Citizens Bancshares 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                     to

Commission File No:  0 - 14535

CITIZENS BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including 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.	x Yes o No.

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

Large accelerated filer    o Accelerated filer    o Non-accelerated filer    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes  x 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: 1,997,483 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on October 31, 2006.

PART 1.   FINANCIAL INFORMATION

ITEM 1.   Financial statements

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2006 AND DECEMBER 31, 2005

(In thousands, except share data)

	2006			2005
	(Unaudited)
ASSETS
Cash and due from banks	$	8,134		$	11,289
Interest-bearing deposits with banks	5,229			398
Certificates of deposit	100			100
Investment securities available for sale, at fair value	69,613			65,766
Investment securities held to maturity, at cost	8,806			9,411
Other investments	2,219			2,835
Loans receivable, net	211,252			215,645
Premises and equipment, net	7,350			7,625
Cash surrender value of life insurance	9,271			9,105
Foreclosed real estate, net	334			570
Other assets	5,861			5,837
Total assets	$	328,169		$	328,581
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	63,361		$	60,087
Interest-bearing deposits	201,365			194,582
Total deposits	264,726			254,669
Accrued expenses and other liabilities	3,258			3,403
Notes payable	340			440
Junior subordinated debentures	5,155			5,155
Advances from Federal Home Loan Bank	25,651			37,700
Total liabilities	299,130			301,367
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock - $1 par value; 20,000,000 shares authorized; 2,230,065 shares issued	2,230			2,230
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding	90			90
Additional paid-in capital	7,483			7,439
Retained earnings	21,906			20,138
Treasury stock at cost, 234,442 and 231,313 shares at September 30, 2006 and December 31, 2005, respectively	(1,915		)	(1,896		)
Accumulated other comprehensive loss, net of income taxes	(755		)	(787		)
Total stockholders’ equity	29,039			27,214
	$	328,169		$	328,581

See notes to consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006			2005		2006		2005
Interest income:
Loans, including fees	$	4,461		$	4,227	$	13,439	$	12,257
Investment securities:
Taxable	673			541		1,932		1,737
Tax-exempt	226			200		667		594
Interest-bearing deposits	14			15		38		112
Total interest income	5,374			4,983		16,076		14,700
Interest expense:
Deposits	1,433			1,004		4,069		2,798
Other borrowings	475			400		1,312		999
Total interest expense	1,908			1,404		5,381		3,797
Net interest income	3,466			3,579		10,695		10,903
Provision for loan losses	—			60		30		228
Net interest income after provision for loan losses	3,466			3,519		10,665		10,675
Noninterest income:
Service charges on deposits	739			881		2,274		2,560
Impairment loss on equity securities	—			—		—		(346		)
Gain on sales of securities	—			30		126		75
Gain (loss) on sales of assets	(23		)	10		—		(6		)
Other operating income	432			406		1,371		1,518
Total noninterest income	1,148			1,327		3,771		3,801
Noninterest expense:
Salaries and employee benefits	1,857			2,056		5,857		6,209
Net occupancy and equipment	568			663		1,738		1,996
Other operating expenses	1,375			1,410		4,181		4,381
Total noninterest expense	3,800			4,129		11,776		12,586
Income before income taxes	814			717		2,660		1,890
Income tax expense	151			37		537		278
Net income	$	663		$	680	$	2,123	$	1,612
Net income per share - basic	$	0.32		$	0.33	$	1.02	$	0.77
Net income per share - diluted	$	0.32		$	0.32	$	1.02	$	0.77
Weighted average outstanding shares - basic	2,085			2,087		2,088		2,085
Weighted average outstanding shares - diluted	2,083			2,098		2,086		2,097
Dividends per common share	$	—		$	—	$	0.17	$	0.15

See notes to consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

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

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(Unaudited - In thousands, except parenthetical footnotes)

																		Accumulated
				Nonvoting			Additional											Other
	Common Stock			Common Stock			Paid-in			Retained			Treasury Stock					Comprehensive
	Shares	Amount		Shares	Amount		Capital			Earnings			Shares		Amount			Income (Loss)			Total
Balance—December 31, 2004	2,230	$	2,230	90	$	90	$	7,442		$	18,108		(241	)	$	(1,955	)	$	(34	)	$	25,881
Net income	—	—		—	—		—			1,612			—		—			—			1,612
Unrealized holding losses on investment securities available for sale—net of taxes of $10,780	—	—		—	—		—			—			—		—			(529		)	(529		)
Less reclassification adjustment for holding  gains included in net income—net of taxes of $15,541	—	—		—	—		—			—			—		—			179			179
Comprehensive loss	—	—		—	—		—			—			—		—			—			1,262
Sale of treasury stock	—	—		—	—		(3		)	—			8		59			—			56
Dividends declared	—	—		—	—		—			(313		)	—		—			—			(313		)
Balance—September 30, 2005	2,230	$	2,230	90	$	90	$	7,439		$	19,407		(233	)	$	(1,896	)	$	(384	)	$	26,886
Balance—December 31, 2005	2,230	$	2,230	90	$	90	$	7,439		$	20,138		(231	)	$	(1,896	)	$	(787	)	$	27,214
Net income	—	—		—	—		—			2,123			—		—			—			2,123
Unrealized holding losses on investment securities available for sale—net of taxes of $59,592	—	—		—	—		—			—			—		—			116			116
Less reclassification adjustment for holding gains included in net income—net of taxes of $42,017	—	—		—	—		—			—			—		—			(84		)	(84		)
Comprehensive loss																					2,155
Purchase of treasury stock	—	—		—	—		2			—			(3	)	(33		)	—			(31		)
Stock based compensation expense	—	—		—	—		36			—			—		—			—			36
Reclassification adjustment of treasury stock	—	—		—	—		6			—			—		14			—			20
Dividends declared	—	—		—	—		—			(355		)	—		—			—			(355		)
Balance—September 30, 2006	2,230	$	2,230	90	$	90	$	7,483		$	21,906		(234	)	$	(1,915	)	$	(755	)	$	29,039

See notes to consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(In thousands)

	September 30,
	2006			2005
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	2,123		$	1,612
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	30			228
Depreciation	487			711
Amortization and accretion, net	296			761
Provision for deferred income taxes (benefit)	204			(172		)
Gain on sale of assets and investments	(126		)	(69		)
Write-down of equity securities	—			346
Stock based compensation expense	36			—
Change in other assets	(494		)	529
Change in accrued expenses and other liabilities	(186		)	(38		)
Net cash provided by operating activities	2,370			3,908
INVESTING ACTIVITIES:
Proceeds from calls and maturities of investment securities held to maturity	598			294
Proceeds from sales and maturities of investment securities available for sale	10,875			14,643
Purchases of investment securities available for sale	(14,717		)	(6,889		)
Net change in other investments	616			466
Net change in loans receivable	3,714			(2,703		)
Net proceeds (premiums paid) on life insurance policy	84			(70		)
Net proceeds from the sale of foreclosed properties	762			1,251
Purchases of premises and equipment, net	(204		)	(107		)
Net change in interest bearing deposits with banks	(4,831		)	(580		)
Net change in certificates of deposit	—			700
Net cash provided by (used in) investing activities	(3,103		)	7,005
FINANCING ACTIVITIES:
Net change in deposits	10,057			984
Sale (purchase) of treasury stock activity	(19		)	59
Net change in additional paid-in-capital	44			(2		)
Principal payments on debt	(100		)	(100		)
Net change in advances from Federal Home Loan Bank	(12,049		)	(9,050		)
Dividends paid	(355		)	(313		)
Net cash used in financing activities	(2,422		)	(8,422		)
Net change in cash and cash equivalents	(3,155		)	2,491
Cash and and cash equivalents, beginning of period	11,289			10,875
Cash and and cash equivalents at end of period	$	8,134		$	13,366
Supplemental disclosures of cash paid during the period for:
Interest	$	5,429		$	3,738
Income taxes	$	677		$	186
Supplemental disclosures of noncash transactions:
Change in unrealized gain (loss) on investment securities available for sale, net of taxes	$	32		$	(350	)

See notes to consolidated financial statements.

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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 seven full-service financial centers in metropolitan Atlanta, Georgia, one full-service financial center in Columbus, Georgia, one full-service financial center in Birmingham, Alabama, and one full-service financial center 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, 2005.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2006 fiscal year.

The consolidated financial statements of the Company for the three and nine month periods ended September 30, 2006 and 2005 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 nine 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, 2005.  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

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

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In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 wi ll have a material impact on its financial position, results of operations and cash flows.

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

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently analyzing the effects of FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been

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recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date — the date at which the benefit obligation and plan assets are measured — is required to be the company’s fiscal year end. SFAS 158 is effective for publicly held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company is currently analyzing the effects of SFAS 158 but does not expect its implementation will have a significant impact on the Company’s financial conditions or results of operations.

In September, 2006, The FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (EITF) relating to EITF 06-4 “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”.  EITF 06-4 addresses employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, or Accounting Principles Board (APB) Opinion No. 12, “Omnibus Opinion—1967”.  EITF 06-4 is effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods.  The Company does not believe the adoption of EITF 06-4 will have a material impact on its financial position, results of operations and cash flows.

On September 13, 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB 108 and determined that upon adoption it will have no impact on the reported results of operations or financial conditions.

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

2.  STOCK BASED COMPENSATION

On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Accounting for Stock-Based Compensation, to account for compensation costs under its stock option plans.  The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as amended) (“APB 25”).  Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Company’s stock options because the option exercise price in its plans equals the market price on the

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date of grant.  Prior to January 1, 2006, the Company only disclosed the pro forma effects on net income and earnings per share as if the fair value recognition provisions of SFAS 123(R) had been utilized.

In adopting SFAS No. 123, the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method.  Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share amounts):

	For the three months ended September 30,						For the nine months ended September 30,
	2006			2005			2006			2005
Net income as reported	$	663		$	680		$	2,123		$	1,612
Add: stock-based compensation expense included in reported net income, net of tax	8			—			25			—
Less: total stock-based compensation expense determined under fair value method for all awards, net of tax	(8		)	(6		)	(25		)	(18		)
Pro forma net income	$	663		$	674		$	2,123		$	1,594
Earnings per share:
Basic—as reported	$	0.32		$	0.33		$	1.02		$	0.77
Basic—pro forma	$	0.32		$	0.32		$	1.02		$	0.76
Diluted—as reported	$	0.32		$	0.32		$	1.02		$	0.77
Diluted—pro forma	$	0.32		$	0.32		$	1.02		$	0.76

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.

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

	September 30, 2006				December 31, 2005
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Unamortized intangible asset: Goodwill	$	362	$	—	$	362	$	—
Amortized intangible assets: Core deposit intangibles	$	2,836	$	2,498	$	2,836	$	2,195

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

	For the 3 months ended September 30, 2006		For the 9 months ended September 30, 2006		For the 3 months ended September 30, 2005		For the 9 months ended September 30, 2005
Aggregate amortization expense of core deposit intangibles:	$	101	$	303	$	101	$	303

Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:

2006	$	404
2007	$	112
2008	$	53
2009	$	53
2010	$	19

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 (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
Net Income	$	663	$	680		$	2,123	$	1,612
Other comprehensive income (loss)	712		(341		)	32		(350		)
Comprehensive income	$	1,375	$	339		$	2,155	$	1,262

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5.STOCK OPTIONS

2005 Option—On April 25, 2005, the Company granted its president and certain officers options to purchase 21,000 shares of common stock of the Company at an exercise price of $13.41 per share (the “2005 Option”), as compared to trades of stock at $13.00 per share on the date of grant.  The 2005 Option vests at a rate of 33.3% per year, commencing on April 24, 2006. The option’s term is ten years from the date of grant, and at September 30, 2006, 14,500 options to purchase shares under the 2005 Option remained outstanding.

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

2006 Option—On May 1, 2006, the Company granted its president and certain officers options to purchase 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 $11.40 per share on the date of grant.  The 2006 Option vests at a rate of 33.3% per year, commencing on May 1, 2007. The option’s term is ten years from the date of grant, and at September 30, 2006, 16,000 options to purchase shares under the 2006 Option remained outstanding.

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

A summary of the status of the Company’s stock options for the three and nine months ended September 30, 2006 is presented below:

	For the 3 months ended				For the 9 months ended
	September 30, 2006				September 30, 2006
		Weighted		Weighted					Weighted
		Weighted		Average			Weighted		Average
		Average		Remaining			Average		Remaining
		Exercise		Contractual			Exercise		Contractual
	Shares	Price		Life	Shares		Price		Life
Outstanding—beginning of period	73,176	$	10.93	6.92 years	60,176		$	10.92	8.99 years
Granted	—	—			16,000		11.45
Expired/Terminated	—	—			(3,000	)	13.41
Outstanding—end of period	73,176	$	10.93	6.92 years	73,176		$	10.93	6.92 years
Options exercisable at year-end	52,299	$	9.76		52,299		$	9.76

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6.  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 nine months ended September 30, 2006 and 2005 (in thousands, except per share data):

	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
Three Months ended September 30, 2006
Basic earnings per share	$	663	2,085	$	0.32
Effect of dilutive securities: options to purchase common shares	—		—	—
Diluted earnings per share	$	663	2,085	$	0.32
Three Months ended September 30, 2005
Basic earnings per share	$	680	2,087	$	0.33
Effect of dilutive securities: options to purchase common shares	—		11	(0.01		)
Diluted earnings per share	$	680	2,098	$	0.32
Nine Months ended September 30, 2006
Basic earnings per share	$	2,123	2,088	$	1.02
Effect of dilutive securities: options to purchase common shares	—		—	—
Diluted earnings per share	$	2,123	2,088	$	1.02
Nine Months ended September 30, 2005
Basic earnings per share	$	1,612	2,085	$	0.77
Effect of dilutive securities: options to purchase common shares	—		12	—
Diluted earnings per share	$	1,612	2,097	$	0.77

RECLASSIFICATIONS

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

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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 10 full-service financial centers 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 September 30, 2006 and the changes in the financial condition and results of operations for the three and nine month periods ended September 30, 2006 and 2005.

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:

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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 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 2006 or 2005.

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, 2005.  The Company has followed those policies in preparing this report.

FINANCIAL CONDITION

Citizens Bancshares Corporation’s total assets at September 30, 2006 were $328 million compared to $324 million a year ago and are consistent with December 31, 2005.  Compared to December 2005, interest bearing deposits with banks increased by $4,831,000 to $5,229,000 and investment securities classified as available for sale increased by $3,847,000, partially offset by a $605,000 decrease in investment securities held to maturity. Other investments, which consist of the Company’s investment in the stock of the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (FHLB),

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decreased by $616,000 and fluctuate daily due to the amount of advances outstanding at the FHLB. The increases in interest bearing deposits and investments securities were partially offset by a decrease in loans receivable, net of $4,393,000.  While total production of new loans was $49 million in the first nine months of 2006, the Company experienced an unusually heavy paydown and payoff trend of $21 million in the third quarter of 2006, resulting in a decrease of $4,393,000 in loans receivable, net for the year. Management considers this level of paydown and payoffs to be an isolated incident and is not the norm of the Company’s loan portfolio. Total earning assets for the nine months ending September 30, 2006 increased by $3 million compared to December 31, 2005.

Total liabilities decreased by $2 million to $299 million at September 30, 2006 compared to $301 million at December 31, 2005. This decrease is primarily due to a $12,049,000 decrease in advances from the FHLB, partially offset by a $10,057,000 increase in total deposits. The Company used the excess liquidity generated by its deposit growth to reduce its outstanding borrowings with the FHLB, thereby reducing the yield paid on its interest-bearing liabilities.

INVESTMENT SECURITIES

The Company invests a portion of its assets in U.S. government sponsored agency securities, state, county and municipal securities, mortgage backed bonds, as well as certain equity securities.  At September 30, 2006 and December 31, 2005, the Company’s investment securities portfolio represented approximately 25% and 24% of total assets, respectively.

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

At September 30, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies	$	6,938	$	—	$	148	$	6,790
State, county, and municipal securities	17,152		178		65		$	17,265
Mortgage-backed securities	46,666		50		1,158		$	45,558
Totals	$	70,756	$	228	$	1,371	$	69,613

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

(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.

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

At September 30, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies	$	3,000	$	—	$	77	$	2,923
State, county, and municipal securities	4,834		88		1		4,921
Mortgage-backed securities	972		—		46		926
Totals	$	8,806	$	88	$	124	$	8,770

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

Securities classified as available-for-sale are recorded at fair market value and held-to-maturity securities are recorded at amortized cost.  The Company evaluates its investment portfolio periodically to identify any impairment that is other than temporary.  At September 30, 2006, the Company had several debt securities that have been in an unrealized loss position for twelve months or more.  The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest 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 obligations of the United States, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio.  The company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions.   Management believes credit risk associated with correspondent accounts is not significant.

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LOANS

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

	September 30,		December 31,
	2006		2005
Commercial, financial, and agricultural	$	15,177	$	12,647
Installment	12,432		10,132
Real estate - mortgage	157,577		175,739
Real estate - construction	27,318		18,830
Other	2,249		2,164
Loans receivable	214,753		219,512
Less:   Net deferred loan fees	282		399
Allowance for loan losses	3,219		3,327
Discount on loans acquired	—		141
Loans receivable, net	$	211,252	$	215,645

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 increased by $1.2 million to $5,901,000 at September 30, 2006 from $4,713,000 at December 31, 2005.  At September 30, a convenience store loan in the amount of $1.3 million became 90 days past-due and accordingly, was placed on nonaccrued status. The loan is adequately secured by real estate and 71% of the loan is guaranteed.  In November 2006, the customer made all past due payments needed to remove the loan from nonaccrued status and bring it current.  At September 30, 2006, $3,164,000 of the outstanding balance in nonperforming assets is wholly or partially guaranteed by the U.S. Government through the Small Business Administration Program.

Nonperforming assets represents 2.75% of loans, net of unearned income, discounts, and real estate acquired through foreclosure at September 30, 2006 as compared to 2.15% at December 31, 2005.

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The table below presents a summary of the Company’s nonperforming assets at September 30, 2006 and December 31, 2005.

	September 30,			December 31,
	2006			2005
	(in thousands, except
	financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans	$	5,569		$	4,143
Past-due loans of 90 days or more	—			—
Nonperforming loans	5,569			4,143
Real estate acquired through foreclosure	332			570
Total nonperforming assets	$	5,901		$	4,713
Ratios:
Nonperforming loans to loans, net of unearned income and discount on loans	2.60		%	1.89		%
Nonperforming assets to loans, net of unearned income, discounts, and real estate acquired through foreclosure	2.75		%	2.15		%
Nonperforming assets to total assets	1.80		%	1.43		%
Allowance for loan losses to nonperforming loans	57.80		%	80.29		%
Allowance for loan losses to nonperforming assets	54.55		%	70.58		%

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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 nine month period ended September 30, 2006 provisions for loan losses totaled $30,000 compared to $228,000 for the same period in 2005, representing an 87 percent decrease over the previous year.  The reduction in the provision expense is attributed to the continuing improvement in the credit quality of the Company’s loan portfolio.

The allowance for loan losses at September 30, 2006 was approximately $3,219,000, representing 1.50% of total loans, net of unearned income and discounts compared to approximately $3,327,000 at December 31, 2005, which represented 1.52% of total loans, net of unearned income and discounts.

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 $38 million at September 30, 2006 and at December 31, 2005, respectively.  The Company’s loans to area convenience stores were approximately $13 million at September 30, 2006 and $21 million at December 31, 2005.  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.

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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 nine month periods ended September 30, 2006 and 2005 (amount in thousands, except financial ratios):

	2006			2005
Loans, net of unearned income and discounts	$	214,471		$	212,436
Average loans, net of unearned income, discounts and the allowance for loan losses	$	215,232		$	207,284
Allowance for loan losses at the beginning of period	$	3,327		$	3,183
Loans charged-off:
Commercial, financial, and agricultural	17			40
Real estate - loans	160			55
Installment loans to individuals	162			264
Total loans charged-off	339			359
Recoveries of loans previously charged off:
Commercial, financial, and agricultural	66			119
Real estate - loans	84			70
Installment loans to individuals	51			53
Total loans recovered	201			242
Net loans charged-off (recovered)	138			117
Additions to allowance for loan losses charged to operating expense	30			228
Allowance for loan losses at period end	$	3,219		$	3,294
Ratio of net loans charged-off to average loans, net of unearned income, discounts, and the allowance for loan losses	0.06		%	0.06		%
Ratio of allowance for loan losses to loans, net of unearned income and discounts	1.50		%	1.55		%

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DEPOSITS

Deposits are the Company’s primary source of funding loan growth.  Total deposits at September 30, 2006 increased 4% or $10,057,000 to $264,726,000 from December 31, 2005. Noninterest-bearing deposits increased by $3,274,000 or 5%, and interest-bearing deposits increased by $6,783,000 or 3%.  The increase in total deposits is primarily attributed to Corporate and Governmental customers who make significant monthly deposits and withdrawals based on their budgetary needs.  In addition, the Company implemented a new sales program which places specific emphasis on deposit growth.

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

	September 30,		December 31,
	2006		2005
NOW and money market accounts	$	67,281	$	49,889
Savings accounts	37,309		41,013
Time deposits of $100,000 or more	55,437		46,722
Other time deposits	41,338		56,958
	$	201,365	$	194,582

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 $25,651,000 at September 30, 2006 and $37,700,000 at December 31, 2005.   The outstanding advances at the FHLB fluctuate daily depending on the liquidity needs of the Company.  The following advances are collateralized by a blanket lien on the Company’s 1-4 family mortgage loans.

Maturity	Callable	Type		September 30, 2006				December 31, 2005
July 2007	Daily	Variable		5.61	%	$	15,251,000	4.44	%	$	27,700,000
April 2010	Quarterly	Fixed		5.82	%	10,000,000		5.82	%	10,000,000
August 2026		Fixed	(1)	—		400,000				—
Total Principal Outstanding						$	25,651,000			$	37,700,000
Weighted Average Rate at Period End				5.60	%			4.81	%

(1)Represents an Affordable Housing Program (AHP) award used to subsidized loans for homeownership or rental initiatives.  The AHP is a principal reducing credit, scheduled to mature on August 17, 2006 with an interest rate of zero.

The Company has an unsecured note payable of approximately $340,000 at September 30, 2006, reduced from $440,000 at December 31, 2005.  The note bears interest at a rate of 7.75% (the lender’s prime rate minus 50 basis points).

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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 September 26, 2032, or upon earlier redemption as provided in the indentures beginning September 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 September 30, 2006, the interest rate on the junior subordinated debenture was 8.82%.

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 $113,000 to $3,466,000 for the third quarter of 2006 from $3,579,000 for the third quarter of 2005.  This decrease is due to the Company operating in a difficult interest rate environment of a flat to inverted yield curve throughout the quarter and three more rate hikes this year that have increased the Company’s funding cost.

In the third quarter of 2006, the Company improved the yield on its earning assets as interest income on loans and investments increased $234,000 and $158,000, respectively, partially offset by a $504,000 increase in total interest expense compared to the third quarter of 2005.

For the nine month period ended September 30, 2006, net interest income decreased $208,000 or 2% as compared to the same period of the previous year.  The decrease in net interest income is primarily due to the increase in total interest expense resulting from rising interest rates. For the nine month period ending September 30, 2006, total interest expense increased $1,584,000 while total interest income increased $1,376,000 as compared to the same period in 2005.

Provision for loan losses

The Company improved its credit quality during the first nine months of 2006. Only $30,000 in provision for loan losses was taken in 2006 resulting in a decrease of $60,000 and $198,000, respectively, in the quarterly and year-to-date comparisons to the previous year. No provision for loan losses was deemed necessary for the third quarter.  The provision for loan losses and the resulting allowance 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.  The allowance for loan losses was $3,219,000 in the third quarter of 2006, compared to $3,327,000 at December 31, 2005.  At September 30, 2006, the allowance for loan losses was 55% of the nonperforming assets

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compared to 71% at December 31, 2005.  At September 30, 2006, 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 decreased $179,000 or 13% to $1,148,000 for the three month period ended September 30, 2006 compared to the same period ended September 30, 2005.  Overdraft and checking account fees are significant components of service charges on deposit have decreased $74,000 and $66,000, respectively, compared to the same three month period last year.  Overdrafts fees, due to their nature, fluctuates monthly and checking accounts fees are being impacted by the Company’s free checking account products created to compete against similar products in the Company’s target market area.  For the nine month period ended September 30, 2006, noninterest income was consistent with the previous year, decreasing by less than 1% or $30,000.

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 decreased 8% for the third quarter and 6% for the first nine months of 2006 compared to the same periods last year.  The decrease is due to the Company’s strategy started last year to reduce overhead cost and improve the efficiency throughout its financial centers network.

Last year, the Company consolidated and closed two branches, and reduced its average full-time employee base. During the third quarter of 2006, the Company had an average of 136 full-time employees compared to an average of 148 full-time employees during the same period last year.  For the third quarter of 2006, salaries and employee benefits decreased $199,000, occupancy and equipment expenses decreased $95,000 and other operating expenses decreased $35,000 compared to the same period last year.

For the nine months ending September 30, 2006, the Company had an average of 140 full-time employees compared to an average of 154 full-time employees during the same period last year.  Also, in 2006 to combat the increased cost of providing healthcare, the Company increased the medical deductibles to its employees, enacted certain preventive care and, consequently, has experienced a reduction in the amount of medical claims filed compared to the same period last year.  As a result of these changes and other expense cost measures, salaries and employee benefits decreased $352,000, occupancy and equipment expenses decreased $258,000 and other operating expenses decreased $200,000 compared to the same period last year.

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

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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 September 30, 2006.  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 September 30, 2006.

	Cumulative amounts as of September 30, 2006
	Maturing and repricing within
	3			3 to 12			1 to 5			Over
	Months			Months			Years			5 Years			Total
	(amounts in thousands, except ratios)
Interest-sensitive assets:
Investments	$	946		$	813		$	48,067		$	28,593		78,419
Certificates of deposit	—			100			—			—			100
Loans	67,766			14,736			78,347			53,904			214,753
Interest-bearing deposits with other banks	5,229			—			—			—			5,229
Total interest-sensitive assets	$	73,941		$	15,649		$	126,414		$	82,497		$	298,501
Interest-sensitive liabilities:
Deposits (a)	$	131,454		$	56,014		$	13,893		$	4		$	201,365
Notes payable	—			340			—			—			340
Junior subordinated debentures	—			5,155			—			—			5,155
Other borrowings	—			15,251			10,000			400			25,651
Total interest-sensitive liabilities	$	131,454		$	76,760		$	23,893		$	404		$	232,511
Interest-sensitivity gap	$	(57,513	)	$	(61,111	)	$	102,521		$	82,093		$	65,990
Cumulative interest-sensitivity gap to total interest-sensitive assets	(19.27		)%	(39.74		)%	(5.39		)%	22.11		%	22.11		%

(a) Savings, Now, and money market deposits totaling $104,590 are included in the maturing in 3 months classification.

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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 the dividend payments and must approve dividend payments that exceed 50 percent of the Bank’s prior year net income.  As of September 30, 2006, this amount was approximately $1,374,000.  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 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 paydowns 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 $1,825,000 for the nine months ended September 30, 2006, primarily due to earnings, partially offset by accumulated other comprehensive losses on available for sale securities.  Retained earnings increased by $1,768,000 to $21,906,000 for the nine month period due to net earnings of $2,123,000 reduced by dividend payments of $355,000. Accumulated other comprehensive loss, net of taxes decreased $32,000 to $755,000 during the nine month period ending September 30, 2006.  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 September 30, 2006, the Bank’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 16%, 15% and 11%, respectively.  As of

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September 30, 2006, the Company met all capital adequacy requirements to which it is subject.

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 September 30, 2006 is as follows (in thousands):

	2006
	Carrying		Estimated		Down		Up
	Value		Fair Value		100 bp		100 bp
Financial assets:
Interest-bearing deposits with banks	$	5,229	$	5,229	—	%	—	%
Certificates of deposit	100		100		—		—
Investment securities	78,383		78,419		2.73		(3.49	)
Loans receivable	211,252		207,985		1.55		(1.54	)
Financial liabilities:
Interest-bearing deposits	201,365		189,471		1.08		(1.13	)
Notes payable	340		340		—		—
Junior subordinated debentures	5,155		5,112		—		—
Advances from Federal Home Loan Bank	25,651		25,952		2.32		(0.30	)

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, Chief Operating Officer, and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13g-15(e). Based on this evaluation, the Company’s Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer have concluded that our

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disclosure controls and procedures were effective as of September 30, 2006 in timely alerting them to material information required to be included in our reports filed with or furnished to the Securities and Exchange Commission and that the Company’s disclosure controls and procedures are designed to ensure that the information required to be in those reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There have been no changes in the Company’s internal controls over financial reporting or, to the Company’s knowledge, in other factors that could significantly affect those internal controls that occurred during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.

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

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Exhibit 32

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

SIGNATURES

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

CITIZENS BANCSHARES CORPORATION
Date:   November 13, 2006	By:	/s/ James E. Young
	James E. Young
	President and Chief Executive Officer
Date:   November 13, 2006	By:	/s/ Cynthia N. Day
	Cynthia N. Day
	Senior Executive Vice President and
	Chief Operating Officer
Date:   November 13, 2006	By:	/s/ Samuel J. Cox
	Samuel J. Cox
	Senior Executive Vice President and
	Chief Financial Officer

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