**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10 – Q**

 

**(Mark One)**

 
| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE****SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                    |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                          |
|       |       | **For the quarterly period ended September 30, 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**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

Registrant’stelephone number, including area code:  **(678) 406 - 4000**

 

Indicate by check mark whether the registrant (1) has filed allreports 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) hasbeen subject to such filing requirements for the past 90days.   x Yes  o No.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated 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.

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller reporting company x |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

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

 

SEC 1296(08-03)  **Potential persons who areto respond to the collection of information contained in this form are notrequired to respond unless the form displays a currently valid OMB controlnumber.**

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding for each of the issuer’sclasses of common stock as of the latest practicable date: 2,007,845 shares ofCommon Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock,$1.00 par value outstanding on October 31, 2008.

 

 

 

----

 

**PART 1.****                FINANCIALINFORMATION**

 

**ITEM 1.****                  Financialstatements**

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARY**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

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

 
| ** **                                                                                          | ** ** | **2008**        | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                          |       |            |       |       |       |
| Cash and due from banks                                                                             |       | $               | 6,858      |       | $          | 8,188 |   |
| Interest-bearing deposits with banks                                                                |       | 2,268           |       | 522        |       |
| Certificates of deposit                                                                             |       | 100             |       | 100        |       |
| Investment securities available for sale,  at fair value                                            |       | 81,448          |       | 59,677     |       |
| Investment securities held to maturity, at  cost                                                    |       | 4,613           |       | 7,374      |       |
| Other investments                                                                                   |       | 1,615           |       | 1,842      |       |
| Loans receivable, net                                                                               |       | 211,976         |       | 235,363    |       |
| Premises and equipment, net                                                                         |       | 7,620           |       | 7,792      |       |
| Cash surrender value of life insurance                                                              |       | 10,008          |       | 9,745      |       |
| Foreclosed real estate                                                                              |       | 3,664           |       | 2,423      |       |
| Other assets                                                                                        |       | 5,252           |       | 5,358      |       |
|                                                                                                |       |            |       |       |       |
| Total assets                                                                                        |       | $               | 335,422    |       | $          | 338,384 |   |
|                                                                                                |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                       | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                |       |            |       |       |       |
| LIABILITIES:                                                                                        |       |            |       |       |       |
| Noninterest-bearing deposits                                                                        |       | $               | 62,953     |       | $          | 53,894 |   |
| Interest-bearing deposits                                                                           |       | 223,749         |       | 225,705    |       |
|                                                                                                |       |            |       |       |       |
| Total deposits                                                                                      |       | 286,702         |       | 279,599    |       |
|                                                                                                |       |            |       |       |       |
| Accrued expenses and other liabilities                                                              |       | 3,793           |       | 4,368      |       |
| Federal funds purchased                                                                             |       | —          |       | 2,000      |       |
| Notes payable                                                                                       |       | 240             |       | 340        |       |
| Advances from Federal Home Loan Bank                                                                |       | 11,767          |       | 18,944     |       |
|                                                                                                |       |            |       |       |       |
| Total liabilities                                                                                   |       | 302,502         |       | 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                                                                          |       | 7,597           |       | 7,554      |       |
| Retained earnings                                                                                   |       | 25,608          |       | 25,071     |       |
| Treasury stock at cost, 223,109 shares at  September 30, 2008 and 227,517 at December 31, 2007      |       | (1,884          | )          | (1,859     | )          |
| Accumulated other comprehensive income  (loss), net of income taxes                                 |       | (721            | )          | 47         |       |
|                                                                                                |       |            |       |       |       |
| Total stockholders’ equity                                                                     |       | 32,920          |       | 33,133     |       |
|                                                                                                |       |            |       |       |       |
|                                                                                                |       | $               | 335,422    |       | $          | 338,384 |   |

 

Seenotes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

**(Unaudited - In thousands, exceptper share data)**

 
| ** **                                           | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income:                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Loans, including fees                                |       | $                                                    | 3,701      |                                                | $          | 4,832 |   | $ | 12,166 |   | $ | 13,749 |   |
| Investment securities:                               |       |                                                 |       |                                                |       |   |   |   |   |
| Taxable                                              |       | 874                                                  |       | 637                                                 |       | 2,369 |   | 1,977 |   |
| Tax-exempt                                           |       | 185                                                  |       | 201                                                 |       | 540 |   | 633 |   |
| Interest-bearing deposits                            |       | 21                                                   |       | 32                                                  |       | 130 |   | 291 |   |
| Total interest income                                |       | 4,781                                                |       | 5,702                                               |       | 15,205 |   | 16,650 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense:                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Deposits                                             |       | 1,453                                                |       | 1,909                                               |       | 4,984 |   | 5,496 |   |
| Other borrowings                                     |       | 84                                                   |       | 237                                                 |       | 238 |   | 810 |   |
| Total interest expense                               |       | 1,537                                                |       | 2,146                                               |       | 5,222 |   | 6,306 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,244                                                |       | 3,556                                               |       | 9,983 |   | 10,344 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for loan losses                            |       | 130                                                  |       | —                                              |       | 1,239 |   | — |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income after provision for  loan losses |       | 3,114                                                |       | 3,556                                               |       | 8,744 |   | 10,344 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest income:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Service charges on deposits                          |       | 1,166                                                |       | 823                                                 |       | 3,178 |   | 2,290 |   |
| Gain (loss) on sales of securities                   |       | 10                                                   |       | 3                                                   |       | 38 |   | (30 | ) |
| Gain on sales of assets                              |       | 22                                                   |       | —                                              |       | 32 |   | 64 |   |
| Other operating income                               |       | 271                                                  |       | 284                                                 |       | 850 |   | 1,032 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,469                                                |       | 1,110                                               |       | 4,098 |   | 3,356 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest expense:                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and employee benefits                       |       | 1,703                                                |       | 1,875                                               |       | 5,351 |   | 5,603 |   |
| Net occupancy and equipment                          |       | 618                                                  |       | 635                                                 |       | 1,740 |   | 1,774 |   |
| Other real estate owned                              |       | 46                                                   |       | 3                                                   |       | 488 |   | 26 |   |
| Other operating expenses                             |       | 1,386                                                |       | 1,311                                               |       | 3,856 |   | 3,978 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 3,753                                                |       | 3,824                                               |       | 11,435 |   | 11,381 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 830                                                  |       | 842                                                 |       | 1,407 |   | 2,319 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax expense                                   |       | 212                                                  |       | 174                                                 |       | 241 |   | 446 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                                    | 618        |                                                | $          | 668 |   | $ | 1,166 |   | $ | 1,873 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per share - basic                         |       | $                                                    | 0.29       |                                                | $          | 0.32 |   | $ | 0.56 |   | $ | 0.90 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per share - diluted                       |       | $                                                    | 0.29       |                                                | $          | 0.32 |   | $ | 0.56 |   | $ | 0.90 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average outstanding shares - basic          |       | 2,096                                                |       | 2,092                                               |       | 2,095 |   | 2,089 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average outstanding shares -  diluted       |       | 2,096                                                |       | 2,092                                               |       | 2,095 |   | 2,089 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Dividends per common share                           |       | $                                                    | —     |                                                | $          | — |   | $ | 0.19 |   | $ | 0.19 |   |

 

See notes to consolidated financialstatements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATION**

**AND SUBSIDIARY**

 

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

**FOR THE NINE MONTHS ENDED SEPTEMBER 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                                                                                               |       | —                |       | —                |       | —        |       | —         |       | —                  |       | 1,873             |       | —     |       | —     |       | —                 |       | 1,873      |       |
| Unrealized holding gains on investment  securities available for sale—net of taxes of $68,293       |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | 133                    |       | 133        |       |
| Less reclassification adjustment for  holding losses included in net income—net of taxes of $10,302 |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | 20                     |       | 20         |       |
|                                                                                                     |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive loss                                                                                       |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | —                 |       | 2,026      |       |
|                                                                                                     |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Cumulative effect of adoption of fair value  option                                                      |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (173              | )          | —     |       | —     |       | —                 |       | (173       | )          |
| Stock based compensation expense                                                                         |       | —                |       | —                |       | —        |       | —         |       | 39                      |       | —            |       | —     |       | —     |       | —                 |       | 39         |       |
| Sale of Treasury stock                                                                                   |       | —                |       | —                |       | —        |       | —         |       | 3                       |       | —            |       | 7          |       | 56         |       | —                 |       | 59         |       |
| Dividends declared                                                                                       |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (397              | )          | —     |       | —     |       | —                 |       | (397       | )          |
|                                                                                                     |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| **Balance—September 30, 2007**                                                                 | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,539**  | ** ** | **$**      | **24,089** | ** ** | **(227**               | **)**      | **$**      | **(1,859** | **)** | **$** | **(385** | **)** | **$** | **31,704** | ** ** |
| ** **                                                                                               | ** ** | ** **            | ** ** | ** **            | ** ** | ** **    | ** ** | ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance—December 31, 2007                                                                      |       | 2,230                 |       | $                     | 2,230      |          | 90         |           | $          | 90                      |       | $                 | 7,554      |       | $          | 25,071     |       | (227                   | )          | $          | (1,859     | ) | $ | 47 |   | $ | 33,133 |   |
|                                                                                                     |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Net income                                                                                               |       | —                |       | —                |       | —        |       | —         |       | —                  |       | 1,166             |       | —     |       | —     |       | —                 |       | 1,166      |       |
| Unrealized holding losses on investment  securities available for sale—net of taxes of $383,146     |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (743                   | )          | (743       | )          |
| Less reclassification adjustment for  holding gains included in net income—net of taxes of $12,816  |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (25                    | )          | (25        | )          |
|                                                                                                     |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive income (loss)                                                                              |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       | 398        |       |
|                                                                                                     |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Cumulative effect of adoption of EITF 06-4,  net of taxes                                                |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (231              | )          | —     |       | —     |       | —                 |       | (231       | )          |
| Stock based compensation expense                                                                         |       | —                |       | —                |       | —        |       | —         |       | 43                      |       | —            |       | —     |       | —     |       | —                 |       | 43         |       |
| Purchase of treasury stock                                                                               |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | 4          |       | (25        | )          | —                 |       | (25        | )          |
| Dividends declared                                                                                       |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (398              | )          | —     |       | —     |       | —                 |       | (398       | )          |
|                                                                                                     |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| **Balance—September 30, 2008**                                                                 | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,597**  | ** ** | **$**      | **25,608** | ** ** | **(223**               | **)**      | **$**      | **(1,884** | **)** | **$** | **(721** | **)** | **$** | **32,920** | ** ** |

 

See notes to consolidatedfinancial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**

**(In thousands)**

 
| ** **                                                                                    | ** ** | **2008**        | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                     |       |            |       |     |       |
| Net income                                                                                    |       | $               | 1,166      |     | $          | 1,873 |   |
| **Adjustments to reconcile net income to net  cash provided (used) by operating activities:** |       |            |       |     |       |
| Provision for loan losses                                                                     |       | 1,239           |       | —   |       |
| Depreciation                                                                                  |       | 589             |       | 581      |       |
| Amortization and accretion, net                                                               |       | 106             |       | 213      |       |
| Provision for deferred income taxes  (benefit)                                                |       | 398             |       | 145      |       |
| Gain on sale of assets and investments                                                        |       | (70             | )          | (34      | )          |
| Stock based compensation expense                                                              |       | 43              |       | 39       |       |
| Change in other assets                                                                        |       | (200            | )          | (1,034   | )          |
| Change in accrued expenses and other  liabilities                                             |       | (804            | )          | (66      | )          |
|                                                                                          |       |            |       |     |       |
| Net cash provided by operating activities                                                     |       | 2,467           |       | 1,717    |       |
|                                                                                          |       |            |       |     |       |
| **INVESTING ACTIVITIES:**                                                                     |       |            |       |     |       |
| Proceeds from calls and maturities of  investment securities held to maturity                 |       | 2,755           |       | 149      |       |
| Proceeds from sales and maturities of  investment securities available for sale               |       | 19,521          |       | 11,019   |       |
| Purchases of investment securities  available for sale                                        |       | (42,494         | )          | (1,016   | )          |
| Net change in other investments                                                               |       | 227             |       | 349      |       |
| Net change in loans receivable                                                                |       | 19,714          |       | (18,360  | )          |
| Net proceeds (premiums paid) on life  insurance policy                                        |       | —          |       | (28      | )          |
| Net proceeds from the sale of foreclosed  properties                                          |       | 1,241           |       | 310      |       |
| Purchases of premises and equipment, net                                                      |       | (417            | )          | (788     | )          |
| Proceeds from the sale of premises and  equipment, net                                        |       | —          |       | 179      |       |
| Net change in interest bearing deposits  with banks                                           |       | (1,746          | )          | 4,139    |       |
|                                                                                          |       |            |       |     |       |
| Net cash used in investing activities                                                         |       | (1,199          | )          | (4,047   | )          |
|                                                                                          |       |            |       |     |       |
| **FINANCING ACTIVITIES:**                                                                     |       |            |       |     |       |
| Net change in deposits                                                                        |       | 7,103           |       | 13,130   |       |
| Principal payments on debt                                                                    |       | (100            | )          | —   |       |
| Payoff of junior subordinated debentures,  net                                                |       | —          |       | (5,000   | )          |
| Net change in advances from Federal Home  Loan Bank                                           |       | (7,178          | )          | (8,824   | )          |
| Net change in Federal funds purchased                                                         |       | (2,000          | )          | 1,000    |       |
| Sale (purchase) of treasury stock activity                                                    |       | (25             | )          | 56       |       |
| Net change in additional paid-in-capital                                                      |       | —          |       | 3        |       |
| Dividends paid                                                                                |       | (398            | )          | (397     | )          |
|                                                                                          |       |            |       |     |       |
| Net cash used in financing activities                                                         |       | (2,598          | )          | (32      | )          |
|                                                                                          |       |            |       |     |       |
| Net change in cash and cash equivalents                                                       |       | (1,330          | )          | (2,362   | )          |
|                                                                                          |       |            |       |     |       |
| Cash and cash equivalents, beginning of  period                                               |       | 8,188           |       | 8,615    |       |
|                                                                                          |       |            |       |     |       |
| Cash and cash equivalents at end of period                                                    |       | $               | 6,858      |     | $          | 6,253 |   |
|                                                                                          |       |            |       |     |       |
| **Supplemental disclosures of cash paid  during the period for:**                             |       |            |       |     |       |
| Interest                                                                                      |       | $               | 5,547      |     | $          | 6,336 |   |
|                                                                                          |       |            |       |     |       |
| Income taxes                                                                                  |       | $               | 1,009      |     | $          | 511 |   |
|                                                                                          |       |            |       |     |       |
| **Supplemental disclosures of noncash  transactions:**                                        |       |            |       |     |       |
| Real estate acquired through foreclosure                                                      |       | $               | 2,449      |     | 3,217      |   |
|                                                                                          |       |            |       |     |       |
| Change in unrealized gain on investment  securities available for sale, net of taxes          |       | $               | (768       | )        | $          | 153 |   |
|                                                                                          |       |            |       |     |       |
| Cumulative effect of change in accounting  principle                                          |       | $               | 231        |     | $          | — |   |
|                                                                                          |       |            |       |     |       |
| Cumulative effect of adoption of fair value  option                                           |       | $               | —     |     | $          | 173 |   |

 

See notes to consolidatedfinancial statements.

 

5

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

**Notes tothe Consolidated Financial Statements**

(Unaudited)

 

**1. SUMMARY OF SIGNIFICANT 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 andnine month periods ended September 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 nine month periods have beenincluded.  All adjustments are of anormal recurring nature.  All significantintercompany accounts 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 recentauthoritative pronouncements that could affect the accounting, reporting, anddisclosure of financial information by the Company:

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”)which replaces SFAS 141. SFAS 141(R) establishes principles andrequirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measuresgoodwill 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 isrequired to record and disclose business combinations following existingaccounting guidance until January 1, 2009. The Company will assess theimpact of SFAS 141(R) if and when a future acquisition occurs.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. Beforethis statement, limited guidance existed for reporting noncontrolling interests(minority interest). As a result, diversity in practice exists. In some casesminority interest is reported as a liability and in others it is reported inthe mezzanine section between liabilities and equity. Specifically, SFAS 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financials statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. SFAS 160 clarifies that changes in a parent’s ownership interest ina subsidiary that do not result in deconsolidation are equity transactions ifthe parent retains its controlling financial interest. In addition, thisstatement requires that a parent recognize gain or loss in net income when asubsidiary is deconsolidated. Such gain or loss will be measured using the fairvalue of the noncontrolling equity investment on the deconsolidation date. SFAS160 also includes expanded disclosure requirements regarding the interests ofthe parent and its noncontrolling interests. SFAS 160 is effective for theCompany on January 1, 2009.  Earlier adoption is prohibited. The Company is currently evaluating theimpact, if any, the adoption of SFAS 160 will have on its financial position,results of operations and cash flows.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative andhedging activities and thereby improving the transparency of financialreporting.  It is intended to enhance thecurrent disclosure framework in SFAS 133 by requiring that objectives for usingderivative instruments be disclosed in terms of underlying risk and accountingdesignation. This disclosure better conveys the purpose of derivative use interms of the risks that the entity is intending to manage. SFAS 161 iseffective for the Company on January 1, 2009. This pronouncement does notimpact accounting measurements but will result in additional disclosures if theCompany is involved in material derivative and hedging activities at that time.

 

In February 2008,the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfersof Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”). This FSP provides guidance on accounting for a transfer of a financial assetand the transferor’s repurchase financing of the asset.  This FSP presumesthat an initial transfer of a financial asset and a repurchase financing areconsidered part of the same arrangement (linked transaction) under SFAS No. 140.However, if certain criteria are met, the initial transfer and repurchasefinancing are not evaluated as a linked transaction and are evaluated separatelyunder Statement 140.  FSP 140-3 will be effective for financial statementsissued for fiscal years beginning after November 15, 2008, and interimperiods within those fiscal years and earlier application is not permitted.Accordingly, this FSP is effective for the Company on January 1,2009.  The Company is currently evaluating the impact, if any, theadoption of FSP 140-3 will have on its financial position, results ofoperations and cash flows.

 

In April 2008,the FASB issued FASB Staff Position No. 142-3, “Determination of theUseful 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,”**and other U.S.generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears and early adoption is prohibited. Accordingly, this FSP is effective for the Company on January 1,2009.  The Company does not believe theadoption of FSP 

 

7

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142-3 will havea material impact on its financial position, results of operations or cashflows.

 

In May, 2008,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 162, “The Hierarchy of Generally AcceptedAccounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles andthe framework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles (GAAP) in the United States (the GAAPhierarchy).  SFAS No. 162 will beeffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board’s amendments to AU Section 411, “The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.”  The FASB has stated that it does not expectSFAS No. 162 will result in a change in current practice. The applicationof SFAS No. 162 will have no effect on the Company’s financial position, resultsof operations or cash flows.

 

Effective January 1,2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”) which provides a framework for measuring and disclosing fair value undergenerally accepted accounting principles. SFAS 157 requires disclosures aboutthe fair value of assets and liabilities recognized in the balance sheet inperiods subsequent to initial recognition, whether the measurements are made ona recurring basis (for example, available-for-sale investment securities) or ona nonrecurring basis (for example, impaired loans). The Company elected toearly adopt the provisions of these statements effective January 1,2007.  See Note 2, “Fair Value ofFinancial Instruments” to the Consolidated Financial Statements for relateddisclosures.

 

SFAS 157defines fair value as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transaction betweenmarket participants on the measurement date. SFAS 157 also establishes a fairvalue hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value.The standard describes three levels of inputs that may be used to measure fairvalue:

 
| **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 StaffPosition No. FAS 157-2 delays the implementation of SFAS 157 until thefirst quarter of 2009 with respect to goodwill, other intangible assets, realestate and other assets acquired through foreclosure and other non-financialassets measured at fair value on a nonrecurring basis.

 

During 2007, the FASB’s Emerging Issues TaskForce (“EITF”) issued EITF 06-4 “Accounting for the Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements”, which requires an employer to recognize a liability for thepostretirement death benefits provided under endorsement split-dollar lifeinsurance arrangements.  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 $231,000.

 

FSP SFAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives andCertain Guarantees: An Amendment of FASB Statement No. 133 and FASBInterpretation No. 45; and Clarification of the Effective Date of FASBStatement No. 161,” (“FSP SFAS 133-1 and FIN 45-4”) was issued September 2008,effective for reporting periods (annual or interim) ending after November 15,2008.  FSP SFAS 133-1 and FIN 45-4 amendsSFAS 133 to require the seller of credit derivatives to disclose the nature ofthe credit derivative, the maximum potential amount of future payments, fair valueof the derivative, and the nature of any recourse provisions.  Disclosures must be made for entire hybridinstruments that have embedded credit derivatives.

 

The staff position also amends FIN 45 to require disclosure of thecurrent status of the payment/performance risk of the credit derivativeguarantee.  If an entity utilizesinternal groupings as a basis for the risk, how the groupings are determinedmust be disclosed as well as how the risk is managed.

 

The staff position encourages that the amendments be applied in periodsearlier than the effective date to facilitate comparisons at initialadoption.  After initial adoption,comparative disclosures are required only for subsequent periods.

 

FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161such that required disclosures should be provided for any reporting period(annual or quarterly interim) beginning after November 15, 2008.  The adoption of this Staff Position will haveno material effect on the Company’s financial position, results of operationsor cash flows.

 

The SEC’s Office of the Chief Accountant and the staff of the FASBissued press release 2008-234 on September 30, 2008 (“Press Release”) toprovide clarifications on fair value accounting.  The press release includes guidance on theuse of management’s internal assumptions and the use of “market” quotes.  It also reiterates the factors in SEC StaffAccounting Bulletin (“SAB”) Topic 5M which should be considered whendetermining other-than-temporary impairment: the length of time and extent to 

 

9

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which the market value has been less than cost; financial condition andnear-term prospects of the issuer; and the intent and ability of the holder toretain its investment for a period of time sufficient to allow for anyanticipated recovery in market value.

 

On October 10, 2008, the FASB issued FSP SFAS 157-3, “Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive” (“FSP SFAS 157-3”). This FSP clarifies the application of SFAS No. 157,“Fair Value Measurements” (see Note 2) in a market that is not active andprovides an example to illustrate key considerations in determining the fairvalue of a financial asset when the market for that asset is not active.  The FSP is effective upon issuance, includingprior periods for which financial statements have not been issued. For theCompany, this FSP is effective for the quarter ended September 30, 2008.

 

The Company considered the guidance in the Press Release and in FSPSFAS 157-3 when conducting its review for other-than-temporary impairment as ofSeptember 30, 2008 and determined that it did not result in a change toits impairment estimation techniques.

 

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.

 

10

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**2. FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

In accordance with SFAS No. 159, theCompany has elected to record specific financial assets and financialliabilities at fair value. The following is a description of each asset andliability class for which fair value has been elected (in thousands):

 

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

 
| ** **                                | ** ** | ** **    | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Unobservable  Inputs** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|
| **Description**                           | ** ** | **9/30/2008** | ** ** | **(Level 1)**                                                              | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**       | ** ** |
|                                      |       |          |       |                                                                            |       |                                       |       |                     |       |
| Investments securities available for sale |       | $             | 81,448     |                                                                            | $          | —                                     |       | $                        | 81,448     |   | $ | — |   |
| Total                                     |       | $             | 81,448     |                                                                            | $          | —                                     |       | $                        | 81,448     |   | $ | — |   |

 

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

 
| ** **      | ** ** | ** **    | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Unobservable  Inputs** | ** ** |
|-----------------|------------|---------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|
| **Description** | ** ** | **9/30/2008** | ** ** | **(Level 1)**                                                              | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**       | ** ** |
|            |       |          |       |                                                                            |       |                                       |       |                     |       |
| FHLB Advances   |       | $             | 11,767     |                                                                            | $          | —                                     |       | $                        | 11,767     |   | $ | — |   |
| Total           |       | $             | 11,767     |                                                                            | $          | —                                     |       | $                        | 11,767     |   | $ | — |   |

 

The Company is predominantly an asset basedlender with real estate serving as collateral on a substantial majority ofloans. Loans which are deemed to be impaired are primarily valued nonrecurringbasis at the fair values of the underlying real estate collateral. Such fairvalues are obtained using independent appraisals, which the Company considersto be level 2 inputs. The aggregate carrying amount of impaired loans at September 30,2008 was $14.8 million.

 

The Federal Home Loan Bank (the “FHLB”) Advance balance outstanding at September 30,2008 consist of a Daily Rate Credit advance, which is priced daily off of theFed Funds rates and an Affordable Housing Program (AHP) award used tosubsidized loans for homeownership or rental initiatives.  At September 30, 2008, there were nochanges in fair values that were included in current earnings.

 

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

 

11

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**3.  INTANGIBLE ASSETS**

 

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):

 
| ** **                    | ** ** | **September 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      |                            | $          | 2,752 |   | $ | 2,836 |   | $ | 2,712 |   |

 

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

 
| ** **                                                                                                   | ** ** | **For the 3  months ended  September 30,  2008** | ** ** | **For the 9  months ended  September 30,  2008** | ** ** | **For the 3  months ended  September 30,  2007** | ** ** | **For the 9  months ended  September 30,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
|                                                                                                         |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |
| Aggregate amortization expense of core  deposit intangibles:                                                 |       | $                                                                    | 13         |                                                                 | $          | 40                                                                   |       | $                                                                    | 14         |   | $ | 99 |   |
|                                                                                                         |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |
| Estimated aggregate amortization expense of  core deposit intangibles for the years ending December 31: |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |
|                                                                                                         |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |
| 2008                                                                                                         |       | $                                                                    | 53         |                                                                 |       |                                                                 |       |                                                                 |       |   |
| 2009                                                                                                         |       | $                                                                    | 53         |                                                                 |       |                                                                 |       |                                                                 |       |   |
| 2010                                                                                                         |       | $                                                                    | 18         |                                                                 |       |                                                                 |       |                                                                 |       |   |
|                                                                                                              |            |                                                                      |            |                                                                      |            |                                                                      |            |                                                                      |            |  |  |  |  |

 

12

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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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                        | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                        |       | $                                                    | 618        |                                                | $          | 668 |   | $ | 1,166 |   | $ | 1,873 |   |
|                              |       |                                                 |       |                                                |       |   |   |   |   |
| Other comprehensive income (loss) |       | (169                                                 | )          | 615                                                 |       | (768 | ) | 153 |   |
|                              |       |                                                 |       |                                                |       |   |   |   |   |
| Comprehensive income              |       | $                                                    | 449        |                                                | $          | 1,283 |   | $ | 398 |   | $ | 2,026 |   |

 

13

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**5.  NET INCOME PER COMMON AND COMMON EQUIVALENTSHARE**

 

Basic and diluted net income per common andpotential common share has been calculated based on the weighted average numberof shares outstanding.  The followingschedule reconciles the numerator and denominator of the basic and diluted netincome per common and potential common share for the three and nine monthperiods ended September 30, 2008 and 2007 (in thousands, except per sharedata):

 
| ** **                                                        | ** ** | **Net Income** | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                        | ** ** | **(Numerator)**     | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
|                                                              |       |                |       |              |       |               |       |
| **Three Months ended September 30, 2008**                    |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | 618        |              | 2,096      |               | $          | 0.29 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | 618        |              | 2,096      |               | $          | 0.29 |   |
|                                                              |       |                |       |              |       |               |       |
| **Three Months ended September 30, 2007**                    |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | 668        |              | 2,092      |               | $          | 0.32 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | 668        |              | 2,092      |               | $          | 0.32 |   |
|                                                              |       |                |       |              |       |               |       |
| **Nine Months ended September 30, 2008**                     |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | 1,166      |              | 2,095      |               | $          | 0.56 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | 1,166      |              | 2,095      |               | $          | 0.56 |   |
|                                                              |       |                |       |              |       |               |       |
| **Nine Months ended September 30, 2007**                     |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | 1,873      |              | 2,089      |               | $          | 0.90 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | 1,873      |              | 2,089      |               | $          | 0.90 |   |

 

**RECLASSIFICATIONS**

 

Certain 2007 amounts have been reclassified to conform to the 2008presentation.

 

14

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

 

**INTRODUCTION**

 

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial and personal banking services toindividuals and corporate customers in its primary market areas, metropolitanAtlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabama through itswholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 10 full-service financialcenters in Georgia and Alabama.

 

**ForwardLooking Statements**

 

In addition to historical information, this report on Form 10-Qmay contain forward-looking statements. For this purpose, any statementscontained herein, including documents incorporated by reference, that are notstatements of historical fact may be deemed to be forward-looking statements.Forward-looking statements are subject to numerous assumptions, risks and uncertainties.Without limiting the foregoing, the words “believe,” “anticipates,” “plan,”expects,” and similar expressions are intended to identify forward-lookingstatements.

 

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

 

The following discussion is of the Company’s financial condition as of September 30,2008 and December 31, 2007, and the changes in the financial condition andresults of operations for the nine and three months period ended September 30,2008 and 2007.

 

**Critical Accounting Policies**

 

In response to the Securities and Exchange Commission’s (“SEC”) ReleaseNo. 33-8040, Cautionary Advice Regarding Disclosure About CriticalAccounting Policies, the Company has identified the following as the mostcritical accounting policies upon which its financial status depends.  The critical policies were determined byconsidering accounting policies that involve the most complex or subjectivedecisions or assessments.  The Company’smost critical accounting policies relate to:

 

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

 

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securities during 2008 or 2007.

 

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

 

Gains and losses on sales of investmentsecurities are recognized upon disposition, based on the adjusted cost of thespecific security.  A decline in marketvalue of any security below cost that is deemed other than temporary is chargedto earnings resulting in the establishment of a new cost basis for thesecurity.

 

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

 

**Allowance for Loan Losses**- The Company provides for estimated losses on loans receivable when anysignificant and permanent decline in value occurs.  These estimates for losses are based, notonly on individual assets and their related cash flow forecasts, sales values,and independent appraisals, but also on the volatility of certain real estatemarkets, 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.

 

A description of other accounting policies are summarized in Note 1,Summary of Significant Accounting Policies in the Notes to ConsolidatedFinancial Statements of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2007.  TheCompany has followed those policies in preparing this report.

 

**FINANCIALCONDITION**

 

Total assets at September 30, 2008 decreased by less than 1% or$2,962,000 to $335,422,000 compared to $338,384,000 at December 31,2007.  Loans receivable the Company’slargest earning asset, decreased by $23,387,000 or 10% to $211,976,000 comparedto December 31, 2007.  Due to thecurrent slowdown in economic conditions in the Company’s target markets lendingactivity has slowed and the Company is being more conservative in its lendingcriteria.  Also, as a strategic riskdecision, the Company discontinued several borrowing relationships due to thecontinuing deterioration in the real estate market and recessionary pressures.The Company’s loan officers are spending more time with their loan portfoliosto spot deterioration and intervene timely to curtail significant losses.  The decrease in Loans receivable, net wasoffset by an $18,783,000 increase in investment securities and otherinvestments.

 

Total liabilities at the end of the third quarter of 2008 were$302,502,000, decreasing by $2,749,000 compared to December 31, 2007.Total deposits increased by $7,103,000 to $286,702,000, which was offset by adecrease in Advances from Federal Home Loan Bank of $7,177,000 to$11,767,000.  The Company also used theexcess liquidity generated from its deposit growth to payoff its outstandingFed funds purchased in the amount of $2 million. These actions were taken tobetter manage the 

 

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Company’s assets/liability structure.

 

The Company’s asset/liability management program, which monitors theCompany’s interest rate sensitivity as well as volume and mix changes inearning assets and interest bearing liabilities, may impact the growth of theCompany’s balance sheet as it seeks to maximize net interest income.

 

**INVESTMENT SECURITIES**

 

The composition of the Company’s investment securities portfolioreflects the Company’s investment strategy of maximizing portfolio yieldscommensurate with risk and liquidity considerations. The primary objectives ofthe Company’s investment strategy are to maintain an appropriate level ofliquidity and provide a tool to assist in controlling the Company’s interestrate sensitivity position, while at the same time producing adequate levels ofinterest income.

 

The Company invests a portion of its assets in U.S. governmentsponsored agency securities, state, county and municipal securities, andmortgage backed bonds.  At September 30,2008 and December 31, 2007, the Company’s investment securities portfoliorepresented approximately 26% and 20%, respectively, of total assets.

 

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

 
| **At September 30, 2008** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                     |       |                |       |                         |       |                          |       |                |       |
| State, county, and municipal securities  |       | $                   | 15,354     |                         | $          | 105                           |       | $                   | 214        |   | $ | 15,245 |   |
| Mortgage-backed securities               |       | 67,187              |       | 135                          |       | 1,119                         |       | $                   | 66,203     |   |
| Totals                                   |       | $                   | 82,541     |                         | $          | 240                           |       | $                   | 1,333      |   | $ | 81,448 |   |

 
| **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 |   |

 

17

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

 
| **At September 30, 2008** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                     |       |                |       |                         |       |                          |       |                |       |
| State, county, and municipal securities  |       | $                   | 4,004      |                         | $          | 62                            |       | $                   | —     |   | $ | 4,066 |   |
| Mortgage-backed securities               |       | 609                 |       | 1                            |       | —                        |       | 610                 |       |
|                                     |       |                |       |                         |       |                          |       |                |       |
| Totals                                   |       | $                   | 4,613      |                         | $          | 63                            |       | $                   | —     |   | $ | 4,676 |   |

 
| **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 |   |

 

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

 

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

 

Other investments consist of Federal Home Loan Bank and Federal ReserveBank stock which are restricted and have no readily determined marketvalue.  The Company is required tomaintain an investment in the FHLB and the FRB as part of its membership conditions.The level 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.

 

Securities with carrying values of $52,915,000 and $56,329,000 at September 30,2008 and December 31, 2007 were pledged to secure public deposits asrequired by law.

 

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##### **LOANS**

 

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

 

| ** **                              | ** **                | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|---------------------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** **                | **2008**               | ** ** | **2007**              | ** ** |
|                                    |                      |                   |       |                  |       |
| Commercial, financial, and agricultural |                      | $                      | 11,907     |                  | $          | 9,317 |   |
| Installment                             |                      | 11,126                 |       | 12,233                |       |
| Real estate - mortgage                  |                      | 167,001                |       | 182,120               |       |
| Real estate - construction              |                      | 23,175                 |       | 32,453                |       |
| Other                                   |                      | 2,487                  |       | 2,387                 |       |
|                                    | Loans receivable          |                   | 215,696    |                  | 238,510    |   |
| Less:                                   | Net deferred loan fees    |                   | 191        |                  | 299        |   |
|                                    | Allowance for loan losses |                   | 3,529      |                  | 2,848      |   |
|                                    |                      |                   |       |                  |       |   |
|                                    | Loans receivable, net     |                   | $          | 211,976               |       | $ | 235,363 |   |

 

The classification Real estate – mortgage consists of home equityloans, mortgages on 1–4 family residential, multifamily residential, andnonfarm residential properties such as churches, hotels, and conveniencestores.

 

**NONPERFORMING ASSETS**

 

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

 

With the exception of the loans included within nonperforming assets inthe table below, management is not aware of any loans classified for regulatorypurposes as loss, doubtful, substandard, or special mention that have not beendisclosed which (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.

 

The challenging financial and credit markets continued to experiencedifficulty in the nine months of 2008. As the economic outlook became moreuncertain due to sharp declines in real estate values, and increases indelinquency levels, the current economic environment has impacted the levels ofour nonperforming assets.  Year to date,nonperforming assets increased by $8,684,000 to $16,368,000 at September 30,2008 from $7,684,000 at December 31, 2007. At September 30, 2008, nonperforming assets represents 7.47% ofloans, net of unearned income, and real estate acquired through foreclosure ascompared to 3.19% at December 31, 2007.

 

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The table below presents a summary of theCompany’s nonperforming assets at September 30, 2008 and December 31,2007.

 
| ** **                                                                                           | ** ** | **September 30,**              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2008**                            | ** ** | **2007**              | ** ** |
| ** **                                                                                           | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                           | ** ** | **financial ratios)**          | ** ** |
| Nonperforming assets:                                                                                |       |                                |       |                  |       |
| Nonperforming loans:                                                                                 |       |                                |       |                  |       |
| Nonaccrual loans                                                                                     |       | $                                   | 12,704     |                  | $          | 5,261 |   |
| Past-due loans of 90 days or more                                                                    |       | —                              |       | —                |       |
| Nonperforming loans                                                                                  |       | 12,704                              |       | 5,261                 |       |
|                                                                                                 |       |                                |       |                  |       |
| Real estate acquired through foreclosure                                                             |       | 3,664                               |       | 2,423                 |       |
| Total nonperforming assets                                                                           |       | $                                   | 16,368     |                  | $          | 7,684 |   |
|                                                                                                 |       |                                |       |                  |       |
| Ratios:                                                                                              |       |                                |       |                  |       |
| Nonperforming  loans to loans, net of unearned income and discount on loans                          |       | 5.89                                | %          | 2.21                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Nonperforming assets to loans, net of  unearned income, and real estate acquired through foreclosure |       | 7.47                                | %          | 3.19                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Nonperforming assets to total assets                                                                 |       | 4.88                                | %          | 2.27                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Allowance for loan losses to nonperforming  loans                                                    |       | 27.78                               | %          | 54.12                 | %          |
|                                                                                                 |       |                                |       |                  |       |
| Allowance for loan losses to nonperforming  assets                                                   |       | 21.56                               | %          | 37.06                 | %          |

 

**ALLOWANCE FOR LOAN LOSSES**

 

The allowance for loan losses is primarily available to absorb lossesinherent in the loan portfolio. Credit exposures deemed uncollectible arecharged against the allowance for loan losses.

 

The Company provides for estimated losses on loans receivable when anysignificant and permanent decline in value occurs.  These estimates for losses are based onindividual assets and their cash flow forecasts, sales values, independentappraisals, the volatility of certain real estate markets, and concern fordisposing of real estate in distressed markets. For loans that are pooled for purposes of determining the necessaryprovisions, estimates are based on loan types, history of charge-offs, andother delinquency analyses.  Therefore,the value used to determine the provision for losses is subject to thereasonableness of these estimates. The adequacy of the allowance for loanlosses is reviewed on a monthly basis by management and the Board of Directors.  On a semi-annual basis an independent reviewof the adequacy of allowance for loan losses is performed.  This assessment is made in the context ofhistorical losses as well as existing economic conditions, and individualconcentrations of credit.

 

Loans are charged against the allowance when, in the opinion ofmanagement, such loans are deemed uncollectible and subsequent recoveries areadded to the allowance.  For the ninemonths of 2008, based on the Company’s evaluation, a provision for loan lossesof $1,239,000 was charged against operating earnings.  For the same period in 2007, the Companydetermined that no addition to the provision for loan losses was required.  The increase in the provision for loan lossesfor 2008 relates to several commercial real estate loans where the financialcondition of the borrowers and the collateral value securing the loansdeteriorated due to current economic conditions.

 

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The allowance for loan losses at September 30, 2008 wasapproximately $3,529,000, representing 1.64% of total loans, net of unearnedincome compared to approximately $2,848,000 at December 31, 2007, whichrepresented 1.20% of total loans, net of unearned income.  Approximately $1,583,000 of the allowance forloan losses was allocated to loans management considered impaired at September 30,2008.

 

At September 30, 2008, management believes the allowance for loanlosses is adequate. While management uses available information to recognizelosses on loans, future additions to the allowance may be necessary based onchanges in economic conditions, particularly in the metropolitan Atlanta area.In addition, regulatory agencies, as an integral part of their examinationprocess, periodically review the Company’s allowance for loan losses. Suchagencies may require the Company to recognize additions to the allowance basedon their judgments about information available to them at the time of theirexamination.

 

A substantialportion of the Company’s loan portfolio is secured by real estate in themetropolitan Atlanta and Birmingham markets, including a concentration of loansto churches and convenience stores.  TheCompany’s outstanding church loans were approximately $42 million at September 30,2008 as compared to $48 million at December 31, 2007. The Company’s loansto area convenience stores were approximately $13 million at September 30,2008 and December 31, 2007, respectively. Also, 1–4 family residential mortgage loans secured by first liens wereapproximately $43 million at September 30, 2008 and December 31,2007, respectively. The Company has no subprime mortgages in its portfolio andexited the mortgage origination business in the third quarter of 2007.

 

The ultimate collectibility of a significant portion of the Company’sloan portfolio is susceptible to changes in market conditions in themetropolitan Atlanta and Birmingham areas.

 

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The following table summarizes loans, changes in the allowance for loanlosses arising from loans charged off, recoveries on loans previously chargedoff by loan category, and additions to the allowance which have been charged tooperating expense as of and for the nine month period ended September 30,2008 and 2007 (amount in thousands, except financial ratios):

 
| ** **                                                                                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                       |       |     |       |     |       |
| Loans, net of unearned income                                                                              |       | $        | 215,505    |     | $          | 236,091 |   |
|                                                                                                       |       |     |       |     |       |
| Average loans, net of unearned income and  the allowance for loan losses                                   |       | $        | 221,610    |     | $          | 220,191 |   |
|                                                                                                       |       |     |       |     |       |
| Allowance for loan losses at the beginning  of period                                                      |       | $        | 2,848      |     | $          | 3,109 |   |
|                                                                                                       |       |     |       |     |       |
| Loans charged-off:                                                                                         |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                    |       | 118      |       | 53       |       |
| Real estate - loans                                                                                        |       | 155      |       | 193      |       |
| Installment loans to individuals                                                                           |       | 377      |       | 144      |       |
| Total loans charged-off                                                                                    |       | 650      |       | 390      |       |
|                                                                                                       |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                    |       | 24       |       | 67       |       |
| Real estate - loans                                                                                        |       | 37       |       | 108      |       |
| Installment loans to individuals                                                                           |       | 31       |       | 54       |       |
| Total loans recovered                                                                                      |       | 92       |       | 229      |       |
|                                                                                                       |       |     |       |     |       |
| Net loans charged-off                                                                                      |       | 558      |       | 161      |       |
|                                                                                                       |       |     |       |     |       |
| Additions to allowance for loan losses charged  to operating expense                                       |       | 1,239    |       | —   |       |
|                                                                                                       |       |     |       |     |       |
| Allowance for loan losses at period end                                                                    |       | $        | 3,529      |     | $          | 2,948 |   |
|                                                                                                       |       |     |       |     |       |
| Ratio of net loans charged-off to average  loans, net of unearned income and the allowance for loan losses |       | 0.25     | %          | 0.07     | %          |
|                                                                                                       |       |     |       |     |       |
| Ratio of allowance for loan losses to  loans, net of unearned income and discounts                         |       | 1.64     | %          | 1.25     | %          |

 

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**DEPOSITS**

 

Deposits are the Company’s primary source of funding loan growth.  Total deposits at September 30, 2008increased by 3% or $7 million to $286,702,000, driven by noninterest-bearingdeposits which increased by 17% or $9 million compared to December 31,2007.  The increase innoninterest-bearing deposits is primarily attributed to Corporate andGovernmental customers who make significant monthly deposits and withdrawalsbased on their budgetary needs. Interest-bearing deposits were basically flat during the first ninemonths of 2008, decreasing by $2 million. The Company has an ongoing salesprogram which places specific emphasis on deposit growth.

 

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

 
| ** **                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2008**               | ** ** | **2007**              | ** ** |
|                               |       |                   |       |                  |       |
| NOW and  money market accounts     |       | $                      | 64,850     |                  | $          | 68,728 |   |
| Savings  accounts                  |       | 32,889                 |       | 33,136                |       |
| Time  deposits of $100,000 or more |       | 78,847                 |       | 61,210                |       |
| Other time  deposits               |       | 47,163                 |       | 62,631                |       |
|                               |       | $                      | 223,749    |                  | $          | 225,705 |   |

 

**OTHER BORROWED FUNDS**

 

While the Company continues to emphasize funding earning asset growththrough deposits, the Company has relied on other borrowings as a supplementalfunding source.  Other borrowings consistof Federal funds purchased, short-term borrowings and FHLB advances.

 

Federal funds purchased represent unsecured borrowings from other banksand generally mature daily.  At December 31,2007 the company had $2,000,000 outstanding at a rate of 3.65%.  There was no amount outstanding at September 30,2008.

 

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

 

The Bank had outstanding advances from the FHLB of $11,767,000 at September 30,2008 compared 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, multifamily mortgageloans and commercial real estate loans.

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type**   | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2009                      |       | Daily        |       | Variable   |       | 3.25                             | %          | $                               | 11,400,000 |   | 4.40 | % | $ | 18,565,000 |   |
| August 2026                    |       |         |       | (1         | )          | —                           |       | 367,000                         |       | — |   | 379,408 |   |
|                                |       |         |       |       |       |                             |       |                            |       |   |   |   |   |
| Total  Principal Outstanding        |       |         |       |       |       |                             |       | $                               | 11,767,000 |   |   |   | $ | 18,944,408 |   |
|                                |       |         |       |       |       |                             |       |                            |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |       |       | 3.15                             | %          |                            |       | 4.31 | % |   |   |

 

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(1)          Represents an Affordable Housing Program(AHP) award used to subsidized loans for homeownership or rentalinitiatives.  The AHP is a principalreducing credit, scheduled to mature on August 17, 2026 with an interestrate of zero.

 

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**RESULTS OF OPERATIONS**

 

**Net InterestIncome:**

 

Net interest income is the principalcomponent of a financial institution’s income stream and represents thedifference, or spread, between interest and fee income generated from earningassets and the interest expense paid on deposits and borrowed funds.  Fluctuations in interest rates as well asvolume and mix changes in earning assets and interest bearing liabilities canmaterially impact net interest income.

 

The Company’s net income forthe first nine month of 2008 was negatively impacted by slow loan growth, anincrease in nonaccrual loans and a sharp reduction in earning asset yieldswithout corresponding levels of reductions in deposit rates due to intensedeposit competition and pricing pressure. As a result, the Company’s net interestmargin declined by 0.31% to 4.35%.

 

On a year-to-date basis, netinterest income decreased $361,000 or 3% to $9,983,000 compared to $10,344,000for the same period in 2007.  Totalinterest income decreased by $1,445,000 or 9% compared to the same nine monthperiod in 2007 and was primarily due to a $1,583,000 decrease in interestincome on loans as a result of lowered yields, volume, and an increase innonaccrual loans.  Total interest expensefor the period decreased by $1,084,000 or 17% compared to the same nine monthperiod in 2007.  Interest expense oninterest-bearing deposits decreased by $512,000 or 9%, as the Company was ableto lower rates on some of its deposit products and increased its mix ofnoninterest-bearing deposits.  Also,interest expense on other borrowings decreased by $572,000 or 71% as a resultof the payoff of several outstanding borrowings in 2007 that had significanthigher rates than our deposit base.

 

For the three month periodending September 30, 2008, net interest income decreased by $312,000 inthe third quarter of 2008 compared to the same period last year.  Total interest income for the third quarterof 2008 decreased by $921,000 or 16% and total interest expense decreased by$609,000 or 28% compared to the third quarter of 2007.  Interest income on loans decreased by$1,131,000, partially offset by a $221,000 increase in investment income.  Interest expense on deposits for the thirdquarter of 2008 decreased by $456,000 as a result of a change in the mix ofdeposits and the repricing of deposit rates compared to the same period lastyear.

 

The Company has an asset/liability managementprogram which monitors the Company’s interest rate sensitivity and ensures theCompany is competitive in the loans and deposit market.  The Company continues to monitor itsasset/liability mix and will make changes as appropriate to ensure it isproperly positioned to react to changing interest rates and inflationarytrends.

 

**Provisionfor loan losses**

 

During the nine months periodof 2008, the Company recognized additions to the provision for loan losses of$1,239,000 compared to no additions for the same period in 2007.  Nonaccrual loans increased by $7,443,000 dueto the deteriorating financial condition of several borrowers.  The allowance for loan losses increased to$3,529,000 at September 30, 2008 compared to $2,848,000 at December 31,2007.  At September 30, 2008, theallowance for loan losses was 28% of the nonperforming loans compared to 54% atDecember 31, 2007.  The provisionfor loan losses and the resulting allowance for loan losses are based onchanges in the size and character of the Company’s loan portfolio, changes innonperforming and past due loans, the existing risk of individual loans,concentrations of loans to specific borrowers or industries, and economicconditions. At September 30, 2008, the Company considered its allowancefor loan losses to be adequate.

 

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**Noninterestincome:**

 

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 portfoliosecurities and sales of assets are included in noninterest income.

 

Noninterest income totaled $1,469,000 for the three month period ended September 30,2008, representing an increase of $359,000 or 32% compared with the same periodended September 30, 2007. This increase is primarily attributed to anincrease of $343,000 in service charges on deposit income. Overdraft fees,which are a significant component of service charges on deposits, increased by$369,000 compared to the same three month period last year as a result of a newproduct implemented in the third quarter of 2007. Overdraft fees, due to theirnature, fluctuate monthly based on the short-term loan need of the customers.

 

Year-to-date, noninterest income increased by $742,000 or 22% to$4,098,000 compared to the same period last year. Service charges on depositsincreased by $888,000 due to an overdraft program implemented last year.  Overdraft fees, a component of servicecharges on deposits, increased by $970,000 for the nine month period ending September 30,2008 compared to the same period last year.

 

Gains on the sales of securities and assets totaled $70,000 during thefirst nine months of 2008. The Company realized gains in its investmentportfolio of $38,000 and gains totaling $32,000 from the liquidation of severalforeclosed properties.  By comparison,the Company experienced a loss on the sale of securities of $30,000 and a$64,000 gain on the sale of assets for the same nine month period last year.

 

**Noninterestexpense**:

 

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

 

Noninterest expense decreased by 2% for the third quarter of 2008 andincreased by less than 1% for the first nine months of 2008 compared to thesame periods last year.  The increase isdue to a $462,000 increase in OREO related expenses for the nine monthperiod.  Due to the current economicconditions and the deterioration in real estate values in the Company’s marketarea, the value of several OREO properties were written down to approximatecurrent market values. The Company is continuing its strategy to reduceoverhead costs and improve the efficiency throughout its financial centersnetwork to offset the impact of slow loan growth, increases in nonaccrual loansand OREO expenses, and margin compression.

 

For the three month period ended September 30, 2008, totalcompensation expense decreased by $172,000 and occupancy and equipment expensedeceased by $17,000.  These decreases aredue to the Company’s continuing strategy to reduce overhead costs and improvethe efficiency of its financial centers network.  These reductions were offset by an increaseof $43,000 in OREO related expenses and an increase of $75,000 in otheroperating expenses due to an increase in legal, collections and appraisal fees.

 

For the nine month period ended September 30, 2008, salaries andemployee benefits decreased by $252,000 and occupancy and equipment expensesdecreased by $34,000.  Other operatingexpenses decreased by $122,000 compared to the same period last year as aresult of expense control and a reduction in other losses in our retail branchoperations.

 

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**INTERESTRATE 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 ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitivepressures and the needs of the Company’s customers.  In addition, various assets and liabilitiesindicated as repricing within the same period may in fact reprice at differenttimes within such period and at different rates. The following table shows thecontractual maturities of all interest rate sensitive assets and liabilities atSeptember 30, 2008.  Expectedmaturities may differ from contractual maturities because issuers may have theright to call or prepay obligations with or without call or prepaymentpenalties.  Taking a conservativeapproach, the Company has included demand deposits such as NOW, money market,and savings accounts in the three month category.  However, the actual repricing of theseaccounts may extend beyond twelve months. The interest rate sensitivity gap is only a general indicator ofpotential effects of interest rate changes on net interest income.

 

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

 
| ** **                                                              | ** ** | **Cumulative amounts as of September 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                              |       | $                                                                             | 2,268      |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,268 |   |
| Certificates of deposit                                                 |       | —                                                                        |       | 100 |   | — |   | — |   | 100 |   |
| Investments                                                             |       | —                                                                        |       | 46 |   | 7,311 |   | 78,704 |   | 86,061 |   |
| Loans                                                                   |       | 60,873                                                                        |       | 19,958 |   | 96,678 |   | 38,187 |   | 215,696 |   |
| Total interest-sensitive assets                                         |       | $                                                                             | 63,141     |   | $ | 20,104 |   | $ | 103,989 |   | $ | 116,891 |   | $ | 304,125 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                             | 135,672    |   | $ | 36,573 |   | $ | 11,840 |   | $ | 39,664 |   | $ | 223,749 |   |
| Notes payable                                                           |       | —                                                                        |       | 240 |   | — |   | — |   | 240 |   |
| Other borrowings                                                        |       | —                                                                        |       | 11,400 |   | — |   | 367 |   | 11,767 |   |
| Total interest-sensitive liabilities                                    |       | $                                                                             | 135,672    |   | $ | 48,213 |   | $ | 11,840 |   | $ | 40,031 |   | $ | 235,756 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                                             | (72,531    | ) | $ | (28,109 | ) | $ | 92,149 |   | $ | 76,860 |   | $ | 68,369 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to total  interest-sensitive assets |       | (23.85                                                                        | )%         | (33.09 | )% | (2.79 | )% | 22.48 | % | 22.48 | % |

 

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(a) Savings,Now, and money market deposits totaling $97,739 are included in the maturing in3 months classification.

 

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**LIQUIDITY**

 

Liquidity isthe ability of the Company to convert assets into cash or cash equivalentswithout significant loss and to raise additional funds by increasingliabilities.  Liquidity managementinvolves maintaining the Company’s ability to meet the day-to-day cash flowrequirements of its customers, whether they are depositors wishing to withdrawfunds 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. The payment of dividends mayalso be affected or limited by other factors, such as the requirement tomaintain adequate capital above regulatory guidelines.  The amount of dividends available from theBank without prior approval from the regulators for payment in 2008 isapproximately $1,604,000.  In 2007, theGeorgia Department of Banking and Finance approved a special dividend of$5,155,000 which was used by the Company to redeem its outstanding JuniorSubordinated Debentures.

 

Asset andliability management functions not only serve to assure adequate liquidity inorder to meet the needs of the Company’s customers, but also to maintain anappropriate balance between interest-sensitive assets and interest-sensitiveliabilities so that the Company can earn a return that meets the investmentrequirements of its shareholders.  Dailymonitoring of the sources and uses of funds is necessary to maintain anacceptable cash position that meets both requirements.

 

The assetportion of the balance sheet provides liquidity primarily through loanprincipal repayments, maturities of investment securities and, to a lesserextent, sales or paydowns of investment securities available for sale and heldto maturity.  Other short-terminvestments such as federal funds sold and maturing interest bearing depositswith other banks, are additional sources of liquidity funding.

 

The liabilityportion of the balance sheet provides liquidity through various customers’interest bearing and noninterest bearing deposit accounts.  Federal funds purchased and other short-termborrowings are additional sources of liquidity and, basically, represent theCompany’s incremental borrowing capacity. These sources of liquidity are short-term in nature and are used asnecessary to fund asset growth and meet short-term liquidity needs. The Companydoes not anticipate any liquidity requirements in the near future that it willnot be able to meet.

 

**CAPITAL RESOURCES**

 

Stockholders’ equity decreased by $213,000 for thenine month period ended September 30, 2008 primarily due to a decrease inaccumulated other comprehensive income, net of taxes.  Accumulated other comprehensive income, netof taxes decreased by $768,000 to a loss of $721,000 in the first nine monthsof 2008.  This decrease is attributed tothe rapid movements in the Treasury markets, wild swings in volatility andcredit spreads, and their impact on the Company’s available for sale securitiesportfolio.  Retained earnings increasedby $537,000 for the year due to an increase in net income of $1,166,000partially offset by a dividend of $0.19 per common share to stockholders totaling$398,000 and the cumulative effect adjustment in the amount of $231,000 as aresult of the adoption of EITF 06-4, “Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsed Split-Dollar Life InsuranceArrangements”.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company tomaintain minimum amounts and ratios of total and Tier 1 capital to riskweighted assets, and Tier 1 capital to average assets.  The Bank’s total and Tier 1 capital to riskweighted assets and Tier 1 to 

 

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average assets were 14%, 13%and 10% at September 30, 2008 and December 31, 2007,respectively.  At September 30,2008, the Company met all capital adequacy requirements to which it is subjectand is considered to be ‘well capitalized” under regulatory standards.

 

**RECENT DEVELOPMENTS**

 

On October 3, 2008,Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”),which creates the Troubled Asset Relief Program (“TARP”) and provides the U.S. Secretary of the Treasury with broadauthority to implement certain actions to help restore stability and liquidityto U.S. markets. The Capital Purchase Program (the “CPP”) was announced by theU.S. Treasury on October 14, 2008 as part of TARP.  Pursuant to the CPP,the U.S. Treasury will purchase up to $250 billion of senior preferred shareson standardized terms from qualifying financial institutions. The purpose ofthe CPP is to encourage U.S. financial institutions to build capital toincrease the flow of financing to U.S. businesses and consumers and to supportthe U.S. economy.  The CPP is voluntaryand requires a participating institution to comply with a number of restrictionsand provisions, including standards for executive compensation and corporategovernance and limitations on share repurchases and the declaration and paymentof dividends on common shares.  The CPPallows qualifying financial institutions to issue senior preferred shares tothe U.S. Treasury in aggregate amounts between 1 percent and 3 percent of theinstitution’s risk weighted assets (“Senior Preferred Shares”).   TheSenior Preferred Shares will qualify as Tier 1 capital and rank senior to ourcommon stock.  The Senior PreferredShares will pay a cumulative dividend rate of 5 percent per annum for the firstfive years and will reset to a rate of 9 percent per annum after year five. The Senior Preferred Shares will be non-voting, other than class votingrights on matters that could adversely affect the shares.  The SeniorPreferred Shares will be callable at par after three years.  Prior to theend of three years, the Senior Preferred Shares may be redeemed with theproceeds from a qualifying equity offering of any Tier 1 perpetual preferred orcommon stock.  U.S. Treasury may also transfer the Senior Preferred Sharesto a third party at any time.  In conjunction with the purchase of SeniorPreferred Shares, Treasury will receive warrants to purchase common stock withan aggregate market price equal to 15 percent of the Senior Preferred Shares. The exercise price on the warrants will be the market price of theparticipating institution’s common stock at the time of issuance, calculated ona 20-trading day trailing average.  Companies participating in the CPPmust adopt the U.S. Treasury’s standards for executive compensation andcorporate governance.  The Company is currently evaluating itsparticipation in the CPP.  If the Companywere to participate in the CPP as it is currently structured, it will be unableto pay cash dividends on its common stock without governmental permission for aperiod of three years from the date of its participation unless the issuedsecurities are no longer held by the U.S. Treasury.

 
| **ITEM 3.** | ** ** | **QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK** |
|-------------|------------|-----------------------------------------------------------------|

 

This information is not required since the Companyqualifies as a smaller reporting company.

 
| **ITEM 4T.** | ** ** | **CONTROLS AND PROCEDURES** |
|--------------|------------|-----------------------------|

 

As of the end of the period covered by this report,we conducted, under the supervision of and with the participation of 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 September 30, 2008in accumulating and communicating information to management, including theChief Executive 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 

 

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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 September 30, 2008, there have been nochanges in the Company’s internal controls over financial reporting or, to theCompany’s knowledge, in other factors that could significantly change thoseinternal controls subsequent to the date the Company carried out its evaluationthat have materially affected, or are reasonably likely to materially affect,our internal 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**

 

TheCompany and the Bank are involved in various claims and legal actions arisingin the ordinary course of business.  Inthe opinion of management, based in part on the advice of counsel, the ultimatedisposition of these matters will not have a material adverse impact on theCompany’s consolidated financial position.

 

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

 

Other than as noted below,we believe there have been no material changes from the factors discussed in Part I,“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2007.  You shouldcarefully consider the factors discussed below and in our Annual Report on Form 10-K,which could materially affect our business, financial condition or futureresults. The risks described below and in our Annual Report on Form 10-Kare not the only risks facing us. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

 

The following are supplemental risk factors relating to the recentchanges in the strength of the economy and the impact of public perception onour performance.

 

***Weakness in the economy and in the real estatemarket, including specific weakness within our geographic footprint, hasadversely affected us and may continue to adversely affect us.***

 

If the strength of the U.S. economy in general and the strength of thelocal economies in which we conduct operations decline, or continue to decline,this could result in, among other things, a deterioration in credit quality ora reduced demand for credit, including a resultant adverse effect on our loanportfolio and allowance for loan and lease losses. Declines in the U.S. economyand the real estate market contributed to our increasing provisions for loanlosses through the second quarter of 2008, and our expectation for future loanlosses and loss provisions for the remainder of 2008 and 2009. These factorscould result in loan loss provisions in excess of charge-offs, delinquenciesand/or greater charge-offs in future periods, which may adversely affect ourfinancial condition and results of operations. In addition, deterioration ofthe U.S. economy may adversely impact our traditional banking business.Economic declines may be accompanied by a decrease in demand for consumer orcommercial credit and declining real estate and other asset values. Decliningreal estate and other asset values may reduce the ability of borrowers to usesuch equity to support borrowings. Delinquencies, foreclosures and lossesgenerally 

 

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increase during economic slow downs or recessions. Additionally, ourservicing costs, collection costs and credit losses may also increase inperiods of economic slow down or recessions. The impact of recent eventsrelating to subprime mortgages resulting in a substantial housing recession hasnot been limited to those directly involved in the real estate constructionindustry (such as builders and developers). Rather, it has impacted a number ofrelated businesses such as building materials suppliers, equipment leasingfirms, and real estate attorneys, among others. All of these affectedbusinesses have banking relationships and when their businesses suffer fromrecession, the banking relationship suffers as well.

 

***The impact of the current economic downturn on theperformance of other financial institutions in our primary market area, actionstaken by our competitors to address the current economic downturn, and thepublic perception of and confidence in the economy generally, and the bankingindustry specifically, could negatively impact our performance and operations.***

 

All financial institutions are subject to the same risks resulting froma weakening economy such as increased charge-offs and levels of past due loansand nonperforming assets. As troubled institutions in our market area continueto dispose of problem assets, the already excess inventory of residential homesand lots will continue to negatively impact home values and increase the timeit takes us or our borrowers to sell existing inventory. The perception thattroubled banking institutions (and smaller banking institutions that are not “introuble”) are risky institutions for purposes of regulatory compliance orsafeguarding deposits may cause depositors nonetheless to move their funds tolarger institutions. If our depositors should move their funds based on eventshappening at other financial institutions, our operating results would suffer.

 

***We are subject to liquidity risk in our operations***.

 

Liquidity risk is the possibility of being unable to obligations asthey come due, capitalize on growth opportunities as they arise, or pay regulardividends because of an inability to liquidate assets or obtain adequatefunding on a timely basis, at a reasonable cost and within acceptable risktolerances.  Liquidity is required to fundvarious obligations, including credit obligations to borrowers, mortgageoriginations, withdrawals by depositors, repayment of debt, dividends toshareholders, operating expenses and capital expenditures.  Liquidity is derived primarily from retaildeposit growth and retention, principal and interest payments on loans andinvestment securities, net cash provided from operation and access to otherfunding sources.  Our access to fundingsources in amounts adequate to finance our activities could be impaired byfactors that affect us specifically or the financial services industry ingeneral.  Factors that coulddetrimentally affect our access to liquidity sources include a decrease in thelevel of our business activity due to a market downturn or adverse regulatoryaction against us.  Our ability to borrowcould also be impaired by factors that are not specific to us, such as a severedisruption in the financial markets or negative views and expectations aboutthe prospects for the financial services industry as a whole, given the recentturmoil faced by banking organizations in the domestic and worldwide creditmarkets.

 

***Our ability to raise capital could be limited,could affect our liquidity and could be dilutive to existing shareholders***.

 

Current capital markets conditions are such that traditional sources ofcapital may not be available to us on reasonable terms if we need to raise suchcapital.  In such a case, there is noguarantee that we will be able to borrow funds or successfully raise additionalcapital at all or on terms that are favorable or otherwise not dilutive toexisting shareholders.

 

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***Volatility in the capital and credit markets,together with the current real estate slowdown, have resulted in significantpressure on the financial services industry.***

 

We have experienced a higher level of foreclosures and losses uponforeclosure during recent periods than we have historically.  If current volatility and market conditionscontinue or worse, our business, financial condition and results of operationscould be materially adversely affected. We may therefore experience further increases in loan losses,deterioration of capital or limitations on our access to funding or capital.

 

***The Emergency Economic Stabilization Act of 2008 (“EESA”)may not stabilize the financial services industry***.

 

The EESA, which was signed into law on October 3, 2008, isintended to alleviate the financial crisis affecting the U.S. bankingsystem.  A number of programs are beingdeveloped and implemented under EESA. The EESA may not have the intended effect, however, and as a result, thecondition of the financial services industry could decline instead of improve.  The failure of the EESA to improve thecondition of the U.S. banking system could significantly adversely affect ouraccess to funding or capital, the trading price of our stock, and otherelements of our business, financial condition, and results of operations.

 

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

 

None

** **

**ITEM 3.****         ****DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM 4.****         ****SUBMISSION OF MATTERS TO VOTE OFSECURITY HOLDERS**

 

None

 

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

 

None

 

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

 

**Exhibit 31**

 

Certification pursuant to 18 U.S.C. Section 1350 as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

**Exhibit 32**

 

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

 

31

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**SIGNATURES**

 

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

 

 

**CITIZENS BANCSHARESCORPORATION**

 

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

 

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