**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10 – Q**

**(MarkOne)**
|            | **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** |       | **For the quarterly period ended March 31, 2007**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.                                                x  Yes o No.

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act)
| Large accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer  x |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act) o Yes  x No

APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by checkmark whether registrant has filed all documents and reports required to befiled by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under 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:

Indicate the number ofshares outstanding for each of the issuer’s classes of common stock as of thelatest practicable date: 1,998,910 shares of Common Stock, $1.00 par value and90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on April30, 2007.

 

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

 

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**MARCH 31, 2007 AND DECEMBER 31, 2006**

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

 
| ** **                                                                                          | ** ** | **2007**        | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                          |       |            |       |       |       |
| Cash and due  from banks                                                                            |       | $               | 7,113      |       | $          | 8,615 |   |
| Interest-bearing  deposits with banks                                                               |       | 17,486          |       | 4,589      |       |
| Certificates of  deposit                                                                            |       | 100             |       | 100        |       |
| Investment  securities available for sale, at fair value                                            |       | 68,037          |       | 70,348     |       |
| Investment  securities held to maturity, at cost                                                    |       | 8,115           |       | 8,175      |       |
| Other  investments                                                                                  |       | 1,554           |       | 2,246      |       |
| Loans  receivable, net                                                                              |       | 211,248         |       | 218,003    |       |
| Premises and  equipment, net                                                                        |       | 7,876           |       | 7,850      |       |
| Cash surrender  value of life insurance                                                             |       | 9,444           |       | 9,364      |       |
| Foreclosed real  estate                                                                             |       | 2,684           |       | 130        |       |
| Other assets                                                                                        |       | 5,658           |       | 5,765      |       |
|                                                                                                |       |            |       |       |       |
| Total assets                                                                                        |       | $               | 339,315    |       | $          | 335,185 |   |
|                                                                                                |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                      | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                |       |            |       |       |       |
| LIABILITIES:                                                                                        |       |            |       |       |       |
| Noninterest-bearing  deposits                                                                       |       | $               | 60,200     |       | $          | 60,262 |   |
| Interest-bearing  deposits                                                                          |       | 229,054         |       | 208,758    |       |
|                                                                                                |       |            |       |       |       |
| Total deposits                                                                                      |       | 289,254         |       | 269,020    |       |
|                                                                                                |       |            |       |       |       |
| Accrued expenses  and other liabilities                                                             |       | 3,248           |       | 3,774      |       |
| Notes payable                                                                                       |       | 340             |       | 340        |       |
| Junior  subordinated debentures                                                                     |       | 5,155           |       | 5,155      |       |
| Advances from  Federal Home Loan Bank                                                               |       | 10,666          |       | 26,746     |       |
|                                                                                                |       |            |       |       |       |
| Total liabilities                                                                                   |       | 308,663         |       | 305,035    |       |
|                                                                                                |       |            |       |       |       |
| 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                                                                         |       | 7,513           |       | 7,497      |       |
| Retained  earnings                                                                                  |       | 23,147          |       | 22,786     |       |
| Treasury stock  at cost, 231,155 shares at March 31, 2007 and 234,442 at December 31, 2006          |       | (1,888          | )          | (1,915     | )          |
| Accumulated  other comprehensive loss, net of income taxes                                          |       | (440            | )          | (538       | )          |
|                                                                                                |       |            |       |       |       |
| Total  stockholders’ equity                                                                    |       | 30,652          |       | 30,150     |       |
|                                                                                                |       |            |       |       |       |
|                                                                                                |       | $               | 339,315    |       | $          | 335,185 |   |

 

See notes toconsolidated financial statements.

2

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**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

**(Unaudited - In thousands, except pershare data)**

 
| ** **                                           | ** ** | **Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest income:                                     |       |                                             |       |   |   |
| Loans, including fees                                |       | $                                                | 4,384      |   | $ | 4,356 |   |
| Investment securities:                               |       |                                             |       |   |   |
| Taxable                                              |       | 684                                              |       | 621 |   |
| Tax-exempt                                           |       | 215                                              |       | 215 |   |
| Interest-bearing deposits                            |       | 174                                              |       | 12 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Total interest income                                |       | 5,457                                            |       | 5,204 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest  expense:                                   |       |                                             |       |   |   |
| Deposits                                             |       | 1,767                                            |       | 1,240 |   |
| Other borrowings                                     |       | 299                                              |       | 439 |   |
| Total interest expense                               |       | 2,066                                            |       | 1,679 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,391                                            |       | 3,525 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Provision for  loan losses                           |       | —                                           |       | 30 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net interest  income after provision for loan losses |       | 3,391                                            |       | 3,495 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Noninterest  income:                                 |       |                                             |       |   |   |
| Service charges on deposits                          |       | 701                                              |       | 862 |   |
| Gain (loss) on sales of securities                   |       | (33                                              | )          | 3 |   |
| Gain (loss) on sales of assets                       |       | 6                                                |       | 31 |   |
| Other operating income                               |       | 355                                              |       | 400 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,029                                            |       | 1,296 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Noninterest  expense:                                |       |                                             |       |   |   |
| Salaries and employee benefits                       |       | 1,871                                            |       | 2,000 |   |
| Net occupancy and equipment                          |       | 538                                              |       | 614 |   |
| Other operating expenses                             |       | 1,371                                            |       | 1,321 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 3,780                                            |       | 3,935 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 640                                              |       | 856 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Income tax  expense                                  |       | 105                                              |       | 176 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                                | 535        |   | $ | 680 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income per  share - basic                        |       | $                                                | 0.26       |   | $ | 0.33 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income per  share - diluted                      |       | $                                                | 0.26       |   | $ | 0.32 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Weighted average  outstanding shares - basic         |       | 2,086                                            |       | 2,089 |   |
|                                                 |       |                                             |       |   |   |
| Weighted average  outstanding shares - diluted       |       | 2,087                                            |       | 2,100 |   |

 

See notes to consolidated financial statements.

3

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

**FOR THETHREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**(Unaudited – In thousands, exceptparenthetical footnotes)**

 
| ** **                                                                                              | ** ** | **Common Stock** | ** ** | **Nonvoting  Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                                                              | ** ** | **Shares**            | ** ** | **Amount**                       | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**             | ** ** | **Earnings**                          | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** | ** ** | **Total** | ** ** |
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Balance—December  31, 2005                                                                         |       | 2,230                 |       | $                                | 2,230      |                    | 90         |         | $          | 90                      |       | $                                     | 7,439      |       | $          | 20,138 |   | (231 | ) | $ | (1,896 | ) | $ | (787 | ) | $ | 27,214 |   |
|                                                                                                    |       |                  |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   |   |   |
| Net income                                                                                              |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | 680                                   |       | —     |       | — |   | — |   | 680 |   |
| Unrealized holding  losses on investment securities available for sale—net of taxes of $4,787      |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                                |       | —     |       | — |   | 9 |   | 9 |   |
| Less reclassification  adjustment for holding gains included in net income—net of taxes of $1,129  |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                                |       | —     |       | — |   | (2 | ) | (2 | ) |
|                                                                                                    |       |                  |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   |   |   |
| Comprehensive  loss                                                                                     |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                                |       | —     |       | — |   | — |   | 687 |   |
| Stock based compensation  expense                                                                       |       | —                |       | —                           |       | —                  |       | —       |       | 11                      |       | —                                |       | —     |       | — |   | — |   | 11 |   |
| Reclassification  adjustment of treasury stock                                                          |       | —                |       | —                           |       | —                  |       | —       |       | 5                       |       | —                                |       | —     |       | 14 |   | — |   | 19 |   |
|                                                                                                    |       |                  |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   |   |   |
| **Balance—March 31, 2006**                                                                         | ** ** | **2,230**             | ** ** | **$**                            | **2,230**  | ** **              | **90**     | ** **   | **$**      | **90**                  | ** ** | **$**                                 | **7,455**  | ** ** | **$**      | **20,818** | ** ** | **(231** | **)** | **$** | **(1,882** | **)** | **$** | **(780** | **)** | **$** | **27,931** | ** ** |
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Balance—December  31, 2006                                                                         |       | 2,230                 |       | $                                | 2,230      |                    | 90         |         | $          | 90                      |       | $                                     | 7,497      |       | $          | 22,786 |   | (234 | ) | $ | (1,915 | ) | $ | (538 | ) | $ | 30,150 |   |
|                                                                                                    |       |                  |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   |   |   |
| Net income                                                                                              |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | 535                                   |       | —     |       | — |   | — |   | 535 |   |
| Unrealized holding  losses on investment securities available for sale—net of taxes of $39,325     |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                                |       | —     |       | — |   | 76 |   | 76 |   |
| Less reclassification  adjustment for holding gains included in net income—net of taxes of $11,178 |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                                |       | —     |       | — |   | 22 |   | 22 |   |
|                                                                                                    |       |                  |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   |   |   |
| Comprehensive  income                                                                                   |       | 633                   |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   | 633 |   |
|                                                                                                    |       |                  |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   |   |   |
| Cumulative effect of  adoption of fair value option                                                     |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | (174                                  | )          | —     |       | — |   | — |   | (174 | ) |
| Stock based compensation  expense                                                                       |       | —                |       | —                           |       | —                  |       | —       |       | 15                      |       | —                                |       | —     |       | — |   | — |   | 15 |   |
| Sale of Treasury stock                                                                                  |       | —                |       | —                           |       | —                  |       | —       |       | 1                       |       | —                                |       | 3          |       | 27 |   | — |   | 28 |   |
|                                                                                                    |       |                  |       |                             |       |                    |       |         |       |                    |       |                                  |       |       |       |   |   |   |   |   |   |
| **Balance—March  31, 2007**                                                                        | ** ** | **2,230**             | ** ** | **$**                            | **2,230**  | ** **              | **90**     | ** **   | **$**      | **90**                  | ** ** | **$**                                 | **7,513**  | ** ** | **$**      | **23,147** | ** ** | **(231** | **)** | **$** | **(1,888** | **)** | **$** | **(440** | **)** | **$** | **30,652** | ** ** |

 

See notes toconsolidated financial statements.

4

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THETHREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**(Inthousands)**

 
| ** **                                                                             | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                             | ** ** | **2007**           | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **(Unaudited)**    | ** ** |
| **OPERATING  ACTIVITIES:**                                                             | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net income                                                                             |       | $                  | 535        |   | $ | 680 |   |
| **Adjustments to reconcile net income to net cash  provided by operating activities:** | ** ** | ** **         | ** ** | ** ** | ** ** |
| Provision for loan losses                                                              |       | —             |       | 30 |   |
| Depreciation                                                                           |       | 189                |       | 179 |   |
| Amortization and accretion, net                                                        |       | 131                |       | 81 |   |
| Provision for deferred income taxes (benefit)                                          |       | 226                |       | (25 | ) |
| (Gain) loss on sale of assets and investments                                          |       | 27                 |       | (26 | ) |
| Stock based compensation expense                                                       |       | 14                 |       | 11 |   |
| Change in other assets                                                                 |       | (232               | )          | 109 |   |
| Change in accrued expenses and other liabilities                                       |       | (527               | )          | (207 | ) |
| Net cash provided by operating activities                                              |       | 363                |       | 832 |   |
| **INVESTING  ACTIVITIES:**                                                             | ** ** | ** **         | ** ** | ** ** | ** ** |
| Proceeds from calls and maturities of investment securities  held to maturity          |       | 57                 |       | 102 |   |
| Proceeds from sales and maturities of investment  securities available for sale        |       | 3,400              |       | 3,421 |   |
| Purchases of investment securities available for  sale                                 |       | (1,016             | )          | (7,403 | ) |
| Net change in other investments                                                        |       | 693                |       | 460 |   |
| Net change in loans receivable                                                         |       | 4,088              |       | (719 | ) |
| Net proceeds from the sale of foreclosed properties                                    |       | 101                |       | 394 |   |
| Purchases of premises and equipment, net                                               |       | (210               | )          | (108 | ) |
| Net change in interest bearing deposits with banks                                     |       | (12,897            | )          | (800 | ) |
| Net change in certificates of deposit                                                  |       | —             |       | (100 | ) |
| Net cash used by investing activities                                                  |       | (5,784             | )          | (4,753 | ) |
| **FINANCING  ACTIVITIES:**                                                             | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net change in deposits                                                                 |       | 20,234             |       | 13,472 |   |
| Sale of treasury stock activity                                                        |       | 27                 |       | — |   |
| Net change in advances from Federal Home Loan Bank                                     |       | (16,342            | )          | (8,100 | ) |
| Net cash provided by financing activities                                              |       | 3,919              |       | 5,372 |   |
| Net change in cash and cash equivalents                                                |       | (1,502             | )          | 1,451 |   |
| Cash and and  cash equivalents, beginning of period                                    |       | 8,615              |       | 11,289 |   |
| Cash and and  cash equivalents at end of period                                        |       | $                  | 7,113      |   | $ | 12,740 |   |
| **Supplemental  disclosures of cash paid during the period for:**                      | ** ** | ** **         | ** ** | ** ** | ** ** |
| Interest                                                                               |       | $                  | 2,021      |   | $ | 1,770 |   |
| Income taxes                                                                           |       | $                  | 334        |   | $ | 95,000 |   |
|                                                                                   |       |               |       |   |   |
| **Supplemental  disclosures of noncash transactions:**                                 | ** ** | ** **         | ** ** | ** ** | ** ** |
| Real estate  acquired through foreclosure                                              |       | $                  | 2,654      |   | — |   |
| Change in  unrealized gain on investment securities available for sale, net of taxes   |       | $                  | 98         |   | $ | 7 |   |
| Cumulative effect of  adoption of fair value option (charged to Retained earnings)     |       | $                  | 173        |   | $ | — |   |

 

See notes to consolidatedfinancial statements.

5

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

**Notes tothe Consolidated Financial Statements**

(Unaudited)

**1.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

**Basis ofPresentation**

CitizensBancshares Corporation (the “Company”) is a holding company that provides afull range of commercial banking and mortgage brokerage services to individualand corporate customers in metropolitan Atlanta and Columbus, Georgia, and inBirmingham and Eutaw, Alabama, through its wholly owned subsidiary, CitizensTrust Bank (the “Bank”).  The Bankoperates under a state charter and serves its customers through sevenfull-service financial centers in metropolitan Atlanta, Georgia, onefull-service financial center in Columbus, Georgia, one full-service financialcenter in Birmingham, Alabama, and one full-service financial center in Eutaw,Alabama.  The Company also owns andoperates a wholly owned subsidiary grantor trust, Citizens (GA) Statutory TrustI (the “Trust”) through the issuance of pooled trust preferred securities.  However, in accordance with currentaccounting guidance, the Trust has not been consolidated in the financialstatements.

The accompanyingunaudited consolidated financial statements have been prepared pursuant to therules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required bygenerally accepted accounting principles are not included herein. These interimstatements should be read in conjunction with the financial statements andnotes thereto included in the Company’s latest Annual Report on Form 10-K filedwith the Securities and Exchange Commission for the year ended December 31,2006.  The results of operations for theinterim periods reported herein are not necessarily representative of the resultsexpected for the full 2007 fiscal year.

The consolidatedfinancial statements of the Company for the three month period ended March 31,2007 are unaudited.  In the opinion ofmanagement, all adjustments necessary for a fair presentation of the financialposition and results of operations and cash flows for the three month periodhave been included.  All adjustments areof a normal recurring nature.  Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

**AccountingPolicies**

The Company’sconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America(“GAAP”), which often require the judgment of management in the selection andapplication of certain accounting principles and methods.  Reference is made to the accounting policiesof the Company described in the notes to the consolidated financial statementscontained in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.  The Company hasfollowed those policies in preparing this report.  Management believes that the quality andreasonableness of its most critical policies enable the fair presentation ofits financial position and of its results of operations.

**RecentlyIssued Accounting Standards**

The following is asummary of recent authoritative pronouncements that could affect theaccounting, reporting, and disclosure of financial information by the Company:

InFebruary 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial 

6

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Accounting(“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments—anamendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities,” and SFASNo. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities.” This Statement resolves issues addressed inSFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 toBeneficial Interests in Securitized Financial Assets.” FAS 155 permits fairvalue re-measurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation, clarifies whichinterest only-strips and principal-only strips are not subject to therequirements of Statement 133, establishes a requirement to evaluate interestsin securitized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embeddedderivative requiring bifurcation, clarifies that concentrations of credit riskin the form of subordination are not embedded derivatives, and amends Statement140 to eliminate the prohibition on a qualifying special purpose entity from holdinga derivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument. SFAS No. 155 is effective for allfinancial instruments acquired or issued after January 1, 2007. The Companydoes not believe that the adoption of SFAS No. 155 will have a material impacton its financial position, results of operations or cash flows.

InMarch 2006, the FASB issued SFAS No. 156, “Accounting for Servicing ofFinancial Assets—an amendment of FASB Statement No. 140.”  This Statement amends FASB No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities,” with respect to the accounting for separately recognizedservicing assets and servicing liabilities. SFAS No. 156 requires an entity torecognize a servicing asset or servicing liability each time it undertakes anobligation to service a financial asset by entering into a servicing contract;requires all separately recognized servicing assets and servicing liabilities tobe initially measured at fair value, if practicable; permits an entity tochoose its subsequent measurement methods for each class of separatelyrecognized servicing assets and servicing liabilities; at its initial adoption,permits a one-time reclassification of available-for-sale securities to tradingsecurities by entities with recognized servicing rights, without calling intoquestion the treatment of other available-for-sale securities under Statement115, provided that the available-for-sale securities are identified in somemanner as offsetting the entity’s exposure to changes in fair value ofservicing assets or servicing liabilities that a servicer elects tosubsequently 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. The requiredadoption date for SFAS No. 156 is January 1, 2007. The Company does not believethe adoption of SFAS No. 156 will have a material impact on its financialposition, results of operations or cash flows.

InJuly 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes”. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in enterprises’ financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48prescribes a recognition threshold and measurement attributable for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interim periods,disclosures and transitions. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company does not believe that FIN 48 will have amaterial impact on its financial position, results of operations or cash flows.

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InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans”**(“SFAS158”), which amends SFAS 87 and SFAS 106 to require recognition of the overfundedor underfunded status of pension and other postretirement benefit plans on thebalance sheet. Under SFAS 158, gains and losses, prior service costs andcredits, and any remaining transition amounts under SFAS 87 and SFAS 106 thathave not yet been recognized through net periodic benefit cost will berecognized in accumulated other comprehensive income, net of tax effects, untilthey are amortized as a component of net periodic cost. The measurement date —the date at which the benefit obligation and plan assets are measured — isrequired to be the company’s fiscal year end. SFAS 158 is effective forpublicly-held companies for fiscal years ending after December 15, 2006,except for the measurement date provisions, which are effective for fiscalyears ending after December 15, 2008. The Company does not have a defined benefitpension plan. Therefore, SFAS 158 will not impact the Company’s financialcondition or results of operations.

InSeptember, 2006, The FASB ratified the consensuses reached by the FASB’sEmerging Issues Task Force (“EITF”) relating to EITF 06-4 “Accounting for theDeferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements”. EITF 06-4 addresses employer accounting for endorsement split-dollarlife insurance arrangements that provide a benefit to an employee that extendsto postretirement periods should recognize a liability for future benefits inaccordance with SFAS No. 106, “Employers’ Accounting for PostretirementBenefits Other Than Pensions”*,*or AccountingPrinciples Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967”*. *EITF 06-4 iseffective for fiscal years beginning after December 15, 2007. Entities shouldrecognize the effects of applying this Issue through either (a) a change inaccounting principle through a cumulative-effect adjustment to retainedearnings or to other components of equity or net assets in the statement offinancial position as of the beginning of the year of adoption or (b) a changein accounting principle through retrospective application to all prior periods.  The Company is currently analyzing the effectof the adoption of EITF 06-4 on its financial position, results of operationsand cash flows.

InSeptember 2006, the FASB ratified the consensus reached related to EITF 06-5,**“Accounting for Purchases of Life Insurance—Determining theAmount That Could Be Realized in Accordance with FASB Technical Bulletin No.85-4, Accounting for Purchases of Life Insurance.”  EITF 06-5 states thata policyholder should consider any additional amounts included in thecontractual terms of the insurance policy other than the cash surrender valuein determining the amount that could be realized under the insurancecontract.  EITF 06-5 also states that a policyholder should determine theamount that could be realized under the life insurance contract assuming thesurrender of an individual-life by individual-life policy (or certificate bycertificate in a group policy). EITF 06-5 is effective for fiscal yearsbeginning after December 15, 2007.  The Company is currently analyzing theeffect of the adoption of EITF 06-5 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.     ADOPTIONOF STOCK STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 159 (SFAS 159) “THEFAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES”**

To improve the financial reporting of its financial liabilities, theCompany has elected to adopt SFAS 159 early. The Company has several types of advances from the Federal Home LoanBank (FHLB), which are reflected on its balance sheet as a mixture of fairvalue and book value.  The early adoptionof SFAS 159 allows the Company to reflect its total outstanding advances atfair value.  The fair value presentationof FHLB advances is consistent with the reporting of the Company's otherborrowed funds, which approximate fair value.

8

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| **Description**                                                                       | ** ** | **Balance at  1/1/07  prior to  Adoption** | ** ** | **Net Loss  upon  Adoption** | ** ** | **Balance at  1/1/07  after  Adoption** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------|------------|
| Advances from  Federal Home Loan Bank                                                 |       | $                                                    | 10,000     |                              | $          | 263                                          |       | $ | 10,263 |   |
| Pretax  cumulative effect of adoption of the fair value option                        |       |                                                 |       | 263                               |       |                                         |       |
| Decrease in  deferred tax asset                                                       |       |                                                 |       | (89                               | )          |                                         |       |
| Cumulative effect of  adoption of the fair value option (charge to retained earnings) |       |                                                 |       | $                                 | 174        |                                         |       |   |
|                                                                                       |            |                                                      |            |                                   |            |                                              |            |  |  |  |

In connection with the adoption of SFAS 159 theCompany was required to adopt Statement of Financial Accounting Standards No.157, “Fair Value Measurement” (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  Thefollowing table summarizes quantitative disclosures about the fair valuemeasurement for each category of assets carried at fair value as of March 31,2007.  
| **Description** | ** ** | **3/31/2007** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** |
|-----------------|------------|---------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------|------------|
| FHLB Advances   |       | $             | 10,000     |                                                                                                | $          | —                                                         |       | $                                        | 274        |   | $ | — |   |
| Total           |       | $             | 10,000     |                                                                                                | $          | —                                                         |       | $                                        | 274        |   | $ | — |   |

 

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**3.     INTANGIBLEASSETS**

Finite livedintangible assets of the Company represent deposit assumption premiums recordedupon the purchase of certain assets and liabilities from other financialinstitutions.  Deposit assumptionpremiums are amortized over seven years, the estimated average lives of thedeposit bases acquired, using the straight-line method and are included withinother assets on the Consolidated Balance Sheets.

The Companyapplies a fair value-based impairment test to the carrying value of goodwill onan annual basis and on an interim basis if certain events or circumstancesindicate that an impairment loss may have been incurred.

The followingtable presents information about the Company’s intangible assets at (inthousands):
|                                | ** ** | **March 31, 2007**          | ** ** | **December 31, 2006** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated   Amortization** | ** ** |
| Unamortized  intangible asset: |       |                                  |       |                            |       |   |   |   |   |
| Goodwill                       |       | $                                     | 362        |                            | $          | — |   | $ | 362 |   | $ | — |   |
|                           |       |                                  |       |                            |       |   |   |   |   |
| Amortized  intangible assets:  |       |                                  |       |                            |       |   |   |   |   |
| Core deposit intangibles       |       | $                                     | 2,836      |                            | $          | 2,672 |   | $ | 2,836 |   | $ | 2,600 |   |

 

The followingtable presents information about aggregate amortization expense (in thousands):
|                                                                                                          | ** ** | **For the 3  months ended  March 31, 2007** | ** ** | **For the 3  months ended  March 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Aggregate  amortization expense of core deposit intangibles:                                             |       | $                                                                    | 72         |                                                                 | $          | 101 |   |
|                                                                                                     |       |                                                                 |       |                                                                 |       |
| Estimated  aggregate amortization expense of core deposit intangibles for the years  ending December 31: |       |                                                                 |       |                                                                 |       |
|                                                                                                     |       |                                                                 |       |                                                                 |       |
| 2007                                                                                                     |       | $                                                                    | 112        |                                                                 |       |   |
| 2008                                                                                                     |       | $                                                                    | 53         |                                                                 |       |   |
| 2009                                                                                                     |       | $                                                                    | 53         |                                                                 |       |   |
| 2010                                                                                                     |       | $                                                                    | 18         |                                                                 |       |   |
|                                                                                                          |            |                                                                      |            |                                                                      |            |  |  |

 

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**4.     COMPREHENSIVEINCOME**

Comprehensiveincome includes: (1) reported net income and (2) unrealized gains and losses onmarketable securities.  The followingtable shows our comprehensive income for the three month periods ended March31, 2007 and 2006 (in thousands):
|                             | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net Income                  |       | $                                                    | 535        |   | $ | 680 |   |
|                        |       |                                                 |       |   |   |
| Other  comprehensive income |       | 98                                                   |       | 7 |   |
|                        |       |                                                 |       |   |   |
| Comprehensive  income       |       | $                                                    | 633        |   | $ | 687 |   |

 

**5.     STOCKOPTIONS**

**2006 Option**—OnMay 1, 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 March 31, 2007,16,000 options to purchase shares under the 2006 Option remained outstanding.There were no options issued in the first quarter of 2007.

The fair value of the2006 Option grant was estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions: dividend yield of 1.48%;expected volatility of 32%; risk free interest rate of 5.14% and an expectedlife of six years. The fair value of the 2006 Option grant was approximately$38,000.

A summary of the statusof the Company’s stock options for the three month period ended March 31, 2007is presented below:
|                                       | ** ** | **For the 3 months ended** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **March 31, 2007**                   | ** ** |
| ** **                            | ** ** | ** **                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                            | ** ** | ** **                                     | ** ** | **Weighted** | ** ** | **Average** | ** ** |
| ** **                            | ** ** | ** **                                     | ** ** | **Average** | ** ** | **Remaining** | ** ** |
| ** **                            | ** ** | ** **                                     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** |
| ** **                            | ** ** | **Shares**                                     | ** ** | **Price** | ** ** | **Life** | ** ** |
|                                  |       |                                           |       |   |   |   |   |
| Outstanding—beginning  of period |       | 73,176                                         |       | $ | 10.93 |   | 6.92  years |   |
|                                  |       |                                           |       |   |   |   |   |
| Granted                               |       | —                                         |       | — |   |   |   |
|                                  |       |                                           |       |   |   |   |   |
| Expired/Terminated                    |       | —                                         |       | — |   |   |   |
|                                  |       |                                           |       |   |   |   |   |
| Outstanding—end  of period       |       | 73,176                                         |       | $ | 10.93 |   | 6.16  years |   |
|                                  |       |                                           |       |   |   |   |   |
| Options exercisable at  end of period |       | 47,509                                         |       | $ | 10.28 |   |   |   |

 

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The following tablesummarizes information about stock options outstanding under the Company’s planat March 31, 2007:
|                                     | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Aggregate** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Average Grant Day** | ** ** | **Intrinsic** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Value** | ** ** |
|                                |       |       |       |   |   |   |   |
| Non-vested—beginning  of year  |       | 30,667     |       | $ | 4.35 |   |   |   |
| Outstanding—beginning  of year |       | 73,176     |       |   |   |   |   |
| Granted                             |       | —     |       |   |   |   |   |
| Exercised                           |       | —     |       |   |   |   |   |
| Expired/Terminated                  |       | —     |       |   |   |   |   |
| Outstanding—end  of year       |       | 73,176     |       |   |   |   |   |
| Exercisable                         |       | 47,509     |       |   |   | $ | 46,466 |   |
| Non-vested—at year-end         |       | 25,667     |       | $ | 4.33 |   | $ | 46,466 |   |

 

The total fair value ofoptions vested at March 31, 2007 and December 31, 2006 was $22,350, and$46,177, respectively.

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

Basic and diluted net income per common and potentialcommon share has been calculated based on the weighted average number of sharesoutstanding.  The following schedulereconciles the numerator and denominator of the basic and diluted net incomeper common and potential common share for the three months ended March 31, 2007and 2006 (in thousands, except per share data):
|                                                                   | ** ** | ** **          | ** ** | ** **        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                        | ** ** | **Net Income** | ** ** | **Shares**        | ** ** | **Amount**         | ** ** |
| ** **                                                        | ** ** | **(Numerator)**     | ** ** | **(Denominator)** | ** ** | ** **         | ** ** |
|                                                              |       |                |       |              |       |               |       |
| **Three  Months ended March 31, 2007**                            |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings  per share                                         |       | $                   | 535        |              | 2,086      |               | $          | 0.26 |   |
| Effect of  dilutive securities: options to purchase common shares |       | —              |       | 1                 |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings  per share                                       |       | $                   | 535        |              | 2,087      |               | $          | 0.26 |   |
|                                                              |       |                |       |              |       |               |       |
| **Three  Months ended March 31, 2006**                            |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings  per share                                         |       | $                   | 680        |              | 2,089      |               | $          | 0.33 |   |
| Effect of  dilutive securities: options to purchase common shares |       | —              |       | 11                |       | (0.01              | )          |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings  per share                                       |       | $                   | 680        |              | 2,100      |               | $          | 0.32 |   |

 

**RECLASSIFICATIONS**

Certain 2006amounts have been reclassified to conform to the 2007 presentation.

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**ITEM 2.      MANAGEMENT’SDISCUSSION AND ANALYSIS**

**INTRODUCTION**

CitizensBancshares Corporation (the “Company”) is a holding company that provides afull range of commercial banking and mortgage brokerage services to individualsand corporate customers in its primary market areas, metropolitan Atlanta andColumbus, Georgia, and Birmingham and Eutaw, Alabama through its wholly ownedsubsidiary, Citizens Trust Bank (the “Bank”). The Bank is a member of the Federal Reserve System and operates under astate charter.  The Company serves itscustomers through 10 full-service financial centers in Georgia andAlabama.  The Company also owns andoperates a wholly owned subsidiary grantor trust, Citizens (GA) Statutory TrustI (the “Trust”) through the issuance of pooled trust preferred securities.However, in accordance with current accounting guidance, the Trust has not beenconsolidated in the financial statements.

**Forward Looking Statements**

In addition tohistorical information, this report on Form 10-Q may contain forward-lookingstatements. For this purpose, any statements contained herein, includingdocuments incorporated by reference, that are not statements of historical factmay be deemed to be forward-looking statements. Forward-looking statements aresubject to numerous assumptions, risks and uncertainties. Without limiting theforegoing, the words “believe,” “anticipates,” “plan,” expects,” and similarexpressions are intended to identify forward-looking statements.

Forward-lookingstatements are based on current management expectations and, by their nature,are subject to risk and uncertainties because of the possibility of changes inunderlying factors and assumptions. Actual conditions, events or results coulddiffer materially from those contained in or implied by such forward-lookingstatements for a variety of reasons, including: sharp and/or rapid changes ininterest rates; significant changes in the economic scenario from the currentanticipated scenario which could materially change anticipated credit qualitytrends and the ability to generate loans and gather deposits; significant delayin or inability to execute strategic initiatives designed to grow revenuesand/or control expenses; unanticipated issues during the integration ofacquisitions; and significant changes in accounting, tax or regulatorypractices or requirements. The Company undertakes no obligation to, nor does itintend to, update forward-looking statements to reflect circumstances or eventsthat occur after the date hereof or to reflect the occurrence of unanticipatedevents.

The followingdiscussion is of the Company’s financial condition as of March 31, 2007 andDecember 31, 2006, and the changes in the financial condition and results ofoperations for the three month periods ended March 31, 2007 and 2006.

**CriticalAccounting Policies**

In response to theSecurities and Exchange Commission’s (“SEC”) Release No. 33-8040, CautionaryAdvice Regarding Disclosure About Critical Accounting Policies, the Company hasidentified the following as the most critical accounting policies upon whichits financial status depends.  Thecritical policies were determined by considering accounting policies thatinvolve the most complex or subjective decisions or assessments.  The Company’s most critical accountingpolicies relate to:

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**Investment Securities**-The Company classifies investments in one of three categories based onmanagement’s intent upon purchase: held to maturity securities which arereported at amortized cost, trading securities which are reported at fair valuewith unrealized holding gains and losses included in earnings, and availablefor sale securities which are recorded at fair value with unrealized holdinggains and losses included as a component of accumulated other comprehensiveincome.  The Company had no investmentsecurities classified as trading securities during 2007 or 2006.

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

Gains and losses on sales of investment securities arerecognized upon disposition, based on the adjusted cost of the specificsecurity.  A decline in market value ofany security below cost that is deemed other than temporary is charged toearnings resulting in the establishment of a new cost basis for the security.

**Loans**  - Loans are reportedat principal amounts outstanding less unearned income and the allowance forloan losses.  Interest income on loans isrecognized on a level-yield basis. Loan fees and certain directorigination costs are deferred and amortized over the estimated terms of theloans using the level-yield method. Discounts on loans purchased are accreted using the level-yield methodover the estimated remaining life of the loan purchased.

**Allowance for Loan Losses** - TheCompany provides for estimated losses on loans receivable when any significantand permanent decline in value occurs. These estimates for losses are based, not only on individual assets andtheir related cash flow forecasts, sales values, and independent appraisals,but also on the volatility of certain real estate markets, and the concern fordisposing of real estate in distressed markets. For loans that are pooled for purposes of determining the necessaryprovisions, estimates are based on loan types, history of charge-offs, andother delinquency analyses.  Therefore,the value used to determine the provision for losses is subject to thereasonableness of these estimates.  Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a quarterly basis a comprehensive review of the adequacy of theallowance for loan losses is performed. This assessment is made in the context of historical losses as well as existingeconomic conditions, and individual concentrations of credit.  Loans are charged against the allowance when,in the opinion of management, such loans are deemed uncollectible andsubsequent recoveries are added to the allowance.

A description ofother accounting policies are summarized in Note 1, Summary of SignificantAccounting Policies in the Notes to Consolidated Financial Statements of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006.  The Company has followed those policies inpreparing this report.

**FINANCIAL CONDITION**

At March 31, 2007, theCompany’s total assets increased by $4 million to $339,315,000.  Interest bearing deposits with banksincreased by $12,897,000 or 281 percent primarily as a result of an 8 percentincrease in deposits and a 3 percent decline in total investments.  Also, cash and due from banks, a non-earningasset, decreased $1,502,000 due to a strategy implemented last year to reducethis asset category and shift these funds into interest earning assets.

The decrease in loans receivable,net, by $6.8 million or 3 percent is mainly due to two significant lendingrelationships totaling over $4.2 million that the Company did not renew due toweakening financial 

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conditions.  Also, the Company foreclosed on a failed realestate loan, transferring approximately $2.6 million from loans receivable, netto foreclosed real estate.  As a resultof the current economic conditions, the Company is being more conservative inits lending criteria and is actively managing its loan portfolio to preventsignificant losses.

Foreclosed real estate, asmentioned above, increased by $2.6 million as a result of the collateral seizedon a troubled loan.  The collateral hasan “as is” liquidated value of $3,039,000 and an “as is” value of$3,971,000.  The Company is in theprocess of selling the collateral and does not expect a loss on the sale of theproperty.

Total liabilitiesincreased $3.6 million to $309 million at March 31, 2007 compared to $305million at December 31, 2006. This increase is primarily due to a $20 millionincrease in total deposits.  Advancesfrom Federal Home Loan Bank (FHLB), another significant component of totalliabilities, decreased $16 million to $10.7 million at March 31, 2007.  The Company used the excess liquiditygenerated from its deposit growth to pay down its outstanding borrowings withthe FHLB to reduce the yield its pays on interest-bearing liabilities.

**INVESTMENTSECURITIES**

The Companyinvests a portion of its assets in U.S. government sponsored agency securities,state, county and municipal securities, and mortgage backed bonds.  At March 31, 2007 and December 31, 2006, theCompany’s investment securities portfolio represented approximately 23% and24%, respectively, of total assets.

Investmentsecurities available for sale are summarized as follows (in thousands):
|                                              | ** ** | **Amortized   Cost** | ** ** | **Gross  Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|
| **At  March 31, 2007**                       |       |                      |       |                               |       |                                      |       |                |       |
| ** **                                   |       |                      |       |                               |       |                                      |       |                |       |
| Government-sponsored  enterprises securities |       | $                         | 6,941      |                               | $          | 2                                         |       | $                   | 90         |   | $ | 6,853 |   |
| State, county,  and municipal securities     |       | 17,532                    |       | 142                                |       | 48                                        |       | $                   | 17,626     |   |
| Mortgage-backed  securities                  |       | 44,229                    |       | 125                                |       | 796                                       |       | $                   | 43,558     |   |
| Totals                                       |       | $                         | 68,702     |                               | $          | 269                                       |       | $                   | 934        |   | $ | 68,037 |   |

 
|                                              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **At  December 31, 2006**                    |       |                |       |                         |       |                          |       |                |       |
|                                         |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored  enterprises securities |       | $                   | 6,939      |                         | $          | —                        |       | $                   | 117        |   | $ | 6,822 |   |
| State, county,  and municipal securities     |       | 16,522              |       | 137                          |       | 59                            |       | 16,600              |       |
| Mortgage-backed  securities                  |       | 47,701              |       | 104                          |       | 879                           |       | 46,926              |       |
| Totals                                       |       | $                   | 71,162     |                         | $          | 241                           |       | $                   | 1,055      |   | $ | 70,348 |   |

 

Investment securities held to maturity are summarizedas follows (in thousands):

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|                                              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **At  March 31, 2007**                       |       |                |       |                         |       |                          |       |                |       |
| ** **                                   |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored  enterprises securities |       | $                   | 3,000      |                         | $          | —                        |       | $                   | 48         |   | $ | 2,952 |   |
| State, county,  and municipal securities     |       | 4,258               |       | 87                           |       | —                        |       | 4,345               |       |
| Mortgage-backed  securities                  |       | 857                 |       | —                       |       | 37                            |       | 820                 |       |
| Totals                                       |       | $                   | 8,115      |                         | $          | 87                            |       | $                   | 85         |   | $ | 8,117 |   |

 
|                                              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **At  December 31, 2006**                    |       |                |       |                         |       |                          |       |                |       |
| ** **                                   |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored  enterprises securities |       | $                   | 3,000      |                         | $          | —                        |       | $                   | 62         |   | $ | 2,938 |   |
| State, county,  and municipal securities     |       | 4,259               |       | 84                           |       | —                        |       | 4,343               |       |
| Mortgage-backed  securities                  |       | 916                 |       | —                       |       | 40                            |       | 876                 |       |
| Totals                                       |       | $                   | 8,175      |                         | $          | 84                            |       | $                   | 102        |   | $ | 8,157 |   |

 

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 March 31, 2007,the Company had several debt securities that have been in an unrealized lossposition for twelve months or more.  TheCompany has the ability and intent to hold these securities until such time asthe value recovers or the securities mature. The Company believes, based on industry analyst reports and creditratings, that the deterioration in value is attributable to changes in marketinterest rates and is not in the credit quality of the issuer and therefore,these losses are not 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 summarized as follows (in thousands):
|                                          | ** **                 | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|----------------------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** **                 | **2007**           | ** ** | **2006**              | ** ** |
|                                     |                       |               |       |                  |       |
| Commercial,  financial, and agricultural |                       | $                  | 15,421     |                  | $          | 15,486 |   |
| Installment                              |                       | 11,778             |       | 12,244                |       |
| Real estate -  mortgage                  |                       | 159,808            |       | 162,092               |       |
| Real estate -  construction              |                       | 25,414             |       | 29,386                |       |
| Other                                    |                       | 2,183              |       | 2,229                 |       |
|                                     | Loans receivable           |               | 214,604    |                  | 221,437    |   |
| Less:                                    | Net deferred  loan fees    |               | 312        |                  | 325        |   |
|                                     | Allowance for  loan losses |               | 3,044      |                  | 3,109      |   |
|                                     |                       |               |       |                  |       |   |
|                                     | Loans  receivable, net     |               | $          | 211,248               |       | $ | 218,003 |   |

 

**NONPERFORMINGASSETS**

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

With the exceptionof the loans included within nonperforming assets in the table below,management is not aware of any loans classified for regulatory purposes asloss, doubtful, substandard, or special mention that have not been disclosedwhich (1) represent or result from trends or uncertainties which managementreasonably expects will materially impact future operating results, liquidity,or capital resources, or (2) represent any information on material creditswhich management is aware that causes management to have serious doubts as tothe abilities of such borrowers to comply with the loan repayment terms.

Nonperformingassets increased during the first quarter of 2007 by $3,623,000 to $7,471,000at March 31, 2007 from $3,848,000 at December 31, 2006.  This increase primarily relates to a $2.6million loan secured by real estate that the Company foreclosed on andtransferred to foreclosed real estate. The value of the collateral pledged to this loan has an “as is”liquidated value of $3,039,000 and an “as is” value of $3,971,000.  The Company is in the process of selling thecollateral and does not expect a loss on the sale of the property.  The remaining increase in nonperformingassets relates to nonperforming mortgage loans. Management is in the process of foreclosing on these properties so thatthey can be liquidated.  The Company doesnot expect any losses as many of these properties have private mortgageinsurance and sufficient market value to offset the principal balanceoutstanding.

Nonperformingassets represents 3.44% of loans, net of unearned income, discounts, and realestate acquired through foreclosure at March 31, 2007 as compared to 1.74% atDecember 31, 2006.  At March 31, 2007,$869,000 of the $4,787,000 nonperforming loans were 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 March 31, 2007 and December 31, 2006.
| ** **                                                                                                       | ** ** | **March 31,**                  | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2007**                            | ** ** | **2006**              | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                                       | ** ** | **financial ratios)**          | ** ** |
| Nonperforming  assets:                                                                                           |       |                                |       |                  |       |
| Nonperforming  loans:                                                                                            |       |                                |       |                  |       |
| Nonaccrual loans                                                                                                 |       | $                                   | 4,787      |                  | $          | 3,718 |   |
| Past-due loans of 90 days or more                                                                                |       | —                              |       | —                |       |
| Nonperforming loans                                                                                              |       | 4,787                               |       | 3,718                 |       |
|                                                                                                             |       |                                |       |                  |       |
| Real estate  acquired through foreclosure                                                                        |       | 2,684                               |       | 130                   |       |
| Total nonperforming assets                                                                                       |       | $                                   | 7,471      |                  | $          | 3,848 |   |
|                                                                                                             |       |                                |       |                  |       |
| Ratios:                                                                                                          |       |                                |       |                  |       |
| Nonperforming  loans to loans, net of unearned income and discount on loans                                      |       | 2.23                                | %          | 1.68                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Nonperforming  assets to loans, net of unearned income, discounts, and real estate acquired  through foreclosure |       | 3.44                                | %          | 1.74                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Nonperforming  assets to total assets                                                                            |       | 2.20                                | %          | 1.15                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Allowance for  loan losses to nonperforming loans                                                                |       | 63.60                               | %          | 83.61                 | %          |
|                                                                                                             |       |                                |       |                  |       |
| Allowance for loan  losses to nonperforming assets                                                               |       | 40.75                               | %          | 80.78                 | %          |

 

**ALLOWANCEFOR LOAN LOSSES**

The allowance forloan losses is primarily available to absorb losses inherent in the loanportfolio. Credit exposures deemed uncorrectable are charged against theallowance for loan losses. Recoveries of previously charged-off amounts arecredited to the allowance for loan losses.

The Companyprovides for estimated losses on loans receivable when any significant andpermanent decline in value occurs.  Theseestimates for losses are based on individual assets and their cash flowforecasts, sales values, independent appraisals, the volatility of certain realestate markets, and concern for disposing of real estate in 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. Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a quarterly basis a comprehensive review of the adequacy of allowancefor loan losses is performed.  Thisassessment is made in the context of historical losses as well as existingeconomic conditions, and individual concentrations of credit.

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Loans are chargedagainst the allowance when, in the opinion of management, such loans are deemeduncollectible and subsequent recoveries are added to the allowance.  For the three month period ended March 31,2007, management determined that no additions to the provision for loan losseswere necessary.  For the same period in2006, the Company added $30,000 to the provision for loan losses.

The allowance forloan losses at March 31, 2007 was approximately $3,044,000, representing 1.42%of total loans, net of unearned income and discounts compared to approximately$3,109,000 at December 31, 2006, which also represented 1.50% 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 $38 million at March 31, 2007 and at December 31, 2006,respectively.  The Company’s loans toarea convenience stores were approximately $10 million at March 31, 2007and $13 million at December 31, 2006. 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 followingtable summarizes loans, changes in the allowance for loan losses arising fromloans charged off, recoveries on loans previously charged off by loan category,and additions to the allowance which have been charged to operating expense asof and for the three month periods ended March 31, 2007 and 2006 (amount inthousands, except financial ratios):
|                                                                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                    |       |     |       |     |       |
| Loans, net of  unearned income and discounts                                                                            |       | $        | 214,292    |     | $          | 219,510 |   |
|                                                                                                                    |       |     |       |     |       |
| Average loans,  net of unearned income, discounts and the allowance for loan losses                                     |       | $        | 215,508    |     | $          | 215,988 |   |
|                                                                                                                    |       |     |       |     |       |
| Allowance for  loan losses at the beginning of period                                                                   |       | $        | 3,109      |     | $          | 3,327 |   |
|                                                                                                                    |       |     |       |     |       |
| Loans  charged-off:                                                                                                     |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                 |       | 34       |       | —   |       |
| Real estate - loans                                                                                                     |       | 26       |       | 91       |       |
| Installment loans to individuals                                                                                        |       | 53       |       | 21       |       |
| Total loans  charged-off                                                                                                |       | 113      |       | 112      |       |
|                                                                                                                    |       |     |       |     |       |
| Recoveries of  loans previously charged off:                                                                            |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                                 |       | 15       |       | 11       |       |
| Real estate - loans                                                                                                     |       | 17       |       | 10       |       |
| Installment loans to individuals                                                                                        |       | 16       |       | 16       |       |
| Total loans  recovered                                                                                                  |       | 48       |       | 37       |       |
|                                                                                                                    |       |     |       |     |       |
| Net loans  charged-off                                                                                                  |       | 65       |       | 75       |       |
|                                                                                                                    |       |     |       |     |       |
| Additions to  allowance for loan losses charged to operating expense                                                    |       | —   |       | 30       |       |
|                                                                                                                    |       |     |       |     |       |
| Allowance for  loan losses at period end                                                                                |       | $        | 3,044      |     | $          | 3,282 |   |
|                                                                                                                    |       |     |       |     |       |
| Ratio of net  loans charged-off to average loans, net of unearned income, discounts, and  the allowance for loan losses |       | 0.03     | %          | 0.03     | %          |
|                                                                                                                    |       |     |       |     |       |
| Ratio of allowance for  loan losses to loans, net of unearned income and discounts                                      |       | 1.42     | %          | 1.50     | %          |

 

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**DEPOSITS**

Deposits are theCompany’s primary source of funding loan growth.  Total deposits for the first quarter of 2007increased by 8% or $20,234,000 to $289,254,000, driven by interest-bearingdeposits which increased by 10% or $20,296,000. 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 has an ongoing sales program which places specificemphasis on deposit growth.  

The following is asummary of interest-bearing deposits (in thousands):
|                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                               |       |               |       |                  |       |
| NOW and money market  accounts     |       | $                  | 71,611     |                  | $          | 64,850 |   |
| Savings accounts                   |       | 35,948             |       | 36,101                |       |
| Time deposits of  $100,000 or more |       | 67,928             |       | 51,650                |       |
| Other time deposits                |       | 53,567             |       | 56,157                |       |
|                               |       | $                  | 229,054    |                  | $          | 208,758 |   |

 

**OTHERBORROWED FUNDS**

While the Companycontinues to emphasize funding earning asset growth through deposits, theCompany has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal Home LoanBank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from theFHLB of $10,666,000 at March 31, 2007 and $26,746,000 at December 31,2006.   The following advances arecollateralized by a blanket lien on the Company’s 1-4 family mortgage loans.
| Maturity                            | ** ** | **Callable** | ** ** | **Type** | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|--------------|------------|----------|------------|------------------------------|------------|---------------------------------|------------|
|                                |       |         |       |     |       |                         |       |                            |       |   |   |   |   |
| July 2007                           |       | Daily        |       | Variable |       | —                       |       | $                               | —     |   | 5.50 | % | $ | 16,350,000 |   |
| April 2010                          |       | Quarterly    |       | Fixed    |       | 5.82                         | %          | 10,274,000                      |       | 5.82 | % | 10,000,000 |   |
| August 2026                         |       |         |       |     | (1)        | —                       |       | 392,000                         |       |   |   | 396,000 |   |
|                                |       |         |       |     |       |                         |       |                            |       |   |   |   |   |
| Total Principal  Outstanding        |       |         |       |     |       |                         |       | $                               | 10,666,000 |   |   |   | $ | 26,746,000 |   |
| Weighted Average Rate at Period End |       |         |       |     |       | 5.61                         | %          |                            |       | 5.54 | % |   |   |

 

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(1)          Represents an AffordableHousing Program (AHP) award used to subsidized loans for homeownership orrental initiatives.  The AHP is aprincipal reducing credit, scheduled to mature on August 17, 2026 with aninterest rate of zero. 

 

The Company had anunsecured note payable of approximately $340,000 at March 31, 2007 and December31, 2006.  The note bears interest at arate of 7.75% (the lender’s prime rate minus 50 basis points).  

During2002, the Company issued $5 million of pooled trust preferred securities throughone issuance by a wholly owned subsidiary grantor trust, Citizens (GA)Statutory Trust I (the “Trust”). The trust preferred securities accrue and paydistributions periodically at an annual rate as provided in the indentures ofthe London Interbank Offered Rate plus 3.45%. The Trust used the net proceedsfrom the offering to purchase a like amount of Junior Subordinated Debentures(the “Debentures”) of the Company. These securities are reported in ourconsolidated balance sheet as Junior Subordinated Debentures.  The trust preferred securities aremandatorily redeemable upon the maturity of the Debentures on June 26, 2032, orupon earlier redemption as provided in the indentures beginning June 26, 2007.  The Company has the right to redeem theDebentures in whole or in part or after specific dates, at a redemption pricespecified in the indentures plus any accrued but unpaid interest to theredemption date.  At March 31, 2007, theinterest rate on the junior subordinated debenture was 8.82%.

**RESULTSOF OPERATIONS**

**Net Interest Income:**

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

Net interest income decreased $134,000 to$3,391,000 for the first quarter of 2007 from $3,525,000 for the first quarterof 2006.  This decrease is a result ofthe Company operating in a difficult interest rate environment of a flat toinverted yield curve throughout the quarter, which has increased the

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Company’s funding cost.

For the three month period ending March 31,2007, total interest expense was $2,066,000, an increase of $387,000 comparedto the same period in 2006. For the first quarter of 2007, total interestincome increased $253,000 compared to the first quarter of 2006. 

**Provision for loan losses**

For the first quarter of2007, management determined that no additions to the provisions for loan losseswere necessary compared to $30,000 for the same period in 2006.  The provision for loan losses and theresulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions.  The allowance for loan losses was $3,044,000in the first quarter of 2007 compared to $3,109,000 at December 31, 2006.  At March 31, 2007, the allowance for loanlosses was 64 percent of the nonperforming loans compared to 84 percent atDecember 31, 2006.  At March 31, 2007,the Company considered its allowance for loan losses to be adequate.

**Noninterest income:**

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

Noninterest income totaled $1,029,000 for thethree month period ended March 31, 2007, a decrease of $267,000 or 21% comparedwith the same period ended March 31, 2006. This decrease is primarilyattributed to decreases of $161,000 and $45,000 in deposit and service feeincome, and other noninterest income, respectively.  Overdraft fees are a significant component ofservice charges on deposit and decreased $131,000 compared to the same threemonth period last year.  Overdraft fees,due to their nature, fluctuate monthly based on the short-term loan need of thecustomers.  Gains on the sales ofsecurities and sales of assets also decreased during the period by $36,000 and$25,000, respectively. 

**Noninterest expense**:

Noninterest expense includes compensationand benefits, occupancy expenses, advertising and marketing, professional fees,office supplies, data processing, telephone expenses, miscellaneous items andother losses.

Noninterest expense totaled $3,780,000 for thethree month period ended March 31, 2007, a decrease of $155,000 or 4% comparedto the same period last year.  Thedecrease is due to the Company continuing strategy to reduce overhead cost andimprove the efficiency throughout its financial centers network.  In March 2007, the Company sold a former financialcenter building for a gain of $3,600. 

For the first quarter of 2007, salaries andemployee benefits decreased $129,000 and, occupancy and equipment expensesdecreased $76,000, partially offset by a $50,000 increase in other operating

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expenses compared to the same period last year.The increase in other operating expenses is due to a $200,000 award leviedagainst the Company by the Superior Court of DeKalb County, Georgia forattorney fees associated with a former court case decided against the Companyand which is being appealed. The Company considers the attorney fees awarded tobe excessive and unwarranted considering the amount of the judgment awarded bythe jury in the case, and is appealing to have the fee reversed.  

**INTEREST RATE SENSITIVITY MANAGEMENT**

Interest ratesensitivity management involves managing the potential impact of interest ratemovements on net interest income within acceptable levels of risk.  The Company seeks to accomplish this bystructuring the balance sheet so that repricing opportunities exist for bothassets and liabilities in equivalent amounts and time intervals.  Imbalances in these repricing opportunitiesat any point in time constitute a financial institution’s interest raterisk.  The Company’s ability to repriceassets and liabilities in the same dollar amounts and at the same timeminimizes interest rate risk.

One method ofmeasuring the impact of interest rate sensitivity is the cumulative gapanalysis.  The difference betweeninterest rate sensitive assets and interest rate sensitive liabilities atvarious time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitivepressures and the needs of the Company’s customers.  In addition, various assets and 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 March 31, 2007.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market, and savings accounts in thethree month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome. 

The followingtable sets forth the distribution of the repricing of the Company’s interestrate sensitive assets and interest rate sensitive liabilities as of March 31,2007. 

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| ** **                                                              | ** ** | **Cumulative amounts as of March 31, 2007** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **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                                                             |       | $                                                                         | —     |   | $ | 2,096 |   | $ | 10,982 |   | $ | 63,074 |   | $ | 76,152 |   |
| Certificates of  deposit                                                |       | —                                                                    |       | 100 |   |   |   | — |   | 100 |   |
| Loans                                                                   |       | 59,221                                                                    |       | 38,149 |   | 75,274 |   | 41,960 |   | 214,604 |   |
| Interest-bearing  deposits with other banks                             |       | 17,486                                                                    |       | — |   | — |   | — |   | 17,486 |   |
| Total  interest-sensitive assets                                        |       | $                                                                         | 76,707     |   | $ | 40,345 |   | $ | 86,256 |   | $ | 105,034 |   | $ | 308,342 |   |
|                                                                    |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                         | 129,853    |   | $ | 86,813 |   | $ | 9,651 |   | $ | 2,737.00 |   | $ | 229,054 |   |
| Notes payable                                                           |       | 340                                                                       |       | — |   | — |   | — |   | 340 |   |
| Junior  subordinated debentures                                         |       | —                                                                    |       | 5,155 |   | — |   | — |   | 5,155 |   |
| Other borrowings                                                        |       | —                                                                    |       | — |   | 10,274 |   | 392 |   | 10,666 |   |
| Total  interest-sensitive liabilities                                   |       | $                                                                         | 130,193    |   | $ | 91,968 |   | $ | 19,925 |   | $ | 3,129 |   | $ | 245,215 |   |
|                                                                    |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                                         | (53,486    | ) | $ | (51,623 | ) | $ | 66,331 |   | $ | 101,905 |   | $ | 63,127 |   |
|                                                                    |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to total interest-sensitive  assets |       | (17.35                                                                    | )%         | (34.09 | )% | (12.58 | )% | 20.47 | % | 20.47 | % |

 

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(a) Savings, Now, and money market depositstotaling  $107,559 are included in thematuring in 3 months classification. 

**LIQUIDITY**

Liquidity is the ability of the Company toconvert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities.  Liquidity management involves maintaining theCompany’s ability to meet the day-to-day cash flow requirements of itscustomers, whether they are depositors wishing to withdraw funds or borrowersrequiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able toperform the primary function of a financial intermediary and would, therefore,not be able to meet the needs of the communities it serves. Additionally, theCompany requires cash for various operating needs including: dividends toshareholders; business combinations; capital injections to its subsidiaries;the servicing of debt; and the payment of general corporate expenses. TheCompany has access to various capital markets. However, the primary source of liquidity for the Company is dividendsfrom its bank subsidiary.  The GeorgiaDepartment of Banking and Finance regulates the dividend payments and mustapprove dividend payments that exceed 50 percent of the Bank’s prior year netincome.  As of March 31, 2007, thisamount was approximately $1,731,000.  Thepayment of dividends may also be affected or limited by other factors, such asthe requirement to maintain adequate capital above regulatory guidelines.  The Company does not anticipate any liquidityrequirements in the near future that it will not be able to meet.

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

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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’equity increased $502,000 for the three months ended March 31, 2007, primarilydue to earnings.  Retained earningsincreased by net income of $535,000, reduced by a cumulative effect adjustmentin the amount of $174,000 as a result of the early adoption of SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities –Including an amendment of FASB Statement No. 115.”  

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total and Tier 1 capital torisk weighted assets, and Tier 1 capital to average assets.  As of March 31, 2007 and December 31, 2006,the Bank’s total and Tier 1 capital to risk weighted assets and Tier 1 toaverage assets were 16%, 15% and 11% respectively.  As of March 31, 2007, the Company met allcapital adequacy requirements to which it is subject.

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**ITEM 3.      QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

Quantitativeinformation about the Company’s market risk at March 31, 2007 is as follows (inthousands):
|                                       | ** ** | **2007**     | ** ** |
|---------------------------------------|------------|--------------|------------|
| ** **                            | ** ** | **Carrying** | ** ** | **Estimated** | ** ** | **Down** | ** ** | **Up** | ** ** |
| ** **                            | ** ** | **Value**    | ** ** | **Fair Value** | ** ** | **100 bp** | ** ** | **100 bp** | ** ** |
|                                  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Financial  assets:                    |       |         |       |   |   |   |   |   |   |
| Interest-bearing deposits with banks  |       | $            | 17,486     |   | $ | 17,486 |   | — | % | — | % |
| Certificates of deposit               |       | 100          |       | 100 |   | — |   | — |   |
| Investment securities                 |       | 76,152       |       | 76,154 |   | 2.32 |   | (3.36 | ) |
| Loans receivable                      |       | 211,248      |       | 209,568 |   | 1.43 |   | (1.51 | ) |
|                                  |       |         |       |   |   |   |   |   |   |
| Financial  liabilities:               |       |         |       |   |   |   |   |   |   |
| Interest-bearing deposits             |       | 229,054      |       | 219,579 |   | 1.03 |   | (1.07 | ) |
| Notes payable                         |       | 340          |       | 340 |   | — |   | — |   |
| Junior subordinated debentures        |       | 5,155        |       | 5,155 |   | — |   | — |   |
| Advances from  Federal Home Loan Bank |       | 10,666       |       | 10,666 |   | — |   | — |   |
|                                       |            |              |            |  |  |  |  |  |  |  |  |

 

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

**ITEM 4.      CONTROLSAND PROCEDURES**

As ofthe end of the period covered by this report, we conducted, under thesupervision of and with the participation of our management, including theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer, an evaluation of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13g-15(e). Based on this evaluation,the Company’s Chief Executive Officer, Chief Operating Officer, and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere effective as of March 31, 2007 in timely alerting them to materialinformation required to be included in our reports filed with or furnished tothe Securities and Exchange Commission. There have been no changes in the Company’s internal controls over

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financialreporting that occurred during the quarter ended March 31, 2007 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II. OTHER INFORMATION**
| **ITEM 1.**  | **LEGAL PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | Subsequent to March 31, 2007, on April 19, 2007, the  Superior Court of DeKalb County, Georgia awarded $200,000 in attorney fees  associated with a former court case against the Company.  The Company  considers the attorney fees awarded to be excessive and unwarranted  considering the amount of the judgment awarded by the jury, and is appealing  the case to the Georgia Supreme Court to have the attorney fees reversed. The  accrual for the attorney fees is reflected in the March 31, 2007 Consolidated  Financial Statements.                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM 1A.** | **RISK FACTORS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | In addition to the other information set forth in  this report, you should carefully consider the factors discussed in Part I,  “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended  December 31, 2006, which could materially affect our business, financial  condition or future results. The risks described in our Annual Report on Form  10-K are not the only risks we face. Additional risks and uncertainties not  currently known to us or that we currently deem to be immaterial also may  materially adversely affect our business, financial condition and/or  operating results. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM 2.**  | **UNREGISTERED SALE OF EQUITY SECURITIES AND USE  OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | On March 13, 2007, the Company issued 3,287  shares of unregistered stock pursuant to the Company’s Employee Stock  Purchase Plan at a price of $8.46 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM 3.**  | **DEFAULTS UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM 4.**  | **SUBMISSION OF MATTERS TO VOTE OF SECURITY  HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM 5.**  | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

27

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

 

**SIGNATURES**

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

**CITIZENS BANCSHARES CORPORATION**
| Date:   May 15, 2007 |   | By:                                   | /s/ James E. Young |   |
|-------------------------------------|--------|---------------------------------------|--------------------|--------|
|                                |   | James E. Young                        |
|                                |   | President and Chief Executive Officer |
|                                |   |                                  |
| Date:   May 15, 2007 |   | By:                                   | /s/ Cynthia N. Day |   |
|                                |   | Cynthia N. Day                        |
|                                |   | Senior Executive Vice President and   |
|                                |   | Chief Operating Officer               |
|                                |   |                                  |
| Date:   May 15, 2007 |   | By:                                   | /s/ Samuel J. Cox  |   |
|                                |   | Samuel J. Cox                         |
|                                |   | Senior Vice President and             |
|                                |   | Chief Financial Officer               |
|                                     |        |                                       |                    |        |  |  |

 

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