBLEASSETS**

 

Finite lived intangible assets of the Companyrepresent deposit assumption premiums recorded upon the purchase of certainassets and liabilities from other financial institutions. Deposit assumptionpremiums are amortized over seven years, the estimated average lives of thedeposit bases acquired, using the straight-line method and are included withinother assets on the Consolidated Balance Sheets.

 

The Company applies a fair value-basedimpairment test to the carrying value of goodwill on an annual basis and on aninterim basis if certain events or circumstances indicate that an impairmentloss may have been incurred.

 

8

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The following table presents informationabout the Company’s intangible assets at (in thousands):

 
| ** **                    | ** ** | **March  31, 2006**  | ** ** | **December 31, 2005**   | ** ** |
|-------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **Gross Carrying Amount** | ** ** | **Accumulated Amortization** | ** ** | **Gross Carrying Amount** | ** ** | **Accumulated Amortization** | ** ** |
|                          |       |                      |       |                         |       |   |   |   |   |
| Unamortized intangible asset: |       |                      |       |                         |       |   |   |   |   |
| Goodwill                      |       | $                         | 362        |                         | $          | — |   | $ | 362 |   | $ | — |   |
|                          |       |                      |       |                         |       |   |   |   |   |
| Amortized intangible assets:  |       |                      |       |                         |       |   |   |   |   |
| Core deposit intangibles      |       | $                         | 2,836      |                         | $          | 2,296 |   | $ | 2,836 |   | $ | 2,195 |   |

 

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

 
| ** **                                                                                                   | ** ** | **For the 3  months ended  March 31, 2006** | ** ** | **For the 3  months ended  March 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                                         |       |                                             |       |                                             |       |
| Aggregate amortization expense of core  deposit intangibles:                                                 |       | $                                                | 101        |                                             | $          | 101 |   |
|                                                                                                         |       |                                             |       |                                             |       |
| Estimated aggregate amortization expense of  core deposit intangibles for the years ending December 31: |       |                                             |       |                                             |       |
|                                                                                                         |       |                                             |       |                                             |       |
| 2006                                                                                                         |       | $                                                | 405        |                                             |       |   |
| 2007                                                                                                         |       | $                                                | 112        |                                             |       |   |
| 2008                                                                                                         |       | $                                                | 53         |                                             |       |   |
| 2009                                                                                                         |       | $                                                | 53         |                                             |       |   |
| 2010                                                                                                         |       | $                                                | 18         |                                             |       |   |
|                                                                                                              |            |                                                  |            |                                                  |            |  |  |

 

**4.  COMPREHENSIVEINCOME**

 

Comprehensive income includes: (1) reportednet income and (2) unrealized gains and losses on marketable securities. Thefollowing table shows our comprehensive income for the three month periods endedMarch 31, 2006 and 2005 (in thousands):

 
| ** **                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                              |       |                                  |       |   |   |
| Net Income                        |       | $                                     | 680        |   | $ | 460 |   |
|                              |       |                                  |       |   |   |
| Other comprehensive income (loss) |       | 7                                     |       | (562 | ) |
|                              |       |                                  |       |   |   |
| Comprehensive income              |       | $                                     | 687        |   | $ | (102 | ) |

 

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**5.****                     NET INCOMEPER COMMON AND COMMON EQUIVALENT SHARE**

 

Basic and diluted net income per common andpotential common share has been calculated based on the weighted average numberof shares outstanding. The following schedule reconciles the numerator anddenominator of the basic and diluted net income per common and potential commonshare for the three months ended March 31, 2006 and 2005 (in thousands,except per share data):

 
| ** **                                                        | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------|------------|
|                                                              |       |                        |       |                      |       |                  |       |
| **Three Months ended March 31, 2006**                        | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **            | ** ** |
|                                                              |       |                        |       |                      |       |                  |       |
| Basic earnings per share                                          |       | $                           | 680        |                      | 2,089      |                  | $          | 0.33 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —                      |       | 11                        |       | (0.01                 | )          |
|                                                              |       |                        |       |                      |       |                  |       |
| Diluted earnings per share                                        |       | $                           | 680        |                      | 2,100      |                  | $          | 0.32 |   |
|                                                              |       |                        |       |                      |       |                  |       |
| **Three Months ended March 31, 2005**                        | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **            | ** ** |
|                                                              |       |                        |       |                      |       |                  |       |
| Basic earnings per share                                          |       | $                           | 460        |                      | 2,081      |                  | $          | 0.22 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —                      |       | 12                        |       | $                     | —     |   |
|                                                              |       |                        |       |                      |       |                  |       |
| Diluted earnings per share                                        |       | $                           | 460        |                      | 2,093      |                  | $          | 0.22 |   |

 

**RECLASSIFICATIONS**

 

Certain 2005 amounts have been reclassifiedto conform to the 2006 presentation.

 

10

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**ITEM 2.****          MANAGEMENT’S DISCUSSIONAND ANALYSIS**

 

**INTRODUCTION**

 

Citizens Bancshares Corporation (the “Company”)is a holding company that provides a full range of commercial banking andmortgage brokerage services to individuals and corporate customers in itsprimary market areas, metropolitan Atlanta and Columbus, Georgia, andBirmingham and Eutaw, Alabama through its wholly owned subsidiary, CitizensTrust Bank (the “Bank”). The Bank is a member of the Federal Reserve System andoperates under a state charter. The Company serves its customers through 10full-service branches in Georgia and Alabama. The Company also owns andoperates a wholly owned subsidiary grantor trust, Citizens (GA) Statutory TrustI (the “Trust”) through the issuance of pooled trust preferred securities.However, in accordance with current accounting guidance, the Trust has not beenconsolidated in the financial statements.

 

**Forward Looking Statements**

 

In addition to historical information, thisreport on Form 10-Q may contain forward-looking statements. For thispurpose, any statements contained herein, including documents incorporated byreference, that are not statements of historical fact may be deemed to beforward-looking statements. Forward-looking statements are subject to numerousassumptions, risks and uncertainties. Without limiting the foregoing, the words“believe,” “anticipates,” “plan,” expects,” and similar expressions areintended to identify forward-looking statements.

 

Forward-looking statements are based oncurrent management expectations and, by their nature, are subject to risk anduncertainties because of the possibility of changes in underlying factors andassumptions. Actual conditions, events or results could differ materially fromthose contained in or implied by such forward-looking statements for a varietyof reasons, including: sharp and/or rapid changes in interest rates;significant changes in the economic scenario from the current anticipatedscenario which could materially change anticipated credit quality trends andthe ability to generate loans and gather deposits; significant delay in orinability to execute strategic initiatives designed to grow revenues and/orcontrol expenses; unanticipated issues during the integration of acquisitions;and significant changes in accounting, tax or regulatory practices or requirements.The Company undertakes no obligation to, nor does it intend to, updateforward-looking statements to reflect circumstances or events that occur afterthe date hereof or to reflect the occurrence of unanticipated events.

 

The following discussion is of the Company’sfinancial condition as of March 31, 2006 and the changes in the financialcondition and results of operations for the three month periods ended March 31,2006 and 2005.

 

**Critical Accounting Policies**

 

In response to the Securities and ExchangeCommission’s (“SEC”) Release No. 33-8040, Cautionary Advice RegardingDisclosure About Critical Accounting Policies, the Company has identified thefollowing as the most critical accounting policies upon which its financialstatus depends. The critical policies were determined by considering accountingpolicies that involve the most complex or subjective decisions or assessments. TheCompany’s most critical accounting policies relate to:

 

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**InvestmentSecurities**- The Companyclassifies investments in one of three categories based on management’s intentupon purchase: held to maturity securities which are reported at amortizedcost, trading securities which are reported at fair value with unrealized holdinggains and losses included in earnings, and available for sale securities whichare recorded at fair value with unrealized holding gains and losses included asa component of accumulated other comprehensive income. The Company had noinvestment securities classified as trading securities during 2006 or 2005.

 

Premiums anddiscounts on available for sale and held to maturity securities are amortizedor accreted using a method which approximates a level yield.

 

Gains andlosses on sales of investment securities are recognized upon disposition, basedon the adjusted cost of the specific security. A decline in market value of anysecurity below cost that is deemed other than temporary is charged to earningsresulting in the establishment of a new cost basis for the security.

 

**Loans**  - Loans are reportedat principal amounts outstanding less unearned income and the allowance forloan losses. Interest income on loans is recognized on a level-yield basis.Loan fees and certain direct origination costs are deferred and amortized overthe estimated terms of the loans using the level-yield method. Discounts onloans purchased are accreted using the level-yield method over the estimatedremaining life of the loan purchased.

 

**Allowancefor Loan Losses** - The Company provides for estimatedlosses on loans receivable when any significant and permanent decline in valueoccurs. These estimates for losses are based, not only on individual assets andtheir related cash flow forecasts, sales values, and independent appraisals,but also on the volatility of certain real estate markets, and the concern fordisposing of real estate in distressed markets. For loans that are pooled forpurposes of determining the necessary provisions, estimates are based on loantypes, history of charge-offs, and other delinquency analyses. Therefore, thevalue 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 of Directors.On a quarterly basis a comprehensive review of the adequacy of the allowancefor loan losses is performed. This assessment is made in the context ofhistorical losses as well as existing economic conditions, and individualconcentrations of credit. Loans are charged against the allowance when, in theopinion of management, such loans are deemed uncollectible and subsequentrecoveries are added to the allowance.

 

A description of other accounting policiesare summarized in Note 1, Summary of Significant Accounting Policies in theNotes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005. The Company has followed thosepolicies in preparing this report.

 

**FINANCIAL CONDITION**

 

Citizens Bancshares Corporation’s totalassets at March 31, 2006 were $334,444,000, an increase of $5,863,000 or2% compared to $328,581,000 at December 31, 2005. This increase isattributed to a $4,847,000 net increase in earning assets during the firstquarter of 2006 funded by a $13,472,000 increase in total deposits.

 

12

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At March 31, 2006, the Companymaintained a balance of cash and due from banks of $12,740,000 representing anincrease of $1,451,000 from December 31, 2005.

 

During the first quarter of 2006, totalearning assets increased $4,847,000. Interest bearing deposits with banksincreased $800,000 to $1,198,000 and investment in certificates of depositsincreased by $100,000 during the first quarter of 2006. Investment securitiesclassified as available for sale increased $3,930,000 and was partially offsetby a $106,000 decrease in investment securities held to maturity. The increaseis due to the Company taking advantage of the continuing rise in interest ratesto increase the average yield and duration of its investment portfolio. Otherinvestments, which consist of the Company’s investment in the stock of theFederal Reserve Bank and the Federal Home Loan Bank (FHLB), decreased by$460,000 and fluctuate daily due to the amount of advances outstanding at theFHLB. Total production of new loans was $18,071,000in the first quarter of 2006, resulting in an increase of $583,000 in loans receivable,net for the period.

 

Total liabilities increased $5,146,000 to$306,513,000 at March 31, 2006 compared to $301,367,000 at December 31,2005. This increase is primarily due to a $13,472,000 increase in totaldeposits. Advances from Federal Home Loan Bank, another significant componentof total liabilities, decreased $8,100,000 to $29,600,000 at March 31,2006. The Company used the excess liquidity generated from its deposit growthto reduce its outstanding borrowings with the FHLB to reduce the yield its payson interest-bearing liabilities.

 

**INVESTMENT SECURITIES**

 

The Company invests a portion of its assetsin U.S. government sponsored agency securities, state, county and municipalsecurities, mortgage backed bonds, as well as certain equity securities. At March 31,2006 and December 31, 2005, the Company’s investment securities portfoliorepresented approximately 24% of total assets.

 

Investment securities available for sale aresummarized as follows (in thousands):

 
| **At March 31, 2006**              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| U.S. Government agencies                |       | $                   | 7,914      |                         | $          | —                        |       | $              | 162        |   | $ | 7,752 |   |
| State, county, and municipal securities |       | 16,310              |       | 152                          |       | 91                            |       | $              | 16,371     |   |
| Mortgage-backed securities              |       | 45,601              |       | 7                            |       | 1,198                         |       | $              | 44,410     |   |
| Equity securities (1)                   |       | 1,054               |       | 113                          |       | 4                             |       | 1,163          |       |
| Totals                                  |       | $                   | 70,879     |                         | $          | 272                           |       | $              | 1,455      |   | $ | 69,696 |   |
|                                         |            |                     |            |                              |            |                               |            |                |            |  |  |  |  |  |

 
| **At December 31, 2005** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                    |       |                |       |                         |       |                          |       |                |       |
| U.S. Government agencies                |       | $                   | 7,937      |                         | $          | 2                             |       | $                   | 153        |   | $ | 7,786 |   |
| State, county, and municipal securities |       | 14,266              |       | 159                          |       | 124                           |       | 14,301              |       |
| Mortgage-backed securities              |       | 43,703              |       | 11                           |       | 1,103                         |       | 42,611              |       |
| Equity securities (1)                   |       | 1,054               |       | 24                           |       | 10                            |       | 1,068               |       |
| Totals                                  |       | $                   | 66,960     |                         | $          | 196                           |       | $                   | 1,390      |   | $ | 65,766 |   |
|                                         |            |                     |            |                              |            |                               |            |                     |            |  |  |  |  |  |

 

13

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----

(1) The equity securitiesrepresent agency dividends received deduction (DRD) preferred stock issued byFannie Mae Corporation (FNMA) and the Federal Home Loan Mortgage Corporation(FHLMC). These securities are callable at par and reprice every two years. Theinterest earned on these equity securities is 70 percent tax free.

 

Investment securities held to maturity aresummarized as follows (in thousands):

 
| **At March 31, 2006**               | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                     |       |                |       |                         |       |                          |       |           |       |
| U.S.  Government agencies                |       | $                   | 3,000      |                         | $          | —                        |       | $              | 78         |   | $ | 2,922 |   |
| State,  county, and municipal securities |       | 5,213               |       | 77                           |       | 2                             |       | 5,288          |       |
| Mortgage-backed  securities              |       | 1,092               |       | 1                            |       | 45                            |       | 1,048          |       |
|                                     |       |                |       |                         |       |                          |       |           |       |
| Totals                                   |       | $                   | 9,305      |                         | $          | 78                            |       | $              | 125        |   | $ | 9,258 |   |

 
| **At December 31, 2005**  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                     |       |                |       |                         |       |                          |       |                |       |
| U.S.  Government agencies                |       | $                   | 3,000      |                         | $          | —                        |       | $                   | 75         |   | $ | 2,925 |   |
| State,  county, and municipal securities |       | 5,212               |       | 75                           |       | 3                             |       | 5,284               |       |
| Mortgage-backed  securities              |       | 1,199               |       | 3                            |       | 42                            |       | 1,160               |       |
|                                     |       |                |       |                         |       |                          |       |                |       |
| Totals                                   |       | $                   | 9,411      |                         | $          | 78                            |       | $                   | 120        |   | $ | 9,369 |   |

 

Securities classified asavailable-for-sale are recorded at fair market value and held-to-maturitysecurities are recorded at amortized cost. The Company evaluates its investmentportfolio periodically to identify any impairment that is other than temporary.At March 31, 2006, the Company had several debt securities that have beenin an unrealized loss position for twelve months or more. The Company has theability and intent to hold these securities until such time as the valuerecovers or the securities mature. The Company believes, based on industryanalyst reports and credit ratings, that the deterioration in value isattributable to changes in market interest rates and is not in the creditquality of the issuer and therefore, these losses are not consideredother-than-temporary.

 

The Company’s investmentportfolio consists principally of obligations of the United States, itsagencies or its corporations and general obligation municipal securities. Inthe opinion of management, there is no concentration of credit risk in itsinvestment portfolio. The company places its deposits and correspondentaccounts with and sells its federal funds to high quality institutions. Managementbelieves credit risk associated with correspondent accounts is not significant.

 

##### **LOANS**

 

Loans outstanding, by classification, aresummarized as follows (in thousands):

 

14

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| ** **                               | ** **                  | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|-----------------------------|--------------------------|------------|-----------------------------|------------|
|                                     |                        |                     |       |                        |       |
| Commercial,  financial, and agricultural |                        | $                        | 12,606     |                        | $          | 12,647 |   |
| Installment                              |                        | 10,258                   |       | 10,132                      |       |
| Real estate  - mortgage                  |                        | 171,492                  |       | 175,739                     |       |
| Real estate  - construction              |                        | 23,420                   |       | 18,830                      |       |
| Other                                    |                        | 2,208                    |       | 2,164                       |       |
|                                     | Loans  receivable           |                     | 219,984    |                        | 219,512    |   |
| Less:                                    | Net deferred  loan fees     |                     | 387        |                        | 399        |   |
|                                     | Allowance  for loan losses  |                     | 3,282      |                        | 3,327      |   |
|                                     | Discount on  loans acquired |                     | 87         |                        | 141        |   |
|                                     |                        |                     |       |                        |       |   |
|                                     | Loans  receivable, net      |                     | $          | 216,228                     |       | $ | 215,645 |   |

 

**NONPERFORMING ASSETS**

 

Nonperforming assets include nonperformingloans, real estate acquired through foreclosure, and repossessed assets. Nonperformingloans consist of loans that are past due with respect to principal or interestmore than 90 days or have been placed on nonaccrual status.

 

With the exception of the loans includedwithin nonperforming assets in the table below, management is not aware of anyloans classified for regulatory purposes as loss, doubtful, substandard, orspecial mention that have not been disclosed which (1) represent or resultfrom trends or uncertainties which management reasonably expects willmaterially impact future operating results, liquidity, or capital resources, or(2) represent any information on material credits which management isaware that causes management to have serious doubts as to the abilities of suchborrowers to comply with the loan repayment terms.

 

Nonperforming assets decreased by $657,000 to$4,056,000 at March 31, 2006 from $4,713,000 at December 31, 2005. Nonperformingassets represents 1.85% of loans, net of unearned income, discounts, and realestate acquired through foreclosure at March 31, 2006 as compared to 2.15%at December 31, 2005. At March 31, 2006, $1,869,000 of the $4,056,000nonperforming assets was guaranteed by the U.S. Government through the SmallBusiness Administration Program.

 

15

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The table below presents asummary of the Company’s nonperforming assets at March 31, 2006 and December 31,2005.

 
| ** **                                                                                                      | ** ** | **March 31,  2006**  | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                                      | ** ** | **financial ratios)**     | ** ** |
| Nonperforming assets:                                                                                           |       |                      |       |                        |       |
| Nonperforming loans:                                                                                            |       |                      |       |                        |       |
| Nonaccrual loans                                                                                                |       | $                         | 3,763      |                        | $          | 4,143 |   |
| Past-due loans of 90 days or more                                                                               |       | —                    |       | —                      |       |
| Nonperforming loans                                                                                             |       | 3,763                     |       | 4,143                       |       |
|                                                                                                            |       |                      |       |                        |       |
| Real estate acquired through foreclosure                                                                        |       | 293                       |       | 570                         |       |
| Total nonperforming assets                                                                                      |       | $                         | 4,056      |                        | $          | 4,713 |   |
|                                                                                                            |       |                      |       |                        |       |
| Ratios:                                                                                                         |       |                      |       |                        |       |
| Nonperforming loans to loans, net of  unearned income and discount on loans                                     |       | 1.71                      | %          | 1.89                        | %          |
|                                                                                                            |       |                      |       |                        |       |
| Nonperforming assets to loans, net of  unearned income, discounts, and real estate acquired through foreclosure |       | 1.85                      | %          | 2.15                        | %          |
|                                                                                                            |       |                      |       |                        |       |
| Nonperforming assets to total assets                                                                            |       | 1.21                      | %          | 1.43                        | %          |
|                                                                                                            |       |                      |       |                        |       |
| Allowance for loan losses to nonperforming  loans                                                               |       | 87.22                     | %          | 80.29                       | %          |
|                                                                                                            |       |                      |       |                        |       |
| Allowance for loan losses to nonperforming  assets                                                              |       | 80.91                     | %          | 70.59                       | %          |

 

16

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**ALLOWANCE FOR LOAN LOSSES**

 

The allowance for loan losses is primarilyavailable to absorb losses inherent in the loan portfolio. Credit exposures deemeduncorrectable are charged against the allowance for loan losses. Recoveries ofpreviously charged-off amounts are credited to the allowance for loan losses.

 

The Company provides for estimated losses onloans receivable when any significant and permanent decline in value occurs. Theseestimates for losses are based on individual assets and their cash flowforecasts, sales values, independent appraisals, the volatility of certain realestate markets, and concern for disposing of real estate in distressed markets.For loans that are pooled for purposes of determining the necessary provisions,estimates are based on loan types, history of charge-offs, and otherdelinquency analyses. Therefore, the value used to determine the provision forlosses is subject to the reasonableness of these estimates. The adequacy of theallowance for loan losses is reviewed on a monthly basis by management and theBoard of Directors. On a quarterly basis a comprehensive review of the adequacyof allowance for loan losses is performed. This assessment is made in thecontext of historical losses as well as existing economic conditions, andindividual concentrations of credit.

 

Loans are charged against the allowance when,in the opinion of management, such loans are deemed uncollectible andsubsequent recoveries are added to the allowance. For the three month periodended March 31, 2006 provisions for loan losses totaled $30,000 comparedto $105,000 for the same period in 2005, representing 71 percent decrease overthe previous year. The decrease is attributed to the continuing improvement inthe credit quality of the Company’s loan portfolio.

 

The allowance for loan losses at March 31,2006 was approximately $3,282,000, representing 1.50% of total loans, net ofunearned income and discounts compared to approximately $3,327,000 at December 31,2005, which also represented 1.52% of total loans, net of unearned income anddiscounts.

 

Management believes the allowance for loanlosses is adequate. While management uses available information to recognizelosses on loans, future additions to the allowance may be necessary basedon changes in economic conditions, particularly in the metropolitan Atlantaarea. In addition, regulatory agencies, as an integral part of theirexamination process, periodically review the Company’s allowance for loanlosses. Such agencies may require the Company to recognize additions tothe allowance based on their judgments about information available to them atthe time of their examination.

 

A substantial portion of the Company’s loanportfolio is secured by real estate in the metropolitan Atlanta market,including a concentration of loans to churches and convenience stores. TheCompany’s outstanding church loans were approximately $37.6 million at March 31,2006 and at December 31, 2005, respectively. The Company’s loans to areaconvenience stores were approximately $17.8 million at March 31, 2006 and$20.9 million at December 31, 2005. Accordingly, the ultimatecollectability of the substantial portion of the Company’s loan portfolio issusceptible to changes in market conditions in the metropolitan Atlanta area.

 

 

17

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The following table summarizes loans, changesin the allowance for loan losses arising from loans charged off, recoveries onloans previously charged off by loan category, and additions to the allowancewhich have been charged to operating expense as of and for the three monthperiods ended March 31, 2006 and 2005 (amount in thousands, except financialratios):

 
| ** **                                                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| Loans, net of unearned income and discounts                                                                            |       | $        | 219,510    |     | $          | 211,105 |   |
|                                                                                                                   |       |     |       |     |       |
| Average loans, net of unearned income,  discounts and the allowance for loan losses                                    |       |     |       |     |       |
|                                                                                                                   |       | $        | 215,988    |     | $          | 212,062 |   |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at the beginning  of period                                                                  |       | $        | 3,327      |     | $          | 3,183 |   |
|                                                                                                                   |       |     |       |     |       |
| Loans  charged-off:                                                                                                    |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                |       | —   |       | 36       |       |
| Real estate - loans                                                                                                    |       | 91       |       | 3        |       |
| Installment loans to individuals                                                                                       |       | 21       |       | 27       |       |
| Total loans  charged-off                                                                                               |       | 112      |       | 66       |       |
|                                                                                                                   |       |     |       |     |       |
| Recoveries  of loans previously charged off:                                                                           |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                |       | 11       |       | 76       |       |
| Real estate - loans                                                                                                    |       | 10       |       | 43       |       |
| Installment loans to individuals                                                                                       |       | 16       |       | 19       |       |
| Total loans  recovered                                                                                                 |       | 37       |       | 138      |       |
|                                                                                                                   |       |     |       |     |       |
| Net loans charged-off (recovered)                                                                                      |       | 75       |       | (72      | )          |
|                                                                                                                   |       |     |       |     |       |
| Additions to allowance for loan losses charged  to operating expense                                                   |       | 30       |       | 105      |       |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at period end                                                                                |       | $        | 3,282      |     | $          | 3,360 |   |
|                                                                                                                   |       |     |       |     |       |
| Ratio of net loans charged-off to average  loans, net of unearned income, discounts, and the allowance for loan losses |       | 0.03     | %          | (0.03    | )%         |
|                                                                                                                   |       |     |       |     |       |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                                     |       | 1.50     | %          | 1.59     | %          |

 

18

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**DEPOSITS**

 

Deposits are the Company’s primary source offunding loan growth. Total deposits at March 31, 2006 increased by 5% or$13,472,000 to $268,141,000 from December 31, 2005. Noninterest-bearingdeposits increased by $5,178,000 or 9%, and interest-bearing deposits increasedby $8,294,000 or 4%. The increase in total deposits is primarily attributed toCorporate and Governmental customers who make significant monthly deposits andwithdrawals based on their budgetary needs. In addition, the Companyimplemented a new sales program which places specific emphasis on depositgrowth.

 

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

 

| ** **                        | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                              |       |                     |       |                        |       |
| NOW and money market accounts     |       | $                        | 54,341     |                        | $          | 49,889 |   |
| Savings accounts                  |       | 39,592                   |       | 41,013                      |       |
| Time deposits of $100,000 or more |       | 51,106                   |       | 46,722                      |       |
| Other time deposits               |       | 57,837                   |       | 56,958                      |       |
|                              |       |                     |       |                        |       |
|                              |       | $                        | 202,876    |                        | $          | 194,582 |   |

 

**OTHER BORROWED FUNDS**

 

While the Company continues to emphasizefunding earning asset growth through deposits, the Company has relied on otherborrowings as a supplemental funding source. Other borrowings consist ofFederal Home Loan Bank (the “FHLB”) advances and short-term borrowings. TheBank had outstanding advances from the FHLB of $29,600,000 at March 31, 2006and $37,700,000 at December 31, 2005. The following advances arecollateralized by a blanket lien on the Company’s 1-4 family mortgage loans.

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type**   | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2006                      |       | Daily        |       | Variable   |       | 5.09                    | %          | $                          | 19,600,000 |   | 4.44 | % | $ | 27,700,000 |   |
| April 2010                     |       | Quarterly    |       | Fixed      |       | 5.82                    | %          | 10,000,000                 |       | 5.82 | % | 10,000,000 |   |
|                                |       |         |       |       |       |                    |       |                       |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |       |       |                    |       | $                          | 29,600,000 |   |   |   | $ | 37,700,000 |   |
|                                |       |         |       |       |       |                    |       |                       |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |       |       | 5.34                    | %          |                       |       | 4.81 | % |   |   |

 

The Company had an unsecured note payable ofapproximately $440,000 at March 31, 2006 and December 31, 2005. Thenote bears interest at a rate of 7.25% (the lender’s prime rate minus 50 basispoints).

 

During 2002, the Company issued $5 million of pooled trust preferredsecurities through one issuance by a wholly owned subsidiary grantor trust,Citizens (GA) Statutory Trust I (the “Trust”). The trust preferred securitiesaccrue and pay distributions periodically at an annual rate as provided in theindentures of the London Interbank Offered Rate plus 3.45%. The Trust used thenet proceeds from the

 

19

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offering to purchase a like amount of Junior Subordinated Debentures(the “Debentures”) of the Company. These securities are reported in ourconsolidated balance sheet as Junior Subordinated Debentures. The trustpreferred securities are mandatorily redeemable upon the maturity of theDebentures on June 26, 2032, or upon earlier redemption as provided in theindentures beginning June 26, 2007. The Company has the right to redeemthe 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. At March 31, 2006, the interest rate onthe junior subordinated debenture was 8.41%.

 

**RESULTS OFOPERATIONS**

 

**Net Interest Income:**

 

Net interest income is the principalcomponent of a financial institution’s income stream and represents thedifference, or spread, between interest and fee income generated from earningassets and the interest expense paid on deposits and borrowed funds. Fluctuationsin interest rates as well as volume and mix changes in earning assets andinterest bearing liabilities can materially impact net interest income.

 

Net interest income decreased $71,000 or2% for the three month period ended March 31, 2006 as compared with thesame period of the previous year. The decrease in net interest income isprimarily due to the increase in total interest expense resulting from risinginterest rates. For the three month period ending March 31, 2006, totalinterest expense was $1,679,000, an increase of $515,000 compared to the sameperiod in 2005. For the first quarter of 2006, total interest income increased$444,000 compared to the first quarter of 2005.

 

**Provision for loan losses**

 

For the first quarter of 2006, the provision for loan losses was$30,000 compared to $105,000 for the same period in 2005, representing a declineof 71 percent. The provision for loan losses and the resulting allowance forloan losses are based on changes in the size and character of the Company’sloan portfolio, changes in nonperforming and past due loans, the existing riskof individual loans, concentrations of loans to specific borrowers orindustries, and economic conditions. The allowance for loan losses was $3,282,000 inthe first quarter of 2006, compared to $3,327,000 at December 31, 2005. AtMarch 31, 2006, the allowance for loan losses was 81 percent of thenonperforming assets compared to 71 percent at December 31, 2005. At March 31,2006, the Company considered its 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 and losses realized from the sale ofinvestment portfolio securities and sales of assets are included in noninterestincome.

 

Noninterest income totaled $1,296,000 forthe three month period ended March 31, 2006, an increase of $40,000 or 3%compared with the same period ended March 31, 2005. This increase isattributed to a $79,000 and $56,000 increase in other noninterest income andgains on sales of assets,

 

20

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respectively, partially offset by a$52,000 decrease in deposit and service fee income, and a $43,000 decrease ingains on the sale of securities.

 

**Noninterest expense**:

 

Noninterest expense totaled $3,935,000 for thethree month period ended March 31, 2006, a decrease of $234,000 or 6%compared to the same period last year. The decrease is due to the Companystrategy started last year to reduce overhead cost and improve the efficiencythroughout its branch network.

 

Last year, the Company consolidated and closed two branches, andreduced its average full-time employee base. During the first quarter of 2006,the Company had an average of 145 full-time employees compared to an average of161 full-time employees during the same period last year. For the first quarterof 2006, salaries and employee benefits decreased $120,000, occupancy andequipment expenses decreased $50,000 and other operating expenses decreased$64,000 compared to the same period last year.

 

**INTEREST RATE SENSITIVITY MANAGEMENT**

 

Interest rate sensitivity management involvesmanaging the potential impact of interest rate movements on net interest incomewithin acceptable levels of risk. The Company seeks to accomplish this bystructuring the balance sheet so that repricing opportunities exist for bothassets and liabilities in equivalent amounts and time intervals. Imbalances inthese repricing opportunities at any point in time constitute a financialinstitution’s interest rate risk. The Company’s ability to reprice assets andliabilities in the same dollar amounts and at the same time minimizes interestrate risk.

 

One method of measuring the impact ofinterest rate sensitivity is the cumulative 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 liabilitysensitive on a short-term basis as reflected in the following table. Generally,a net liability sensitive position indicates that there would be a negativeimpact on net interest income in an increasing 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 assetsand liabilities indicated as repricing within the same period may in factreprice at different times within such period and at different rates. Thefollowing table shows the contractual maturities of all investment securitiesat March 31, 2006. Expected maturities may differ from contractualmaturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties. For conservativepurposes, the Company has included demand deposits such as NOW, money market,and savings accounts in the three month category. However, the actual repricingof these accounts may extend beyond twelve months. The interest ratesensitivity gap is only a general indicator of potential effects of interestrate changes on net interest income.

 

The following table sets forth thedistribution of the repricing of the Company’s interest rate sensitive assetsand interest rate sensitive liabilities as of March 31, 2006.

 

21

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| ** **                                                              | ** ** | **Cumulative amounts as of March 31, 2006  Maturing and repricing within** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **3  Months**                                                                   | ** ** | **3 to 12  Months** | ** ** | **1 to 5  Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **(amounts in thousands, except ratios)**                   | ** ** |
|                                                                    |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Interest-sensitive assets:                                              |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Investments                                                             |       | $                                                                               | 1,657      |   | $ | 1,155 |   | $ | 47,493 |   | $ | 28,696 |   | $ | 79,001 |   |
| Certificates of deposit                                                 |       | 100                                                                             |       | 100 |   |   |   | — |   | 200 |   |
| Loans                                                                   |       | 84,261                                                                          |       | 10,885 |   | 71,790 |   | 53,048 |   | 219,984 |   |
| Interest-bearing deposits with other banks                              |       | 1,198                                                                           |       | — |   | — |   | — |   | 1,198 |   |
| Total interest-sensitive assets                                         |       | $                                                                               | 87,216     |   | $ | 12,140 |   | $ | 119,283 |   | $ | 81,744 |   | $ | 300,383 |   |
|                                                                    |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                               | 110,389    |   | $ | 87,734 |   | $ | 4,753 |   | $ | 0 |   | $ | 202,876 |   |
| Notes payable                                                           |       | 440                                                                             |       | — |   | — |   | — |   | 440 |   |
| Junior subordinated debentures                                          |       | —                                                                          |       | — |   | 5,155 |   | — |   | 5,155 |   |
| Other borrowings                                                        |       | 19,600                                                                          |       | — |   | — |   | 10,000 |   | 29,600 |   |
| Total interest-sensitive liabilities                                    |       | $                                                                               | 130,429    |   | $ | 87,734 |   | $ | 9,908 |   | $ | 10,000 |   | $ | 238,071 |   |
|                                                                    |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |       | $                                                                               | (43,213    | ) | $ | (75,594 | ) | $ | 109,375 |   | $ | 71,744 |   | $ | 62,312 |   |
|                                                                    |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to total  interest-sensitive assets |       | (14.39                                                                          | )%         | (39.55 | )% | (3.14 | )% | 20.74 | % | 20.74 | % |

 

----

(a) Savings, Now, and money market deposits totaling  $93,932 are included in the maturing in 3months classification.

 

**LIQUIDITY**

 

Liquidity is the ability of the Companyto convert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities. Liquidity management involvesmaintaining the Company’s ability to meet the day-to-day cash flow requirementsof its customers, whether they are depositors wishing to withdraw funds orborrowers requiring funds to meet their credit needs. Without proper liquiditymanagement, the Company would not be able to perform the primary functionof a financial intermediary and would, therefore, not be able to meet the needsof the communities it serves. Additionally, the Company requires cash forvarious operating needs including: dividends to shareholders; businesscombinations; capital injections to its subsidiaries; the servicing of debt;and the payment of general corporate expenses. The Company has access tovarious capital markets. However, the primary source of liquidity for theCompany is dividends from its bank subsidiary. The Georgia Department ofBanking and Finance regulates the dividend payments and must approve dividendpayments that exceed 50 percent of the Bank’s prior year net income. As of March 31,2006, this amount was approximately $1,374,000. The payment of dividends may alsobe affected or limited by other factors, such as the requirement to maintainadequate capital above regulatory guidelines. The Company does not anticipateany liquidity requirements in the near future that it will not be able to meet.

 

Asset and liability managementfunctions not only serve to assure adequate liquidity in order to meet theneeds of the Company’s customers, but also to maintain an appropriate balancebetween interest-sensitive assets and interest-sensitive liabilities so thatthe Company can earn a return that meets the investment requirements of itsshareholders. Daily monitoring of the sources and uses of funds is

 

22

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necessary to maintain anacceptable cash position that meets both requirements.

 

The asset portion of the balance sheetprovides liquidity primarily through loan principal repayments, maturities ofinvestment securities and, to a lesser extent, sales or paydowns of investmentsecurities available for sale and held to maturity. Other short-terminvestments such as federal funds sold and maturing interest bearing depositswith other banks, are additional sources of liquidity funding.

 

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

 

**CAPITAL RESOURCES**

 

Stockholders’ equity increased $716,000 forthe three months ended March 31, 2006, primarily due to earnings. Retainedearnings increased by net income of $680,000 to $20,818,000 during the firstthree months of 2006.

 

Quantitative measures established byregulation to ensure capital adequacy require the Company to maintain minimumamounts and ratios of total and Tier 1 capital to risk weighted assets, andTier 1 capital to average assets. As of March 31, 2006, the Bank’s totaland Tier 1 capital to risk weighted assets and Tier 1 to average assets were16%, 14% and 10% respectively, compared with 15%, 14% and 10% respectively, at December 31,2005. As of March 31, 2006, the Company met all capital adequacyrequirements to which it is subject.

 

23

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

 

Market risk is the risk of loss from adversechanges in market prices and interest rates. Our market risk arises principallyfrom interest rate risk inherent in our lending, deposit, and borrowingactivities. Although we manage certain other risks, such as credit quality andliquidity risk, in the normal course of business we consider interest rate riskto be our most significant market risk and the risk that could potentially havethe largest material effect on our financial condition and results ofoperations. We do not maintain a trading portfolio or deal in internationalinstruments, and therefore, other types of market risks, such as foreigncurrency risk and commodity price risk, do not arise in the normal course ofour business activities.

 

Quantitative information about the Company’smarket risk at March 31, 2006 is as follows (in thousands):

 
| ** **                           | ** ** | **2006**            | ** ** |
|--------------------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** | **Down  100 bp** | ** ** | **Up  100 bp** | ** ** |
|                                 |       |                |       |   |   |   |   |   |   |
| Financial assets:                    |       |                |       |   |   |   |   |   |   |
| Interest-bearing deposits with banks |       | $                   | 1,198      |   | $ | 1,198 |   | — | % | — | % |
| Certificates of deposit              |       | 200                 |       | 200 |   | — |   | — |   |
| Investment securities                |       | 79,001              |       | 78,954 |   | 2.83 |   | (3.30 | ) |
| Loans receivable                     |       | 219,984             |       | 211,977 |   | 1.58 |   | (1.52 | ) |
|                                 |       |                |       |   |   |   |   |   |   |
| Financial liabilities:               |       |                |       |   |   |   |   |   |   |
| Interest-bearing deposits            |       | 202,876             |       | 192,722 |   | 1.36 |   | (1.21 | ) |
| Notes payable                        |       | 440                 |       | 440 |   | — |   | — |   |
| Junior subordinated debentures       |       | 5,155               |       | 5,160 |   | — |   | — |   |
| Advances from Federal Home Loan Bank |       | 29,600              |       | 29,816 |   | 1.31 |   | (0.78 | ) |
|                                      |            |                     |            |  |  |  |  |  |  |  |  |

 

The Company has adopted an asset/liabilitymanagement program to monitor the Company’s interest rate sensitivity and toensure that the Company is competitive in the loan and deposit markets. Managementseeks to manage the relationship between interest-sensitive assets andliabilities in order to protect against wide interest rate fluctuations,including those resulting from inflation. The Company has not entered into anyderivative financial instruments such as futures, forwards, swaps or options. Additionally,refer to our interest rate sensitivity management and liquidity disclosureswithin Part 1, Item 2, of this Form 10-Q.

 

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

 

As of the end of the periodcovered by this report, we conducted, under the supervision of and with theparticipation of our management, including the Company’s Chief ExecutiveOfficer, Chief Operating Officer, and Chief Financial Officer, an evaluation ofthe effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13g-15(e).Based on this evaluation, the Company’s Chief Executive Officer, ChiefOperating Officer, and Chief Financial Officer have concluded that ourdisclosure controls and procedures were effective as of March 31, 2006 intimely alerting them to material information required to be included in ourreports filed with or furnished to the Securities and

 

24

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ExchangeCommission.  There have been no changesin the Company’s internal controls over financial reporting that occurredduring the quarter ended March 31, 2006 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

** **
| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **ITEM 1.**       | ** ** | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | The Company is not aware of any material  pending legal proceedings to which the Company or its subsidiary is a party  or to which any of their property is subject.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **ITEM 1A.**      | ** ** | **RISK  FACTORS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | In addition to the other information set  forth in this report, you should carefully consider the factors discussed in  Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K  for the year ended December 31, 2005, which could materially affect our  business, financial condition or future results. The risks described in our  Annual Report on Form 10-K are not the only risks we face. Additional  risks and uncertainties not currently known to us or that we currently deem  to be immaterial also may materially adversely affect our business,  financial condition and/or operating results. |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **ITEM 2.**       | ** ** | **UNREGISTERED  SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **ITEM 3.**       | ** ** | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **ITEM 4.**       | ** ** | **SUBMISSION  OF MATTERS TO VOTE OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **ITEM 5.**       | ** ** | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|              |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |       | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

25

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| **ITEM 6.** |   | **EXHIBITS**                                                                                                                      |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                              |
|        |   | **Exhibit 31**                                                                                                               |
|        |   |                                                                                                                              |
|        |   | Certification pursuant to 18 U.S.C. Section 1350  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |   |                                                                                                                              |
|        |   | **Exhibit 32**                                                                                                               |
|        |   |                                                                                                                              |
|        |   | Certification pursuant to 18 U.S.C. Section 1350  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

**CITIZENSBANCSHARES CORPORATION**

 

 

 
| Date:   May 12, 2006  |   | By:                                   | /s/ James E. Young |   |
|-------------------------------------------|--------|---------------------------------------|--------------------|--------|
|                                      |   | James E. Young                        |
|                                      |   | President and Chief Executive Officer |
|                                      |   |                                  |
|                                      |   |                                  |
| Date:   May 12, 2006  |   | By:                                   | /s/ Cynthia N. Day |   |
|                                      |   | Cynthia N. Day                        |
|                                      |   | Senior Executive Vice President and   |
|                                      |   | Chief Operating Officer               |
|                                      |   |                                  |
|                                      |   |                                  |
| Date:   May 12,  2006 |   | By:                                   | /s/ Samuel J. Cox  |   |
|                                      |   | Samuel J. Cox                         |
|                                      |   | Senior Vice President and             |
|                                      |   | Chief Financial Officer               |
|                                           |        |                                       |                    |        |  |  |  |

 

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