Citizens Bancshares 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - - Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2005

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                       to

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 incorporation or organization)	(IRS Employer Identification No.)
175 John Wesley Dobbs Avenue, N.E., Atlanta, Georgia	30303
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (404) 659 - 5959

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent 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 of shares outstanding for each of the issuer’s classes of common stock as of the latest practicable date: 1,996,887 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on June 30, 2005.

PART 1.     FINANCIAL INFORMATION

ITEM 1.     Financial statements

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(In thousands, except share data)

	2005			2004
	(Unaudited)
ASSETS
Cash and due from banks	$	17,052		$	10,875
Interest-bearing deposits with banks	8,977			734
Certificates of deposit	100			800
Investment securities available for sale, at fair value	64,122			74,687
Investment securities held to maturity, at cost	9,799			9,980
Other investments	2,421			2,469
Loans receivable, net	206,391			207,354
Premises and equipment, net	7,965			8,379
Cash surrender value of life insurance	8,955			8,740
Foreclosed real estate, net	747			1,430
Other assets	5,561			5,936
Total assets	$	332,090		$	331,384
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	65,492		$	57,539
Interest-bearing deposits	201,222			208,963
Total deposits	266,714			266,502
Accrued expenses and other liabilities	2,735			3,056
Notes payable	440			540
Junior subordinated debentures	5,155			5,155
Advances from Federal Home Loan Bank	30,500			30,250
Total liabilities	305,544			305,503
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock - $1 par value; 15,000,000 shares authorized; 2,230,065 shares issued	2,230			2,230
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding	90			90
Additional paid-in capital	7,439			7,442
Retained earnings	18,726			18,108
Treasury stock at cost, 233,178 and 240,643 shares at June 30, 2005 and December 31, 2004, respectively	(1,896		)	(1,955		)
Accumulated other comprehensive loss, net of income taxes	(43		)	(34		)
Total stockholders’ equity	26,546			25,881
	$	332,090		$	331,384

See notes to consolidated financial statements.

2

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - In thousands, except per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005			2004
Interest income:
Loans, including fees	$	4,097	$	3,944	$	8,030		$	7,885
Investment securities:
Taxable	579		628		1,197			1,447
Tax-exempt	195		202		394			409
Interest-bearing deposits	86		5		96			18
Total interest income	4,957		4,779		9,717			9,759
Interest expense:
Deposits	950		658		1,795			1,358
Other borrowings	280		282		599			563
Total interest expense	1,230		940		2,394			1,921
Net interest income	3,727		3,839		7,323			7,838
Provision for loan losses	63		250		167			550
Net interest income after provision for loan losses	3,664		3,589		7,156			7,288
Noninterest income:
Service charges on deposits	852		935		1,679			1,777
Gain on sales of securities	—		—		46			58
Gain (loss) on sales of assets	9		66		(17		)	74
Other operating income	704		687		1,112			977
Total noninterest income	1,565		1,688		2,820			2,886
Noninterest expense:
Salaries and employee benefits	2,034		2,129		4,153			4,083
Net occupancy and equipment	669		657		1,333			1,308
Other operating expenses	1,932		1,692		3,318			3,124
Total noninterest expense	4,635		4,478		8,804			8,515
Income before income taxes	594		799		1,172			1,659
Income tax expense	123		185		241			383
Net income	$	471	$	614	$	931		$	1,276
Net income per share - basic	$	0.23	$	0.30	$	0.45		$	0.62
Net income per share - diluted	$	0.22	$	0.30	$	0.44		$	0.61
Weighted average outstanding shares - basic	2,087		2,074		2,084			2,073
Weighted average outstanding shares - diluted	2,099		2,079		2,096			2,080
Dividends per common share	$	0.15	$	0.15	$	0.15		$	0.15

See notes to consolidated financial statements.

3

CITIZENS BANCSHARES CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(Unaudited - In thousands)

				Nonvoting			Additional											Accumulated Other
	Common Stock			Common Stock			Paid-in			Retained			Treasury Stock					Comprehensive
	Shares	Amount		Shares	Amount		Capital			Earnings			Shares		Amount			Income (Loss)			Total
Balance—December 31, 2003	2,230	$	2,230	90	$	90	$	7,445		$	16,114		(250	)	$	(2,025	)	$	90		$	23,944
Net income	—	—		—	—		—			1,276			—		—			—			1,276
Unrealized holding gains on investment securities available for sale—net of taxes of $546	—	—		—	—		—			—			—		—			(1,059		)	(1,059		)
Less reclassification adjustment for holding gains included in net income—net of taxes of $20	—	—		—	—		—			—			—		—			(39		)	(39		)
Comprehensive income	—	—		—	—		—			—			—		—			—			178
Sale of treasury stock	—	—		—	—		(2		)	—			5		38			—			36
Dividends declared	—	—		—	—		—			(311		)	—		—			—			(311		)
Balance—June 30, 2004	2,230	$	2,230	90	$	90	$	7,443		$	17,079		(245	)	$	(1,987	)	$	(1,008	)	$	23,847
Balance—December 31, 2004	2,230	$	2,230	90	$	90	$	7,442		$	18,108		(241	)	$	(1,955	)	$	(34	)	$	25,881
Net income	—	—		—	—		—			931			—		—			—			931
Unrealized holding losses on investment securities available for sale—net of taxes of $11	—	—		—	—		—			—			—		—			21			21
Less reclassification adjustment for holding gains included in net income—net of taxes of $16	—	—		—	—		—			—			—		—			(30		)	(30		)
Comprehensive loss	—	—		—	—		—			—			—		—			—			922
Sale of treasury stock	—	—		—	—		(3		)	—			8		59			—			56
Dividends declared	—	—		—	—		—			(313		)	—		—			—			(313		)
Balance—June 30, 2005	2,230	$	2,230	90	$	90	$	7,439		$	18,726		(233	)	$	(1,896	)	$	(43	)	$	26,546

See notes to consolidated financial statements.

4

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(In thousands)

	June 30,
	2005			2004
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	931		$	1,276
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	167			550
Depreciation	483			523
Amortization and accretion, net	381			607
Provision for deferred income taxes (benefit)	(34		)	87
Gain on sale of assets and investments	(29		)	(133		)
Write-down of equity securities	346			—
Change in other assets	326			(279		)
Change in accrued expenses and other liabilities	(322		)	(621		)
Net cash provided by operating activities	2,249			2,010
INVESTING ACTIVITIES:
Proceeds from calls and maturities of investment securities held to maturity	174			346
Proceeds from sales and maturities of investment securities available for sale	9,866			24,376
Purchases of investment securities available for sale	—			(9,423		)
Net change in other investments	48			474
Net change in loans receivable	292			3,668
Premiums paid on life insurance policy	(70		)	(70		)
Net proceeds from the sale of foreclosed properties	1,134			825
Purchases of premises and equipment, net	(78		)	(112		)
Net change in interest bearing deposits with banks	(8,243		)	(806		)
Net change in certificates of deposit	700			1,988
Net cash provided by investing activities	3,823			21,266
FINANCING ACTIVITIES:
Net change in deposits	212			(6,865		)
Sale of treasury stock	59			38
Principal payments on debt	(100		)	—
Net change in advances from Federal Home Loan Bank	250			(12,000		)
Decrease in federal funds sold	—			(4,000		)
Net change in additional paid-in-capital	(3		)	(2		)
Dividends paid	(313		)	(311		)
Net cash provided (used) in financing activities	105			(23,140		)
Net change in cash and cash equivalents	6,177			136
Cash and cash equivalents, beginning of period	10,875			11,694
Cash and cash equivalents at end of period	$	17,052		$	11,830
Supplemental disclosures of cash paid during the period for:
Interest	$	2,379		$	2,070
Income taxes	$	186		$	410
Supplemental disclosures of noncash transactions:
Change in unrealized loss on investment securities available for sale, net of taxes	$	(9	)	$	(1,098	)

See notes to consolidated financial statements.

5

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required by generally accepted accounting principles are not included herein. These interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2004.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2005 fiscal year.

The consolidated financial statements of the Company for the three and six month periods ended June 30, 2005 and 2004 are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations, changes in stockholders’ equity and cash flows for the six month periods have been included.  All adjustments are of a normal recurring nature.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which often require the judgment of management in the selection and application of certain accounting principles and methods.  Reference is made to the accounting policies of the Company described in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.  The Company has followed those policies in preparing this report.  Management believes that the quality and reasonableness of its most critical policies enable the fair presentation of its financial position and of its results of operations.

Recently Issued Accounting Standards

No recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by us have occurred during the quarter ending June 30, 2005, other than the items described below.

6

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

In April 2005, the Securities and Exchange Commission’s Office of the Chief Accountant and its Division of Corporation Finance has released Staff Accounting Bulletin (SAB) No.107 to provide guidance regarding the application of FASB Statement No.123 (revised 2004), Share-Based Payment.  Statement No.123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  SAB 107 provides interpretive guidance related to the interaction between Statement No.123R and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to Statement No.123R.

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

In November 2003, the Emerging Issues Task Force (“EITF”) reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which other-than-temporary impairment has not been recognized.  Accordingly the EITF issued EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”  This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures.  The disclosure requirements of EITF No. 03-1 are effective for annual financial statements for fiscal years ending after September 15, 2005.  The effective date for the measurement and recognition guidance of EITF No. 03-1 has been delayed.  The FASB staff has issued a proposed

7

Board-directed FASB Staff Position (“FSP”), FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of Issue No. 03-1.” The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under the measurement and recognition requirements of EITF No. 03-1.  The delay of the effective date for the measurement and recognition requirements of EITF No. 03-1 will be superseded concurrent with the final issuance of FSP EITF 03-1-a.  Citizens Bancshares adopted the guidance of EITF 03-1, effective as of June 30, 2005.  The impact of this adoption is reflected in the Company’s June 30, 2005 consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

2.  STOCK BASED COMPENSATION

The Company’s as reported and pro forma information, including stock-based compensation expense as if the fair-value based method had been applied, is illustrated in the following table (in thousands, except per share data):

	For the six months ended June 30,
	2005			2004
As reported net income available to common stockholders	$	931		$	1,276
Less: stock-based compensation expense determined under fair value method, net of tax	(12		)	(8		)
Pro forma net income	$	919		$	1,268
As reported earnings per share	$	0.45		$	0.62
Pro forma earnings per share	$	0.44		$	0.61
As reported earnings per diluted share	$	0.44		$	0.61
Pro forma earnings per diluted share	$	0.44		$	0.61

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

3.  INTANGIBLE ASSETS

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

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

8

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

	June 30, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Unamortized intangible asset:
Goodwill	$	362	$	—	$	362	$	—
Amortized intangible assets:
Core deposit intangibles	$	2,836	$	1,992	$	2,836	$	1,790

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

	For the 3 months ended June 30, 2005		For the 6 months ended June 30, 2005		For the 3 months ended June 30, 2004		For the 6 months ended June 30, 2004
Aggregate amortization expense of core deposit intangibles:	$	101	$	202	$	101	$	202
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2005	$	405
2006	$	405
2007	$	112
2008	$	53
2009	$	53

4.  COMPREHENSIVE INCOME

Comprehensive income includes: (1) reported net income and (2) unrealized gains and losses on marketable securities.  The following table shows our comprehensive income for the three and six month periods ended June 30, 2005 and 2004 (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2005		2004			2005			2004
Net Income	$	471	$	614		$	931		$	1,276
Other comprehensive income (loss)	553		(1,692		)	(9		)	(1,098		)
Comprehensive income	$	1,024	$	(1,078	)	$	922		$	178

9

5.  NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

Basic and diluted net income per common and potential common share has been calculated based on the weighted average number of shares outstanding.  The following schedule reconciles the numerator and denominator of the basic and diluted net income per common and potential common share for the three and six month periods ended June 30, 2005 and 2004 (in thousands, except per share data):

	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
Three Months ended June 30, 2005
Basic earnings per share	$	471	2,086	$	0.23
Effect of dilutive securities: options to purchase common shares	—		13	$	(0.01	)
Diluted earnings per share	$	471	2,099	$	0.22
Three Months ended June 30, 2004
Basic earnings per share	$	614	2,074	$	0.30
Effect of dilutive securities: options to purchase common shares	—		5	—
Diluted earnings per share	$	614	2,079	$	0.30
Six Months ended June 30, 2005
Basic earnings per share	$	931	2,084	$	0.45
Effect of dilutive securities: options to purchase common shares	—		12	$	(0.01	)
Diluted earnings per share	$	931	2,096	$	0.44
Six Months ended June 30, 2004
Basic earnings per share	$	1,276	2,073	$	0.62
Effect of dilutive securities: options to purchase common shares	—		7	$	(0.01	)
Diluted earnings per share	$	1,276	2,080	$	0.61

RECLASSIFICATIONS

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

10

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION

Citizens Bancshares Corporation (the “Company”) is a holding company that provides a full range of commercial banking and mortgage brokerage services to individuals and corporate customers in its primary market areas, metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabama through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal Reserve System and operates under a state charter.  The Company serves its customers through 11 full-service branches in Georgia and Alabama.  The Company also owns and operates a wholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the “Trust”) through the issuance of pooled trust preferred securities. However, in accordance with current accounting guidance, the Trust has not been consolidated in the financial statements.

Forward Looking Statements

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

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

The following discussion is of the Company’s financial condition as of June 30, 2005 and the changes in the financial condition and results of operations for the three and six month periods ended June 30, 2005 and 2004.

Critical Accounting Policies

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

Investment Securities - The Company classifies investments in one of three categories based on management’s intent upon purchase: held to maturity securities which are reported at

11

amortized cost, trading securities which are reported at fair value with unrealized holding gains and losses included in earnings, and available for sale securities which are recorded at fair value with unrealized holding gains and losses included as a component of accumulated other comprehensive income.  The Company had no investment securities classified as trading securities during 2005 or 2004.

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

Gains and losses on sales of investment securities are recognized upon disposition, based on the adjusted cost of the specific security.  A decline in market value of any security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.

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

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

A description of other accounting policies are summarized in Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.  The Company has followed those policies in preparing this report.

FINANCIAL CONDITION

Citizens Bancshares Corporation’s total assets at June 30, 2005 were $332,090,000, an increase of $706,000 or 0.21% compared to $331,384,000 at December 31, 2004.

At June 30, 2005, the Company maintained a balance of cash and due from banks of $17,052,000 representing an increase of $6,177,000 from December 31, 2004.  Interest bearing deposits with banks increased $8,243,000 to $8,977,000 at June 30, 2005 from $734,000 at December 31, 2004.  The Company increased its cash balance in anticipation of funding a $12 million withdrawal of a single depositor.  This deposit is typically returned to the Company in the third quarter.

12

Investment securities classified as available for sale and held to maturity decreased $10,565,000 and $181,000, respectively, since December 31, 2004.  In February 2005, the Company took advantage of an opportunity to increase its average yield on earning assets through the sale of $1.8 million in available for sale securities to fund loan growth. The remaining decrease in investments available for sale is attributed to called securities and pay-downs of mortgage-backed securities in the investment portfolio.

Loans receivable, net decreased $963,000 to $206,391,000 for the period ended June 30, 2005 compared to $207,354,000 at December 31, 2004.  During the first quarter of 2005, a significant outstanding loan in the amount of $2.5 million paid-off.

Total liabilities increased $41,000 to $305,544,000 at June 30, 2005 compared to $305,503,000 at December 31, 2004. Total deposits, a component of total liabilities, increased $212,000 to $266,714,000 at June 30, 2005.  Another significant component of total liabilities, advances from Federal Home Loan Bank (FHLB) increased $250,000 to $30,500,000 at June 30, 2005 compared to $30,250,000 at December 31, 2004.

INVESTMENT SECURITIES

The Company invests a portion of its assets in U.S. government sponsored agency securities, state, county and municipal securities, mortgage backed bonds, as well as certain equity securities.  At June 30, 2005 and December 31, 2004, the Company’s investment securities portfolio represented approximately 23% and 26% of total assets, respectively.

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

At June 30, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies	$	8,350	$	7	$	69	$	8,288
State, county, and municipal securities	12,329		329		5		$	12,653
Mortgage-backed securities	42,632		25		530		$	42,127
Equity securities (1)	1,054		—		—		1,054
Totals	$	64,365	$	361	$	604	$	64,122

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

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

13

The fair values of equity securities are highly correlated to the level of short-term interest rates and the shape of the yield curve.  Management has the ability to hold the securities for a reasonable period of time for a forecasted recovery of the fair value.  However, the Company’s equity investments in the preferred stock of the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) have been in an unrealized loss position for more than twelve months.  In accordance with SFAS 115 and SAB 59, as the forecasted market price recovery period lengthened on the investments, management determined that there was a lack of objective evidence to support recovery of the cost of the securities over a reasonable period of time, which resulted in the other-than-temporary impairment.  In June 2005, the Company recorded $346,000 for other-than-temporary impairment in the securities.  Management continues to evaluate and assess the remaining classes of securities for any impairment deemed other-than-temporary and will take appropriate actions when deemed necessary under the guidelines.

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

At June 30, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies	$	3,000	$	—	$	27	$	2,973
State, county, and municipal securities	5,391		163		—		5,554
Mortgage-backed securities	1,408		3		35		1,376
Totals	$	9,799	$	166	$	62	$	9,903

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

14

LOANS

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

		June 30,		December 31,
		2005		2004
Commercial, financial, and agricultural		$	17,059	$	22,327
Installment		9,501		7,666
Real estate - mortgage		163,656		174,335
Real estate - construction		17,933		4,510
Other		2,346		2,609
	Loans receivable	210,495		211,447
Less:	Net deferred loan fees	433		554
	Allowance for loan losses	3,422		3,183
	Discount on loans acquired	249		356
	Loans receivable, net	$	206,391	$	207,354

NONPERFORMING ASSETS

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

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

Nonperforming assets decreased by $370,000 to $3,713,000 at June 30, 2005 from $4,083,000 at December 31, 2004.  Nonperforming assets represents 1.76% of loans, net of unearned income, discounts, and real estate acquired through foreclosure at June 30, 2005 as compared to 1.93% at December 31, 2004.

15

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

	June 30,			December 31,
	2005			2004
	(in thousands, except
	financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans	$	2,966		$	2,652
Past-due loans of 90 days or more	—			—
Nonperforming loans	2,966			2,652
Real estate acquired through foreclosure	747			1,431
Total nonperforming assets	$	3,713		$	4,083
Ratios:
Nonperforming loans to loans, net of unearned income and discount on loans	1.41		%	1.26		%
Nonperforming assets to loans, net of unearned income, discounts, and real estate acquired through foreclosure	1.76		%	1.93		%
Nonperforming assets to total assets	1.12		%	1.23		%
Allowance for loan losses to nonperforming loans	115.37		%	120.02		%
Allowance for loan losses to nonperforming assets	92.16		%	77.95		%

16

ALLOWANCE FOR LOAN LOSSES

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

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

Loans are charged against the allowance when, in the opinion of management, such loans are deemed uncollectible and subsequent recoveries are added to the allowance.  For the six month period ended June 30, 2005 provisions for loan losses totaled $167,000 compared to $550,000 for the same period in 2004.

The allowance for loan losses at June 30, 2005 was approximately $3,422,000, representing 1.63% of total loans, net of unearned income and discounts compared to approximately $3,183,000 at December 31, 2004, which also represented 1.51% of total loans, net of unearned income and discounts.

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

A substantial portion of the Company’s loan portfolio is secured by real estate in the metropolitan Atlanta market, including a concentration of loans to churches and convenience stores.  The Company’s outstanding church loans were approximately $42.7 million at June 30, 2005 and $46.1 million at December 31, 2004.  The Company’s loans to area convenience stores were approximately $21.3 million at June 30, 2005 and $23.6 million at December 31, 2004.  Accordingly, the ultimate collectability of the substantial portion of the Company’s loan portfolio is susceptible to changes in market conditions in the metropolitan Atlanta area.

17

The following table summarizes loans, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expense as of and for the six month periods ended June 30, 2005 and 2004 (amount in thousands, except financial ratios):

	2005			2004
Loans, net of unearned income and discounts	$	209,813		$	207,022
Average loans, net of unearned income, discounts and the allowance for loan losses	$	210,561		$	206,795
Allowance for loan losses at the beginning of period	$	3,183		$	3,240
Loans charged off:
Commercial, financial, and agricultural	40			400
Real estate - loans	33			324
Installment loans to individuals	51			118
Total loans charged off	124			842
Recoveries of loans previously charged off:
Commercial, financial, and agricultural	102			145
Real estate - loans	56			47
Installment loans to individuals	38			193
Total loans recovered	196			385
Net loans recovered (charged off)	72			(457		)
Additions to allowance for loan losses charged to operating expense	167			550
Allowance for loan losses at period end	$	3,422		$	3,333
Ratio of net loans charged off to average loans, net of unearned income, discounts, and the allowance for loan losses	0.03		%	-0.22		%
Ratio of allowance for loan losses to loans, net of unearned income and discounts	1.63		%	1.61		%

18

DEPOSITS

Deposits are the Company’s primary source of funding loan growth.  Total deposits at June 30, 2005 increased by $212,000 to $266,714,000 from $266,502,000 at December 31, 2004.  Noninterest-bearing deposits increased by $7,953,000 or 13.82%, while interest-bearing deposits decreased by $7,741,000 or 3.70%. The increase in noninterest bearing deposits is the result of the Company’s new sales program in 2005 which places specific emphasis on noninterest deposit growth as well as the continued success of the bank’s new free checking account product.   The decrease in interest bearing deposits is primarily attributed to Corporate and Governmental customers who make significant monthly deposits and withdrawals based on their budgetary needs.  In June, a single governmental depositor withdrew $12 million of a maturing certificate.  As is typical, the Company expects the return of those funds in September of 2005.

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

	June 30,		December 31,
	2005		2004
NOW and money market accounts	$	61,541	$	55,748
Savings accounts	44,055		43,620
Time deposits of $100,000 or more	51,261		65,039
Other time deposits	44,365		44,556
	$	201,222	$	208,963

OTHER BORROWED FUNDS

While the Company continues to emphasize funding earning asset growth through deposits, the Company has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal Home Loan Bank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from the FHLB of $30,500,000 at June 30, 2005 and $30,250,000 at December 31, 2004.   The following advances are collateralized by a blanket lien on the Company’s 1-4 family mortgage loans.

Maturity	Callable	Type		June 30, 2005				December 31, 2004
April 2010	Quarterly	Fixed		5.82	%	$	10,000,000	5.82	%	$	10,000,000
July 2005	Daily	Variable		3.63	%	15,500,000		2.44	%	15,250,000
September 2006	Monthly	Variable		3.27	%	5,000,000		2.45	%	5,000,000
			��
Total Principal Outstanding						$	30,500,000			$	30,250,000
Weighted Average Rate at Period End				4.29	%			3.56	%

The Company had an unsecured note payable of approximately $440,000 at June 30, 2005 and $540,000 at December 31, 2004.  The note bears interest at the lender’s prime rate minus 50 basis points.   At June 30, 2005 the interest rate on the unsecured note payable was 5.50%

19

During 2002, the Company issued $5 million of pooled trust preferred securities through one issuance by a wholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the “Trust”). The trust preferred securities accrue and pay distributions periodically at an annual rate as provided in the indentures of the London Interbank Offered Rate plus 3.45%. The Trust used the net proceeds from the offering to purchase a like amount of Junior Subordinated Debentures (the “Debentures”) of the Company. These securities are reported in our consolidated balance sheet as Junior Subordinated Debentures.  The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures on June 26, 2032, or upon earlier redemption as provided in the indentures beginning June 26, 2007.  The Company has the right to redeem the Debentures in whole or in part or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.  At June 30, 2005, the interest rate on the junior subordinated debenture was 6.92%.

RESULTS OF OPERATIONS

Net Interest Income:

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

Net interest income decreased $112,000 or 3% for the three month period ended June 30, 2005 as compared with the same period of the previous year.  The decrease in net interest income resulted primarily from the decrease in investment interest income as average investments declined coupled with increases in total interest expense resulting from rising interest rates.  For the three month period ending June 30, 2005, the average investment in available for sale securities decreased $16,679,000 to $77,870,000 compared to $94,549,000 for the comparative three month period ending June 30, 2004 and 2005.  The Company reduced the size of its investment portfolio in order to strategically reposition its balance in a rising rate environment.

Net Interest income decreased $515,000 or 7% for the six month comparative periods ending June 30, 2004 and 2005.  Interest income on securities decreased $265,000 as the six month average balance of the Company’s investment portfolio declined $19,883,000 to $80,837,000 at June 30, 2005 from $100,720,000 million at June 30, 2004.  During March 2004, the Company sold securities from its investment portfolio in order reposition its portfolio, reduce investment duration risk, and fund withdrawals of public funds that it elected not to renew.  In addition, interest expense on earning liabilities increased $473,000 due to increases in the average interest rates.

Provision for loan losses

The provision for loan loss for the second quarter of 2005 is $63,000 compared to $250,000 for the same period of 2004, representing a decline of 75 percent.  The allowance for loan losses and the resulting provision for loan losses are based on changes in the size and character of the Company’s loan portfolio, changes in nonperforming and past due loans, the existing risk of individual loans, concentrations of loans to specific borrowers or industries, and economic conditions.  For the six month period ended June 30, 2005, the provision for loan losses was $167,000 compared to $550,000

20

for the same period ended June 30, 2004, representing a decline of 70 percent.  The allowance for loan losses was $3,422,000 at June 30, 2005, compared to $3,183,000 at December 31, 2004. At June 30, 2005, the allowance for loan losses was 92 percent of the nonperforming assets compared to 78 percent at December 31, 2004.  At June 30, 2005, the Company considered its allowance for loan losses to be adequate.

Noninterest income:

Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services, and profits and commissions earned through securities and insurance sales.  In addition, gains and losses realized from the sale of investment portfolio securities and sales of assets are included in noninterest income.

Noninterest income totaled $1,565,000 for the three month period ended June 30, 2005, a decrease of $123,000 or 7% compared with the same period ended June 30, 2004.  The decrease is attributed to an $83,000 decline in service charges on deposits and a $57,000 decline in gains on sales of assets partially offset by a $17,000 increase in other operating income.

For the six month period ended June 30, 2005, noninterest income totaled $2,820,000 a decrease of $66,000 or 2% compared with the same period ended June 30, 2004.  The decrease is attributed to a $98,000 decline in service charges on deposits and a $91,000 decline in the gains on the sale of assets.  These decreases were partially offset by a $135,000 increase in other operating income as the bank realized increases in debit card and ATM income, servicing fee and credit card income.  In 2004, the Company reserved $250,000 for a contingent liability resulting from a jury verdict in a lawsuit against the bank.  In 2005, the Company won a reversal of the verdict on appeal and reversed the accrual.  During the same period in 2004, the bank recovered approximately $260,000 in fraudulent losses.

Noninterest expense:

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

Noninterest expense totaled $4,635,000 for the three month period ended June 30, 2005, an increase of $157,000 or 4% compared to the same period last year.  This increase is primarily due to a $346,000 charge for other-than-temporary impairment of investments in Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) perpetual preferred stocks, and a $100,000 judgment levied against the Company.  Partially offsetting these charges, were decreases in salaries and employee benefits.  Salaries and employee benefits decreased $95,000 or 4% for the three month period ended June 30, 2005 compared to the same period in 2004. The Company’s full-time equivalent employees declined by 14 to 157 as of June 30, 2005 from 171 for the same period in 2004.  For three month period ending June 30, 2005, net occupancy and equipment increased $12,000 compared to the same period ending June 30, 2004.

Noninterest expense totaled $8,804,000 for the six month period ended June 30, 2005, an increase of $289,000 compared to the same period last year.  Salaries and employee benefits increased $70,000.  In January 2005, the Company adopted a common review and salary adjustment date for all employees.  Consequently, all salary adjustments became effective in January on a prorated basis as opposed to being spread over twelve months as was the case in 2004.  The Company anticipates this

21

change will improve staff morale and retention.  In addition, the Company started accruing for anticipated bonuses in 2005 in anticipation of expected performance levels.  No bonuses were accrued in 2004.

Net occupancy and equipment expense increased $25,000 or 2% over the six month comparative period ending June 30, 2004 and 2005.  These costs are expected to decrease as the Company realizes savings for the consolidation of a branch located in Birmingham, Alabama during the second quarter of 2005.

Other operating expenses increased $194,000 over the six month period ended June 30, 2005.  The increase is most attributable to a loss of $346,000 that was recognized in the second quarter of 2005 relating to the other-than-temporary impairment of investments in the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation perpetual preferred equity securities.  In addition, the Company recorded a $100,000 loss reserve for a judgment against its subsidiary bank in a lawsuit.  The Company is appealing the jury verdict in the lawsuit.  Partially offsetting these losses are decreases of $116,000 in advertising and marketing expenses and $189,000 in professional services.

INTEREST RATE SENSITIVITY MANAGEMENT

Interest rate sensitivity management involves managing the potential impact of interest rate movements on net interest income within acceptable levels of risk.  The Company seeks to accomplish this by structuring the balance sheet so that repricing opportunities exist for both assets and liabilities in equivalent amounts and time intervals.  Imbalances in these repricing opportunities at any point in time constitute a financial institution’s interest rate risk.  The Company’s ability to reprice assets and liabilities in the same dollar amounts and at the same time minimizes interest rate risk.

One method of measuring the impact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest rate sensitive assets and interest rate sensitive liabilities at various time intervals is referred to as the gap.  The Company is liability sensitive on a short-term basis as reflected in the following table.  Generally, a net liability sensitive position indicates that there would be a negative impact on net interest income in an increasing rate environment.  However, interest rate sensitivity gap does not necessarily indicate the impact of general interest rate movements on the net interest margin, since all interest rates and yields do not adjust at the same velocity and the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company’s customers.  In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. The following table shows the contractual maturities of all investment securities at June 30, 2005.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  For conservative purposes, the Company has included demand deposits such as NOW, money market, and savings accounts in the three month category.  However, the actual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only a general indicator of potential effects of interest rate changes on net interest income.

The following table sets forth the distribution of the repricing of the Company’s interest rate sensitive assets and interest rate sensitive liabilities as of June 30, 2005.

22

	Cumulative amounts as of June 30, 2005 Maturing and repricing within
	3			3 to 12			1 to 5			Over
	Months			Months			Years			5 Years			Total
	(amounts in thousands, except ratios)
Interest-sensitive assets:
Investments	$	445		$	3,025		$	23,678		$	46,773		$	73,921
Certificates of deposit	—			100			—			—			100
Loans	81,008			7,239			69,466			52,782			210,495
Interest-bearing deposits with other banks	8,977			—			—			—			8,977
Total interest-sensitive assets	$	90,430		$	10,364		$	93,144		$	99,555		$	293,493
Interest-sensitive liabilities:
Deposits (a)	$	140,915		$	41,650		$	18,654		$	3		$	201,222
Notes payable	440			—			—			—			440
Junior subordinated debentures	—			—			5,155			—			5,155
Other borrowings	15,500			—			5,000			10,000			30,500
Total interest-sensitive liabilities	$	156,855		$	41,650		$	28,809		$	10,003		$	237,317
Interest-sensitivity gap	$	(66,425	)	$	(31,286	)	$	64,335		$	89,552		$	56,176
Cumulative interest-sensitivity gap to total interest-sensitive assets	(22.63		)%	(33.29		)%	(11.37		)%	19.14		%	19.14		%

(a) Savings, Now, and money market deposits totaling $105,596,000 are included in the maturing in 3 months classification.

LIQUIDITY

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.  Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. Additionally, the Company requires cash for various operating needs including: dividends to shareholders; business combinations; capital injections to its subsidiaries; the servicing of debt; and the payment of general corporate expenses. The Company has access to various capital markets.  However, the primary source of liquidity for the Company is dividends from its bank subsidiary.  The Georgia Department of Banking and Finance regulates and must approve dividend payments that exceed 50 percent of the Bank’s prior year net income.  In 2005, the amount that can be paid by the Bank to the Company without prior regulatory approval is approximately $1,357,000 of which the bank paid $672,000 in April 2005. The payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.  The Company does not anticipate any liquidity requirements in the near future that it will not be able to meet.

Asset and liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Company’s customers, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can earn a return that meets the investment requirements of its shareholders.  Daily monitoring of the sources and uses of funds is

23

necessary to maintain an acceptable cash position that meets both requirements.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and, to a lesser extent, sales or pay-downs of investment securities available for sale and held to maturity.  Other short-term investments such as federal funds sold and maturing interest bearing deposits with other banks, are additional sources of liquidity funding.

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

CAPITAL RESOURCES

Stockholders’ equity increased $665,000 for the six months ended June 30, 2005, primarily due to earnings, partially offset by accumulated other comprehensive losses on available for sale securities.  Retained earnings increased by $618,000 to $18,726,000 for the six month period due to net earnings of $931,000 reduced by dividend payments of $313,000.  Accumulated other comprehensive loss, net of taxes increased by $9,000 to $43,000 during the six month period ending June 30, 2005.  These losses are due to the impact of changing economic conditions and changes in market interest rates on the Company’s available for sale securities.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets.  As of June 30, 2005, the Bank’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 14.93%, 13.68% and 9.23% respectively, compared with 14.47%, 13.22% and 8.80% respectively, at December 31, 2004.  As of June 30, 2005, the Company met all capital adequacy requirements to which it is subject.

24

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and interest rates.  Our market risk arises principally from interest rate risk inherent in our lending, deposit, and borrowing activities.  Although we manage certain other risks, such as credit quality and liquidity risk, in the normal course of business we consider interest rate risk to be our most significant market risk and the risk that could potentially have the largest material effect on our financial condition and results of operations.  We do not maintain a trading portfolio or deal in international instruments, and therefore, other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities.

Quantitative information about the Company’s market risk at June 30, 2005 is as follows (in thousands):

	2005
	Carrying		Estimated		Down		Up
	Value		Fair Value		100 bp		100 bp
Financial assets:
Interest-bearing deposits with banks	$	8,977	$	8,977	—	%	—	%
Certificates of deposit	100		100		—		—
Investment securities	73,921		74,025		1.79		(3.08	)
Loans receivable	210,495		205,948		1.13		(1.52	)
Financial liabilities:
Interest-bearing deposits	201,222		191,574		1.46		(1.34	)
Notes payable	440		440		—		—
Junior subordinated debentures	5,155		5,245		—		—
Advances from Federal Home Loan Bank	30,500		31,208		1.54		(1.48	)

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

ITEM 4.  CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted, under the supervision of and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2005 in timely alerting them to material information required to be included in our reports filed with or furnished to the Securities and Exchange Commission.  There have been no changes in

25

the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS
	On September 24, 2003, a jury awarded $250,000 in a court case against the Company.  The Company appealed the case and won a reversal of the jury award on May 16, 2005. The reversal of the $250,000 accrual for losses is reflected in the June 30, 2005 Consolidated Financial Statements.
	On June 24, 2005, a jury awarded $100,000 in a court case against the Company.  The Company is appealing the case and is seeking to have the jury award reversed. The accrual for this loss is reflected in the June 30, 2005 Consolidated Financial Statements.
ITEM 2.	UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
	On February 24, 2005, March 31, 2005 and April 12, 2005 the Company issued 3,231shares, 312 shares and 1256 shares, respectively, of unregistered stock at $7.00 per share pursuant to the applicable option agreement with senior management.
	Also, on March 31, 2005, the Company issued 2,666 shares of unregistered stock which was purchased pursuant to the Company’s Employee Stock Purchase Plan at a price of $8.49 per share.
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
	None
ITEM 4.	SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
	The Company held its Annual Shareholders’ Meeting on Wednesday, May 25, 2005, at 10:00 a.m., at the Atlanta Life Insurance Company, Herndon Plaza, 100 Auburn Avenue, N.E., Atlanta, Georgia. The purpose of the Annual Shareholders’ Meeting was to elect three (3) Class I directors who will serve a three year term expiring at the 2008 annual meeting. The following table presents the results of the shareholders vote:

Directors	For	Withhold
Stephen Elmore	1,258,060	29,635
Ingrid Saunders Jones	1,250,835	36,860
Donald Ratajczak	1,258,050	29,645

26

ITEM 5.	OTHER INFORMATION
	None
ITEM 6.	EXHIBITS
	Exhibit 31
	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.
	Exhibit 32
	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.

27

SIGNATURES

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

		CITIZENS BANCSHARES CORPORATION
Date:	August 12, 2005		By:	/s/ James E. Young
			James E. Young
			President and Chief Executive Officer
Date:	August 12, 2005		By:	/s/ Samuel J. Cox
			Samuel J. Cox
			Senior Vice President and Chief Financial Officer

28