**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10 – Q**

 
| **(Mark One)** |                                                                                                                                                                                                                                                                                                             |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                             |
| **x**          | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                          |
|           |                                                                                                                                                                                                                                                                                                             |
|           | **For the  quarterly period ended June 30, 2008**                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                                                                             |
| **OR**         |
|           |                                                                                                                                                                                                                                                                                                             |
| **o**          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                         |
|           |                                                                                                                                                                                                                                                                                                             |
| ** **     | **For the  transition period from                       to                        ** |

 

**CommissionFile No:  0 - 14535**

 

**CITIZENSBANCSHARES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Georgia**                                                      | ** ** | **58 –  1631302**             |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification No.) |

 

| **175 John  Wesley Dobbs Avenue, N.E., Atlanta, Georgia** | ** ** | **30303**  |
|-----------------------------------------------------------|------------|------------|
| (Address of principal  executive offices)                 |       | (Zip Code) |

 

Registrant’s telephonenumber, including area code: **(678) 406 -4000**

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

Largeaccelerated filer o     Acceleratedfiler o     Non-acceleratedfiler o     Smallerreporting company x

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

 

SEC 1296 (08-03)  **Potential persons who are to respond to the collectionof information contained in this form are not required to respond unless theform displays a currently valid OMB control number.**

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding for each of the issuer’s classes of commonstock as of the latest practicable date: 2,004,635 shares of Common Stock,$1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par valueoutstanding on July 31, 2008.

 

 

 

----

 

**PART 1.       FINANCIALINFORMATION**

** **

**ITEM 1.        Financialstatements**

** **

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARY**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**JUNE 30, 2008 AND DECEMBER 31, 2007**

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

** **
| ** **                                                                                           | ** ** | **2008**        | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                           |       |            |       |       |       |
| Cash and due  from banks                                                                             |       | $               | 9,944      |       | $          | 8,188 |   |
| Interest-bearing  deposits with banks                                                                |       | 7,821           |       | 522        |       |
| Certificates  of deposit                                                                             |       | 100             |       | 100        |       |
| Investment  securities available for sale, at fair value                                             |       | 82,562          |       | 59,677     |       |
| Investment  securities held to maturity, at cost                                                     |       | 4,651           |       | 7,374      |       |
| Other  investments                                                                                   |       | 1,102           |       | 1,842      |       |
| Loans  receivable, net                                                                               |       | 214,532         |       | 235,363    |       |
| Premises and  equipment, net                                                                         |       | 7,721           |       | 7,792      |       |
| Cash  surrender value of life insurance                                                              |       | 9,922           |       | 9,745      |       |
| Foreclosed  real estate                                                                              |       | 3,493           |       | 2,423      |       |
| Other assets                                                                                         |       | 6,079           |       | 5,358      |       |
|                                                                                                 |       |            |       |       |       |
| Total assets                                                                                         |       | $               | 347,927    |       | $          | 338,384 |   |
|                                                                                                 |       |            |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                       | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                 |       |            |       |       |       |
| LIABILITIES:                                                                                         |       |            |       |       |       |
| Noninterest-bearing  deposits                                                                        |       | $               | 59,807     |       | $          | 53,894 |   |
| Interest-bearing  deposits                                                                           |       | 250,963         |       | 225,705    |       |
|                                                                                                 |       |            |       |       |       |
| Total  deposits                                                                                      |       | 310,770         |       | 279,599    |       |
|                                                                                                 |       |            |       |       |       |
| Accrued  expenses and other liabilities                                                              |       | 4,009           |       | 4,368      |       |
| Federal  funds purchased                                                                             |       | —          |       | 2,000      |       |
| Notes  payable                                                                                       |       | 240             |       | 340        |       |
| Advances  from Federal Home Loan Bank                                                                |       | 371             |       | 18,944     |       |
|                                                                                                 |       |            |       |       |       |
| Total  liabilities                                                                                   |       | 315,390         |       | 305,251    |       |
|                                                                                                 |       |            |       |       |       |
| COMMITMENTS  AND CONTINGENCIES                                                                       |       |            |       |       |       |
|                                                                                                 |       |            |       |       |       |
| STOCKHOLDERS’  EQUITY:                                                                          |       |            |       |       |       |
| Common stock  - $1 par value; 20,000,000 shares authorized; 2,230,065 shares issued and  outstanding |       | 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                                                                          |       | 7,583           |       | 7,554      |       |
| Retained  earnings                                                                                   |       | 25,029          |       | 25,071     |       |
| Treasury  stock at cost, 225,430 shares at June 30, 2008 and 227,517 at  December 31, 2007 |       | (1,842          | )          | (1,859     | )          |
| Accumulated  other comprehensive income (loss), net of income taxes                                  |       | (553            | )          | 47         |       |
|                                                                                                 |       |            |       |       |       |
| Total  stockholders’ equity                                                                     |       | 32,537          |       | 33,133     |       |
|                                                                                                 |       |            |       |       |       |
|                                                                                                 |       | $               | 347,927    |       | $          | 338,384 |   |

 

See notes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                           | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest  income:                                    |       |                                            |       |                                          |       |   |   |   |   |
| Loans,  including fees                               |       | $                                               | 4,059      |                                          | $          | 4,630 |   | $ | 8,465 |   | $ | 9,013 |   |
| Investment  securities:                              |       |                                            |       |                                          |       |   |   |   |   |
| Taxable                                              |       | 822                                             |       | 657                                           |       | 1,495 |   | 1,341 |   |
| Tax-exempt                                           |       | 178                                             |       | 217                                           |       | 355 |   | 432 |   |
| Interest-bearing  deposits                           |       | 55                                              |       | 84                                            |       | 109 |   | 259 |   |
| Total  interest income                               |       | 5,114                                           |       | 5,588                                         |       | 10,424 |   | 11,045 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense:                                   |       |                                            |       |                                          |       |   |   |   |   |
| Deposits                                             |       | 1,771                                           |       | 1,819                                         |       | 3,531 |   | 3,586 |   |
| Other  borrowings                                    |       | 3                                               |       | 275                                           |       | 154 |   | 574 |   |
| Total  interest expense                              |       | 1,774                                           |       | 2,094                                         |       | 3,685 |   | 4,160 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest  income                                 |       | 3,340                                           |       | 3,494                                         |       | 6,739 |   | 6,885 |   |
| Provision  for loan losses                           |       | 1,004                                           |       | —                                        |       | 1,109 |   | — |   |
|                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 2,336                                           |       | 3,494                                         |       | 5,630 |   | 6,885 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  income:                                 |       |                                            |       |                                          |       |   |   |   |   |
| Service  charges on deposits                         |       | 1,037                                           |       | 767                                           |       | 2,012 |   | 1,468 |   |
| Gain (loss)  on sales of securities                  |       | —                                          |       | —                                        |       | 27 |   | (33 | ) |
| Gain (loss)  on sales of assets                      |       | 11                                              |       | 58                                            |       | 11 |   | 64 |   |
| Other  operating income                              |       | 250                                             |       | 392                                           |       | 579 |   | 747 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  noninterest income                            |       | 1,298                                           |       | 1,217                                         |       | 2,629 |   | 2,246 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  expense:                                |       |                                            |       |                                          |       |   |   |   |   |
| Salaries and  employee benefits                      |       | 1,772                                           |       | 1,953                                         |       | 3,647 |   | 3,824 |   |
| Net  occupancy and equipment                         |       | 545                                             |       | 601                                           |       | 1,122 |   | 1,139 |   |
| Other  operating expenses                            |       | 1,705                                           |       | 1,319                                         |       | 2,913 |   | 2,690 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  noninterest expense                           |       | 4,022                                           |       | 3,873                                         |       | 7,682 |   | 7,653 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  (loss) before income taxes                   |       | (388                                            | )          | 838                                           |       | 577 |   | 1,478 |   |
| Income tax  expense (benefit)                        |       | (224                                            | )          | 168                                           |       | 29 |   | 273 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                   |       | $                                               | (164       | )                                             | $          | 670 |   | $ | 548 |   | $ | 1,205 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss) per share - basic                 |       | $                                               | (0.08      | )                                             | $          | 0.32 |   | $ | 0.26 |   | $ | 0.58 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss) per share - diluted               |       | $                                               | (0.08      | )                                             | $          | 0.32 |   | $ | 0.26 |   | $ | 0.58 |   |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted  average outstanding shares - basic         |       | 2,095                                           |       | 2,089                                         |       | 2,094 |   | 2,088 |   |
|                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Weighted  average outstanding shares - diluted       |       | 2,095                                           |       | 2,089                                         |       | 2,094 |   | 2,088 |   |
|                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Dividends  per common share                          |       | $                                               | 0.19       |                                          | $          | 0.19 |   | $ | 0.19 |   | $ | 0.19 |   |

 

See notes to consolidated financialstatements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

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

**FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007**

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

 
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **    | ** ** | ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|---------------|------------|----------------|------------|-------------------------|------------|-------------------|------------|------------|------------|------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** | **Nonvoting** | ** ** | **Additional** | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **             | ** ** |
| ** **                                                                                              | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Paid-in**   | ** ** | **Retained**   | ** ** | **Treasury Stock** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                              | ** ** | **Shares**            | ** ** | **Amount**            | ** ** | **Shares**    | ** ** | **Amount**     | ** ** | **Capital**             | ** ** | **Earnings**      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Balance—December 31, 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 gains included in net income—net  of taxes of $11,178 |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | 22                     |       | 22         |       |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive loss                                                                                      |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | —                 |       | 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 30, 2007**                                                                     | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,527**  | ** ** | **$**      | **23,421** | ** ** | **(231**               | **)**      | **$**      | **(1,889** | **)** | **$** | ** (1,000** | **)** | **$** | **30,379** | ** ** |
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **    | ** ** | ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** |       | ** ** |
| Balance—December 31, 2007                                                                     |       | 2,230                 |       | $                     | 2,230      |          | 90         |           | $          | 90                      |       | $                 | 7,554      |       | $          | 25,071     |       | (227                   | )          | $          | (1,859     | ) | $ |  47 |   | $ | 33,133 |   |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Net income                                                                                              |       | —                |       | —                |       | —        |       | —         |       | —                  |       | 548               |       | —     |       | —     |       | —                 |       | 548        |       |
| Unrealized holding losses on investment securities available for sale—net  of taxes of $299,812    |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (582                   | )          | (582       | )          |
| Less reclassification adjustment for holding gains included in net income—net  of taxes of $9,288  |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (18                    | )          | (18        | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive income                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       | (52        | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Cumulative effect of adoption of EITF 06-4, net of taxes                                                |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (192              | )          | —     |       | —     |       | —                 |       | (192       | )          |
| Stock based compensation expense                                                                        |       | —                |       | —                |       | —        |       | —         |       | 29                      |       | —            |       | —     |       | —     |       | —                 |       | 29         |       |
| Purchase of treasury stock                                                                              |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | (2         | )          | (15        | )          | —                 |       | (15        | )          |
| Sale of Treasury stock                                                                                  |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | 4          |       | 32         |       | —                 |       | 32         |       |
| Dividends declared                                                                                      |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (398              | )          | —     |       | —     |       | —                 |       | (398       | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| **Balance—June 30, 2008**                                                                     | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,583**  | ** ** | **$**      | **25,029** | ** ** | **(225**               | **)**      | **$**      | **(1,842** | **)** | **$** | ** (553** | **)** | **$** | **32,537** | ** ** |

 

Seenotes to consolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007**

**(In thousands)**

 
| ** **                                                                                    | ** ** | **2008**        | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)** | ** ** |
| **OPERATING  ACTIVITIES:**                                                                    |       |            |       |     |       |
| Net income                                                                                    |       | $               | 548        |     | $          | 1,205 |   |
| **Adjustments  to reconcile net income to net cash provided (used) by operating activities:** |       |            |       |     |       |
| Provision  for loan losses                                                                    |       | 1,109           |       | —   |       |
| Depreciation                                                                                  |       | 393             |       | 385      |       |
| Amortization  and accretion, net                                                              |       | 108             |       | 164      |       |
| Provision  for deferred income taxes (benefit)                                                |       | 239             |       | 488      |       |
| Gain on sale  of assets and investments                                                       |       | (38             | )          | (31      | )          |
| Stock based  compensation expense                                                             |       | 29              |       | 29       |       |
| Change in  other assets                                                                       |       | (854            | )          | (726     | )          |
| Change in  accrued expenses and other liabilities                                             |       | (550            | )          | (81      | )          |
| Net cash  provided by (used in) operating activities                                          |       | 984             |       | 1,433    |       |
|                                                                                          |       |            |       |     |       |
| **INVESTING  ACTIVITIES:**                                                                    |       |            |       |     |       |
| Proceeds  from calls and maturities of investment securities held to maturity                 |       | 2,719           |       | 109      |       |
| Proceeds  from sales and maturities of investment securities available for sale               |       | 16,045          |       | 5,659    |       |
| Purchases of  investment securities available for sale                                        |       | (39,865         | )          | (1,016   | )          |
| Net change  in other investments                                                              |       | 739             |       | 515      |       |
| Net change  in loans receivable                                                               |       | 17,570          |       | (14,374  | )          |
| Net proceeds  from the sale of foreclosed properties                                          |       | 1,070           |       | 218      |       |
| Purchases of  premises and equipment, net                                                     |       | (323            | )          | (563     | )          |
| Proceeds  from the sale of premises and equipment, net                                        |       | —          |       | 179      |       |
| Net change  in interest bearing deposits with banks                                           |       | (7,300          | )          | 2,493    |       |
| Net cash  used in investing activities                                                        |       | (9,345          | )          | (6,780   | )          |
|                                                                                          |       |            |       |     |       |
| **FINANCING  ACTIVITIES:**                                                                    |       |            |       |     |       |
| Net change  in deposits                                                                       |       | 31,171          |       | 18,919   |       |
| Net change  in Federal funds purchased                                                        |       | (2,000          | )          | 2,000    |       |
| Principal  payments on debt                                                                   |       | (100            | )          | —   |       |
| Net change  in advances from Federal Home Loan Bank                                           |       | (18,573         | )          | (10,356  | )          |
| Payoff of  junior subordinated debentures, net                                                |       | —          |       | (5,000   | )          |
| Sale  (purchase) of treasury stock activity                                                   |       | 17              |       | 27       |       |
| Dividends  paid                                                                               |       | (398            | )          | (397     | )          |
| Net cash  provided by financing activities                                                    |       | 10,117          |       | 5,193    |       |
|                                                                                          |       |            |       |     |       |
| Net change  in cash and cash equivalents                                                      |       | 1,756           |       | (154     | )          |
|                                                                                          |       |            |       |     |       |
| Cash and cash  equivalents, beginning of period                                               |       | 8,188           |       | 8,615    |       |
| Cash and  cash equivalents at end of period                                                   |       | $               | 9,944      |     | $          | 8,461 |   |
|                                                                                          |       |            |       |     |       |
| **Supplemental  disclosures of cash paid during the period for:**                             |       |            |       |     |       |
| Interest                                                                                      |       | $               | 3,878      |     | $          | 4,045 |   |
| Income taxes                                                                                  |       | $               | 1,009      |     | $          | 337 |   |
|                                                                                          |       |            |       |     |       |
| **Supplemental  disclosures of noncash transactions:**                                        |       |            |       |     |       |
| Real estate  acquired through foreclosure                                                     |       | $               | 2,130      |     | 3,101      |   |
|                                                                                          |       |            |       |     |       |
| Change in  unrealized gain on investment securities available for sale, net of taxes          |       | $               | (600       | )        | $          | (462 | ) |
|                                                                                          |       |            |       |     |       |
| Cumulative  effect of change in accounting principle                                          |       | $               | 192        |     | $          | — |   |
|                                                                                          |       |            |       |     |       |
| Cumulative  effect of adoption of fair value option                                           |       | $               | —     |     | $          | 173 |   |

 

5

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

**Notes to the Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial and personal banking services toindividual and corporate customers in metropolitan Atlanta and Columbus,Georgia, and in Birmingham and Eutaw, Alabama, through its wholly ownedsubsidiary, Citizens Trust Bank (the “Bank”). The Bank operates under a state charter and serves its customers throughseven full-service financial centers in metropolitan Atlanta, Georgia, onefull-service financial center in Columbus, Georgia, one full-service financialcenter in Birmingham, Alabama, and one full-service financial center in Eutaw,Alabama.

 

The accompanying unaudited consolidated financial statements have beenprepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required bygenerally accepted accounting principles are not included herein. These interimstatements should be read in conjunction with the financial statements andnotes thereto included in the Company’s latest Annual Report on Form 10-Kfiled with the Securities and Exchange Commission for the year ended December 31,2007.  The results of operations for theinterim periods reported herein are not necessarily representative of theresults expected for the full 2008 fiscal year.

 

The consolidated financial statements of the Company for the three andsix month periods ended June 30, 2008 are unaudited.  In the opinion of management, all adjustmentsnecessary for a fair presentation of the financial position and results ofoperations and cash flows for the three and six month periods have been included.  All adjustments are of a normal recurringnature.  All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

**Accounting Policies**

 

The Company’s consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”), which often require the judgment of management in theselection and application 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 ended December 31,2007.  The Company has followed thosepolicies in preparing this report. Management believes that the quality and reasonableness of its mostcritical policies enable the fair presentation of its financial position and ofits results of operations.

 

**Recently Issued Accounting Standards**

 

The following is a summary of recent authoritative pronouncements thatcould affect the accounting, reporting, and disclosure of financial informationby the Company:

 

In December 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any controlling interest; recognizes andmeasures goodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. FAS 141(R) is effective for acquisitions by theCompany taking place on or after January 1, 2009. Early adoption isprohibited. Accordingly, a calendar year-end 

 

6

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company is required to record and disclose business combinationsfollowing existing accounting guidance until January 1, 2009. The Companywill assess the impact of SFAS 141(R) if and when a future acquisitionoccurs.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No. 51”(“SFAS 160”). SFAS 160 establishes new accounting and reporting standards forthe noncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. Before this statement, limited guidance existed for reportingnoncontrolling interests (minority interest). As a result, diversity inpractice exists. In some cases minority interest is reported as a liability andin others it is reported in the mezzanine section between liabilities andequity. Specifically, SFAS 160 requires the recognition of a noncontrollinginterest (minority interest) as equity in the consolidated financialsstatements and separate from the parent’s equity. The amount of net incomeattributable to the noncontrolling interest will be included in consolidatednet income on the face of the income statement. SFAS 160 clarifies that changesin a parent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest. In addition, this statement requires that a parentrecognize gain or loss in net income when a subsidiary is deconsolidated. Suchgain or loss will be measured using the fair value of the noncontrolling equityinvestment on the deconsolidation date. SFAS 160 also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterests. SFAS 160 is effective for the Company on January 1, 2009.   Earlier adoption is prohibited. The Companyis currently evaluating the impact, if any, the adoption of SFAS 160 will haveon its financial position, results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities” (“SFAS 161”).  SFAS 161 requires enhanced disclosures aboutan entity’s derivative and hedging activities and thereby improving thetransparency of financial reporting.  Itis intended to enhance the current disclosure framework in SFAS 133 byrequiring that objectives for using derivative instruments be disclosed interms of underlying risk and accounting designation. This disclosure betterconveys the purpose of derivative use in terms of the risks that the entity isintending to manage. SFAS 161 is effective for the Company on January 1,2009. This pronouncement does not impact accounting measurements but willresult in additional disclosures if the Company is involved in materialderivative and hedging activities at that time.

 

In February 2008, the FASB issued FASB Staff Position No. 140-3,“Accounting for Transfers of Financial Assets and Repurchase FinancingTransactions” (“FSP 140-3”).  This FSP provides guidance on accounting fora transfer of a financial asset and the transferor’s repurchase financing ofthe asset.  This FSP presumes that an initial transfer of a financialasset and a repurchase financing are considered part of the same arrangement(linked transaction) under SFAS No. 140. However, if certain criteria aremet, the initial transfer and repurchase financing are not evaluated as alinked transaction and are evaluated separately under Statement 140.  FSP140-3 will be effective for financial statements issued for fiscal yearsbeginning after November 15, 2008, and interim periods within those fiscalyears and earlier application is not permitted. Accordingly, this FSP iseffective for the Company on January 1, 2009.  The Company iscurrently evaluating the impact, if any, the adoption of FSP 140-3 will have onits financial position, results of operations and cash flows.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3,“Determination of the Useful Life of Intangible Assets” (“FSP 142-3”).  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwilland Other Intangible Assets”.  The intentof this FSP is to improve the consistency between the useful life of arecognized intangible asset under SFAS No. 142 and the period of expectedcash flows used to measure the fair value of the asset under SFAS No. 141(R),“Business Combinations,”**andother U.S. generally accepted accounting principles.  This FSP is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years and early adoption isprohibited.  Accordingly, this FSP iseffective for the Company on January 1, 2009.  The Company does not believe the adoption ofFSP 

 

7

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142-3 will have a material impact on its financial position, results ofoperations or cash flows.

 

In May, 2008, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 162, “TheHierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”).  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board’s amendments to AU Section 411,“The Meaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples.”  The FASB has stated that itdoes not expect SFAS No. 162 will result in a change in current practice.The application of SFAS No. 162 will have no effect on the Company’sfinancial position, results of operations or cash flows.

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting (“SFAS”) No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  This standard eliminates inconsistenciesfound in various prior pronouncements but does not require any new fair valuemeasurements.  SFAS 157 is effective forthe Company on January 1, 2008. The Company elected to early adopt theprovisions of these statements effective January 1, 2007.  See Note 2, “Fair Value of FinancialInstruments” to the Consolidated Financial Statements for related disclosures.

 

SFAS 157 defines fair value as the exchange price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. SFAS 157 alsoestablishes a fair value hierarchy which requires an entity to maximize the useof observable inputs and minimize the use of unobservable inputs when measuringfair value. The standard describes three levels of inputs that may be used tomeasure fair value:

 
| **Level 1** |   | Quoted prices in active markets for identical assets or liabilities.  Level 1 assets and liabilities include debt and equity securities and  derivative contracts that are traded in an active exchange market, as well as  U.S. Treasury and other highly liquid investments are actively traded in  over-the-counter markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Level 2** |   | Observable inputs other than Level 1 prices  such as quoted prices for similar assets or liabilities; quoted prices in  markets that are not active; or other inputs that are observable or can be  corroborated by observable market data for substantially the full term of the  assets or liabilities. Level 2 assets and liabilities include debt securities  with quoted prices that are traded less frequently than exchange-traded  instruments and derivative contracts whose value is determined using a  pricing model with inputs that are observable in the market or can be derived  principally from or corroborated by observable market data. This category  generally includes U.S. Government and agency mortgage-backed debt  securities, certain derivative contracts and impaired loans. |

 

8

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| **Level 3** |   | Unobservable inputs that are supported by little or no market  activity and that are significant to the fair value of the assets or  liabilities. Level 3 assets and liabilities include financial instruments  whose value is determined using pricing models, discounted cash flow  methodologies, or similar techniques, as well as instruments for which the  determination of fair value requires significant management judgment or  estimation. For example, this category generally includes certain private  equity investments, retained residual interests in securitizations,  residential mortgage servicing rights, and highly-structured or long-term  derivative contracts. |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

FASB Staff Position No. FAS 157-2 delays the implementation ofSFAS 157 until the first quarter of 2009 with respect to goodwill, otherintangible assets, real estate and other assets acquired through foreclosureand other non-financial assets measured at fair value on a nonrecurring basis.

 

During 2007, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF06-4 “Accounting for the Deferred Compensation and Postretirement BenefitAspects of Endorsement Split-Dollar Life Insurance Arrangements”, whichrequires an employer to recognize a liability for the postretirement deathbenefits provided under endorsement split-dollar life insurancearrangements.  An endorsementsplit-dollar life insurance arrangement is where the employer owns a lifeinsurance policy that covers the life of an employee and, pursuant to aseparate agreement, endorses a portion of the policy’s death benefits to theinsured employee’s beneficiary.  EITF06-4 is effective for fiscal years beginning after December 15, 2007. TheCompany has entered into Supplemental Death Benefit Agreements with certainexecutive officers pursuant to which the Company has agreed to pay a portion ofthe death benefit to the executives’ beneficiaries upon their death. As aresult of the adoption of EITF 06-4, the Company recognized a cumulative effectadjustment to retained earnings of $192,000, net of deferred taxes of $99,000which represents the $291,000 in additional liability on January 1, 2008.

 

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

 

9

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**2. FAIR VALUE OF FINANCIALINSTRUMENTS**

 

In accordance with SFAS No. 159, the Company has elected to recordspecific financial assets and financial liabilities at fair value. Thefollowing is a description of each asset and liability class for which fairvalue has been elected (in thousands):

 

**Assets Measured at Fair Value on a Recurring Basis:**

 
| **Description**                            | ** ** | **6/30/2008** | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** |
|--------------------------------------------|------------|---------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------|
| Investments  securities available for sale |       | $             | 82,562     |                                                                                            | $          | —                                                     |       | $                                        | 82,562     |   | $ | — |   |
|                                       |       |          |       |                                                                                            |       |                                                       |       |                                     |       |
| Total                                      |       | $             | 82,562     |                                                                                            | $          | —                                                     |       | $                                        | 82,562     |   | $ | — |   |

 

**Liabilities Measured at Fair Value on a RecurringBasis:**

 
| **Description** | ** ** | **6/30/2008** | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** |
|-----------------|------------|---------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------|
| FHLB  Advances  |       | $             | 371        |                                                                                            | $          | —                                                     |       | $                                        | 371        |   | $ | — |   |
|            |       |          |       |                                                                                            |       |                                                       |       |                                     |       |
| Total           |       | $             | 371        |                                                                                            | $          | —                                                     |       | $                                        | 371        |   | $ | — |   |

 

The Federal Home Loan Bank (the “FHLB”) Advance balance outstanding at June 30,2008 represents an Affordable Housing Program (AHP) award used to subsidizedloans for homeownership or rental initiatives. At June 30, 2008, therewere no changes in fair values that were included in current earnings.

 

As of June 30, 2008, the Company has no assets or liabilitieswhose fair values are measured using level 3 inputs.

 

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**3.  INTANGIBLEASSETS**

 

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

 

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

 

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

 
| ** **                     | ** ** | **June 30, 2008**     | ** ** | **December 31, 2007** | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Unamortized  intangible asset: |       |                            |       |                            |       |   |   |   |   |
| Goodwill                       |       | $                               | 362        |                            | $          | — |   | $ | 362 |   | $ | — |   |
|                           |       |                            |       |                            |       |   |   |   |   |
| Amortized  intangible assets:  |       |                            |       |                            |       |   |   |   |   |
| Core deposit  intangibles      |       | $                               | 2,836      |                            | $          | 2,739 |   | $ | 2,836 |   | $ | 2,712 |   |

 

Thefollowing table presents information about aggregate amortization expense (inthousands):

 
| ** **                                                                                                    | ** ** | **For the 3  months ended  June 30, 2008** | ** ** | **For the 6  months ended  June 30, 2008** | ** ** | **For the 3  months ended  June 30, 2007** | ** ** | **For the 6  months ended  June 30, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| Aggregate  amortization expense of core deposit intangibles:                                                  |       | $                                                                   | 13         |                                                                | $          | 27                                                                  |       | $                                                                   | 13         |   | $ | 85 |   |
|                                                                                                          |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
| Estimated  aggregate amortization expense of core deposit intangibles for the years ending  December 31: |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
|                                                                                                          |       |                                                                |       |                                                                |       |                                                                |       |                                                                |       |
| 2008                                                                                                          |       | $                                                                   | 53         |                                                                |       |                                                                |       |                                                                |       |   |
| 2009                                                                                                          |       | $                                                                   | 53         |                                                                |       |                                                                |       |                                                                |       |   |
| 2010                                                                                                          |       | $                                                                   | 18         |                                                                |       |                                                                |       |                                                                |       |   |
|                                                                                                               |            |                                                                     |            |                                                                     |            |                                                                     |            |                                                                     |            |  |  |  |  |

 

11

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**4. COMPREHENSIVE INCOME**

 

Comprehensive income includes: (1) reported net income and (2) unrealizedgains and losses on marketable securities. The following table shows our comprehensive income (in thousands):

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Net Income                         |       | $                                               | (164       | )                                             | $          | 670 |   | $ | 548 |   | $ | 1,205 |   |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Other  comprehensive income (loss) |       | (809                                            | )          | (560                                          | )          | (600 | ) | (462 | ) |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Comprehensive  income              |       | $                                               | (973       | )                                             | $          | 110 |   | $ | (52 | ) | $ | 743 |   |

 

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**5. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE**

 

Basic and diluted net income per common and potential common share hasbeen 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, 2008 and 2007 (in thousands, except per share data):

 
| ** **                                                        | ** ** | **Net Income** | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                        | ** ** | **(Numerator)**     | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
|                                                              |       |                |       |              |       |               |       |
| **Three Months ended June 30, 2008**                         |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | (164       | )                 | 2,095      |               | $          | (0.08 | ) |
| Effect of dilutive securities: options to purchase  common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | (164       | )                 | 2,095      |               | $          | (0.08 | ) |
|                                                              |       |                |       |              |       |               |       |
| **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 |   |
|                                                              |       |                |       |              |       |               |       |
| **Six Months ended June 30, 2008**                           |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | 548        |              | 2,094      |               | $          | 0.26 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | 548        |              | 2,094      |               | $          | 0.26 |   |
|                                                              |       |                |       |              |       |               |       |
| **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 |   |

 

**RECLASSIFICATIONS**

 

Certain2007 amounts have been reclassified to conform to the 2008 presentation.

 

13

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

 

**INTRODUCTION**

 

CitizensBancshares Corporation (the “Company”) is a holding company that provides afull range of commercial and personal banking services to individuals andcorporate customers in its primary market areas, metropolitan Atlanta andColumbus, Georgia, and Birmingham and Eutaw, Alabama through its wholly ownedsubsidiary, Citizens Trust Bank (the “Bank”). The Bank is a member of the Federal Reserve System and operates under astate charter.  The Company serves itscustomers through 10 full-service financial centers in Georgia and Alabama.

 

**Forward Looking Statements**

 

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

 

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

 

Thefollowing discussion is of the Company’s financial condition as of June 30,2008 and December 31, 2007, and the changes in the financial condition andresults of operations for the six and three months period ended June 30,2008 and 2007.

 

**Critical Accounting Policies**

 

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

 

**Investment Securities** – The Company classifies investments in oneof three categories based on management’s intent upon purchase: held tomaturity securities which are reported at amortized cost, trading securitieswhich are reported at fair value with unrealized holding gains and lossesincluded in earnings, and available for sale securities which are recorded atfair value with unrealized holding gains and losses included as a component ofaccumulated other comprehensive income. The Company had no investment securities classified as trading 

 

14

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securitiesduring 2008 or 2007.

 

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

 

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

 

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

 

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

 

Adescription of other accounting policies are summarized in Note 1, Summary ofSignificant Accounting Policies in the Notes to Consolidated FinancialStatements of the Company’s Annual Report on Form 10-K for the year ended December 31,2007.  The Company has followed thosepolicies in preparing this report.

 

**FINANCIAL CONDITION**

 

AtJune 30, 2008, the Company’s total assets increased by $9.5 million to$347,927,000.  Interest bearing depositswith banks increased by $7,300,000 primarily as a result of an 11 percentincrease in deposits.  The Company ismaintaining this level of liquidity to fund seasonal withdrawals by some of itsgovernmental customers in the third quarter of 2008. Cash and due from banksincreased by $1,756,000 primarily due to clearing items deposited in theCompany’s Federal Reserve Bank account that cleared the next business day.

 

Loansreceivable, net decreased by $20,832,000 or 9% to $214,532,000 compared to December 31,2007.  Due to the current slowdown ineconomic conditions in the Company’s target markets lending activity has slowedand the Company is being more conservative in its lending criteria.  Also, as a strategic risk decision, theCompany discontinued several borrowing relationships due to the continuingdeterioration in the real estate market and recessionary pressures. The Company’sloan officers are spending more time with their loan portfolios to spotdeterioration and intervene timely to curtail significant losses.  The decrease in Loans receivable, net wasoffset by a $19,422,000 increase in investment securities.

 

15

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Totalliabilities at the end of the first six months of 2008 were $315,390,000,increasing by $10 million compared to December 31, 2007. Total depositsincreased by $31,171,000 to $310,770,000, partially offset by a decrease of$18,573,000 to $371,000 in Advances from Federal Home Loan Bank, anothersignificant component of total liabilities. The Company also used the excess liquidity generated from its depositgrowth to payoff its outstanding Fed funds purchased in the amount of $2million. These actions were taken to better manage the Company’sassets/liability structure.

 

TheCompany’s asset/liability management program, which monitors the Company’sinterest rate sensitivity as well as volume and mix changes in earning assetsand interest bearing liabilities, may impact the growth of the Company’sbalance sheet as it seeks to maximize net interest income.

 

**INVESTMENT SECURITIES**

 

Thecomposition of the Company’s investment securities portfolio reflects theCompany’s investment strategy of maximizing portfolio yields commensurate withrisk and liquidity considerations. The primary objectives of the Company’sinvestment strategy are to maintain an appropriate level of liquidity andprovide a tool to assist in controlling the Company’s interest rate sensitivityposition, while at the same time producing adequate levels of interest income.

 

TheCompany invests a portion of its assets in U.S. government sponsored agencysecurities, state, county and municipal securities, and mortgage backedbonds.  At June 30, 2008 and December 31,2007, the Company’s investment securities portfolio represented approximately25% and 20%, respectively, of total assets.

 

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

 
| **At June 30, 2008**         | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                        |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored enterprises securities |       | $                   | 989        |                         | $          | 13                            |       | $                   | —     |   | $ | 1,002 |   |
| State, county, and municipal securities     |       | 13,990              |       | 69                           |       | 169                           |       | $                   | 13,890     |   |
| Mortgage-backed securities                  |       | 68,420              |       | 227                          |       | 977                           |       | $                   | 67,670     |   |
|                                        |       |                |       |                         |       |                          |       |                |       |
| Totals                                      |       | $                   | 83,399     |                         | $          | 309                           |       | $                   | 1,146      |   | $ | 82,562 |   |

 
| **At December 31, 2007**     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                        |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored enterprises securities |       | $                   | 6,945      |                         | $          | 24                            |       | $                   | 5          |   | $ | 6,964 |   |
| State, county, and municipal securities     |       | 13,919              |       | 112                          |       | 43                            |       | 13,988              |       |
| Mortgage-backed securities                  |       | 38,742              |       | 213                          |       | 230                           |       | 38,725              |       |
|                                        |       |                |       |                         |       |                          |       |                |       |
| Totals                                      |       | $                   | 59,606     |                         | $          | 349                           |       | $                   | 278        |   | $ | 59,677 |   |

 

16

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

 
| **At June 30, 2008**     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                    |       |                |       |                         |       |                          |       |                |       |
| State, county, and municipal securities |       | $                   | 4,004      |                         | $          | 43                            |       | $                   | —     |   | $ | 4,047 |   |
| Mortgage-backed securities              |       | 647                 |       | 1                            |       | 2                             |       | 646                 |       |
|                                    |       |                |       |                         |       |                          |       |                |       |
| Totals                                  |       | $                   | 4,651      |                         | $          | 44                            |       | $                   | 2          |   | $ | 4,693 |   |

 
| **At December 31, 2007**     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                        |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored enterprises securities |       | $                   | 2,385      |                         | $          | —                        |       | $                   | 4          |   | $ | 2,381 |   |
| State, county, and municipal securities     |       | 4,256               |       | 82                           |       | —                        |       | 4,338               |       |
| Mortgage-backed securities                  |       | 733                 |       | —                       |       | 15                            |       | 718                 |       |
|                                        |       |                |       |                         |       |                          |       |                |       |
| Totals                                      |       | $                   | 7,374      |                         | $          | 82                            |       | $                   | 19         |   | $ | 7,437 |   |

 

Securitiesclassified as available-for-sale are recorded at fair market value andheld-to-maturity securities are recorded at amortized cost.  The Company evaluates its investmentportfolio periodically to identify any impairment that is other thantemporary.  At June 30, 2008, theCompany had several debt securities that have been in an unrealized lossposition for twelve months or more.  TheCompany has the ability and intent to hold these securities until such time asthe value recovers or the securities mature. The Company believes, based on industry analyst reports and creditratings, that the deterioration in value is attributable to changes in marketinterest rates and is not in the credit quality of the issuer and therefore,these losses are not considered other than temporary.

 

TheCompany’s investment portfolio consists principally of obligations of theUnited 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.

 

Otherinvestments consist of Federal Home Loan Bank and Federal Reserve Bank stockwhich are restricted and have no readily determined market value.  The Company is required to maintain aninvestment in the FHLB and the FRB as part of its membership conditions. Thelevel of investments at the FHLB is primarily determined by the amount ofoutstanding advances. The FRB investment level is 6 percent of the par value ofthe bank’s common stock outstanding and paid-in-capital.  These investments are carried at cost.

 

Securitieswith carrying values of $53,064,000 and $56,329,000 at June 30, 2008 and December 31,2007 were pledged to secure public deposits and for other purposes as requiredby law.

 

17

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**LOANS**

 

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

 
| ** **                              | ** **                | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|---------------------------|-------------------|------------|-----------------------|------------|
| ** **                              | ** **                | **2008**          | ** ** | **2007**              | ** ** |
|                                    |                      |              |       |                  |       |
| Commercial, financial, and agricultural |                      | $                 | 7,663      |                  | $          | 9,317 |   |
| Installment                             |                      | 11,053            |       | 12,233                |       |
| Real estate - mortgage                  |                      | 178,121           |       | 182,120               |       |
| Real estate - construction              |                      | 19,170            |       | 32,453                |       |
| Other                                   |                      | 2,304             |       | 2,387                 |       |
|                                    | Loans receivable          |              | 218,311    |                  | 238,510    |   |
| Less:                                   | Net deferred loan fees    |              | 238        |                  | 299        |   |
|                                    | Allowance for loan losses |              | 3,541      |                  | 2,848      |   |
|                                    |                      |              |       |                  |       |   |
|                                    | Loans receivable, net     |              | $          | 214,532               |       | $ | 235,363 |   |

 

Theclassification Real estate – mortgage consists of home equity loans, mortgageson 1–4 family residential, multifamily residential, and nonfarm residentialproperties such as churches, hotels, and convenience stores.

 

**NONPERFORMING ASSETS**

 

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

 

Withthe exception of the loans included within nonperforming assets in the tablebelow, management is not aware of any loans classified for regulatory purposesas loss, doubtful, substandard, or special mention that have not been disclosedwhich (1) represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity, or capital resources, or (2) represent any information onmaterial credits of which management is aware that causes management to haveserious doubts as to the abilities of such borrowers to comply with the loanrepayment terms.

 

Thechallenging financial and credit markets continued to experience difficulty inthe six months of 2008. As the economic outlook became more uncertain due tosharp declines in real estate values, and increases in delinquency levels, thecurrent economic environment has impacted the levels of our nonperformingassets.  During the first six months of2008, nonperforming assets increased by $3,966,000 to $11,650,000 at June 30,2008 from $7,684,000 at December 31, 2007. At June 30, 2008, nonperforming assets represents 5.26% of loans,net of unearned income, and real estate acquired through foreclosure ascompared to 3.19% at December 31, 2007.

 

18

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Thetable below presents a summary of the Company’s nonperforming assets at June 30,2008 and December 31, 2007.

 
| ** **                                                                                           | ** ** | **June 30,**                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2008**                            | ** ** | **2007**              | ** ** |
| ** **                                                                                           | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                           | ** ** | **financial ratios)**          | ** ** |
| Nonperforming assets:                                                                                |       |                                |       |                  |       |
| Nonperforming loans:                                                                                 |       |                                |       |                  |       |
| Nonaccrual loans                                                                                     |       | $                                   | 8,157      |                  | $          | 5,261 |   |
| Past-due loans of 90 days or more                                                                    |       | —                              |       | —                |       |
| Nonperforming loans                                                                                  |       | 8,157                               |       | 5,261                 |       |
|                                                                                                 |       |                                |       |                  |       |
| Real estate acquired through foreclosure                                                             |       | 3,493                               |       | 2,423                 |       |
| Total nonperforming assets                                                                           |       | $                                   | 11,650     |                  | $          | 7,684 |   |
|                                                                                                 |       |                                |       |                  |       |
| Ratios:                                                                                              |       |                                |       |                  |       |
| Nonperforming loans to loans, net of  unearned income and discount on loans                          |       | 3.74                                | %          | 2.21                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Nonperforming assets to loans, net of  unearned income, and real estate acquired through foreclosure |       | 5.26                                | %          | 3.19                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Nonperforming assets to total assets                                                                 |       | 3.35                                | %          | 2.27                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Allowance for loan losses to nonperforming  loans                                                    |       | 43.41                               | %          | 54.12                 | %          |
|                                                                                                 |       |                                |       |                  |       |
| Allowance for loan losses to nonperforming  assets                                                   |       | 30.39                               | %          | 37.06                 | %          |

 

**ALLOWANCE FOR LOAN LOSSES**

 

Theallowance for loan losses is primarily available to absorb losses inherent inthe loan portfolio. Credit exposures deemed uncollectible are charged againstthe 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 on individual assets and their cashflow forecasts, sales values, independent appraisals, the volatility of certainreal estate 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.

 

Loansare charged against the allowance when, in the opinion of management, suchloans are deemed uncollectible and subsequent recoveries are added to theallowance.  For the first six months of2008, based on the Company’s evaluation, a provision for loan losses of $1,109,000was charged against operating earnings. For the same period in 2007, the Company determined that no addition tothe provision for loan losses was required. The increase in the provision for loan losses for 2008 relates toseveral commercial real estate loans where the financial condition of theborrowers and the collateral value securing the loans deteriorated due tocurrent economic conditions.

 

19

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Theallowance for loan losses at June 30, 2008 was approximately $3,541,000,representing 1.62% of total loans, net of unearned income compared toapproximately $2,848,000 at December 31, 2007, which represented 1.20% oftotal loans, net of unearned income.

 

AtJune 30, 2008, management believes the allowance for loan losses isadequate. While management uses available information to recognize losses onloans, future additions to the allowance may be necessary based on changes ineconomic conditions, particularly in the metropolitan Atlanta area. In addition,regulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses. Such agencies mayrequire the Company to recognize additions to the allowance based on theirjudgments about information available to them at the time of their examination.

 

A substantial portion of the Company’s loan portfolio is secured byreal estate in the metropolitan Atlanta and Birmingham markets, including aconcentration of loans to churches and convenience stores.  The Company’s outstanding church loans wereapproximately $46 million at June 30, 2008 as compared to $48 million at December 31,2007. The Company’s loans to area convenience stores were approximately $13million at June 30, 2008 and December 31, 2007, respectively.  Also at June 30, 2008, 1—4 familyresidential mortgage loans, secured by first liens, were approximately $43million. The Company has no subprime mortgages in its portfolio and exited themortgage origination business in the third quarter of 2007.

 

Theultimate collectibility of a significant portion of the Company’s loanportfolio is susceptible to changes in market conditions in the metropolitanAtlanta and Birmingham areas.

 

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Thefollowing table summarizes loans, changes in the allowance for loan lossesarising from loans charged off, recoveries on loans previously charged off byloan category, and additions to the allowance which have been charged tooperating expense as of and for the six month period ended June 30, 2008and 2007 (amount in thousands, except financial ratios):

 
| ** **                                                                                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                       |       |     |       |     |       |
| Loans, net of unearned income                                                                              |       | $        | 218,073    |     | $          | 232,315 |   |
|                                                                                                       |       |     |       |     |       |
| Average loans, net of unearned income and  the allowance for loan losses                                   |       | $        | 225,741    |     | $          | 215,331 |   |
|                                                                                                       |       |     |       |     |       |
| Allowance for loan losses at the beginning  of period                                                      |       | $        | 2,848      |     | $          | 3,109 |   |
|                                                                                                       |       |     |       |     |       |
| Loans charged-off:                                                                                         |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                    |       | 54       |       | 53       |       |
| Real estate - loans                                                                                        |       | 149      |       | 99       |       |
| Installment loans to individuals                                                                           |       | 263      |       | 90       |       |
| Total loans charged-off                                                                                    |       | 466      |       | 242      |       |
|                                                                                                       |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                    |       | 14       |       | 32       |       |
| Real estate - loans                                                                                        |       | 14       |       | 102      |       |
| Installment loans to individuals                                                                           |       | 22       |       | 37       |       |
| Total loans recovered                                                                                      |       | 50       |       | 171      |       |
|                                                                                                       |       |     |       |     |       |
| Net loans charged-off                                                                                      |       | 416      |       | 71       |       |
|                                                                                                       |       |     |       |     |       |
| Additions to allowance for loan losses charged  to operating expense                                       |       | 1,109    |       | —   |       |
|                                                                                                       |       |     |       |     |       |
| Allowance for loan losses at period end                                                                    |       | $        | 3,541      |     | $          | 3,038 |   |
|                                                                                                       |       |     |       |     |       |
| Ratio of net loans charged-off to average  loans, net of unearned income and the allowance for loan losses |       | 0.18     | %          | 0.03     | %          |
|                                                                                                       |       |     |       |     |       |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                         |       | 1.62     | %          | 1.31     | %          |

 

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**DEPOSITS**

 

Depositsare the Company’s primary source of funding loan growth.  Total deposits at June 30, 2008increased by 11% or $23 million to $310,770,000, driven by interest-bearingdeposits which increased by 11% or $28 million compared to December 31,2007.  The increase in interest-bearingdeposits is primarily attributed to Corporate and Governmental customers whomake significant monthly deposits and withdrawals based on their budgetaryneeds.  Noninterest-bearing deposits alsoincreased by 11% or $6 million during the first six months of 2008 to nearly$60 million. The Company has an ongoing sales program which places specificemphasis on deposit growth.

 

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

 
| ** **                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|                              |       |              |       |                  |       |
| NOW and money market accounts     |       | $                 | 71,410     |                  | $          | 68,728 |   |
| Savings accounts                  |       | 34,560            |       | 33,136                |       |
| Time deposits of $100,000 or more |       | 87,862            |       | 61,210                |       |
| Other time deposits               |       | 57,131            |       | 62,631                |       |
|                              |       |              |       |                  |       |
|                              |       | $                 | 250,963    |                  | $          | 225,705 |   |

 

**OTHER BORROWED FUNDS**

 

Whilethe Company continues to emphasize funding earning asset growth throughdeposits, the Company has relied on other borrowings as a supplemental fundingsource.  Other borrowings consist ofFederal funds purchased, short-term borrowings and FHLB advances.

 

Federalfunds purchased represent unsecured borrowings from other banks and generallymature daily.  At December 31, 2007the company had $2,000,000 outstanding at a rate of 3.65%.  There was no amount outstanding at June 30,2008.

 

TheCompany had an unsecured note payable of approximately $240,000 at June 30,2008 compared to $340,000 at December 31, 2007.  The note bears an interest rate of 4.50% at June 30,2008 and 6.75% at December 31, 2007 (the lender’s prime rate minus 50 basispoints).

 

TheBank had outstanding advances from the FHLB of $371,000 at June 30, 2008compared to $18,944,000 at December 31, 2007.   The following advances are collateralized bya blanket lien on the Company’s 1-4 family mortgage loans.

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type**   | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2008                      |       | Daily        |       | Variable   |       | —                      | %          | $                               | —     |   | 4.40 | % | $ | 18,565,000 |   |
| August 2026                    |       |         |       |       | (1)        | —                      |       | 371,000                         |       | — |   | 379,408 |   |
|                                |       |         |       |       |       |                        |       |                            |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |       |       |                        |       | $                               | 371,000    |   |   |   | $ | 18,944,408 |   |
|                                |       |         |       |       |       |                        |       |                            |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |       |       | —                      | %          |                            |       | 4.31 | % |   |   |

 

----

| (1) |   | Represents  an Affordable Housing Program (AHP) award used to subsidized loans for  homeownership or rental initiatives. The AHP is a principal reducing credit,  scheduled to mature on August 17, 2026 with an interest rate of zero. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**RESULTS OF OPERATIONS**

 

**Net Interest Income:**

 

Net interest income is the principal component of a financialinstitution’s income stream and represents the difference, or spread, betweeninterest and fee income generated from earning assets and the interest expensepaid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes inearning assets and interest bearing liabilities can materially impact netinterest income.

 

The Company’s net income for the first six month of 2008 was negativelyimpacted by slow loan growth, an increase in nonaccrual loans and a sharpreduction in earning asset yields without corresponding levels of reductions indeposit rates due to intense deposit competition and pricing pressure. As a result,the Company’s net interest margin declined by 0.34% to 4.33%.

 

On a year-to-date basis, net interest income decreased $146,000 or 2%to $6,739,000 compared to $6,885,000 for the same period in 2007.  Total interest income for this perioddecreased by $620,000 or 6% compared to the same six month period in 2007 andwas primarily due to a $549,000 decrease in interest income on loans as aresult of lowered yields and an increase in nonaccrual loans.  Total interest expense for the perioddecreased by $474,000 or 11% compared to the same six month period in2007.  This decrease is due to a $420,000decrease in interest expense on other borrowings as a result of the payoff ofseveral outstanding borrowings in 2007 which had significant higher rates thanour deposit base.

 

For the three month period ending June 30, 2008, net interestincome decreased by $154,000 in the second quarter of 2008 compared to the sameperiod last year.  Total interest incomefor the second quarter of 2008 decreased by $474,000 or 8% and total interestexpense decreased by $320,000 or 15% compared to the second quarter of2007.  Interest income on loans decreasedby $572,000, partially offset by a $126,000 increase in investment income.  Interest expense for the second quarter of2008 decreased by $272,000 as a result of reduced balances of other borrowingscompared to the same period last year.

 

The Company has an asset/liability management program which monitorsthe Company’s interest rate sensitivity and ensures the Company is competitivein the loans and deposit market.  TheCompany continues to monitor its asset/liability mix and will make changes asappropriate to ensure it is properly positioned to react to changing interestrates and inflationary trends.

 

**Provision for loan losses**

 

During the six months period of 2008, the Company recognized additionsto the provision for loan losses of $1,109,000 compared to no provision for thesame period in 2007.  Nonaccrual loansincreased by $2,896,000 due to the deteriorating financial condition of severalborrowers.  The allowance for loan losses increased to $3,541,000 at June 30, 2008compared to $2,848,000 at December 31, 2007.  At June 30, 2008, the allowancefor loan losses was 43% of the nonperforming loans compared to 54% at December 31,2007.  The provision for loan losses andthe resulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions. At June 30,2008, the Company considered its allowance for loan losses to be adequate.

 

23

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**Noninterest income:**

 

Noninterest income consists of revenues generated from a broad range offinancial services and activities, including fee-based services and commissionsearned through insurance sales.  Inaddition, gains and losses realized from the sale of investment portfolio securitiesand sales of assets are included in noninterest income.

 

Noninterest income totaled $1,298,000 for the three month period ended June 30,2008, representing an increase of $82,000 or 7% compared with the same periodended June 30, 2007. This increase is primarily attributed to an increaseof $270,000 in service charges on deposits income. Overdraft fees, which are asignificant component of service charges on deposits, increased by $293,000compared to the same three month period last year as a result of a new productimplemented in the third quarter of 2007. Overdraft fees, due to their nature,fluctuate monthly based on the short-term loan need of the customers.

 

Year-to-date, noninterest income increased by $383,000 or 17% to$2,629,000 compared to the same period last year. Service charges on depositsincreased by $545,000 due to an overdraft program implemented last.  Overdraft fees, a component of servicecharges on deposits, increased by $601,000 for the six month period ending June 30,2008 compared to the same period last year.

 

Gains on the sales of securities and assets totaled $38,000 during thefirst six months of 2008. The Company swapped the tail-end of severalmortgage-backed securities and realized a $27,000 gain during the first quarterof 2008.  In the second quarter of 2008,the Company liquidated a foreclosed property and realized a gain of$11,000.  By comparison, the Companyexperienced a loss on the sale of securities of $33,000 and a $64,000 gain onthe sale of assets for the same six month period last year.

 

**Noninterest expense**:

 

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

 

Noninterest expense increased 4% for the second quarter of 2008 andless than 1% for the first six months of 2008 compared to the same periods lastyear.  This increase is primarily due toa $420,000 increase in ORE related expenses. Due to the current economic conditions and the deterioration in realestate values in the Company’s market area, the value of several ORE propertieswere written down to approximate current market values. The Company iscontinuing its strategy to reduce overhead costs and improve the efficiencythroughout its financial centers network to offset the impact of slow loangrowth, an increase in nonaccrual loans and margin compression.

 

For the three month period ended June 30, 2008, total compensationexpense decreased by $181,000 and occupancy and equipment expense deceased by$56,000.  These decreases are due to theCompany’s continuing strategy to reduce overhead costs and improve theefficiency of its financial centers network. Other operating expenses increased by a net of $386,000 due to a$400,000 writedown of ORE properties taken in the second quarter of 2008.

 

For the six month period ended June 30, 2008, salaries andemployee benefits decreased by $177,000 and occupancy and equipment expenseswere flat, decreasing by $17,000.  Otheroperating expenses increased by $223,000 compared to the same period last yearas a result of a $420,000 increase in ORE related expenses associated with thewritedown of several foreclosed properties.

 

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**INTEREST RATE SENSITIVITY MANAGEMENT**

 

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

 

One method of measuring the impact of interest rate sensitivity is thecumulative gap analysis.  The differencebetween interest rate sensitive assets and interest rate sensitive liabilitiesat various time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact of generalinterest rate movements on the net interest margin, since all interest ratesand yields do not adjust at the same velocity and the repricing of variouscategories of assets and liabilities is subject to competitive pressures andthe needs of the Company’s customers.  Inaddition, various assets and liabilities indicated as repricing within the sameperiod may in fact reprice at different times within such period and atdifferent rates. The following table shows the contractual maturities of allinterest rate sensitive assets and liabilities at June 30, 2008.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  For conservative purposes, the Company hasincluded demand deposits such as NOW, money market, and savings accounts in thethree month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

 

The following table sets forth the distribution of the repricing of theCompany’s interest rate sensitive assets and interest rate sensitiveliabilities as of June 30, 2008.

 
| ** **                                                              | ** ** | **Cumulative amounts as of June 30, 2008** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **Maturing and repricing within**                         | ** ** |
| ** **                                                              | ** ** | **3**                                                                    | ** ** | **3 to 12** | ** ** | **1 to 5** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Months**                                                               | ** ** | **Months** | ** ** | **Years** | ** ** | **5 Years** | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **(amounts in thousands, except ratios)**            | ** ** |
| Interest-sensitive assets:                                              |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits  with other banks                             |       | $                                                                        | 7,821      |   | $ | — |   | $ | — |   | $ | — |   | $ | 7,821 |   |
| Certificates of deposit                                                 |       | —                                                                   |       | 100 |   | — |   | — |   | 100 |   |
| Investments                                                             |       | —                                                                   |       | 93 |   | 6,188 |   | 80,932 |   | 87,213 |   |
| Loans                                                                   |       | 29,969                                                                   |       | 25,801 |   | 119,175 |   | 43,366 |   | 218,311 |   |
| Total interest-sensitive  assets                                        |       | $                                                                        | 37,790     |   | $ | 25,994 |   | $ | 125,363 |   | $ | 124,298 |   | $ | 313,445 |   |
|                                                                    |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                        | 144,993    |   | $ | 34,560 |   | $ | 18,571 |   | $ | 52,839 |   | $ | 250,963 |   |
| Notes payable                                                           |       | —                                                                   |       | 240 |   | — |   | — |   | 240 |   |
| Other borrowings                                                        |       | —                                                                   |       | — |   | — |   | 371 |   | 371 |   |
| Total interest-sensitive  liabilities                                   |       | $                                                                        | 144,993    |   | $ | 34,800 |   | $ | 18,571 |   | $ | 53,210 |   | $ | 251,574 |   |
|                                                                    |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |       | $                                                                        | (107,203   | ) | $ | (8,806 | ) | $ | 106,792 |   | $ | 71,088 |   | $ | 61,871 |   |
|                                                                    |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (34.20                                                                   | )%         | (37.01 | )% | (2.94 | )% | 19.74 | % | 19.74 | % |

 

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(a) Savings, Now, and money market deposits totaling  $105,970 are included in the maturing in 3months classification.

 

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**LIQUIDITY**

 

Liquidity is the ability of the Company to convert assets into cash orcash equivalents without significant loss and to raise additional funds byincreasing liabilities.  Liquiditymanagement involves maintaining the Company’s ability to meet the day-to-daycash flow requirements of its customers, whether they are depositors wishing towithdraw funds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, theCompany would not be able to perform the primary function of a financialintermediary and would, therefore, not be able to meet the needs of thecommunities it serves. Additionally, the Company requires cash for variousoperating needs including: dividends to shareholders; business combinations;capital injections to its subsidiary; the servicing of debt; and the payment ofgeneral corporate expenses. The Company has access to various capitalmarkets.  However, the primary source ofliquidity for the Company is dividends from its bank subsidiary.  The Georgia Department of Banking and Financeregulates the dividend payments and must approve dividend payments that exceed50 percent of the Bank’s prior year net income. As of June 30, 2008, this amount was approximately $1,604,000. Thepayment of dividends may also be affected or limited by other factors, such asthe requirement to maintain adequate capital above regulatory guidelines.  In 2007, the Georgia Department of Bankingand Finance approved a special dividend of $5,155,000 which was used by theCompany to redeem its outstanding Junior Subordinated Debentures.

 

Asset and liability management functions not only serve to assureadequate liquidity in order to meet the needs of the Company’s customers, butalso to maintain an appropriate balance between interest-sensitive assets andinterest-sensitive liabilities so that the Company can earn a return that meetsthe 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 provides liquidity primarilythrough loan principal repayments, maturities of investment securities and, toa lesser extent, sales or paydowns of investment securities available for saleand held to maturity.  Other short-terminvestments such as federal funds sold and maturing interest bearing depositswith other banks, are additional sources of liquidity funding.

 

The liability portion of the balance sheet provides liquidity throughvarious customers’ interest bearing and noninterest bearing depositaccounts.  Federal funds purchased andother short-term borrowings are additional sources of liquidity and, 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.

 

**CAPITAL RESOURCES**

 

Stockholders’ equity decreased by $596,000 for the six month periodended June 30, 2008 primarily due to a decrease in accumulated othercomprehensive income, net of taxes. Accumulated other comprehensive income, net of taxes decreased by$600,000 to a loss of $553,000 in the first six month of 2008.  This decrease is attributed to the rapidmovements in the Treasury markets, wild swings in volatility and creditspreads, and their impact on the Company’s available for sale securitiesportfolio.  Retained earnings was flatfor the period, decreasing by $41,000 due to a cumulative effect adjustment inthe amount of $192,000 as a result of the adoption of EITF 06-4, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsedSplit-Dollar Life Insurance Arrangements”, a dividend of $0.19 per common shareto stockholders totaling $398,000, partially offset by an increase in netincome of $548,000.

 

Quantitative measures established by regulation to ensure capitaladequacy require the Company to maintain minimum amounts and ratios of totaland Tier 1 capital to risk weighted assets, and Tier 1 capital to averageassets.  The Bank’s total and Tier 1capital to risk weighted assets and Tier 1 to

 

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average assets were 14%, 13% and 9% at June 30, 2008 and comparedto 14%, 13% and 10% at December 31, 2007. At June 30, 2008, the Company met all capital adequacy requirementsto which it is subject and is considered to be ‘well capitalized” underregulatory standards.

 

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

 

This information is not required since the Company qualifies as asmaller reporting company.

 

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

 

As of the end of the period covered by this report,we conducted, under the supervision of and with the participation of ourmanagement, including the Company’s Chief Executive Officer, Chief OperatingOfficer, and Chief Financial Officer, an evaluation of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).Based on this evaluation, the Company’s Chief Executive Officer, ChiefOperating Officer, and Chief Financial Officer have concluded that ourdisclosure controls and procedures were effective as of June 30, 2008 inaccumulating and communicating information to management, including the ChiefExecutive Officer, the Chief Operating Officer, and the Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures of that information under the SEC’s rules and forms and thatthe Company’s disclosure controls and procedures are designed to ensure thatthe information required to be disclosed in reports filed or submitted by theCompany under the Securities Exchange Act is recorded, processed, summarizedand reported within the specified time periods. During the quarter ended June 30, 2008, there have been no changesin the Company’s internal controls over financial reporting or, to the Company’sknowledge, in other factors that could significantly change those internalcontrols subsequent to the date the Company carried out its evaluation thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. However, the design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

**PART II. OTHER INFORMATION**

 

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

 

The Company and the Bank are involved invarious claims and legal actions arising in the ordinary course ofbusiness.  In the opinion of management,based in part on the advice of counsel, the ultimate disposition of thesematters will not have a material adverse impact on the Company’s consolidatedfinancial position.

 

**ITEM 1A.****       ****RISK FACTORS**

 

Other than as noted below, we believe therehave been no material changes from the factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2007.  You should carefully consider thefactors discussed below and in our Annual Report on Form 10-K, which couldmaterially affect our business, financial condition or future results. Therisks described below and in our Annual Report on Form 10-K are not theonly risks facing us. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

 

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The following are supplemental risk factorsrelating to the recent changes in the strength of the economy and the impact ofpublic perception on our performance.

 

***Weakness in the economy and in the real estate market, includingspecific weakness within our geographic footprint, has adversely affected usand may continue to adversely affect us.***

 

If the strength of the U.S. economy ingeneral and the strength of the local economies in which we conduct operationsdecline, or continue to decline, this could result in, among other things, adeterioration in credit quality or a reduced demand for credit, including aresultant adverse effect on our loan portfolio and allowance for loan and leaselosses. Declines in the U.S. economy and the real estate market contributed toour increasing provisions for loan losses through the second quarter of 2008,and our expectation for future loan losses and loss provisions for theremainder of 2008 and 2009. These factors could result in loan loss provisionsin excess of charge-offs, delinquencies and/or greater charge-offs in futureperiods, which may adversely affect our financial condition and results ofoperations. In addition, deterioration of the U.S. economy may adversely impactour traditional banking business. Economic declines may be accompanied by adecrease in demand for consumer or commercial credit and declining real estate andother asset values. Declining real estate and other asset values may reduce theability of borrowers to use such equity to support borrowings. Delinquencies,foreclosures and losses generally increase during economic slow downs orrecessions. Additionally, our servicing costs, collection costs and creditlosses may also increase in periods of economic slow down or recessions. Theimpact of recent events relating to subprime mortgages resulting in asubstantial housing recession has not been limited to those directly involvedin the real estate construction industry (such as builders and developers).Rather, it has impacted a number of related businesses such as buildingmaterials suppliers, equipment leasing firms, and real estate attorneys, amongothers. All of these affected businesses have banking relationships and whentheir businesses suffer from recession, the banking relationship suffers aswell.

 

***The impact of the current economic downturn on the performance of otherfinancial institutions in our primary market area, actions taken by ourcompetitors to address the current economic downturn, and the public perceptionof and confidence in the economy generally, and the banking industryspecifically, could negatively impact our performance and operations.***

 

All financial institutions are subject to thesame risks resulting from a weakening economy such as increased charge-offs andlevels of past due loans and nonperforming assets. As troubled institutions inour market area continue to dispose of problem assets, the already excessinventory of residential homes and lots will continue to negatively impact homevalues and increase the time it takes us or our borrowers to sell existinginventory. The perception that troubled banking institutions (and smaller bankinginstitutions that are not “in trouble”) are risky institutions for purposes ofregulatory compliance or safeguarding deposits may cause depositors nonethelessto move their funds to larger institutions. If our depositors should move theirfunds based on events happening at other financial institutions, our operatingresults would suffer.

 

**ITEM 2.****          ****UNREGISTERED SALE OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None

 

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**ITEM 3.****          ****DEFAULTS UPON SENIORSECURITIES**

 

None

 

**ITEM 4.****          ****SUBMISSION OF MATTERS TOVOTE OF SECURITY HOLDERS**

 

The Company held its Annual Shareholders’Meeting on Wednesday, May 28, 2008, at 10:30 a.m., at Atlanta LifeFinancial Group, Herndon Plaza, 100 Auburn Avenue, N.E., Atlanta, Georgia.  The purpose of the Annual Shareholders’Meeting was to elect two (2) Class III directors who will serve athree year term expiring at the 2011 annual meeting.  The following table presents the results ofthe shareholders vote:

 
| **Directors**     | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|-------------------|------------|-----------|------------|--------------|------------|
|              |       |      |       |         |       |
| Stephen A. Elmore |       | 1,274,101 |       | 4,777        |       |
| Donald Ratajczak  |       | 1,274,086 |       | 4,792        |       |

 

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**ITEM 5.****          ****OTHER INFORMATION**

 

None

 

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

 

**Exhibit 31**

 

Certification pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

**Exhibit 32**

 

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

 

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
| **CITIZENS BANCSHARES CORPORATION** |
|-------------------------------------|
|                                |
|                                |
| Date:                               | August 14, 2008 | By: | /s/ James E. Young |
|                                |   | James E. Young |
|                                |   | President and Chief Executive Officer |
|                                |   |   |
|                                |   |   |
| Date:                               | August 14, 2008 | By: | /s/ Cynthia N. Day |
|                                |   | Cynthia N. Day |
|                                |   | Senior Executive Vice President and |
|                                |   | Chief Operating Officer |
|                                |   |   |
|                                |   |   |
| Date:                               | August 14, 2008 | By: | /s/ Samuel J. Cox |
|                                |   | Samuel J. Cox |
|                                |   | Executive Vice President and |
|                                |   | Chief Financial Officer |

 

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