**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**
|            | **x**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE**                                                                      |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                                                                                |
| ** ** | ** ** | ** **                                                                                                                         |
| ** ** | ** ** | **For the quarterly period ended June 30, 2007**                                                                                   |
| ** ** | ** ** | ** **                                                                                                                         |
| ** ** | ** ** | **OR**                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                         |
| ** ** | **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE**                                                                     |
| ** ** | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                                                                                |
| ** ** | ** ** | ** **                                                                                                                         |
|       |       | **For the transition period from                   to** |

 

**Commission File No:  0-14535**

**CITIZENSBANCSHARES 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:      **(678) 406-4000**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.               x  Yes   o  No.

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

 

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

APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by checkmark whether registrant has filed all documents and reports required to befiled by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.      o  Yes   o  No.

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number ofshares outstanding for each of the issuer’s classes of common stock as of thelatest practicable date: 2,002,548 shares of Common Stock, $1.00 par value and90,000 shares of Non-Voting Common Stock, $1.00 par value outstanding on July31, 2007.

 

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**PART 1.                FINANCIAL INFORMATION**

**ITEM 1.  Financialstatements**

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARIES**

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2007 AND DECEMBER 31, 2006

(Inthousands, except share data)
| ** **                                                                                          | ** ** | **2007**        | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                          |       |            |       |       |       |
| Cash and due  from banks                                                                            |       | $               | 8,461      |       | $          | 8,615 |   |
| Interest-bearing  deposits with banks                                                               |       | 2,095           |       | 4,589      |       |
| Certificates of  deposit                                                                            |       | 100             |       | 100        |       |
| Investment  securities available for sale, at fair value                                            |       | 64,898          |       | 70,348     |       |
| Investment  securities held to maturity, at cost                                                    |       | 8,060           |       | 8,175      |       |
| Other  investments                                                                                  |       | 1,731           |       | 2,246      |       |
| Loans  receivable, net                                                                              |       | 229,278         |       | 218,003    |       |
| Premises and  equipment, net                                                                        |       | 7,854           |       | 7,850      |       |
| Cash surrender  value of life insurance                                                             |       | 9,530           |       | 9,364      |       |
| Foreclosed real  estate                                                                             |       | 3,072           |       | 130        |       |
| Other assets                                                                                        |       | 5,924           |       | 5,765      |       |
|                                                                                                |       |            |       |       |       |
| Total assets                                                                                        |       | $               | 341,003    |       | $          | 335,185 |   |
|                                                                                                |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                      | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                |       |            |       |       |       |
| LIABILITIES:                                                                                        |       |            |       |       |       |
| Noninterest-bearing  deposits                                                                       |       | $               | 65,449     |       | $          | 60,262 |   |
| Interest-bearing  deposits                                                                          |       | 222,491         |       | 208,758    |       |
|                                                                                                |       |            |       |       |       |
| Total deposits                                                                                      |       | 287,940         |       | 269,020    |       |
|                                                                                                |       |            |       |       |       |
| Accrued expenses  and other liabilities                                                             |       | 3,693           |       | 3,774      |       |
| Federal funds  purchased                                                                            |       | 2,000           |       | —     |       |
| Notes payable                                                                                       |       | 340             |       | 340        |       |
| Junior  subordinated debentures                                                                     |       | —          |       | 5,155      |       |
| Advances from  Federal Home Loan Bank                                                               |       | 16,651          |       | 26,746     |       |
|                                                                                                |       |            |       |       |       |
| Total  liabilities                                                                                  |       | 310,624         |       | 305,035    |       |
|                                                                                                |       |            |       |       |       |
| COMMITMENTS AND  CONTINGENCIES                                                                      |       |            |       |       |       |
|                                                                                                |       |            |       |       |       |
| STOCKHOLDERS’ EQUITY:                                                                          |       |            |       |       |       |
| Common stock -  $1 par value; 20,000,000 shares authorized; 2,230,065 shares issued                 |       | 2,230           |       | 2,230      |       |
| Nonvoting common  stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and  outstanding |       | 90              |       | 90         |       |
| Additional  paid-in capital                                                                         |       | 7,527           |       | 7,497      |       |
| Retained  earnings                                                                                  |       | 23,421          |       | 22,786     |       |
| Treasury stock  at cost, 231,155 shares at June 30, 2007 and 234,442 at December 31, 2006           |       | (1,889          | )          | (1,915     | )          |
| Accumulated  other comprehensive loss, net of income taxes                                          |       | (1,000          | )          | (538       | )          |
|                                                                                                |       |            |       |       |       |
| Total  stockholders’ equity                                                                    |       | 30,379          |       | 30,150     |       |
|                                                                                                |       |            |       |       |       |
|                                                                                                |       | $               | 341,003    |       | $          | 335,185 |   |

 

See notes to consolidatedfinancial statements.

2

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited- In thousands, except per share data)**
| ** **                                           | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                     |       |                                            |       |                                          |       |   |   |   |   |
| Loans, including fees                                |       | $                                               | 4,630      |                                          | $          | 4,622 |   | $ | 9,013 |   | $ | 8,978 |   |
| Investment securities:                               |       |                                            |       |                                          |       |   |   |   |   |
| Taxable                                              |       | 657                                             |       | 638                                           |       | 1,341 |   | 1,259 |   |
| Tax-exempt                                           |       | 217                                             |       | 226                                           |       | 432 |   | 441 |   |
| Interest-bearing deposits                            |       | 84                                              |       | 12                                            |       | 259 |   | 24 |   |
| Total interest income                                |       | 5,588                                           |       | 5,498                                         |       | 11,045 |   | 10,702 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense:                                   |       |                                            |       |                                          |       |   |   |   |   |
| Deposits                                             |       | 1,819                                           |       | 1,396                                         |       | 3,586 |   | 2,636 |   |
| Other borrowings                                     |       | 275                                             |       | 398                                           |       | 574 |   | 837 |   |
| Total interest expense                               |       | 2,094                                           |       | 1,794                                         |       | 4,160 |   | 3,473 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,494                                           |       | 3,704                                         |       | 6,885 |   | 7,229 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for  loan losses                           |       | —                                          |       | —                                        |       | — |   | 30 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest  income after provision for loan losses |       | 3,494                                           |       | 3,704                                         |       | 6,885 |   | 7,199 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  income:                                 |       |                                            |       |                                          |       |   |   |   |   |
| Service charges on deposits                          |       | 767                                             |       | 862                                           |       | 1,468 |   | 1,725 |   |
| Gain (loss) on sales of securities                   |       | —                                          |       | 123                                           |       | (33 | ) | 126 |   |
| Gain (loss) on sales of assets                       |       | 58                                              |       | (7                                            | )          | 64 |   | 23 |   |
| Other operating income                               |       | 392                                             |       | 350                                           |       | 747 |   | 749 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,217                                           |       | 1,328                                         |       | 2,246 |   | 2,623 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  expense:                                |       |                                            |       |                                          |       |   |   |   |   |
| Salaries and employee benefits                       |       | 1,953                                           |       | 2,001                                         |       | 3,824 |   | 4,001 |   |
| Net occupancy and equipment                          |       | 601                                             |       | 555                                           |       | 1,139 |   | 1,169 |   |
| Other operating expenses                             |       | 1,319                                           |       | 1,485                                         |       | 2,690 |   | 2,806 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 3,873                                           |       | 4,041                                         |       | 7,653 |   | 7,976 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 838                                             |       | 991                                           |       | 1,478 |   | 1,846 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  expense                                  |       | 168                                             |       | 211                                           |       | 273 |   | 386 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                               | 670        |                                          | $          | 780 |   | $ | 1,205 |   | $ | 1,460 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per  share - basic                        |       | $                                               | 0.32       |                                          | $          | 0.37 |   | $ | 0.58 |   | $ | 0.70 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per  share - diluted                      |       | $                                               | 0.32       |                                          | $          | 0.37 |   | $ | 0.58 |   | $ | 0.69 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  outstanding shares - basic         |       | 2,089                                           |       | 2,089                                         |       | 2,088 |   | 2,089 |   |
|                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  outstanding shares - diluted       |       | 2,089                                           |       | 2,103                                         |       | 2,088 |   | 2,101 |   |
|                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Dividends per common  share                          |       | $                                               | 0.19       |                                          | $          | 0.17 |   | $ | 0.19 |   | $ | 0.17 |   |

 

See notes toconsolidated financial statements.

3

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**CITIZENS BANCSHARES CORPORATION**

**AND SUBSIDIARIES**

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

**FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006**

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

** **
| ** **                                                                                               | ** ** | ** **            | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | **Accumulated**          | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                                                                               | ** ** | **Common Stock** | ** ** | **Nonvoting  Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Other  Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** ** | **Shares**            | ** ** | **Amount**                       | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**             | ** ** | **Earnings**             | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** | ** ** | **Total** | ** ** |
| ** **                                                                                               | ** ** | ** **            | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance—December 31, 2005                                                                           |       | 2,230                 |       | $                                | 2,230      |                    | 90         |         | $          | 90                      |       | $                        | 7,439      |       | $          | 20,138 |   | (231 | ) | $ | (1,896 | ) | $ | (787 | ) | $  | 27,214  |   |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| Net income                                                                                               |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | 1,460                    |       | —     |       | — |   | — |   |          1,460  |   |
| Unrealized holding losses on investment securities available for  sale—net of taxes of $306,998     |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                   |       | —     |       | — |   | (596 | ) | (596 | ) |
| Less reclassification adjustment for holding gains included in net  income—net of taxes of $42,017  |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                   |       | —     |       | — |   | (84 | ) | (84 | ) |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| Comprehensive loss                                                                                       |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                   |       | —     |       | — |   | — |   |            780  |   |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| Purchase of treasury stock                                                                               |       | —                |       | —                           |       | —                  |       | —       |       | 1                       |       | —                   |       | (4         | )          | (31 | ) | — |   | (30 | ) |
| Stock based compensation expense                                                                         |       | —                |       | —                           |       | —                  |       | —       |       | 22                      |       | —                   |       | —     |       | — |   | — |   |              22  |   |
| Reclassification adjustment of treasury stock                                                            |       | —                |       | —                           |       | —                  |       | —       |       | 5                       |       | —                   |       | —     |       | 14 |   | — |   |              19  |   |
| Dividends declared                                                                                       |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | (355                     | )          | —     |       | — |   | — |   | (355 | ) |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| **Balance—June 30, 2006**                                                                           | ** ** | **2,230**             | ** ** | **$**                            | **2,230**  | ** **              | **90**     | ** **   | **$**      | **90**                  | ** ** | **$**                    | **7,467**  | ** ** | **$**      | **21,243** | ** ** | **(235** | **)** | **$** | **(1,913** | **)** | **$** | **(1,467** | **)** | **$ ** | **  27,650 ** | ** ** |
| ** **                                                                                               | ** ** | ** **            | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance—December 31, 2006                                                                           |       | 2,230                 |       | $                                | 2,230      |                    | 90         |         | $          | 90                      |       | $                        | 7,497      |       | $          | 22,786 |   | (234 | ) | $ | (1,915 | ) | $ | (538 | ) | $  |   30,150  |   |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| Net income                                                                                               |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | 1,205                    |       | —     |       | — |   | — |   |         1,205  |   |
| Unrealized holding losses on investment securities available for sale—net  of taxes of $249,275     |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                   |       | —     |       | — |   | (484 | ) | (484 | ) |
| Less reclassification adjustment for holding losses included in net  income—net of taxes of $11,178 |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | —                   |       | —     |       | — |   | 22 |   |              22  |   |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| Comprehensive income                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |             743  |   |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| Cumulative effect of adoption of fair value option                                                       |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | (173                     | )          | —     |       | — |   | — |   | (173 | ) |
| Stock based compensation expense                                                                         |       | —                |       | —                           |       | —                  |       | —       |       | 29                      |       | —                   |       | —     |       | — |   | — |   |              29  |   |
| Sale of Treasury stock                                                                                   |       | —                |       | —                           |       | —                  |       | —       |       | 1                       |       | —                   |       | 3          |       | 26 |   | — |   |              27  |   |
| Dividends declared                                                                                       |       | —                |       | —                           |       | —                  |       | —       |       | —                  |       | (397                     | )          | —     |       | — |   | — |   | (397 | ) |
|                                                                                                     |       |                  |       |                             |       |                    |       |         |       |                    |       |                     |       |       |       |   |   |   |   |   |   |
| **Balance—June 31, 2007**                                                                           | ** ** | **2,230**             | ** ** | **$**                            | **2,230**  | ** **              | **90**     | ** **   | **$**      | **90**                  | ** ** | **$**                    | **7,527**  | ** ** | **$**      | **23,421** | ** ** | **(231** | **)** | **$** | **(1,889** | **)** | **$** | **(1,000** | **)** | **$ ** | **  30,379 ** | ** ** |

 

See notes to consolidated financial statements.

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006**

**(In thousands)**
| ** **                                                                             | ** ** | **2007**        | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                             | ** ** | **(Unaudited)** | ** ** |
| **OPERATING  ACTIVITIES:**                                                             | ** ** | ** **      | ** ** | ** ** | ** ** |
| Net income                                                                             |       | $               | 1,205      |       | $          | 1,460 |   |
| **Adjustments to reconcile net income to net cash  provided by operating activities:** | ** ** | ** **      | ** ** | ** ** | ** ** |
| Provision for loan losses                                                              |       | —          |       | 30         |       |
| Depreciation                                                                           |       | 385             |       | 333        |       |
| Amortization and accretion, net                                                        |       | 164             |       | 239        |       |
| Provision for deferred income taxes (benefit)                                          |       | 488             |       | (42        | )          |
| Gain on sale of assets and investments                                                 |       | (31             | )          | (149       | )          |
| Stock based compensation expense                                                       |       | 29              |       | 22         |       |
| Change in other assets                                                                 |       | (726            | )          | 191        |       |
| Change in accrued expenses and other liabilities                                       |       | (81             | )          | (131       | )          |
|                                                                                   |       |            |       |       |       |
| Net cash provided by operating activities                                              |       | 1,433           |       | 1,953      |       |
|                                                                                   |       |            |       |       |       |
| **INVESTING  ACTIVITIES:**                                                             | ** ** | ** **      | ** ** | ** ** | ** ** |
| Proceeds from calls and maturities of investment  securities held to maturity          |       | 109             |       | 537        |       |
| Proceeds from sales and maturities of investment  securities available for sale        |       | 5,659           |       | 8,181      |       |
| Purchases of investment securities available for  sale                                 |       | (1,016          | )          | (10,577    | )          |
| Net change in other investments                                                        |       | 515             |       | 523        |       |
| Net change in loans receivable                                                         |       | (14,374         | )          | (4,467     | )          |
| Premiums paid on life insurance policy                                                 |       | —          |       | (54        | )          |
| Net proceeds from the sale of foreclosed properties                                    |       | 218             |       | 556        |       |
| Purchases of premises and equipment, net                                               |       | (563            | )          | (147       | )          |
| Proceeds from the sale of premises and equipment,  net                                 |       | 179             |       | —     |       |
| Net change in interest bearing deposits with banks                                     |       | 2,493           |       | (862       | )          |
|                                                                                   |       |            |       |       |       |
| Net cash used by investing activities                                                  |       | (6,780          | )          | (6,310     | )          |
|                                                                                   |       |            |       |       |       |
| **FINANCING  ACTIVITIES:**                                                             | ** ** | ** **      | ** ** | ** ** | ** ** |
| Net change in deposits                                                                 |       | 18,919          |       | 13,254     |       |
| Sale (purchase) of treasury stock activity                                             |       | 26              |       | (16        | )          |
| Payoff of junior subordinated debentures, net                                          |       | (5,000          | )          | —     |       |
| Net change in additional paid-in-capital                                               |       | 1               |       | 27         |       |
| Principal payments on debt                                                             |       | —          |       | (100       | )          |
| Net change in advances from Federal Home Loan Bank                                     |       | (10,356         | )          | (11,499    | )          |
| Increase in federal funds sold                                                         |       | 2,000           |       | —     |       |
| Dividends paid                                                                         |       | (397            | )          | (355       | )          |
|                                                                                   |       |            |       |       |       |
| Net cash provided by financing activities                                              |       | 5,193           |       | 1,311      |       |
|                                                                                   |       |            |       |       |       |
| Net change in cash and cash equivalents                                                |       | (154            | )          | (3,046     | )          |
|                                                                                   |       |            |       |       |       |
| Cash and and  cash equivalents, beginning of period                                    |       | 8,615           |       | 11,289     |       |
|                                                                                   |       |            |       |       |       |
| Cash and and  cash equivalents at end of period                                        |       | $               | 8,461      |       | $          | 8,243 |   |
|                                                                                   |       |            |       |       |       |
| **Supplemental  disclosures of cash paid during the period for:**                      | ** ** | ** **      | ** ** | ** ** | ** ** |
| Interest                                                                               |       | $               | 4,045      |       | $          | 3,358 |   |
|                                                                                   |       |            |       |       |       |
| Income taxes                                                                           |       | $               | 337        |       | $          | 379 |   |
|                                                                                   |       |            |       |       |       |
| **Supplemental  disclosures of noncash transactions:**                                 | ** ** | ** **      | ** ** | ** ** | ** ** |
| Real estate  acquired through foreclosure                                              |       | $               | 3,101      |       | —     |   |
| ** **                                                                             | ** ** | ** **      | ** ** | ** ** | ** ** |
| Change in  unrealized gain on investment securities available for sale, net of taxes   |       | $               | (462       | )          | $          | (679 | ) |
|                                                                                   |       |            |       |       |       |
| Cumulative  effect of adoption of fair value option (charged to Retained earnings)     |       | $               | 173        |       | $          | — |   |

 

5

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARIES**

**Notes to the Consolidated Financial Statements**

(Unaudited)

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Basis ofPresentation**

CitizensBancshares Corporation (the “Company”) is a holding company that provides afull range of commercial banking and mortgage brokerage services to individualand corporate customers in metropolitan Atlanta and Columbus, Georgia, and inBirmingham and Eutaw, Alabama, through its wholly owned subsidiary, CitizensTrust Bank (the “Bank”).  The Bankoperates under a state charter and serves its customers through sevenfull-service financial centers in metropolitan Atlanta, Georgia, onefull-service financial center in Columbus, Georgia, one full-service financialcenter in Birmingham, Alabama, and one full-service financial center in Eutaw,Alabama.  On June 26, 2007, the Companyexercised its option to have its junior subordinated debentures issued througha wholly owned subsidiary grantor trust, Citizens (GA) Statutory Trust I (the“Trust”) redeemed and retired. Upon completion of the junior subordinateddebentures redemption and windup of Trust activities, the Trust subsidiary wasdissolved.

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

The consolidatedfinancial statements of the Company for the three and six month periods endedJune 30, 2007 are unaudited.  In theopinion of management, all adjustments necessary for a fair presentation of thefinancial position and results of operations and cash flows for the six monthperiod have been included.  Alladjustments are of a normal recurring nature. All significant intercompany accounts and transactions have beeneliminated in consolidation.

**AccountingPolicies**

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

**RecentlyIssued Accounting Standards**

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

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit

6

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Pensionand Other Postretirement Plans”**(“SFAS 158”),which amends SFAS 87 and SFAS 106 to require recognition of the overfunded orunderfunded status of pension and other postretirement benefit plans on thebalance sheet. Under SFAS 158, gains and losses, prior service costs andcredits, and any remaining transition amounts under SFAS 87 and SFAS 106 thathave not yet been recognized through net periodic benefit cost will berecognized in accumulated other comprehensive income, net of tax effects, untilthey are amortized as a component of net periodic cost. The measurement date —the date at which the benefit obligation and plan assets are measured — isrequired to be the company’s fiscal year end. SFAS 158 is effective forpublicly-held companies for fiscal years ending after December 15, 2006,except for the measurement date provisions, which are effective for fiscalyears ending after December 15, 2008. The Company does not have a defined benefitpension plan. Therefore, SFAS 158 will not impact the Company’s financialcondition or results of operations.

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

InSeptember 2006, the FASB ratified the consensus reached related to EITF 06-5,**“Accounting for Purchases of Life Insurance—Determining theAmount That Could Be Realized in Accordance with FASB Technical Bulletin No.85-4, Accounting for Purchases of Life Insurance.”  EITF 06-5 states thata policyholder should consider any additional amounts included in thecontractual terms of the insurance policy other than the cash surrender valuein determining the amount that could be realized under the insurancecontract.  EITF 06-5 also states that a policyholder should determine theamount that could be realized under the life insurance contract assuming thesurrender of an individual-life by individual-life policy (or certificate bycertificate in a group policy). EITF 06-5 is effective for fiscal yearsbeginning after December 15, 2007.  The Company is currently analyzing theeffect of the adoption of EITF 06-5 on its financial position, results ofoperations and cash flows.

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

7

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**2.  ADOPTION OF STOCK STATEMENT OF FINANCIALACCOUNTING STANDARDS NO. 159 (SFAS 159)“THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES”**

To improve the financial reporting of its financial liabilities, theCompany has elected to adopt SFAS 159 early. The Company has several types of advances from the Federal Home LoanBank (FHLB), which are reflected on its balance sheet as a mixture of fairvalue and book value.  The early adoptionof SFAS 159 allows the Company to reflect its total outstanding advances atfair value.  The fair value presentationof FHLB advances is consistent with the reporting of the Company’s otherborrowed funds, which approximate fair value.
| Description                                                                           | ** ** | **Balance at  1/1/07  prior to  Adoption** | ** ** | **Net Loss  upon  Adoption** | ** ** | **Balance at  1/1/07  after  Adoption** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------|------------|
|                                                                                  |       |                                                 |       |                              |       |                                         |       |
| Advances from Federal  Home Loan Bank                                                 |       | $                                                    | 10,000     |                              | $          | 262                                          |       | $ | 10,262 |   |
|                                                                                  |       |                                                 |       |                              |       |                                         |       |
| Pretax cumulative  effect of adoption of the fair value option                        |       |                                                 |       | 262                               |       |                                         |       |
|                                                                                  |       |                                                 |       |                              |       |                                         |       |
| Decrease in deferred  tax asset                                                       |       |                                                 |       | (89                               | )          |                                         |       |
|                                                                                  |       |                                                 |       |                              |       |                                         |       |
| Cumulative effect of  adoption of the fair value option (charge to retained earnings) |       |                                                 |       | $                                 | 173        |                                         |       |   |
|                                                                                       |            |                                                      |            |                                   |            |                                              |            |  |  |  |

 

Inconnection with the adoption of SFAS 159 the Company was required to adopt Statementof Financial Accounting Standards No. 157, “Fair Value Measurement” (SFAS157).   SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.  The following table summarizes quantitativedisclosures about the fair value measurement for each category of assetscarried at fair value as of June 30, 2007.
| Description   | ** ** | **6/30/2007** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** |
|---------------|------------|---------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------|------------|
|          |       |          |       |                                                                                                |       |                                                           |       |                                     |       |
| FHLB Advances |       | $             | 16,651     |                                                                                                | $          | —                                                         |       | $                                        | 163        |   | $ | — |   |
|          |       |          |       |                                                                                                |       |                                                           |       |                                     |       |
| Total         |       | $             | 16,651     |                                                                                                | $          | —                                                         |       | $                                        | 163        |   | $ | — |   |

 

8

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Thefollowing tables reflect the changes in fair values for the three and six monthperiods ended June 30, 2007 and where these changes are included in the incomestatement.

**Three Months ended June 30, 2007**
| Description                         | ** ** | **Noninterest  income** | ** ** | **Total change in  Fair Value  included in  current earnings** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| FHLB Advances                       |       | $                       | 111        |                                                                                    | $          | 111 |   |
|                                |       |                    |       |                                                                                    |       |
| Total                               |       | $                       | 111        |                                                                                    | $          | 111 |   |
|                                |       |                    |       |                                                                                    |       |
| **Six  Months ended June 30, 2007** | ** ** | ** **              | ** ** | ** **                                                                              | ** ** |
|                                |       |                    |       |                                                                                    |       |
| FHLB Advances                       |       | $                       | 99         |                                                                                    | $          | 99 |   |
|                                |       |                    |       |                                                                                    |       |
| Total                               |       | $                       | 99         |                                                                                    | $          | 99 |   |

 

**3.  INTANGIBLE ASSETS**

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

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

The followingtable presents information about the Company’s intangible assets at (inthousands):
|                                | ** ** | **June 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated**

**Amortization** | ** ** |
|                           |       |                            |       |                            |       |   |   |   |   |
| Unamortized  intangible asset: |       |                            |       |                            |       |   |   |   |   |
| Goodwill                       |       | $                               | 362        |                            | $          | — |   | $ | 362 |   | $ | — |   |
|                           |       |                            |       |                            |       |   |   |   |   |
| Amortized  intangible assets:  |       |                            |       |                            |       |   |   |   |   |
| Core deposit intangibles       |       | $                               | 2,836      |                            | $          | 2,685 |   | $ | 2,836 |   | $ | 2,600 |   |

 

9

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The followingtable presents information about aggregate amortization expense (in thousands):
| ** **                                                                                               | ** ** | **For the 3  months ended  June 30, 2007** | ** ** | **For the 6  months ended  June 30, 2007** | ** ** | **For the 3  months ended  June 30, 2006** | ** ** | **For the 6  months ended  June 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
|                                                                                                     |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
| Aggregate  amortization expense of core deposit intangibles:                                             |       | $                                                                   | 13         |                                                                | $          | 85                                                                  |       | $                                                                   | 101        |   | $ | 202 |   |
|                                                                                                     |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
| Estimated  aggregate amortization expense of core deposit intangibles for the years  ending December 31: |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
|                                                                                                     |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
| 2007                                                                                                     |       | $                                                                   | 112        |                                                                |       |                                                                |       |                                                                |       |   |
| 2008                                                                                                     |       | $                                                                   | 53         |                                                                |       |                                                                |       |                                                                |       |   |
| 2009                                                                                                     |       | $                                                                   | 53         |                                                                |       |                                                                |       |                                                                |       |   |
| 2010                                                                                                     |       | $                                                                   | 18         |                                                                |       |                                                                |       |                                                                |       |   |
|                                                                                                          |            |                                                                     |            |                                                                     |            |                                                                     |            |                                                                     |            |  |  |  |  |

 

**4.  COMPREHENSIVE INCOME**

Comprehensiveincome includes: (1) reported net income and (2) unrealized gains and losses onmarketable securities.  The followingtable shows our comprehensive income (in thousands):
|                                    | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Income                         |       | $                                                     | 670        |                                          | $          | 780 |   | $ | 1,205 |   | $ | 1,460 |   |
|                               |       |                                                  |       |                                          |       |   |   |   |   |
| Other  comprehensive income (loss) |       | (560                                                  | )          | (673                                          | )          | (462 | ) | (680 | ) |
|                               |       |                                                  |       |                                          |       |   |   |   |   |
| Comprehensive  income              |       | $                                                     | 110        |                                          | $          | 107 |   | $ | 743 |   | $ | 780 |   |

 

**5.**                      STOCK OPTIONS

**2007 Option**—OnApril 25, 2007, the Company granted its president and certain officers optionsto purchase 34,500 shares of common stock of the Company at an exercise priceof $10.50 per share (the “2007 Option”), as compared to trades of stock at$10.50 per share on the date of grant. The 2007 Option vests at a rate of 33.3% per year, commencing on April25, 2008. The option’s term is ten years from the date of grant, and at June 30,2007, 34,500 options to purchase shares under the 2007 Option remainedoutstanding.  There were no optionsissued in the first quarter of 2007.

The fair value of the2007 Option grant was estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions: dividend yield of 1.74%;expected volatility of 29%; risk free interest rate of 4.66% and an expectedlife of six years. The fair value of the 2007 Option grant was approximately$68,000 which includes options that are expected to be forfeited.

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A summary of the statusof the Company’s stock options is presented below.  There was no stock option activity during thefirst quarter of 2007; therefore, the table below represents both the threemonth and six month periods ended June 30, 2007.
|                                       | ** ** | **For the 3 months and 6 months ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **June 30, 2007**                                                | ** ** |
| ** **                            | ** ** | **Shares**                                                                 | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** |
| ** **                            | ** ** | ** **                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding—beginning  of period |       | 73,176                                                                     |       | $ | 10.92 |   | 6.92 years |   |
|                                  |       |                                                                       |       |   |   |   |   |
| Granted                               |       | 34,500                                                                     |       | 10.50 |   |   |   |
|                                  |       |                                                                       |       |   |   |   |   |
| Expired/Terminated                    |       | —                                                                     |       | — |   |   |   |
|                                  |       |                                                                       |       |   |   |   |   |
| Outstanding—end  of period       |       | 107,676                                                                    |       | $ | 10.80 |   | 7.39 years |   |
|                                  |       |                                                                       |       |   |   |   |   |
| Options exercisable at  end of period |       | 57,676                                                                     |       | $ | 10.63 |   |   |   |

 

The following table summarizes information about stockoptions outstanding under the Company’s plan at June 30, 2007:
|                                     | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average Grant Day  Fair Value** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-vested—beginning  of year  |       | 30,667     |       | $ | 4.35 |   | $ | 79,677 |   |
|                                |       |       |       |   |   |   |   |
| Outstanding—beginning  of year |       | 73,176     |       |   |   |   |   |
|                                |       |       |       |   |   |   |   |
| Granted                             |       | 34,500     |       | $ | 3.27 |   |   |   |
| Exercised                           |       | —     |       |   |   |   |   |
| Expired/Terminated                  |       | —     |       |   |   |   |   |
|                                |       |       |       |   |   |   |   |
| Outstanding—end  of year       |       | 107,676    |       |   |   |   |   |
|                                |       |       |       |   |   |   |   |
| Exercisable                         |       | 57,676     |       |   |   | $ | 46,466 |   |
|                                |       |       |       |   |   |   |   |
| Non-vested—at year-end         |       | 50,000     |       | $ | 3.61 |   | $ | 46,466 |   |

 

The total fair value of options vested at June 30,2007 and December 31, 2006 was $67,323, and $46,177, respectively.

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

Basic and diluted net income per common and potentialcommon share has been calculated based on the weighted average number of sharesoutstanding.  The following schedulereconciles the numerator and denominator of the basic and diluted net incomeper common and potential common share for the three and six month periods endedJune 30, 2007 and 2006 (in thousands, except per share data):
|                                                                   | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|----------------------------|------------|
|                                                              |       |                             |       |                      |       |                       |       |
| **Three Months ended June 30,  2007**                             | ** ** | ** **                       | ** ** | ** **                | ** ** | ** **                 | ** ** |
|                                                              |       |                             |       |                      |       |                       |       |
| Basic earnings per  share                                         |       | $                                | 670        |                      | 2,089      |                       | $          | 0.32 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —                           |       | —                    |       | —                     |       |
|                                                              |       |                             |       |                      |       |                       |       |
| Diluted earnings per  share                                       |       | $                                | 670        |                      | 2,089      |                       | $          | 0.32 |   |
|                                                              |       |                             |       |                      |       |                       |       |
| **Three Months ended June 30,  2006**                             | ** ** | ** **                       | ** ** | ** **                | ** ** | ** **                 | ** ** |
|                                                              |       |                             |       |                      |       |                       |       |
| Basic earnings per  share                                         |       | $                                | 780        |                      | 2,089      |                       | $          | 0.37 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —                           |       | 14                        |       | —                     |       |
|                                                              |       |                             |       |                      |       |                       |       |
| Diluted earnings per  share                                       |       | $                                | 780        |                      | 2,103      |                       | $          | 0.37 |   |
|                                                              |       |                             |       |                      |       |                       |       |
| **Six Months ended June 30, 2007**                                | ** ** | ** **                       | ** ** | ** **                | ** ** | ** **                 | ** ** |
|                                                              |       |                             |       |                      |       |                       |       |
| Basic earnings per  share                                         |       | $                                | 1,205      |                      | 2,088      |                       | $          | 0.58 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —                           |       | —                    |       | —                     |       |
|                                                              |       |                             |       |                      |       |                       |       |
| Diluted earnings per  share                                       |       | $                                | 1,205      |                      | 2,088      |                       | $          | 0.58 |   |
|                                                              |       |                             |       |                      |       |                       |       |
| **Six Months ended June 30, 2006**                                | ** ** | ** **                       | ** ** | ** **                | ** ** | ** **                 | ** ** |
|                                                              |       |                             |       |                      |       |                       |       |
| Basic earnings per  share                                         |       | $                                | 1,460      |                      | 2,089      |                       | $          | 0.70 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —                           |       | 12                        |       | (0.01                      | )          |
|                                                              |       |                             |       |                      |       |                       |       |
| Diluted earnings per  share                                       |       | $                                | 1,460      |                      | 2,101      |                       | $          | 0.69 |   |

 

**RECLASSIFICATIONS**

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

12

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

**INTRODUCTION**

CitizensBancshares Corporation (the “Company”) is a holding company that provides afull range of commercial banking and mortgage brokerage services to individualsand corporate customers in its primary market areas, metropolitan Atlanta andColumbus, Georgia, and Birmingham and Eutaw, Alabama through its wholly ownedsubsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 10 full-service financialcenters in Georgia and Alabama.  TheCompany also operated a wholly owned subsidiary grantor trust, Citizens (GA)Statutory Trust I (the “Trust”) through the issuance of pooled trust preferredsecurities.  On June 26, 2007, theCompany exercised its option to have the junior subordinated debenturesredeemed and retired. Upon completion of the junior subordinated debenturesredemption and windup of Trust activities, the Trust subsidiary was dissolved.

**Forward Looking Statements**

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

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

The followingdiscussion is of the Company’s financial condition as of June 30, 2007 and thechanges in the financial condition and results of operations for the three andsix month periods ended June 30, 2007 and 2006.

**CriticalAccounting Policies**

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

13

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

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

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

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

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

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

**FINANCIAL CONDITION**

At June 30, 2007, theCompany’s total assets increased by $6 million or 2 percent to $341,003,000 dueto a 5 percent growth in loans receivable, net.

Loans receivable, netincreased by $11 million to $229,278,000 compared to the year ended December31, 2006 despite not renewing two significant lending relationships totalingover $4.2 million due to weakening financial conditions of the borrowers andthe transfer of a $2.6 million loan to foreclosed real estate.  Both of these transactions took place earlierin the year, during the first quarter. Due to the current economic conditions,the Company is being more conservative in its

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lending criteria and isactively managing its loan portfolio to prevent significant losses. Thisincrease in Loans receivable, net was partially offset by a $2 million decreasein Interest-bearing deposits with banks and $6 million in investment securitiesas these funds were shifted into loans which offer higher yields.

The increase inforeclosed real estate, as mentioned above, is primarily due to the collateralseized on a $2.6 million troubled loan. The collateral has an “as is” liquidated value of $3,039,000 and an “asis” value of $3,971,000.  The Company isin the process of selling the collateral.

Total liabilitiesincreased $5.6 million to $311 million at June 30, 2007 compared to $305million at December 31, 2006. This increase is primarily due to a $19 millionincrease in total deposits.  Advancesfrom Federal Home Loan Bank (FHLB), another significant component of totalliabilities, decreased $10 million to $17 million and Junior subordinateddebentures decreased by $5.2 million at June 30, 2007.  The Company used the excess liquiditygenerated from its deposit growth to paydown its outstanding borrowings withthe FHLB and to retire its Junior subordinated debentures to reduce the yieldits pays on interest-bearing liabilities.

**INVESTMENTSECURITIES**

The composition ofthe Company’s investment securities portfolio reflects the Company’s investmentstrategy of maximizing portfolio yields commensurate with risk and liquidityconsiderations. The primary objectives of the Company’s investment strategy areto maintain an appropriate level of liquidity and provide a tool to assist incontrolling the Company’s interest rate sensitivity position, while at the sametime producing adequate levels of interest income.

The Companyinvests a portion of its assets in U.S. government sponsored agency securities,state, county and municipal securities, and mortgage backed bonds.  At June 30, 2007 and December 31, 2006, theCompany’s investment securities portfolio represented approximately 22% and24%, respectively, of total assets.

Investmentsecurities available for sale are summarized as follows (in thousands):
| At June 30, 2007              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                         |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored  enterprises securities |       | $                   | 6,942      |                         | $          | —                        |       | $                   | 112        |   | $ | 6,830 |   |
| State, county,  and municipal securities     |       | 17,279              |       | 42                           |       | 332                           |       | $                   | 16,989     |   |
| Mortgage-backed  securities                  |       | 42,192              |       | 27                           |       | 1,140                         |       | $                   | 41,079     |   |
| Totals                                       |       | $                   | 66,413     |                         | $          | 69                            |       | $                   | 1,584      |   | $ | 64,898 |   |

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

 

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Investment securities held to maturity are summarizedas follows (in thousands):
| At June 30, 2007              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                         |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored  enterprises securities |       | $                   | 3,000      |                         | $          | —                        |       | $                   | 77         |   | $ | 2,923 |   |
| State, county,  and municipal securities     |       | 4,257               |       | 13                           |       | 12                            |       | 4,258               |       |
| Mortgage-backed  securities                  |       | 803                 |       | —                       |       | 36                            |       | 767                 |       |
|                                         |       |                |       |                         |       |                          |       |                |       |
| Totals                                       |       | $                   | 8,060      |                         | $          | 13                            |       | $                   | 125        |   | $ | 7,948 |   |

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

 

Securities classified as available-for-sale are recorded at fair marketvalue and held-to-maturity securities are recorded at amortized cost.  The Company evaluates its investment portfolioperiodically to identify any impairment that is other than temporary.  At June 30, 2007, the Company had severaldebt securities that have been in an unrealized loss position for twelve monthsor more.  The Company has the ability andintent to hold these securities until such time as the value recovers or thesecurities mature.  The Company believes,based on industry analyst reports and credit ratings, that the deterioration invalue is attributable to changes in market interest rates and is not in the creditquality of the issuer and therefore, these losses are not considered other thantemporary.

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

Other investmentsconsist of Federal Home Loan Bank and Federal Reserve Bank stock which arerestricted and have no readily determine market value.  The Company is required to maintain aninvestment in the FHLB and FRB as part of its membership conditions. The levelof investments is determined by the amount of outstanding advances at the FHLBand 6 percent of the par value of the bank’s common stock outstanding andpaid-in-capital.  These investments arecarried at cost.

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##### **LOANS**

Loans outstanding,by classification, are summarized as follows (in thousands):
|                                          | ** **                 | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------|----------------------------|-------------------------|------------|-----------------------------|------------|
|                                     |                       |                    |       |                        |       |
| Commercial,  financial, and agricultural |                       | $                       | 13,888     |                        | $          | 15,486 |   |
| Installment                              |                       | 12,464                  |       | 12,244                      |       |
| Real estate -  mortgage                  |                       | 166,752                 |       | 162,092                     |       |
| Real estate -  construction              |                       | 37,402                  |       | 29,386                      |       |
| Other                                    |                       | 2,121                   |       | 2,229                       |       |
|                                     | Loans receivable           |                    | 232,627    |                        | 221,437    |   |
| Less:                                    | Net deferred  loan fees    |                    | 313        |                        | 325        |   |
|                                     | Allowance for  loan losses |                    | 3,038      |                        | 3,109      |   |
|                                     |                       |                    |       |                        |       |   |
|                                     | Loans  receivable, net     |                    | $          | 229,276                     |       | $ | 218,003 |   |

 

The classificationReal estate – mortgage consists of home equity loans, mortgages on 1 – 4 familyresidential, multifamily residential, and nonfarm residential properties suchas churches, hotels, and convenience stores.

**NONPERFORMINGASSETS**

Nonperformingassets include nonperforming loans, real estate acquired through foreclosure,and repossessed assets.  At June 30, 2007there were no repossessed assets. Nonperforming loans consist of loans that arepast due with respect to principal or interest more than 90 days and have beenplaced on nonaccrual status.

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

Nonperformingassets increased during the first six months of 2007 by $3,617,000 to$7,465,000 at June 30, 2007 from $3,848,000 at December 31, 2006.  This increase is primarily related to a $2.6million loan secured by real estate that the Company foreclosed and transferredto foreclosed real estate.  The value ofthe collateral pledged to this loan has an “as is” liquidated value of$3,039,000 and an “as is” value of $3,971,000. The Company is in the process of selling the collateral and does notexpect a loss on the sale of the property. The remaining increase in nonperforming assets relates to nonperformingmortgage loans.  Management is in theprocess of foreclosing these properties. The Company does not expect any significant losses as many of theseproperties have private mortgage insurance and/or sufficient market value tooffset the principal balance outstanding.

Nonperformingassets represents 3.17% of loans, net of unearned income, discounts, and realestate acquired through foreclosure at June 30, 2007 as compared to 1.74% atDecember 31, 2006.  At June

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30, 2007,$1,843,000 of the $4,393,000 in nonperforming loans was guaranteed by the U.S.Government through the Small Business Administration Program.

The table below presents a summary of theCompany’s nonperforming assets at June 30, 2007 and December 31, 2006.
| ** **                                                                                                       | ** ** | **June 30,  2007**                                     | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                       | ** ** | **(in thousands, except  financial ratios)** | ** ** |
| Nonperforming assets:                                                                                            |       |                                                        |       |                        |       |
| Nonperforming loans:                                                                                             |       |                                                        |       |                        |       |
| Nonaccrual loans                                                                                                 |       | $                                                           | 4,393      |                        | $          | 3,718 |   |
| Past-due loans  of 90 days or more                                                                               |       | —                                                      |       | —                      |       |
| Nonperforming  loans                                                                                             |       | 4,393                                                       |       | 3,718                       |       |
|                                                                                                             |       |                                                        |       |                        |       |
| Real estate acquired  through foreclosure                                                                        |       | 3,072                                                       |       | 130                         |       |
| Total  nonperforming assets                                                                                      |       | $                                                           | 7,465      |                        | $          | 3,848 |   |
|                                                                                                             |       |                                                        |       |                        |       |
| Ratios:                                                                                                          |       |                                                        |       |                        |       |
| Nonperforming loans to  loans, net of unearned income and discount on loans                                      |       | 1.89                                                        | %          | 1.68                        | %          |
|                                                                                                             |       |                                                        |       |                        |       |
| Nonperforming assets to  loans, net of unearned income, discounts, and real estate acquired through  foreclosure |       | 3.17                                                        | %          | 1.74                        | %          |
|                                                                                                             |       |                                                        |       |                        |       |
| Nonperforming assets to  total assets                                                                            |       | 2.19                                                        | %          | 1.15                        | %          |
|                                                                                                             |       |                                                        |       |                        |       |
| Allowance for loan  losses to nonperforming loans                                                                |       | 69.14                                                       | %          | 83.61                       | %          |
|                                                                                                             |       |                                                        |       |                        |       |
| Allowance for loan losses to nonperforming assets                                                                |       | 40.69                                                       | %          | 80.78                       | %          |

 

**ALLOWANCEFOR LOAN LOSSES**

The allowance forloan losses is primarily available to absorb losses inherent in the loanportfolio. Credit exposures deemed uncollectible are charged against theallowance for loan losses.

The Companyprovides for estimated losses on loans receivable when any significant andpermanent decline in value occurs.  Theseestimates for losses are based on individual assets and their cash flowforecasts, sales values, independent appraisals, the volatility of certain realestate markets, and concern for disposing of real estate in distressedmarkets.  For loans that are pooled forpurposes of determining the necessary provisions, estimates are based on loantypes, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine theprovision for losses is subject to the reasonableness of these estimates. Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a semi-annual basis an independent review of the adequacy ofallowance for loan losses is performed. This assessment is made in the context of historical losses as well asexisting economic conditions, and individual concentrations of credit.

Loans are chargedagainst the allowance when, in the opinion of management, such loans are deemeduncollectible and subsequent recoveries are added to the allowance.  For the six month

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period ended June 30,2007, management determined that no additions to the provision for loan losseswere necessary.  For the same period in2006, the Company added $30,000 to the provision for loan losses.

The allowance forloan losses at June 30, 2007 was approximately $3,038,000, representing 1.31%of total loans, net of unearned income and discounts compared to approximately$3,109,000 at December 31, 2006, which represented 1.50% of total loans, net ofunearned income and discounts.

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

A substantial portion of the Company’s loan portfoliois secured by real estate in the metropolitan Atlanta and Birmingham markets,including a concentration of loans to churches and convenience stores.  The Company’s outstanding church loans wereapproximately $47 million at June 30, 2007 compared to $38 million at December31, 2006.  The Company’s loans to areaconvenience stores were approximately $13 million at June 30, 2007 and December31, 2006, respectively.  Theseconcentrations of loans are performing in accordance with their respective loanagreements.

Also at June 30, 2007, 1 –4 family residential mortgage loans, secured by first liens, were approximately$43 million. The Company’s 1 – 4 family residential lending philosophy isfairly conservative, requiring a minimum of 10 percent equity and PrivateMortgage Insurance on any loan with a loan-to-value ratio higher than 80percent that was originated over the last several years.  The Company brokered or sold 1 – 4 familyresidential mortgage loans that required origination into the more exoticproducts such as interest-only, step-payment, stated-income, or reduceddocumentation loans. The ultimate collectibility of a significant portion ofthe Company’s loan portfolio is susceptible to changes in market conditions inthe metropolitan Atlanta and Birmingham areas and management does not believethat sub-prime lending activity is a factor.

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The followingtable summarizes loans, changes in the allowance for loan losses arising fromloans charged off, recoveries on loans previously charged off by loan category,and additions to the allowance which have been charged to operating expense asof and for the six month periods ended June 30, 2007 and 2006 (amount inthousands, except financial ratios):
| ** **                                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                    |       |     |       |     |       |
| Loans, net of unearned  income and discounts                                                                            |       | $        | 232,315    |     | $          | 222,883 |   |
|                                                                                                                    |       |     |       |     |       |
| Average loans, net of  unearned income, discounts and the allowance for loan losses                                     |       | $        | 215,331    |     | $          | 216,706 |   |
|                                                                                                                    |       |     |       |     |       |
| Allowance for loan  losses at the beginning of period                                                                   |       | $        | 3,109      |     | $          | 3,327 |   |
|                                                                                                                    |       |     |       |     |       |
| Loans charged-off:                                                                                                      |       |     |       |     |       |
| Commercial, financial,  and agricultural                                                                                |       | 53       |       | —   |       |
| Real estate - loans                                                                                                     |       | 99       |       | 142      |       |
| Installment loans to  individuals                                                                                       |       | 90       |       | 121      |       |
| Total loans charged-off                                                                                                 |       | 242      |       | 263      |       |
|                                                                                                                    |       |     |       |     |       |
| Recoveries of loans  previously charged off:                                                                            |       |     |       |     |       |
| Commercial, financial,  and agricultural                                                                                |       | 32       |       | 29       |       |
| Real estate - loans                                                                                                     |       | 102      |       | 60       |       |
| Installment loans to  individuals                                                                                       |       | 37       |       | 32       |       |
| Total loans recovered                                                                                                   |       | 171      |       | 121      |       |
|                                                                                                                    |       |     |       |     |       |
| Net loans charged-off                                                                                                   |       | 71       |       | 142      |       |
|                                                                                                                    |       |     |       |     |       |
| Additions to allowance  for loan losses charged to operating expense                                                    |       | —   |       | 30       |       |
|                                                                                                                    |       |     |       |     |       |
| Allowance for loan  losses at period end                                                                                |       | $        | 3,038      |     | $          | 3,215 |   |
|                                                                                                                    |       |     |       |     |       |
| Ratio of net loans  charged-off to average loans, net of unearned income, discounts, and the  allowance for loan losses |       | 0.03     | %          | 0.07     | %          |
|                                                                                                                    |       |     |       |     |       |
| Ratio of allowance for loan losses to loans, net of unearned income  and discounts                                      |       | 1.31     | %          | 1.44     | %          |

 

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**DEPOSITS**

Deposits are theCompany’s primary source of funding loan growth.  Total deposits at June 30, 2007 increased by7% or $18,920,000 to $287,940,000, driven by interest-bearing deposits whichincreased by 7% or $13,733,000.  Theincrease in total deposits is primarily attributed to Corporate andGovernmental customers who make significant monthly deposits and withdrawalsbased on their budgetary needs.  Inaddition, the Company has an ongoing sales program which places specificemphasis on deposit growth.

The following is asummary of interest-bearing deposits (in thousands):
|                                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                               |       |                    |       |                        |       |
| NOW and money  market accounts     |       | $                       | 66,421     |                        | $          | 64,850 |   |
| Savings accounts                   |       | 34,994                  |       | 36,101                      |       |
| Time deposits of  $100,000 or more |       | 66,907                  |       | 51,650                      |       |
| Other time deposits                |       | 54,169                  |       | 56,157                      |       |
|                               |       | $                       | 222,491    |                        | $          | 208,758 |   |

 

**OTHERBORROWED FUNDS**

While the Companycontinues to emphasize funding earning asset growth through deposits, theCompany has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal Home LoanBank (the “FHLB”) advances and short-term borrowings.  The Bank had outstanding advances from theFHLB of $16,651,000 at June 30, 2007 and $26,746,000 at December 31, 2006.   The following advances are collateralized bya blanket lien on the Company’s 1-4 family mortgage loans.
| Maturity                             | ** ** | **Callable** | ** ** | **Type**   | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|--------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2007                            |       | Daily        |       | Variable   |       | 5.63                        | %          | $                               | 6,100,000  |   | 5.50 | % | $ | 16,350,000 |   |
| April 2010                           |       | Quarterly    |       | Fixed      |       | 5.82                        | %          | 10,163,000                      |       | 5.82 | % | 10,000,000 |   |
| August 2026                          |       |         |       | (1         | )          | —                      |       | 388,000                         |       |   |   | 396,000 |   |
|                                 |       |         |       |       |       |                        |       |                            |       |   |   |   |   |
| Total Principal  Outstanding         |       |         |       |       |       |                        |       | $                               | 16,651,000 |   |   |   | $ | 26,746,000 |   |
|                                 |       |         |       |       |       |                        |       |                            |       |   |   |   |   |
| Weighted Average Rate  at Period End |       |         |       |       |       | 5.61                        | %          |                            |       | 5.54 | % |   |   |

 

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(1)    Representsan Affordable Housing Program (AHP) award used to subsidized loans forhomeownership or rental initiatives.  TheAHP is a principal reducing credit, scheduled to mature on August 17, 2026 withan interest rate of zero.

The Company had anunsecured note payable of approximately $340,000 at June 30, 2007 and December31, 2006.  The note bears interest at arate of 7.75% (the lender’s prime rate minus 50 basis points).

During 2002, the Company issued $5 million of pooled trust preferredsecurities through one issuance by a wholly owned subsidiary grantor trust,Citizens (GA) Statutory Trust I (the “Trust”). The trust preferred securitiesaccrued and paid distributions periodically at an annual rate as provided inthe

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indentures of the London Interbank Offered Rate plus 3.45%. The Trustused the net proceeds from the offering to purchase a like amount of JuniorSubordinated Debentures (the “Debentures”) of the Company. These securities arereported in our consolidated balance sheet as Junior Subordinated Debentures.  The trust preferred securities weremandatorily redeemable upon the maturity of the Debentures on June 26, 2032, orupon earlier redemption as provided in the indentures beginning June 26,2007.  The Company had the right toredeem the Debentures in whole or in part or after specific dates, at aredemption price specified in the indentures plus any accrued but unpaidinterest to the redemption date.  On June26, 2007, the Company exercised its right to redeem the Debentures in whole. The interest rate on the junior subordinated debenture at the time ofredemption was 8.82%.

**RESULTSOF OPERATIONS**

**Net Interest Income:**

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

Net interest income decreased by $210,000 to$3,494,000 for the second quarter of 2007 compared to $3,704,000 for the sameperiod in 2006.  On a year-to-date basis,net interest income decreased by $314,000. These decreases are the results of the Company operating in a difficultinterest rate environment of a flat to inverted yield curve throughout 2007,which has increased the Company’s funding cost and lowered its net margin.

For the second quarter of 2007, the Companyexperienced growth in its earnings assets and total interest income increasedby $90,000; however, this increase was offset by a $300,000 increase in totalinterest expense driven by increases in deposit costs.  Similarly, for the six month period endedJune 30, 2007, total interest income increased by $343,000 or 3% and was offsetby a $687,000 increase in total interest expense compared to the same period in2006.

The Company has an asset/liability managementprogram which monitors the Company’s interest rate sensitivity and to ensurethe Company is competitive in the loans and deposit market.  The Company also performs periodic reviews toensure its banking services and products are priced appropriately.  As a result of its asset/liability managementprogram, on June 26, 2007 the Company retired its junior subordinateddebentures which carried an interest rate of 8.82 percent during 2007.  This funding was replaced by lower costdeposits.  The Company continues tomonitor its asset/liability mix and will make changes as appropriate to ensureit is properly positioned to react to changing interest rates and inflationarytrends.

**Provision for loan losses**

For the six months periodin 2007, management determined that no additions to the provisions for loanlosses were necessary compared to a $30,000 provision for the same period in2006. No provisions for loan losses were made in the second quarter of 2007 or2006. The provision for loan losses and the resulting allowance for loan lossesare 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 individualloans, concentrations of loans to specific borrowers or industries, andeconomic conditions.  The allowance forloan losses was $3,038,000 at June 30, 2007 compared to $3,109,000 at December31, 2006.  At June 30, 2007, theallowance for loan losses was 69 percent of the

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nonperforming loanscompared to 84 percent at December 31, 2006. At June 30, 2007, the Company considered its allowance for loan lossesto be adequate.

**Noninterest income:**

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

Noninterest income totaled $1,217,000 for thethree month period ended June 30, 2007, a decrease of $111,000 or 8% comparedwith the same period ended June 30, 2006. This decrease is primarily attributedto decreases of $95,000 and $123,000 in service charges on deposit and gains onsales of securities, respectively.  Thesedecreases were partially offset by increases in gains on sale of assets andother noninterest income of $65,000 and 42,000, respectively.

For the six month period ended June 30, 2007,noninterest income decreased by $377,000 to $2,246,000.  This reduction is primarily due to a decreasein overdraft fees which are a significant component of service charges ondeposit.   Overdrafts fees decreased by$186,000 to $836,000 compared to $1,022,000 for the same six month period lastyear.  Overdraft fees, due to theirnature, fluctuate monthly based on the short-term loan need of thecustomers.  Gains on the sales ofsecurities also decreased in the six month period of 2007 by $159,000.  The Company swapped the tail-end of severalmortgage-backed securities at a loss of $33,000 in 2007 and placed the fundsinto higher yielding earning assets compared to a gain of $126,000 for the sameperiod last year.

**Noninterest expense**:

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

Noninterest expense decreased 4% for the secondquarter and for the first six months of 2007 compared to the same periods lastyear.  The decrease is due to the Company’sstrategy started last year to reduce overhead cost and improve the efficiencythroughout its financial centers network.

Noninterest expense totaled $3,873,000 for thesecond quarter of 2007, a decrease of $168,000 compared to the same period lastyear.  This decrease is attributed to a$166,000 or 11 percent decrease in other noninterest expense during the secondquarter of 2007.

For the six month period ended June 30, 2007,noninterest expense decreased $323,000 or 4% compared to the same period last year.  Salaries and employee benefits decreased$177,000 as the Company reduced its average full-time employees to 135 comparedto an average of 142 full-time employees during the same period last year.  Occupancy and equipment expenses decreased$30,000 for the six month period.  InMarch 2007, the Company sold a former financial center building for a gain of$3,600.  Other operating expensesdecreased $116,000 compared to the same period last year.  Other operating expenses includes a $200,000award levied against the Company by the Superior Court of DeKalb County,Georgia for attorney fees associated with a former court case decided againstthe Company.  The Company considers theattorney fees awarded to be excessive and unwarranted considering the amount ofthe judgment awarded by the jury in the case, and is appealing to have the feereversed.

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**INTEREST RATE SENSITIVITY MANAGEMENT**

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

One method ofmeasuring the impact of interest rate sensitivity is the cumulative gapanalysis.  The difference betweeninterest rate sensitive assets and interest rate sensitive liabilities atvarious time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitive pressuresand the needs of the Company’s customers. In addition, various assets and liabilities indicated as repricingwithin the same period may in fact reprice at different times within suchperiod and at different rates. The following table shows the contractualmaturities of all investment securities at June 30, 2007.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market, and savings accounts in thethree month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

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The followingtable sets forth the distribution of the repricing of the Company’s interestrate sensitive assets and interest rate sensitive liabilities as of June 30,2007.
| ** **                                                              | ** ** | **Cumulative amounts as of June 30, 2007  Maturing and repricing within** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **3  Months**                                                                                                          | ** ** | **3 to 12  Months** | ** ** | **1 to 5  Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **(amounts in thousands, except ratios)**                                                          | ** ** |
| Interest-sensitive  assets:                                             |       |                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits with other banks                              |       | $                                                                                                                      | 2,095      |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,095 |   |
| Certificates of deposit                                                 |       | —                                                                                                                 |       | 100 |   | — |   | — |   | 100 |   |
| Investments                                                             |       | —                                                                                                                 |       | 2,233 |   | 11,601 |   | 59,124 |   | 72,958 |   |
| Loans                                                                   |       | 60,778                                                                                                                 |       | 48,715 |   | 80,799 |   | 42,336 |   | 232,628 |   |
| Total interest-sensitive assets                                         |       | $                                                                                                                      | 62,873     |   | $ | 51,048 |   | $ | 92,400 |   | $ | 101,460 |   | $ | 307,781 |   |
|                                                                    |       |                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                                                                      | 136,339    |   | $ | 67,468 |   | $ | 15,688 |   | $ | 2,996 |   | $ | 222,491 |   |
| Notes payable                                                           |       | —                                                                                                                 |       | 340 |   | — |   | — |   | 340 |   |
| Junior subordinated debentures                                          |       | —                                                                                                                 |       | — |   | — |   | — |   | — |   |
| Other borrowings                                                        |       | 6,100                                                                                                                  |       | — |   | 10,163 |   | 388 |   | 16,651 |   |
| Total interest-sensitive liabilities                                    |       | $                                                                                                                      | 142,439    |   | $ | 67,808 |   | $ | 25,851 |   | $ | 3,384 |   | $ | 239,482 |   |
|                                                                    |       |                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                                                                                      | (79,566    | ) | $ | (16,760 | ) | $ | 66,549 |   | $ | 98,076 |   | $ | 68,299 |   |
|                                                                    |       |                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (25.85                                                                                                                 | )%         | (31.30 | )% | (9.67 | )% | 22.19 | % | 22.19 | % |

 

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(a) Savings, Now,and money market deposits totaling $101,415 are included in the maturing in 3months classification.

**LIQUIDITY**

Liquidity is the ability of the Company toconvert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities.  Liquidity management involves maintaining theCompany’s ability to meet the day-to-day cash flow requirements of itscustomers, whether they are depositors wishing to withdraw funds or borrowersrequiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able toperform the primary function of a financial intermediary and would, therefore,not be able to meet the needs of the communities it serves. Additionally, theCompany requires cash for various operating needs including: dividends toshareholders; business combinations; capital injections to its subsidiaries;the servicing of debt; and the payment of general corporate expenses. TheCompany has access to various capital markets. However, the primary source of liquidity for the Company is dividendsfrom its bank subsidiary.  The GeorgiaDepartment of Banking and Finance regulates the dividend payments and mustapprove dividend payments that exceed 50 percent of the Bank’s prior year netincome.  As of June 30, 2007, this amountwas approximately $1,731,000. The payment of dividends may also be affected orlimited by other factors, such as the requirement to maintain adequate capitalabove regulatory guidelines.  On June 26,2007, the Georgia Department of Banking and Finance approved a special dividendof $5,155,000 which was used by the Company to redeem its outstanding Junior Subordinated Debentures.

Asset and liability management functions notonly serve to assure adequate liquidity in order to meet the needs of theCompany’s customers, but also to maintain an appropriate balance betweeninterest-sensitive assets and interest-

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sensitive liabilities so that the Company canearn a return that meets the investment requirements of its shareholders.  Daily monitoring of the sources and uses offunds is necessary to maintain an acceptable cash position that meets bothrequirements.

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

The liability portion of the balance sheetprovides liquidity through various customers’ interest bearing and noninterestbearing deposit accounts.  Federal fundspurchased and other short-term borrowings are additional sources of liquidityand, basically, represent the Company’s incremental borrowing capacity.  These sources of liquidity are short-term innature and are used as necessary to fund asset growth and meet short-termliquidity needs. The Company does not anticipate any liquidity requirements inthe near future that it will not be able to meet.

**CAPITALRESOURCES**

Stockholders’equity increased by $229,000 for the six months period ended June 30, 2007,primarily due to earnings.  Retainedearnings increased by net income of $1,205,000, reduced by a cumulative effectadjustment in the amount of $173,000 as a result of the early adoption of SFASNo. 159, “The Fair Value Option for Financial Assets and Financial Liabilities– Including an amendment of FASB Statement No. 115” and dividend payments of $397,000.  Accumulatedother comprehensive loss, net of taxes also increased during the six monthperiod by $462,000 to $1,000,000.  Theselosses are attributed to the rapid movements in the Treasury markets, wildswings in volatility and credit spreads, and their impact on the Company’savailable for sale securities portfolio.

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total and Tier 1 capital torisk weighted assets, and Tier 1 capital to average assets.  As of June 30, 2007 the Bank’s total and Tier1 capital to risk weighted assets and Tier 1 to average assets were 13%, 12%and 9% respectively compared to 16%, 15% and 11% respectively at December 31,2006.  The decrease in the Bank’s June30, 2007 capital ratios is attributed to a special dividend paid to the Companyon June 26, 2007.  With the approval ofthe Georgia Department of Banking and Finance, the Bank paid a $5,155,000dividend used by the Company to redeem its outstanding Junior Subordinated Debentures. The Debentures were issued to the Company’s Trust subsidiary for the netproceeds obtained from the issuance of pooled trust preferredsecurities.  The pooled trust preferredsecurities provided additional capital that was required to complete a 2003bank acquisition.  Based on internal ofgrowth of the Bank’s capital position since the acquisition, Managementdetermined that the additional capital provided by the pool trust securities ata current rate of 9% was no longer required.  At June 30, 2007, the Company met all capital adequacy requirements towhich it is subject and is considered to be ‘well capitalized” under regulatorystandards.

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

Marketrisk is the risk of loss from adverse changes in market prices and interestrates.  Our market risk arises principallyfrom interest rate risk inherent in our lending, deposit, and borrowingactivities.  Although we manage certainother risks, such as credit quality and liquidity risk, in the normal course ofbusiness we consider interest rate risk to be our most significant market riskand the risk that could potentially have the largest material effect on ourfinancial condition and results of operations. We do not maintain a trading portfolio or deal in international instruments,and therefore, other types of

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marketrisks, such as foreign currency risk and commodity price risk, do not arise inthe normal course of our business activities.

Quantitativeinformation about the Company’s market risk at June 30, 2007 is as follows (inthousands):
|                                       | ** ** | **2007**            | ** ** |
|---------------------------------------|------------|---------------------|------------|
| ** **                            | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** | **Down  100 bp** | ** ** | **Up  100 bp** | ** ** |
|                                  |       |                |       |   |   |   |   |   |   |
| Financial  assets:                    |       |                |       |   |   |   |   |   |   |
| Interest-bearing deposits with banks  |       | $                   | 2,095      |   | $ | 2,095 |   | — | % | — | % |
| Certificates of deposit               |       | 100                 |       | 100 |   | — |   | — |   |
| Investment securities                 |       | 72,958              |       | 72,846 |   | 2.81 |   | (3.43 | ) |
| Loans receivable                      |       | 232,628             |       | 226,251 |   | 1.37 |   | (1.42 | ) |
|                                  |       |                |       |   |   |   |   |   |   |
| Financial  liabilities:               |       |                |       |   |   |   |   |   |   |
| Interest-bearing deposits             |       | 222,491             |       | 212,123 |   | 0.96 |   | (1.00 | ) |
| Federal funds purchased               |       | 2,000               |       | 2,000 |   | — |   | — |   |
| Notes payable                         |       | 340                 |       | 340 |   | — |   | — |   |
| Advances from  Federal Home Loan Bank |       | 16,651              |       | 16,744 |   | 1.64 |   | (1.02 | ) |
|                                       |            |                     |            |  |  |  |  |  |  |  |  |

 

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

**ITEM 4.  CONTROLSAND PROCEDURES**

As ofthe end of the period covered by this report, we conducted, under thesupervision of and with the participation of our management, including theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer, an evaluation of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e). Based on this evaluation,the Company’s Chief Executive Officer, Chief Operating Officer, and ChiefFinancial Officer have concluded that our disclosure controls and procedures wereeffective as of June 30, 2007 in accumulating and communicating information tomanagement, including the Chief Executive Officer, the Chief Operating Officer,and the Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosures of that information under the SEC’s rules andforms and that the Company’s disclosure controls and procedures are designed toensure that the information required to be disclosed in reports filed orsubmitted by the Company under the Securities Exchange Act is recorded,processed, summarized and reported within the specified time periods.  There have been no changes in the Company’sinternal controls over financial reporting that occurred during the quarterended June 30, 2007 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II. OTHER INFORMATION**

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

The Company and the Bank are involved in variousclaims and legal actions arising in the ordinary course of business.  In the opinion of management, based in parton the advice of counsel, the ultimate disposition of these matters will nothave a material adverse impact on the Company’s consolidated financial position.

**ITEM 1A.   RISK FACTORS**

In addition to the other information set forth in thisreport, you should carefully consider the factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December31, 2006, which could materially affect our business, financial condition orfuture results. The risks described in our Annual Report on Form 10-K are notthe only risks we face. Additional risks and uncertainties not currently knownto us or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

**ITEM 2.      UNREGISTERED SALE OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

None

**ITEM 3.      DEFAULTS UPON SENIOR SECURITIES**

None

**ITEM 4.      SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS**

The Company held it’s AnnualShareholders’ Meeting on Wednesday, May 23, 2007, at 10:00 a.m., at AtlantaLife Financial Group, Herndon Plaza, 100 Auburn Avenue, N.E., Atlanta,Georgia.  The purpose of the AnnualShareholders’ Meeting was to elect four (4) Class II directors who will serve athree year term expiring at the 2010 annual meeting.  The following table presents the results ofthe shareholders vote:
| Directors         | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|-------------------|------------|-----------|------------|--------------|------------|
|              |       |      |       |         |       |
| Robert L. Brown   |       | 1,175,321 |       | 167,511      |       |
| C. David Moody    |       | 1,175,343 |       | 167,589      |       |
| Mercy P. Owens    |       | 1,174,755 |       | 168,077      |       |
| James E. Williams |       | 1,175,147 |       | 167,685      |       |

 

**ITEM 5.      OTHERINFORMATION**

None

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**ITEM 6.      EXHIBITS**

**Exhibit 31**

Certification pursuant to18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

**Exhibit 32**

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

**SIGNATURES**

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

 

**CITIZENS BANCSHARES CORPORATION**

 
| Date:  August 14, 2007 | By:                                    | /s/ James E. Young |   |
|----------------------------------|----------------------------------------|--------------------|--------|
|                             | James E. Young                         |
|                             | President and  Chief Executive Officer |
|                             |                                   |
|                             |                                   |
| Date:  August 14, 2007 | By:                                    | /s/ Cynthia N. Day |   |
|                             | Cynthia N. Day                         |
|                             | Senior Executive  Vice President and   |
|                             | Chief Operating  Officer               |
|                             |                                   |
|                             |                                   |
| Date:  August 14, 2007 | By:                                    | /s/ Samuel J. Cox  |   |
|                             | Samuel J. Cox                          |
|                             | Executive Vice  President and          |
|                             | Chief Financial  Officer               |
|                                  |                                        |                    |        |  |  |

 

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