** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10 – Q**

**(Mark One)**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                         |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            |
| ** ** |       | **For the quarterly period ended June 30, 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                           ** |

 

**Commission File No:  0 - 14535**

**CITIZENS BANCSHARES CORPORATION**(Exact name of registrant 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’s telephone number, including areacode:    **(404) 659 -5959**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.              x  Yes   o  No.

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act)
| Large  accelerated filer  o | Accelerated filer   o | Non-accelerated filer  x |
|---------------------------------------|----------------------------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act)     oYes   x  No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether registrant has filedall documents and reports required to be filed by Sections 12, 13, or 15(d) ofthe Securities Exchange Act of 1934 subsequent to the distribution of securitiesunder a plan confirmed by a court.           o  Yes    o No.
| SEC 1296 (08-03) | **Potential persons who are to respond to the  collection of information contained in this form are not required to respond  unless the form displays a currently valid OMB control number.** |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicatethe number of shares outstanding for each of the issuer’s classes of commonstock as of the latest practicable date: 1,995,366 shares of Common Stock,$1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par valueoutstanding on August 9, 2006.

 

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**PART 1.                FINANCIALINFORMATION**

**ITEM 1.                  Financialstatements**

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**June 30, 2006 AND DECEMBER 31, 2005**

**(In thousands, except share data)**
| ** **                                                                                                | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                |       |            |       |       |       |
| ** **                                                                                                |       |            |       |       |       |
| Cash  and due from banks                                                                                  |       | $               | 8,243      |       | $          | 11,289 |   |
| Interest-bearing  deposits with banks                                                                     |       | 1,260           |       | 398        |       |
| Certificates  of deposit                                                                                  |       | 100             |       | 100        |       |
| Investment  securities available for sale, at fair value                                                  |       | 67,129          |       | 65,766     |       |
| Investment  securities held to maturity, at cost                                                          |       | 8,868           |       | 9,411      |       |
| Other  investments                                                                                        |       | 2,312           |       | 2,835      |       |
| Loans  receivable, net                                                                                    |       | 219,668         |       | 215,645    |       |
| Premises  and equipment, net                                                                              |       | 7,446           |       | 7,625      |       |
| Cash  surrender value of life insurance                                                                   |       | 9,159           |       | 9,105      |       |
| Foreclosed  real estate, net                                                                              |       | 339             |       | 570        |       |
| Other  assets                                                                                             |       | 6,039           |       | 5,837      |       |
|                                                                                                      |       |            |       |       |       |
| Total  assets                                                                                             |       | $               | 330,563    |       | $          | 328,581 |   |
|                                                                                                      |       |            |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                            | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                      |       |            |       |       |       |
| LIABILITIES:                                                                                              |       |            |       |       |       |
| Noninterest-bearing  deposits                                                                             |       | $               | 63,802     |       | $          | 60,087 |   |
| Interest-bearing  deposits                                                                                |       | 204,121         |       | 194,582    |       |
|                                                                                                      |       |            |       |       |       |
| Total  deposits                                                                                           |       | 267,923         |       | 254,669    |       |
|                                                                                                      |       |            |       |       |       |
| Accrued  expenses and other liabilities                                                                   |       | 3,294           |       | 3,403      |       |
| Notes  payable                                                                                            |       | 340             |       | 440        |       |
| Junior  subordinated debentures                                                                           |       | 5,155           |       | 5,155      |       |
| Advances  from Federal Home Loan Bank                                                                     |       | 26,201          |       | 37,700     |       |
|                                                                                                      |       |            |       |       |       |
| Total  liabilities                                                                                        |       | 302,913         |       | 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                                                                               |       | 7,467           |       | 7,439      |       |
| Retained  earnings                                                                                        |       | 21,243          |       | 20,138     |       |
| Treasury  stock at cost, 234,699 and 231,313 shares at June 30, 2006 and December 31,  2005, respectively |       | (1,913          | )          | (1,896     | )          |
| Accumulated  other comprehensive loss, net of income taxes                                                |       | (1,467          | )          | (787       | )          |
|                                                                                                      |       |            |       |       |       |
| Total  stockholders’ equity                                                                          |       | 27,650          |       | 27,214     |       |
|                                                                                                      |       |            |       |       |       |
|                                                                                                      |       | $               | 330,563    |       | $          | 328,581 |   |

 

See notes to consolidatedfinancial statements.

2

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited- In thousands, except per share data)**
| ** **                                          | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income:                                    |       |                                            |       |                                          |       |   |   |   |   |
| Loans, including fees                               |       | $                                               | 4,622      |                                          | $          | 4,097 |   | $ | 8,978 |   | $ | 8,030 |   |
| Investment securities:                              |       |                                            |       |                                          |       |   |   |   |   |
| Taxable                                             |       | 638                                             |       | 579                                           |       | 1,259 |   | 1,197 |   |
| Tax-exempt                                          |       | 226                                             |       | 195                                           |       | 441 |   | 394 |   |
| Interest-bearing deposits                           |       | 12                                              |       | 86                                            |       | 24 |   | 96 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total interest income                               |       | 5,498                                           |       | 4,957                                         |       | 10,702 |   | 9,717 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense:                                   |       |                                            |       |                                          |       |   |   |   |   |
| Deposits                                            |       | 1,396                                           |       | 950                                           |       | 2,636 |   | 1,795 |   |
| Other borrowings                                    |       | 398                                             |       | 280                                           |       | 837 |   | 599 |   |
| Total interest expense                              |       | 1,794                                           |       | 1,230                                         |       | 3,473 |   | 2,394 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income                                 |       | 3,704                                           |       | 3,727                                         |       | 7,229 |   | 7,323 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for loan losses                           |       | —                                          |       | 63                                            |       | 30 |   | 167 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income after provision for loan losses |       | 3,704                                           |       | 3,664                                         |       | 7,199 |   | 7,156 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest income:                                 |       |                                            |       |                                          |       |   |   |   |   |
| Service charges on deposits                         |       | 760                                             |       | 852                                           |       | 1,535 |   | 1,679 |   |
| Impairment loss on equity securities                |       | —                                          |       | (346                                          | )          | — |   | (346 | ) |
| Gain on sales of securities                         |       | 123                                             |       | —                                        |       | 126 |   | 46 |   |
| Gain (loss) on sales of assets                      |       | (7                                              | )          | 9                                             |       | 23 |   | (17 | ) |
| Other operating income                              |       | 452                                             |       | 704                                           |       | 939 |   | 1,112 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest income                            |       | 1,328                                           |       | 1,219                                         |       | 2,623 |   | 2,474 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest expense:                                |       |                                            |       |                                          |       |   |   |   |   |
| Salaries and employee benefits                      |       | 2,001                                           |       | 2,034                                         |       | 4,001 |   | 4,153 |   |
| Net occupancy and equipment                         |       | 555                                             |       | 669                                           |       | 1,169 |   | 1,333 |   |
| Other operating expenses                            |       | 1,485                                           |       | 1,586                                         |       | 2,806 |   | 2,972 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest expense                           |       | 4,041                                           |       | 4,289                                         |       | 7,976 |   | 8,458 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income before income taxes                          |       | 991                                             |       | 594                                           |       | 1,846 |   | 1,172 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax expense                                  |       | 211                                             |       | 123                                           |       | 386 |   | 241 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                          |       | $                                               | 780        |                                          | $          | 471 |   | $ | 1,460 |   | $ | 931 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per share - basic                        |       | $                                               | 0.37       |                                          | $          | 0.23 |   | $ | 0.70 |   | $ | 0.45 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per share - diluted                      |       | $                                               | 0.37       |                                          | $          | 0.22 |   | $ | 0.69 |   | $ | 0.44 |   |
| ** **                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average outstanding shares - basic         |       | 2,089                                           |       | 2,087                                         |       | 2,089 |   | 2,084 |   |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average outstanding shares - diluted       |       | 2,103                                           |       | 2,099                                         |       | 2,101 |   | 2,096 |   |
| Dividends per common share                          |       | $                                               | 0.17       |                                          | $          | 0.15 |   | $ | 0.17 |   | $ | 0.15 |   |

 

See notes toconsolidated financial statements.

3

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

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

**FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

**(Unaudited - In thousands, except parenthetical footnotes)**

 
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **    | ** ** | ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------|------------|----------------|------------|-------------------------|------------|-------------------|------------|------------|------------|------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** | **Nonvoting** | ** ** | **Additional** | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **             | ** ** |
| ** **                                                                                              | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Paid-in**   | ** ** | **Retained**   | ** ** | **Treasury Stock** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                              | ** ** | **Shares**            | ** ** | **Amount**            | ** ** | **Shares**    | ** ** | **Amount**     | ** ** | **Capital**             | ** ** | **Earnings**      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance—December 31,  2004                                                                         |       | 2,230                 |       | $                     | 2,230      |          | 90         |           | $          | 90                      |       | $                 | 7,442      |       | $          | 18,108     |       | (241                   | )          | $          | (1,955     | ) | $ | (34 | ) | $ | 25,881 |   |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Net income                                                                                              |       | —                |       | —                |       | —        |       | —         |       | —                  |       | 931               |       | —     |       | —     |       | —                 |       | 931        |       |
| Unrealized holding losses on investment securities  available for sale—net of taxes of $10,780     |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | 21                     |       | 21         |       |
| Less reclassification adjustment for holding gains  included in net income—net of taxes of $15,541 |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (30                    | )          | (30        | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive loss                                                                                      |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | —                 |       | 922        |       |
| Sale of treasury stock                                                                                  |       | —                |       | —                |       | —        |       | —         |       | (3                      | )          | —            |       | 8          |       | 59         |       | —                 |       | 56         |       |
| Dividends declared                                                                                      |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (313              | )          | —     |       | —     |       | —                 |       | (313       | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| **Balance—June 30, 2005**                                                                          | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,439**  | ** ** | **$**      | **18,726** | ** ** | **(233**               | **)**      | **$**      | **(1,896** | **)** | **$** | **(43** | **)** | **$** | **26,546** | ** ** |
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **    | ** ** | ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance—December 31,  2005                                                                         |       | 2,230                 |       | $                     | 2,230      |          | 90         |           | $          | 90                      |       | $                 | 7,439      |       | $          | 20,138     |       | (231                   | )          | $          | (1,896     | ) | $ | (787 | ) | $ | 27,214 |   |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Net income                                                                                              |       | —                |       | —                |       | —        |       | —         |       | —                  |       | 1,460             |       | —     |       | —     |       | —                 |       | 1,460      |       |
| Unrealized holding losses on investment securities  available for sale—net of taxes of $306,998    |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (596                   | )          | (596       | )          |
| Less reclassification adjustment for holding gains  included in net income—net of taxes of $42,017 |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (84                    | )          | (84        | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive loss                                                                                      |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       | 780        |       |
| Purchase of treasury stock                                                                              |       | —                |       | —                |       | —        |       | —         |       | 1                       |       | —            |       | (4         | )          | (31        | )          | —                 |       | (30        | )          |
| Stock based compensation expense                                                                        |       | —                |       | —                |       | —        |       | —         |       | 22                      |       | —            |       | —     |       | —     |       | —                 |       | 22         |       |
| Reclassification adjustment of treasury stock                                                           |       | —                |       | —                |       | —        |       | —         |       | 5                       |       | —            |       | —     |       | 14         |       | —                 |       | 19         |       |
| Dividends declared                                                                                      |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (355              | )          | —     |       | —     |       | —                 |       | (355       | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| **Balance—June 30, 2006**                                                                          | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,467**  | ** ** | **$**      | **21,243** | ** ** | **(235**               | **)**      | **$**      | **(1,913** | **)** | **$** | **(1,467** | **)** | **$** | **27,650** | ** ** |

 

See notes to consolidatedfinancial statements.

4

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**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

**(In thousands)**
| ** **                                                                                  | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                  | ** ** | **2006**          | ** ** | **2005** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**   | ** ** |
| **OPERATING ACTIVITIES:**                                                                   |       |              |       |   |   |
| Net income                                                                                  |       | $                 | 1,460      |   | $ | 931 |   |
| **Adjustments to reconcile net income to net cash  provided by operating activities:**      |       |              |       |   |   |
| Provision for loan losses                                                                   |       | 30                |       | 167 |   |
| Depreciation                                                                                |       | 333               |       | 483 |   |
| Amortization and accretion, net                                                             |       | 239               |       | 381 |   |
| Provision for deferred income taxes (benefit)                                               |       | (42               | )          | (34 | ) |
| Gain on sale of assets and investments                                                      |       | (149              | )          | (29 | ) |
| Write-down of equity securities                                                             |       | —            |       | 346 |   |
| Stock based compensation expense                                                            |       | 22                |       | — |   |
| Change in other assets                                                                      |       | 191               |       | 326 |   |
| Change in accrued expenses and other liabilities                                            |       | (131              | )          | (322 | ) |
|                                                                                        |       |              |       |   |   |
| Net cash provided by operating activities                                                   |       | 1,953             |       | 2,249 |   |
|                                                                                        |       |              |       |   |   |
| **INVESTING ACTIVITIES:**                                                                   |       |              |       |   |   |
| Proceeds from calls and maturities of investment  securities held to maturity               |       | 537               |       | 174 |   |
| Proceeds from sales and maturities of investment  securities available for sale             |       | 8,181             |       | 9,866 |   |
| Purchases of investment securities available for  sale                                      |       | (10,577           | )          | — |   |
| Net change in other investments                                                             |       | 523               |       | 48 |   |
| Net change in loans receivable                                                              |       | (4,467            | )          | 292 |   |
| Premiums paid on life insurance policy                                                      |       | (54               | )          | (70 | ) |
| Net proceeds from the sale of foreclosed properties                                         |       | 556               |       | 1,134 |   |
| Purchases of premises and equipment, net                                                    |       | (147              | )          | (78 | ) |
| Net change in interest bearing deposits with banks                                          |       | (862              | )          | (8,243 | ) |
| Net change in certificates of deposit                                                       |       | —            |       | 700 |   |
|                                                                                        |       |              |       |   |   |
| Net cash provided (used) by investing activities                                            |       | (6,310            | )          | 3,823 |   |
|                                                                                        |       |              |       |   |   |
| **FINANCING ACTIVITIES:**                                                                   |       |              |       |   |   |
| Net change in deposits                                                                      |       | 13,254            |       | 212 |   |
| Sale (purchase) of treasury stock activity                                                  |       | (16               | )          | 59 |   |
| Net change in additional paid-in-capital                                                    |       | 27                |       | (3 | ) |
| Principal payments on debt                                                                  |       | (100              | )          | (100 | ) |
| Net change in advances from Federal Home Loan Bank                                          |       | (11,499           | )          | 250 |   |
| Dividends paid                                                                              |       | (355              | )          | (313 | ) |
|                                                                                        |       |              |       |   |   |
| Net cash provided by financing activities                                                   |       | 1,311             |       | 105 |   |
|                                                                                        |       |              |       |   |   |
| Net change in cash and cash equivalents                                                     |       | (3,046            | )          | 6,177 |   |
|                                                                                        |       |              |       |   |   |
| Cash and and cash equivalents, beginning of period                                          |       | 11,289            |       | 10,875 |   |
|                                                                                        |       |              |       |   |   |
| Cash and and cash equivalents at end of period                                              |       | $                 | 8,243      |   | $ | 17,052 |   |
|                                                                                        |       |              |       |   |   |
| **Supplemental disclosures of cash paid during the  period for:**                           |       |              |       |   |   |
| Interest                                                                                    |       | $                 | 3,358      |   | $ | 2,379 |   |
|                                                                                        |       |              |       |   |   |
| Income taxes                                                                                |       | $                 | 379        |   | $ | 186 |   |
|                                                                                        |       |              |       |   |   |
| **Supplemental disclosures of noncash  transactions:**                                      |       |              |       |   |   |
| Change in unrealized gain (loss) on investment  securities available for sale, net of taxes |       | $                 | (679       | ) | $ | (9 | ) |

 

See notes to consolidatedfinancial statements.

5

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIESNotes to the Consolidated Financial Statements**(Unaudited)

**1.  SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

**Basis of Presentation**

Citizens Bancshares Corporation (the “Company”) is aholding company that provides a full range of commercial banking and mortgagebrokerage services to individual and corporate customers in metropolitanAtlanta and Columbus, Georgia, and in Birmingham and Eutaw, Alabama, throughits wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank operates under a state charter andserves its customers through seven full-service financial centers inmetropolitan Atlanta, Georgia, one full-service financial center in Columbus,Georgia, one full-service financial center in Birmingham, Alabama, and onefull-service financial center in Eutaw, Alabama.  The Company also owns and operates a whollyowned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the “Trust”)through the issuance of pooled trust preferred securities.  However, in accordance with currentaccounting guidance, the Trust has not been consolidated in the financialstatements.

The accompanying unaudited consolidated financialstatements have been prepared pursuant to the rules and regulations for reportingon Form 10-Q.  Accordingly, certaindisclosures required by generally accepted accounting principles are notincluded herein. These interim statements should be read in conjunction withthe financial statements and notes thereto included in the Company’s latestAnnual Report on Form 10-K filed with the Securities and Exchange Commissionfor the year ended December 31, 2005. The results of operations for the interim periods reported herein arenot necessarily representative of the results expected for the full 2006 fiscalyear.

The consolidated financialstatements of the Company for the three and six month periods ended June 30,2006 and 2005 are unaudited.  In theopinion of management, all adjustments necessary for a fair presentation of thefinancial position and results of operations, changes in stockholders’ equityand cash flows for the six month periods have been included.  All adjustments are of a normal recurringnature.  All significant intercompanyaccounts and transactions have been eliminated in consolidation.

**Accounting Policies**

The Company’s consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“GAAP”), which often require the judgment ofmanagement in the selection and application of certain accounting principlesand methods.  Reference is made to theaccounting policies of the Company described in the notes to the consolidatedfinancial statements contained in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2005.  TheCompany has followed those policies in preparing this report.  Management believes that the quality andreasonableness of its most critical policies enable the fair presentation ofits financial position and of its results of operations.

**Recently Issued Accounting Standards**

Thefollowing is a summary of recent authoritative pronouncements that could affectthe accounting, reporting, and disclosure of financial information by theCompany:

6

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In February 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.”This Statement 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 acquired orissued after the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The Company does not believe that the adoption of SFAS No.155 will have a material impact on its financial position, results ofoperations and cash flows.

In March 2006, theFASB issued SFAS No. 156, “**Accountingfor Servicing of Financial Assets—an amendment of FASB Statement No. 140.” **This Statement amendsFASB No. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,” with respect to the accounting for separatelyrecognized servicing assets and servicing liabilities. SFAS No. 156 requires anentity to recognize a servicing asset or servicing liability each time itundertakes an obligation to service a financial asset by entering into aservicing 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 classof separately 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 year thatbegins after September 15, 2006. The Company does not believe the adoption ofSFAS No. 156 will have a material impact on its financial position, results ofoperations and cash flows.

Other accountingstandards that have been issued or proposed by the FASB or otherstandards-setting bodies are not expected to have a material impact on theCompany’s financial position, results of operations and cash flows.

**2.  STOCKBASED COMPENSATION**

# On January 1,2006, the Company adopted the fair value recognition provisions of FinancialAccounting Standards Board (“FASB”) Statement of Financial Accounting Standards(“SFAS”) No. 123(R), *Accounting forStock-Based Compensation*, to account for compensation costs underits 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 intrinsic value method prescribedby APB 25, no compensation costs were recognized for the Company’s stockoptions because the option exercise price in its plans equals the market priceon the date of grant.  Prior to January1, 2006, the Company only disclosed the pro forma effects on net income andearnings per share as if the fair value recognition provisions of SFAS 123(R)had been utilized.

# In adopting SFASNo. 123, the Company elected to use the modified prospective method to accountfor the transition from the intrinsic value method to the fair valuerecognition method.  Under the modifiedprospective method, compensation cost is recognized from the adoption dateforward for all 

7

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# new stock optionsgranted and for any outstanding unvested awards as if the fair value method hadbeen applied to those awards as of the date of grant. The following tableillustrates the effect on net income and earnings per share as if the fairvalue based method had been applied to all outstanding and unvested awards ineach period (in thousands, except per share amounts):

|                                                                                                             | ** ** | **For the six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2006**                                                        | ** ** | **2005** | ** ** |
| ** **                                                                                                  | ** ** | ** **                                                      | ** ** | ** ** | ** ** |
| Net income as reported                                                                                      |       | $                                                               | 1,460      |   | $ | 931 |   |
| Add: stock-based compensation expense included in reported  net income, net of tax                          |       | 17                                                              |       | — |   |
| Less: total stock-based compensation expense  determined under fair value method for all awards, net of tax |       | (17                                                             | )          | (12 | ) |
|                                                                                                        |       |                                                            |       |   |   |
| Pro forma net income                                                                                        |       | $                                                               | 1,460      |   | $ | 919 |   |
|                                                                                                        |       |                                                            |       |   |   |
| Earnings per share:                                                                                         |       |                                                            |       |   |   |
| Basic—as reported                                                                                      |       | $                                                               | 0.70       |   | $ | 0.45 |   |
| Basic—pro forma                                                                                        |       | $                                                               | 0.70       |   | $ | 0.44 |   |
|                                                                                                        |       |                                                            |       |   |   |
| Diluted—as reported                                                                                    |       | $                                                               | 0.69       |   | $ | 0.44 |   |
| Diluted—pro forma                                                                                      |       | $                                                               | 0.69       |   | $ | 0.44 |   |

 

**3.  INTANGIBLE ASSETS**

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

The Company applies a fair value-based impairment testto the carrying value of goodwill on an annual basis and on an interim basis ifcertain events or circumstances indicate that an impairment loss may have beenincurred.

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The following table presents information about theCompany’s intangible assets at (in thousands):
| ** **                     | ** ** | **June 30, 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      |                            | $          | 2,397 |   | $ | 2,836 |   | $ | 2,195 |   |

 

Thefollowing table presents information about aggregate amortization expense (inthousands):
| ** **                                                                                               | ** ** | **For the 3  months ended  June 30, 2006** | ** ** | **For the 6  months ended  June 30, 2006** | ** ** | **For the 3  months ended  June 30, 2005** | ** ** | **For the 6  months ended  June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
|                                                                                                     |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
| Aggregate amortization  expense of core deposit intangibles:                                             |       | $                                                                   | 101        |                                                                | $          | 202                                                                 |       | $                                                                   | 101        |   | $ | 202 |   |
|                                                                                                     |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
| 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.  COMPREHENSIVE INCOME**

Comprehensiveincome includes: (1) reported net income and (2) unrealized gains and losses onmarketable securities.  The followingtable shows our comprehensive income (in thousands):

|                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended June  30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Net Income                         |       | $                                               | 780        |                                          | $          | 471 |   | $ | 1,460 |   | $ | 931 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Other  comprehensive income (loss) |       | (673                                            | )          | 553                                           |       | (680 | ) | (9 | ) |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Comprehensive income               |       | $                                               | 107        |                                          | $          | 1,024 |   | $ | 780 |   | $ | 922 |   |

 

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**5.       STOCK OPTIONS**

***2005Option***—OnApril 25, 2005, the Company granted its president and certain officers optionsto purchase 21,000 shares of common stock of the Company at an exercise priceof $13.41 per share (the “2005 Option”), as compared to trades of stock at$13.00 per share on the date of grant. The 2005 Option vests at a rate of 33.3% per year, commencing on April24, 2006. The option’s term is ten years from the date of grant, and at June 30,2006, 14,500 options to purchase shares under the 2005 Option remainedoutstanding.

The fair value ofthe 2005 Option grant was estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions: dividendyield of 1.36%; expected volatility of 39%; risk free interest rate of 4.26%and an expected life of six years. The fair value of the 2005 Option grant wasapproximately $62,000.

***2006Option***—On May1, 2006, the Company granted its president and certain officers options topurchase 16,000 shares of common stock of the Company at an exercise price of$11.45 per share (the “2006 Option”), as compared to trades of stock at $11.40per share on the date of grant.  The 2006Option vests at a rate of 33.3% per year, commencing on May 1, 2007. Theoption’s term is ten years from the date of grant, and at June 30, 2006, 16,000options to purchase shares under the 2006 Option remained outstanding.

The fair value ofthe 2006 Option grant was estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions: dividendyield of 1.48%; expected volatility of 32%; risk free interest rate of 5.14%and an expected life of six years. The fair value of the 2006 Option grant wasapproximately $38,000.

A summary of thestatus of the Company’s stock options for the three and six months ended June30, 2006 is presented below:
| ** **                            | ** ** | **For the 3 months ended  June 30, 2006** | ** ** | **For the 6 months ended  June 30, 2006** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Shares**                                                              | ** ** | **Weighted  Average  Exercise  Price**                                  | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** |
| Outstanding—beginning  of period |       | 58,176                                                                  |       | $                                                                       | 10.92      |   | 8.99 years |   | 60,176 |   | $ | 10.92 |   | 8.99 years |   |
| Granted                               |       | 16,000                                                                  |       | 11.45                                                                   |       |   |   | 16,000 |   | 11.45 |   |   |   |
| Expired/Terminated                    |       | (1,000                                                                  | )          | 13.41                                                                   |       |   |   | (3,000 | ) | 13.41 |   |   |   |
| Outstanding—end of  period       |       | 73,176                                                                  |       | $                                                                       | 10.93      |   | 6.92 years |   | 73,176 |   | $ | 10.93 |   | 6.92 years |   |
| Options exercisable at year-end       |       | 52,299                                                                  |       | $                                                                       | 9.76       |   |   |   | 52,299 |   | $ | 9.76 |   |   |   |

** **

**6.  NETINCOME PER COMMON AND COMMON EQUIVALENT SHARE**

Basicand diluted net income per common and potential common share has beencalculated based on the weighted average number of shares outstanding.  The following schedule reconciles thenumerator and denominator of the basic and diluted net income per common andpotential common share for the three and six months ended June 30, 2006 and2005 (in thousands, except per share data):

|                                                                   | ** ** | **Net Income**  | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|
| ** **                                                        | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**    | ** ** |
| **Three Months ended June 30,  2006**                             | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** |
| Basic earnings per  share                                         |       | $               | 780        |              | 2,089      |          | $          | 0.37 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —          |       | 14                |       | —        |       |
| Diluted earnings per  share                                       |       | $               | 780        |              | 2,103      |          | $          | 0.37 |   |
| **Three Months ended June 30,  2005**                             | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** |
| Basic earnings per  share                                         |       | $               | 471        |              | 2,087      |          | $          | 0.23 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —          |       | 12                |       | (0.01         | )          |
| Diluted earnings per  share                                       |       | $               | 471        |              | 2,099      |          | $          | 0.22 |   |
| **Six Months ended June 30, 2006**                                | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** |
| Basic earnings per  share                                         |       | $               | 1,460      |              | 2,089      |          | $          | 0.70 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —          |       | 12                |       | (0.01         | )          |
| Diluted earnings per  share                                       |       | $               | 1,460      |              | 2,101      |          | $          | 0.69 |   |
| **Six Months ended June 30, 2005**                                | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** |
| Basic earnings per  share                                         |       | $               | 931        |              | 2,084      |          | $          | 0.45 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —          |       | 12                |       | (0.01         | )          |
| Diluted earnings per  share                                       |       | $               | 931        |              | 2,096      |          | $          | 0.44 |   |

 

**RECLASSIFICATIONS**

Certain 2005 amounts have been reclassified to conformto the 2006 presentation.

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

**INTRODUCTION**

Citizens Bancshares Corporation (the “Company”) is aholding company that provides a full range of commercial banking and mortgagebrokerage services to individuals and corporate customers in its primary marketareas, metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw,Alabama through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 10 full-service financialcenters in Georgia and Alabama.  TheCompany also owns and operates a wholly owned subsidiary grantor trust,Citizens (GA) Statutory Trust I (the “Trust”) through the issuance of pooledtrust preferred securities. However, in accordance with current accountingguidance, the Trust has not been consolidated in the financial statements.

**Forward Looking Statements**

In addition to historical information, this report onForm 10-Q may contain forward-looking statements. For this purpose, anystatements contained herein, including documents incorporated by reference,that are not statements of historical fact may be deemed to be forward-lookingstatements. Forward-looking statements are subject to numerous assumptions,risks and uncertainties. Without limiting the foregoing, the words “believe,” “anticipates,”“plan,” expects,” and similar expressions are intended to identifyforward-looking statements.

Forward-looking statements are based on currentmanagement 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 orrequirements. The Company undertakes no obligation to, nor does it intend to,update forward-looking statements to reflect circumstances or events that occurafter the date hereof or to reflect the occurrence of unanticipated events.

The following discussion is of the Company’s financialcondition as of June 30, 2006 and the changes in the financial condition andresults of operations for the three and six month periods ended June 30, 2006and 2005.

**Critical Accounting Policies**

In response to the Securities and Exchange Commission’s(“SEC”) Release No. 33-8040, Cautionary Advice Regarding Disclosure AboutCritical Accounting Policies, the Company has identified the following as themost critical accounting policies upon which its financial status depends.  The critical policies were determined byconsidering accounting policies that involve the most complex or subjectivedecisions or assessments.  The Company’smost critical accounting policies relate to:

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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 unrealizedholding gains and losses included in earnings, and available for sale securitieswhich are recorded at fair value with unrealized holding gains and lossesincluded as a component of accumulated other comprehensive income.  The Company had no investment securitiesclassified 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 and losseson sales of investment securities are recognized upon disposition, based on theadjusted cost of the specific security. A decline in market value of any security below cost that is deemedother than temporary is charged to earnings resulting in the establishment of anew cost basis for the security.

**Loans** -Loans are reported at principal amounts outstanding less unearned income andthe allowance for loan losses.  Interestincome on loans is recognized on a level-yield basis. Loan fees andcertain direct origination costs are deferred and amortized over the estimatedterms of the loans using the level-yield method.  Discounts on loans purchased are accretedusing the level-yield method over the estimated remaining life of the loanpurchased.

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

A description of other accounting policies aresummarized in Note 1, Summary of Significant Accounting Policies in the Notesto Consolidated Financial Statements of the Company’s Annual Report on Form10-K for the year ended December 31, 2005. The Company has followed those policies in preparing this report.

**FINANCIAL CONDITION**

Citizens Bancshares Corporation’s total assets at June30, 2006 were $331 million compared to $329 million at December 31, 2005.During the first half of 2006, total earning assets increased by $5,182,000.Interest bearing deposits with banks increased $862,000 to $1,260,000 andinvestment securities classified as available for sale increased by $1,363,000,partially offset by a $543,000 decrease in investment securities held tomaturity. Other investments, which consist of the Company’s investment in thestock of the Federal Reserve Bank and the Federal Home Loan Bank (FHLB),

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decreased by $523,000 and fluctuate daily due to theamount of advances outstanding at the FHLB. Total production of new loans was$31,697,000 in the first half of 2006,resulting in an increase of $4,023,000 in loans receivable, net for theperiod. These increases are due to the Company taking advantage of thecontinuing rise in interest rates to increase the average yield and duration ofits earning assets.

Total liabilities increased $2 million to $303 millionat June 30, 2006 compared to $301 million at December 31, 2005. This increaseis primarily due to a $13,254,000 increase in total deposits, partially offsetby an $11,499,000 decrease in advances from the FHLB. The Company used theexcess liquidity generated by its deposit growth to reduce its outstandingborrowings with the FHLB, thereby reducing the yield paid on itsinterest-bearing liabilities.

**INVESTMENT SECURITIES**

The Company invests a portion of its assets in U.S.government sponsored agency securities, state, county and municipal securities,mortgage backed bonds, as well as certain equity securities.  At June 30, 2006 and December 31, 2005, theCompany’s investment securities portfolio represented approximately 24% oftotal assets.

Investment securities available for sale aresummarized as follows (in thousands):
| At June 30, 2006          | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                     |       |                |       |                         |       |                          |       |                |       |
| U.S. Government  agencies                |       | $                   | 6,937      |                         | $          | —                        |       | $                   | 243        |   | $ | 6,694 |   |
| State, county,  and municipal securities |       | 16,841              |       | 101                          |       | 257                           |       | $                   | 16,685     |   |
| Mortgage-backed  securities              |       | 45,573              |       | 21                           |       | 1,844                         |       | $                   | 43,750     |   |
|                                     | Totals     |                | $          | 69,351                       |       | $                             | 122        |                | $          | 2,344 |   | $ | 67,129 |   |
|                                          |            |                     |            |                              |            |                               |            |                     |            |  |  |  |  |  |

 
| 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 |   |
|                                          |            |                     |            |                              |            |                               |            |                     |            |  |  |  |  |  |

 

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(1) The equity securities represent agency dividendsreceived deduction (DRD) preferred stock issued by Fannie Mae Corporation(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).  These securities are callable at par andreprice every two years.  The interestearned on these equity securities is 70 percent tax free.

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Investment securitiesheld to maturity are summarized as follows (in thousands):
| At June 30, 2006          | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                               | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| U.S. Government  agencies                |       | $                   | 3,000      |                         | $          | —                        |       | $                   | 132        |   | $ | 2,868 |   |
| State, county,  and municipal securities |       | 4,833               |       | 34                           |       | 7                             |       | 4,860               |       |
| Mortgage-backed  securities              |       | 1,035               |       | —                       |       | 57                            |       | 978                 |       |
|                                     |       |                |       |                         |       |                          |       |                |       |
|                                     | Totals     |                | $          | 8,868                        |       | $                             | 34         |                | $          | 196 |   | $ | 8,706 |   |
|                                          |            |                     |            |                              |            |                               |            |                     |            |  |  |  |  |  |

 
| 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 as available-for-sale are recorded at fair marketvalue and held-to-maturity securities are recorded at amortized cost.  The Company evaluates its investmentportfolio periodically to identify any impairment that is other thantemporary.  At June 30, 2006, the Companyhad several debt securities that have been in an unrealized loss position fortwelve months or more.  The Company hasthe ability and intent to hold these securities until such time as the valuerecovers or the securities mature.  TheCompany believes, based on industry analyst reports and credit ratings, thatthe deterioration in value is attributable to changes in market interest ratesand is not in the credit quality of the issuer and therefore, these losses arenot considered other-than-temporary.

The Company’s investment portfolio consists principally of obligationsof the United States, its agencies or its corporations and general obligationmunicipal securities. In the opinion of management, there is no concentrationof credit risk in its investment portfolio. The company places its deposits and correspondent accounts with andsells its federal funds to high quality institutions.   Management believes credit risk associatedwith correspondent accounts is not significant.

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##### **LOANS**

Loans outstanding, by classification, are summarizedas follows (in thousands):
|                                          | ** **                  | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|-----------------------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** **                  | **2006**          | ** ** | **2005**              | ** ** |
|                                     |                        |              |       |                  |       |
| Commercial,  financial, and agricultural |                        | $                 | 15,608     |                  | $          | 12,647 |   |
| Installment                              |                        | 10,862            |       | 10,132                |       |
| Real estate -  mortgage                  |                        | 168,149           |       | 175,739               |       |
| Real estate -  construction              |                        | 26,523            |       | 18,830                |       |
| Other                                    |                        | 2,101             |       | 2,164                 |       |
|                                     | Loans receivable            |              | 223,243    |                  | 219,512    |   |
| Less:                                    | Net deferred  loan fees     |              | 327        |                  | 399        |   |
|                                     | Allowance for  loan losses  |              | 3,215      |                  | 3,327      |   |
|                                     | Discount on  loans acquired |              | 33         |                  | 141        |   |
|                                     |                        |              |       |                  |       |   |
|                                     | Loans  receivable, net      |              | $          | 219,668               |       | $ | 215,645 |   |

 

**NONPERFORMING ASSETS**

Nonperforming assets include nonperforming loans, realestate acquired through foreclosure, and repossessed assets.  Nonperforming loans consist of loans that arepast due with respect to principal or interest more than 90 days or have beenplaced on nonaccrual status.

With the exception of the loans included withinnonperforming assets in the table below, management is not aware of any loansclassified for regulatory purposes as loss, doubtful, substandard, or specialmention that have not been disclosed which (1) represent or result from trendsor uncertainties which management reasonably expects will materially impactfuture operating results, liquidity, or capital resources, or (2) represent anyinformation on material credits which management is aware that causesmanagement to have serious doubts as to the abilities of such borrowers tocomply with the loan repayment terms.

Nonperforming assets decreased by $696,000 to$4,017,000 at June 30, 2006 from $4,713,000 at December 31, 2005.  Nonperforming assets represents 1.80% ofloans, net of unearned income, discounts, and real estate acquired throughforeclosure at June 30, 2006 as compared to 2.15% at December 31, 2005.  At June 30, 2006, $1,933,000 of theoutstanding balance in nonperforming assets is guaranteed by the U.S.Government through the Small Business Administration Program.

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The table below presents a summary of theCompany’s nonperforming assets at June 30, 2006 and December 31, 2005.
| ** **                                                                                                       | ** ** | **June 30,**                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2006**                            | ** ** | **2005**              | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                                       | ** ** | **financial ratios)**          | ** ** |
| Nonperforming  assets:                                                                                           |       |                                |       |                  |       |
| Nonperforming  loans:                                                                                            |       |                                |       |                  |       |
| Nonaccrual loans                                                                                                 |       | $                                   | 3,678      |                  | $          | 4,143 |   |
| Past-due loans of 90 days or more                                                                                |       | —                              |       | —                |       |
| Nonperforming loans                                                                                              |       | 3,678                               |       | 4,143                 |       |
|                                                                                                             |       |                                |       |                  |       |
| Real estate  acquired through foreclosure                                                                        |       | 339                                 |       | 570                   |       |
| Total nonperforming assets                                                                                       |       | $                                   | 4,017      |                  | $          | 4,713 |   |
|                                                                                                             |       |                                |       |                  |       |
| Ratios:                                                                                                          |       |                                |       |                  |       |
| Nonperforming  loans to loans, net of unearned income and discount on loans                                      |       | 1.65                                | %          | 1.89                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Nonperforming  assets to loans, net of unearned income, discounts, and real estate acquired  through foreclosure |       | 1.80                                | %          | 2.15                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Nonperforming  assets to total assets                                                                            |       | 1.22                                | %          | 1.43                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Allowance for  loan losses to nonperforming loans                                                                |       | 87.40                               | %          | 80.29                 | %          |
|                                                                                                             |       |                                |       |                  |       |
| Allowance for loan  losses to nonperforming assets                                                               |       | 80.03                               | %          | 70.58                 | %          |

 

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**ALLOWANCE FOR LOAN LOSSES**

The allowance for loan losses is primarily availableto 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 on loansreceivable when any significant and permanent decline in value occurs.  These estimates for losses are based onindividual assets and their cash flow forecasts, sales values, independentappraisals, the volatility of certain real estate markets, and concern fordisposing of real estate in distressed markets. For loans that are pooled for purposes of determining the necessary provisions,estimates are based on loan types, history of charge-offs, and otherdelinquency 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 ofDirectors.  On a quarterly basis acomprehensive review of the adequacy of allowance for loan losses isperformed.  This assessment is made in thecontext of historical 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. For the six month period ended June 30, 2006 provisions for loan lossestotaled $30,000 compared to $167,000 for the same period in 2005, representingan 82 percent decrease over the previous year. The reduction in the provision expense is attributed to the continuing improvementin the credit quality of the Company’s loan portfolio.

The allowance for loan losses at June 30, 2006 wasapproximately $3,215,000, representing 1.44% of total loans, net of unearnedincome and discounts compared to approximately $3,327,000 at December 31, 2005,which represented 1.52% of total loans, net of unearned income and discounts.

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

A substantial portion of the Company’s loan portfoliois secured by real estate in the metropolitan Atlanta market, including aconcentration of loans to churches and convenience stores.  The Company’s outstanding church loans wereapproximately $37.6 million at June 30, 2006 and at December 31, 2005,respectively.  The Company’s loans toarea convenience stores were approximately $16.4 million at June 30, 2006 and$20.9 million at December 31, 2005. Accordingly, the ultimate collectability of the substantial portion ofthe Company’s loan portfolio is susceptible to changes in market conditions inthe metropolitan Atlanta area.

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The following table summarizes loans, changes in theallowance for loan losses arising from loans charged off, recoveries on loanspreviously charged off by loan category, and additions to the allowance whichhave been charged to operating expense as of and for the six month periodsended June 30, 2006 and 2005 (amount in thousands, except financial ratios):
| ** **                                                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                    |       |     |       |     |       |
| Loans, net of  unearned income and discounts                                                                            |       | $        | 222,883    |     | $          | 209,813 |   |
|                                                                                                                    |       |     |       |     |       |
| Average loans,  net of unearned income, discounts and the allowance for loan losses                                     |       | $        | 216,706    |     | $          | 210,561 |   |
|                                                                                                                    |       |     |       |     |       |
| Allowance for  loan losses at the beginning of period                                                                   |       | $        | 3,327      |     | $          | 3,183 |   |
|                                                                                                                    |       |     |       |     |       |
| Loans  charged-off:                                                                                                     |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                 |       | —   |       | 40       |       |
| Real estate - loans                                                                                                     |       | 142      |       | 33       |       |
| Installment loans to individuals                                                                                        |       | 121      |       | 51       |       |
| Total loans  charged-off                                                                                                |       | 263      |       | 124      |       |
|                                                                                                                    |       |     |       |     |       |
| Recoveries of  loans previously charged off:                                                                            |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                 |       | 29       |       | 102      |       |
| Real estate - loans                                                                                                     |       | 60       |       | 56       |       |
| Installment loans to individuals                                                                                        |       | 32       |       | 38       |       |
| Total loans  recovered                                                                                                  |       | 121      |       | 196      |       |
|                                                                                                                    |       |     |       |     |       |
| Net loans  charged-off (recovered)                                                                                      |       | 142      |       | (72      | )          |
|                                                                                                                    |       |     |       |     |       |
| Additions to  allowance for loan losses charged to operating expense                                                    |       | 30       |       | 167      |       |
|                                                                                                                    |       |     |       |     |       |
| Allowance for  loan losses at period end                                                                                |       | $        | 3,215      |     | $          | 3,422 |   |
|                                                                                                                    |       |     |       |     |       |
| Ratio of net  loans charged-off to average loans, net of unearned income, discounts, and  the allowance for loan losses |       | 0.07     | %          | (0.03    | )%         |
|                                                                                                                    |       |     |       |     |       |
| Ratio of allowance for  loan losses to loans, net of unearned income and discounts                                      |       | 1.44     | %          | 1.63     | %          |

 

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**DEPOSITS**

Deposits are the Company’s primary source of fundingloan growth.  Total deposits at June 30,2006 increased 5% or $13,254,000 to $267,923,000 from December 31, 2005.Noninterest-bearing deposits increased by $3,715,000 or 6%, and interest-bearingdeposits increased by $9,539,000 or 5%. The increase in total deposits is primarily attributed to Corporate andGovernmental customers who make significant monthly deposits and withdrawalsbased on their budgetary needs.  Inaddition, the Company implemented a new sales program which places specificemphasis on deposit growth.

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

|                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                               |       |              |       |                  |       |
| NOW and money market  accounts     |       | $                 | 71,319     |                  | $          | 49,889 |   |
| Savings accounts                   |       | 38,571            |       | 41,013                |       |
| Time deposits of  $100,000 or more |       | 50,965            |       | 46,722                |       |
| Other time deposits                |       | 43,266            |       | 56,958                |       |
|                               |       |              |       |                  |       |
|                               |       | $                 | 204,121    |                  | $          | 194,582 |   |

 

**OTHER BORROWED FUNDS**

Whilethe Company continues to emphasize funding earning asset growth throughdeposits, the Company has relied on other borrowings as a supplemental fundingsource.  Other borrowings consist ofFederal Home Loan Bank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from theFHLB of $26,201,000 at June 30, 2006 and $37,700,000 at December 31, 2005.   The outstanding advances at the FHLBfluctuate daily depending on the liquidity needs of the Company.  The following advances are collateralized bya blanket lien on the Company’s 1-4 family mortgage loans.

| Maturity                             | ** ** | **Callable** | ** ** | **Type**   | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|--------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2006                            |       | Daily        |       | Variable   |       | 5.54                        | %          | $                               | 16,201,000 |   | 4.44 | % | $ | 27,700,000 |   |
| April 2010                           |       | Quarterly    |       | Fixed      |       | 5.82                        | %          | 10,000,000                      |       | 5.82 | % | 10,000,000 |   |
|                                 |       |         |       |       |       |                        |       |                            |       |   |   |   |   |
| Total Principal  Outstanding         |       |         |       |       |       |                        |       | $                               | 26,201,000 |   |   |   | $ | 37,700,000 |   |
|                                 |       |         |       |       |       |                        |       |                            |       |   |   |   |   |
| Weighted Average Rate  at Period End |       |         |       |       |       | 5.64                        | %          |                            |       | 4.81 | % |   |   |

 

The Company has an unsecured note payable ofapproximately $340,000 at June 30, 2006, reduced from $440,000 at December 31,2005.  The note bears interest at a rateof 7.50% (the lender’s prime rate minus 50 basis points).

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 the

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indentures of the London Interbank Offered Rate plus 3.45%. The Trustused the net proceeds from the offering to purchase a like amount of JuniorSubordinated Debentures (the “Debentures”) of the Company. These securities arereported in our consolidated balance sheet as Junior SubordinatedDebentures.  The trust preferred securitiesare mandatorily redeemable upon the maturity of the Debentures on June 26,2032, or upon earlier redemption as provided in the indentures beginning June26, 2007.  The Company has the right toredeem the Debentures in whole or in part or after specific dates, at aredemption price specified in the indentures plus any accrued but unpaidinterest to the redemption date.  At June30, 2006, the interest rate on the junior subordinated debenture was 8.91%.

**RESULTSOF OPERATIONS**

**NetInterest Income:**

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

Net interest income decreased $23,000 to$3,704,000 for the second quarter of 2006 from $3,727,000 for the secondquarter of 2005.  Compared to the firstquarter of 2006, net interest income in the second quarter of 2006 increased$179,000. This increase is due to the Company asset/liability managementphilosophy in a difficult interest rate environment. In the second quarter of2006, the Company improved the yield on its earning assets as interest incomeon loans and investments increased $266,000 and $28,000, respectively,partially offset by an $115,000 increase in total interest expense compared tothe first quarter of 2006.

For the six month period ended June 30, 2006,net interest income decreased $94,000 or 1% as compared to the same period ofthe previous year.  The decrease in netinterest income is primarily due to the increase in total interest expenseresulting from rising interest rates. For the six month period ending June 30,2006, total interest expense increased $1,079,000 while total interest incomeincreased $985,000 as compared to the same period in 2005.

**Provisionfor loan losses**

The Companyimproved its credit quality during the first half of 2006. Only $30,000 inprovision for loan losses was taken in 2006 resulting in a decrease of $63,000and $137,000, respectively, in the quarterly and year-to-date comparisons tothe previous year. No provision for loan losses was deemed necessary for thesecond quarter. The reduction in the provision expense is attributed tocontinued improvement in the credit quality of the Company’s loan portfolio.The provision for loan losses and the resulting allowance for loan losses arebased on changes in the size and character of the Company’s loan portfolio,changes in nonperforming and past due loans, the existing risk of individualloans, concentrations of loans to specific borrowers or industries, and economicconditions.  The allowance for loanlosses was $3,215,000 in the second quarter of 2006, compared to $3,327,000 atDecember 31, 2005.  At June 30, 2006, theallowance for loan losses was 80% of the nonperforming assets compared to 71%at December 31, 2005.  At June 30, 2006,the Company considered its allowance for loan losses to be adequate.

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**Noninterestincome:**

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

Noninterest income increased 9% to $1,328,000for the three month period ended June 30, 2006, an increase of $109,000compared to the same period ended June 30, 2005. This increase is primarily dueto a $123,000 gain on the sale of equity securities in the second quarter of2006.  The Company incurred a $346,000impairment loss on the equity securities in the second quarter of 2005,partially offset by a $250,000 reversal of a judgment won on appeal that’srecorded to other non-interest income.  For the six month period ended June 30, 2006, noninterest incomeincreased 6% to $2,623,000, an increase of $149,000 compared to the same periodended June 30, 2005.

**Noninterestexpense**:

Noninterestexpense includes compensation and benefits, occupancy expenses, advertising andmarketing, professional fees, office supplies, data processing, telephoneexpenses, miscellaneous items and other losses.

Noninterest expense totaled decreased 6% for thesecond quarter and for the first six months of 2006 compared to the sameperiods last year.  The decrease is dueto the Company’s strategy started last year to reduce overhead cost and improvethe efficiency throughout its financial centers network.

Last year, theCompany consolidated and closed two branches, and reduced its average full-timeemployee base. During the second quarter of 2006, the Company had an average of139 full-time employees compared to an average of 154 full-time employeesduring the same period last year.  Forthe second quarter of 2006, salaries and employee benefits decreased $33,000,occupancy and equipment expenses decreased $114,000 and other operatingexpenses decreased $101,000 compared to the same period last year.

For the first halfof 2006, the Company had an average of 142 full-time employees compared to anaverage of 158 full-time employees during the same period last year.  For the first half of 2006, salaries andemployee benefits decreased $152,000, occupancy and equipment expensesdecreased $164,000 and other operating expenses decreased $166,000 compared tothe same period last year.

**INTEREST RATE SENSITIVITY MANAGEMENT**

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

One method of measuring the impact of interest ratesensitivity is the cumulative gap analysis. The difference between interest rate sensitive assets and interest ratesensitive liabilities at various time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a

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negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitivepressures and the needs of the Company’s customers.  In addition, various assets and liabilities indicatedas repricing within the same period may in fact reprice at different timeswithin such period and at different rates. The following table shows thecontractual maturities of all investment securities at June 30, 2006.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market, and savings accounts in thesix month category.  However, the actualrepricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

The following table sets forth the distribution of therepricing of the Company’s interest rate sensitive assets and interest ratesensitive liabilities as of June 30, 2006.
| ** **                                                              | ** ** | **Cumulative amounts as of June 30, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **Maturing and repricing within**                         | ** ** |
| ** **                                                              | ** ** | **3**                                                                    | ** ** | **3 to 12** | ** ** | **1 to 5** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Months**                                                               | ** ** | **Months** | ** ** | **Years** | ** ** | **5 Years** | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **(amounts in thousands, except ratios)**            | ** ** |
| Interest-sensitive  assets:                                             |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Investments                                                             |       | $                                                                        | 484        |   | $ | 1,477 |   | $ | 44,889 |   | $ | 29,147 |   | $ | 75,997 |   |
| Certificates  of deposit                                                |       | —                                                                   |       | 100 |   | — |   | — |   | 100 |   |
| Loans                                                                   |       | 82,417                                                                   |       | 11,567 |   | 76,424 |   | 52,835 |   | 223,243 |   |
| Interest-bearing  deposits with other banks                             |       | 1,260                                                                    |       | — |   | — |   | — |   | 1,260 |   |
| Total  interest-sensitive assets                                        |       | $                                                                        | 84,161     |   | $ | 13,144 |   | $ | 121,313 |   | $ | 81,982 |   | $ | 300,600 |   |
|                                                                    |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Deposits  (a)                                                           |       | $                                                                        | 145,403    |   | $ | 42,816 |   | $ | 15,902 |   | $ | — |   | $ | 204,121 |   |
| Notes  payable                                                          |       | 340                                                                      |       | — |   | — |   | — |   | 340 |   |
| Junior  subordinated debentures                                         |       | —                                                                   |       | 5,155 |   | — |   | — |   | 5,155 |   |
| Other  borrowings                                                       |       | 16,201                                                                   |       | — |   | 10,000 |   | — |   | 26,201 |   |
| Total  interest-sensitive liabilities                                   |       | $                                                                        | 161,944    |   | $ | 47,971 |   | $ | 25,902 |   | $ | 0 |   | $ | 235,817 |   |
|                                                                    |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                                        | (77,783    | ) | $ | (34,827 | ) | $ | 95,411 |   | $ | 81,982 |   | $ | 64,783 |   |
|                                                                    |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (25.88                                                                   | )%         | (37.46 | )% | (5.72 | )% | 21.55 | % | 21.55 | % |

 

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(a) Savings, Now, and moneymarket deposits totaling $109,891are included in the maturing in 3 monthsclassification.

**LIQUIDITY**

Liquidity is the ability of the Company toconvert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities.  Liquidity management involves maintaining theCompany’s ability to meet the day-to-day cash flow requirements of itscustomers, whether they are depositors wishing to withdraw funds or borrowersrequiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able toperform the

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primary function of a financial intermediary andwould, therefore, not be able to meet the needs of the communities it serves.Additionally, the Company requires cash for various operating needs including:dividends to shareholders; business combinations; capital injections to itssubsidiaries; the servicing of debt; and the payment of general corporateexpenses. The Company has access to various capital markets.  However, the primary source of liquidity forthe Company is dividends from its bank subsidiary.  The Georgia Department of Banking and Financeregulates the dividend payments and must approve dividend payments that exceed50 percent of the Bank’s prior year net income. As of June 30, 2006, this amount was approximately $1,374,000.  The payment of dividends may also be affectedor limited by other factors, such as the requirement to maintain adequatecapital above regulatory guidelines.  TheCompany does not anticipate any liquidity requirements in the near future thatit will not be able to meet.

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

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

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

**CAPITALRESOURCES**

Stockholders’ equityincreased $436,000 for the six months ended June 30, 2006, primarily due toearnings, partially offset by accumulated other comprehensive losses onavailable for sale securities.  Retainedearnings increased by $1,105,000 to $21,243,000 for the six month period due tonet earnings of $1,460,000 reduced by dividend payments of $355,000.Accumulated other comprehensive loss, net of taxes increased $680,000 to$1,467,000 during the six month period ending June 30, 2006.  These losses are due to the impact ofchanging economic conditions and changes in market interest rates on theCompany’s available for sale securities.

Quantitative measures established by regulation toensure capital adequacy require the Company to maintain minimum amounts andratios of total and Tier 1 capital to risk weighted assets, and Tier 1 capitalto average assets.  As of June 30, 2006and December 31, 2005, the Bank’s total and Tier 1 capital to risk weightedassets and Tier 1 to average assets were 15%, 14% and 10%, respectively.  As of June 30, 2006, the Company met allcapital adequacy requirements to which it is subject.

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**ITEM 3.****  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk is the risk of loss from adverse changesin market prices and interest rates.  Ourmarket risk arises principally from interest rate risk inherent in our lending,deposit, and borrowing activities. 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 tradingportfolio or deal in international instruments, and therefore, other types ofmarket risks, such as foreign currency risk and commodity price risk, do notarise in the normal course of our business activities.

Quantitativeinformation about the Company’s market risk at June 30, 2006 is as follows (inthousands):

|                                       | ** ** | **2006**     | ** ** |
|---------------------------------------|------------|--------------|------------|
| ** **                            | ** ** | **Carrying** | ** ** | **Estimated** | ** ** | **Down** | ** ** | **Up** | ** ** |
| ** **                            | ** ** | **Value**    | ** ** | **Fair Value** | ** ** | **100 bp** | ** ** | **100 bp** | ** ** |
|                                  |       |         |       |   |   |   |   |   |   |
| Financial  assets:                    |       |         |       |   |   |   |   |   |   |
| Interest-bearing  deposits with banks |       | $            | 1,260      |   | $ | 1,260 |   | — | % | — | % |
| Certificates of  deposit              |       | 100          |       | 100 |   | — |   | — |   |
| Investment  securities                |       | 75,997       |       | 75,835 |   | 2.83 |   | (3.30 | ) |
| Loans receivable                      |       | 223,243      |       | 215,117 |   | 1.58 |   | (1.52 | ) |
|                                  |       |         |       |   |   |   |   |   |   |
| Financial  liabilities:               |       |         |       |   |   |   |   |   |   |
| Interest-bearing  deposits            |       | 204,121      |       | 192,856 |   | 1.39 |   | (1.22 | ) |
| Notes payable                         |       | 340          |       | 340 |   | — |   | — |   |
| Junior  subordinated debentures       |       | 5,155        |       | 5,136 |   | — |   | — |   |
| Advances from  Federal Home Loan Bank |       | 26,201       |       | 26,030 |   | 0.03 |   | (1.74 | ) |
|                                       |            |              |            |  |  |  |  |  |  |  |  |

 

The Company has adopted an asset/liability managementprogram to monitor the Company’s interest rate sensitivity and to ensure thatthe Company is competitive in the loan and deposit markets.  Management seeks to manage the relationshipbetween interest-sensitive assets and liabilities in order to protect againstwide interest rate fluctuations, including those resulting from inflation.  The Company has not entered into any derivativefinancial instruments such as futures, forwards, swaps or options.  Additionally, refer to our interest ratesensitivity management and liquidity disclosures within Part 1, Item 2, of thisForm 10-Q.

**ITEM 4.****  CONTROLSAND PROCEDURES**

As of the end of the period covered by this report, weconducted, under the supervision of and with the participation of ourmanagement, including the Company’s Chief Executive Officer, Chief OperatingOfficer, and Chief Financial Officer, an evaluation of the effectiveness of ourdisclosure 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 June 30, 2006 in timelyalerting them to material information required to be included in our reportsfiled with or furnished to the Securities and

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Exchange Commission. There have been no changes in the Company’s internal controls overfinancial reporting that occurred during the quarter ended June 30, 2006 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II.  OTHER INFORMATION**

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

The Company is notaware of any material pending legal proceedings to which the Company or itssubsidiary is a party or to which any of their property is subject.

**ITEM 1A.****       RISKFACTORS**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2005, which could materially affectour business, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks we face. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

**ITEM 2.****          UNREGISTEREDSALE OF EQUITY SECURITIES AND USE OF PROCEEDS**

None

**ITEM 3.****          DEFAULTSUPON SENIOR SECURITIES**

None

**ITEM 4.****          SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS**

The Company held its Annual Shareholders’Meeting on Wednesday, May 24, 2006, at 10:00 a.m., at the Atlanta LifeInsurance Company, Herndon Plaza, 100 Auburn Avenue, N.E., Atlanta,Georgia.  The purpose of the AnnualShareholders’ Meeting was to elect three (3) Class I directors who will serve athree year term expiring at the 2009 annual meeting.  The following table presents the results ofthe shareholders vote:
| Directors          | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|--------------------|------------|-----------|------------|--------------|------------|
|               |       |      |       |         |       |
| James E. Young     |       | 1,138,548 |       | 171,439      |       |
| Ray Robinson       |       | 1,158,426 |       | 151,561      |       |
| H. Jerome  Russell |       | 1,158,256 |       | 151,731      |       |

 

**ITEM 5.****          OTHERINFORMATION**

None

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

**Exhibit31**

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

**Exhibit32**

Certificationpursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

**CITIZENS BANCSHARES CORPORATION**
| Date:  August  11, 2006 | By:                                   | /s/ James E. Young |   |
|------------------------------|---------------------------------------|--------------------|--------|
|                         | James E. Young                        |
|                         | President and Chief Executive Officer |
|                         |                                  |
|                         |                                  |
| Date:  August  11, 2006 | By:                                   | /s/ Cynthia N. Day |   |
|                         | Cynthia N. Day                        |
|                         | Senior Executive Vice President and   |
|                         | Chief Operating Officer               |
|                         |                                  |
|                         |                                  |
| Date:  August  11, 2006 | By:                                   | /s/ Samuel J. Cox  |   |
|                         | Samuel J. Cox                         |
|                         | Senior Executive Vice President and   |
|                         | Chief Financial Officer               |
|                              |                                       |                    |        |  |  |

 

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