**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 March 31, 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 all reports required to be filed by Section 13 or 15 (d) ofthe Securities 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 90 days.                     xYes  o No.

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer o                        |   | Smaller reporting company x |
| (Do not check if a smaller  reporting company) |   |                             |

 

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

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

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding foreach of the issuer’s classes of common stock as of the latest practicable date:2,004,635 shares of Common Stock, $1.00 par value and 90,000 shares ofNon-Voting Common Stock, $1.00 par value outstanding on April 30, 2008.

 

 

----

 

**PART 1.                FINANCIALINFORMATION**

 

**ITEM 1.  Financialstatements**

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2008 AND DECEMBER 31, 2007**

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

 
| ** **                                                                                           | ** ** | **2008**        | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                           | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash and due from banks                                                                              |       | $               | 12,687     |       | $          | 8,188 |   |
| Interest-bearing deposits with banks                                                                 |       | 6,823           |       | 522        |       |
| Certificates of deposit                                                                              |       | 100             |       | 100        |       |
| Investment securities available for sale,  at fair value                                             |       | 77,965          |       | 59,677     |       |
| Investment securities held to maturity, at  cost                                                     |       | 4,705           |       | 7,374      |       |
| Other investments                                                                                    |       | 1,102           |       | 1,842      |       |
| Loans receivable, net                                                                                |       | 224,857         |       | 235,363    |       |
| Premises and equipment, net                                                                          |       | 7,787           |       | 7,792      |       |
| Cash surrender value of life insurance                                                               |       | 9,836           |       | 9,745      |       |
| Foreclosed real estate                                                                               |       | 2,994           |       | 2,423      |       |
| Other assets                                                                                         |       | 5,719           |       | 5,358      |       |
|                                                                                                 |       |            |       |       |       |
| Total assets                                                                                         |       | $               | 354,575    |       | $          | 338,384 |   |
|                                                                                                 |       |            |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                       | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                 |       |            |       |       |       |
| LIABILITIES:                                                                                         |       |            |       |       |       |
| Noninterest-bearing deposits                                                                         |       | $               | 61,337     |       | $          | 53,894 |   |
| Interest-bearing deposits                                                                            |       | 252,168         |       | 225,705    |       |
|                                                                                                 |       |            |       |       |       |
| Total deposits                                                                                       |       | 313,505         |       | 279,599    |       |
|                                                                                                 |       |            |       |       |       |
| Accrued expenses and other liabilities                                                               |       | 4,461           |       | 4,368      |       |
| Federal funds purchased                                                                              |       | —          |       | 2,000      |       |
| Notes payable                                                                                        |       | 340             |       | 340        |       |
| Advances from Federal Home Loan Bank                                                                 |       | 2,375           |       | 18,944     |       |
|                                                                                                 |       |            |       |       |       |
| Total liabilities                                                                                    |       | 320,681         |       | 305,251    |       |
|                                                                                                 |       |            |       |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                        |       |            |       |       |       |
|                                                                                                 |       |            |       |       |       |
| STOCKHOLDERS’ EQUITY:                                                                           |       |            |       |       |       |
| Common stock - $1 par value; 20,000,000  shares authorized; 2,230,065 shares issued                  |       | 2,230           |       | 2,230      |       |
| Nonvoting common stock - $1 par value;  5,000,000 shares authorized; 90,000 issued and outstanding   |       | 90              |       | 90         |       |
| Additional paid-in capital                                                                           |       | 7,568           |       | 7,554      |       |
| Retained earnings                                                                                    |       | 25,592          |       | 25,071     |       |
| Treasury stock at cost, 225,250 shares at  March 31, 2008 and 227,517 at December 31, 2007 |       | (1,842          | )          | (1,859     | )          |
| Accumulated other comprehensive income, net  of income taxes                                         |       | 256             |       | 47         |       |
|                                                                                                 |       |            |       |       |       |
| Total stockholders’ equity                                                                      |       | 33,894          |       | 33,133     |       |
|                                                                                                 |       | $               | 354,575    |       | $          | 338,384 |   |

 

See notes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                           | ** ** | **Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest income:                                     |       |                                             |       |   |   |
| Loans, including fees                                |       | $                                                | 4,406      |   | $ | 4,384 |   |
| Investment securities:                               |       |                                             |       |   |   |
| Taxable                                              |       | 673                                              |       | 684 |   |
| Tax-exempt                                           |       | 177                                              |       | 215 |   |
| Interest-bearing deposits                            |       | 54                                               |       | 174 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Total interest income                                |       | 5,310                                            |       | 5,457 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest expense:                                    |       |                                             |       |   |   |
| Deposits                                             |       | 1,761                                            |       | 1,767 |   |
| Other borrowings                                     |       | 150                                              |       | 299 |   |
| Total interest expense                               |       | 1,911                                            |       | 2,066 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,399                                            |       | 3,391 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Provision for loan losses                            |       | 105                                              |       | — |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net interest income after provision for  loan losses |       | 3,294                                            |       | 3,391 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Noninterest income:                                  |       |                                             |       |   |   |
| Service charges on deposits                          |       | 976                                              |       | 701 |   |
| Gain (loss) on sales of securities                   |       | 27                                               |       | (33 | ) |
| Gain on sales of assets                              |       | —                                           |       | 6 |   |
| Other operating income                               |       | 328                                              |       | 355 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,331                                            |       | 1,029 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Noninterest expense:                                 |       |                                             |       |   |   |
| Salaries and employee benefits                       |       | 1,874                                            |       | 1,871 |   |
| Net occupancy and equipment                          |       | 578                                              |       | 538 |   |
| Other operating expenses                             |       | 1,207                                            |       | 1,371 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 3,659                                            |       | 3,780 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 966                                              |       | 640 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Income tax expense                                   |       | 253                                              |       | 105 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                                | 713        |   | $ | 535 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income per share - basic                         |       | $                                                | 0.34       |   | $ | 0.26 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income per share - diluted                       |       | $                                                | 0.34       |   | $ | 0.26 |   |
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Weighted average outstanding shares - basic          |       | 2,093                                            |       | 2,086 |   |
|                                                 |       |                                             |       |   |   |
| Weighted average outstanding shares -  diluted       |       | 2,093                                            |       | 2,087 |   |

 

See notes to consolidated financial statements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATION**

 

**AND SUBSIDIARY**

 

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

**FOR THE THREE MONTHS ENDED MARCH 31, 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                                                                                              |       | —                |       | —                |       | —        |       | —         |       | —                  |       | 535               |       | —     |       | —     |       | —                 |       | 535        |       |
| Unrealized holding losses on investment  securities available for sale—net of taxes of $39,325     |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | 76                     |       | 76         |       |
| Less reclassification adjustment for  holding gains included in net income—net of taxes of $11,178 |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | 22                     |       | 22         |       |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive loss                                                                                      |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | —                 |       | 633        |       |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Cumulative effect of adoption of fair value  option                                                     |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (174              | )          | —     |       | —     |       | —                 |       | (174       | )          |
| Stock based compensation expense                                                                        |       | —                |       | —                |       | —        |       | —         |       | 15                      |       | —            |       | —     |       | —     |       | —                 |       | 15         |       |
| Sale of Treasury stock                                                                                  |       | —                |       | —                |       | —        |       | —         |       | 1                       |       | —            |       | 3          |       | 27         |       | —                 |       | 28         |       |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| **Balance—March 31, 2007**                                                                    | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,513**  | ** ** | **$**      | **23,147** | ** ** | **(231**               | **)**      | **$**      | **(1,888** | **)** | **$** | **(440** | **)** | **$** | **30,652** | ** ** |
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **    | ** ** | ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance—December 31, 2007                                                                     |       | 2,230                 |       | $                     | 2,230      |          | 90         |           | $          | 90                      |       | $                 | 7,554      |       | $          | 25,071     |       | (227                   | )          | $          | (1,859     | ) | $ | 47 |   | $ | 33,133 |   |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Net income                                                                                              |       | —                |       | —                |       | —        |       | —         |       | —                  |       | 713               |       | —     |       | —     |       | —                 |       | 713        |       |
| Unrealized holding gains on investment  securities available for sale—net of taxes of $117,026     |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | 227                    |       | 227        |       |
| Less reclassification adjustment for  holding losses included in net income—net of taxes of $9,288 |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | —     |       | —     |       | (18                    | )          | (18        | )          |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Comprehensive income                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       | 922        |       |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| Cumulative effect of adoption of EITF 06-4,  net of taxes                                               |       | —                |       | —                |       | —        |       | —         |       | —                  |       | (192              | )          | —     |       | —     |       | —                 |       | (192       | )          |
| Stock based compensation expense                                                                        |       | —                |       | —                |       | —        |       | —         |       | 14                      |       | —            |       | —     |       | —     |       | —                 |       | 14         |       |
| Purchase of treasury stock                                                                              |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | (2         | )          | (15        | )          | —                 |       | (15        | )          |
| Sale of Treasury stock                                                                                  |       | —                |       | —                |       | —        |       | —         |       | —                  |       | —            |       | 4          |       | 32         |       | —                 |       | 32         |       |
|                                                                                                    |       |                  |       |                  |       |          |       |           |       |                    |       |              |       |       |       |       |       |                   |       |       |       |
| **Balance—March 31, 2008**                                                                    | ** ** | **2,230**             | ** ** | **$**                 | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**                  | ** ** | **$**             | **7,568**  | ** ** | **$**      | **25,592** | ** ** | **(225**               | **)**      | **$**      | **(1,842** | **)** | **$** | **256** | ** ** | **$** | **33,894** | ** ** |

 

See notes to consolidatedfinancial statements.

4

----

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARY**

** **

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31,2008 AND 2007**

**(In thousands)**

** **
| ** **                                                                                    | ** ** | **2008**        | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                     |       |            |       |     |       |
| Net income                                                                                    |       | $               | 713        |     | $          | 535 |   |
| **Adjustments to reconcile  net income to net cash provided (used) by operating activities:** |       |            |       |     |       |
| Provision for loan losses                                                                     |       | 105             |       | —   |       |
| Depreciation                                                                                  |       | 200             |       | 189      |       |
| Amortization and  accretion, net                                                              |       | 66              |       | 131      |       |
| Provision for deferred  income taxes (benefit)                                                |       | (129            | )          | 226      |       |
| Gain on sale of assets and  investments                                                       |       | (27             | )          | 27       |       |
| Stock based compensation  expense                                                             |       | 14              |       | 14       |       |
| Change in other assets                                                                        |       | (915            | )          | (232     | )          |
| Change in accrued expenses  and other liabilities                                             |       | (198            | )          | (527     | )          |
|                                                                                          |       |            |       |     |       |
| Net cash provided by (used  in) operating activities                                          |       | (171            | )          | 363      |       |
|                                                                                          |       |            |       |     |       |
| **INVESTING ACTIVITIES:**                                                                     |       |            |       |     |       |
| Proceeds from calls and  maturities of investment securities held to maturity                 |       | 2,667           |       | 57       |       |
| Proceeds from sales and  maturities of investment securities available for sale               |       | 10,618          |       | 3,400    |       |
| Purchases of investment  securities available for sale                                        |       | (28,583         | )          | (1,016   | )          |
| Net change in other  investments                                                              |       | 739             |       | 693      |       |
| Net change in loans  receivable                                                               |       | 10,373          |       | 4,088    |       |
| Net proceeds from the sale  of foreclosed properties                                          |       | —          |       | 101      |       |
| Purchases of premises and  equipment, net                                                     |       | (196            | )          | (210     | )          |
| Net change in interest  bearing deposits with banks                                           |       | (6,302          | )          | (12,897  | )          |
|                                                                                          |       |            |       |     |       |
| Net cash used in investing  activities                                                        |       | (10,684         | )          | (5,784   | )          |
|                                                                                          |       |            |       |     |       |
| **FINANCING ACTIVITIES:**                                                                     |       |            |       |     |       |
| Net change in deposits                                                                        |       | 33,906          |       | 20,234   |       |
| Net change in Federal  funds purchased                                                        |       | (2,000          | )          | —   |       |
| Net change in advances  from Federal Home Loan Bank                                           |       | (16,569         | )          | (16,342  | )          |
| Sale (purchase) of  treasury stock activity                                                   |       | 17              |       | 27       |       |
|                                                                                          |       |            |       |     |       |
| Net cash provided by  financing activities                                                    |       | 15,354          |       | 3,919    |       |
|                                                                                          |       |            |       |     |       |
| Net change in cash and  cash equivalents                                                      |       | 4,499           |       | (1,502   | )          |
|                                                                                          |       |            |       |     |       |
| Cash and cash equivalents,  beginning of period                                               |       | 8,188           |       | 8,615    |       |
|                                                                                          |       |            |       |     |       |
| Cash and cash equivalents  at end of period                                                   |       | $               | 12,687     |     | $          | 7,113 |   |
|                                                                                          |       |            |       |     |       |
| **Supplemental disclosures  of cash paid during the period for:**                             |       |            |       |     |       |
| Interest                                                                                      |       | $               | 2,086      |     | $          | 2,021 |   |
|                                                                                          |       |            |       |     |       |
| Income taxes                                                                                  |       | $               | 415        |     | $          | 334 |   |
|                                                                                          |       |            |       |     |       |
| **Supplemental disclosures  of noncash transactions:**                                        |       |            |       |     |       |
| Real estate acquired  through foreclosure                                                     |       | $               | 571        |     | 2,654      |   |
|                                                                                          |       |            |       |     |       |
| Change in unrealized gain  on investment securities available for sale, net of taxes          |       | $               | 209        |     | $          | 98 |   |
|                                                                                          |       |            |       |     |       |
| Cumulative effect of  change in accounting principle                                          |       | $               | 192        |     | $          | — |   |
|                                                                                          |       |            |       |     |       |
| Cumulative effect of  adoption of fair value option                                           |       | $               | —     |     | $          | 174 |   |

 

See notes to consolidatedfinancial statements.

 

5

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

**Notes to the ConsolidatedFinancial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

Citizens BancsharesCorporation (the “Company”) is a holding company that provides a full range ofcommercial and personal banking services to individual and corporate customersin metropolitan Atlanta and Columbus, Georgia, and in Birmingham and Eutaw, Alabama,through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank operates under a state charter andserves its customers through seven full-service financial centers inmetropolitan Atlanta, Georgia, one full-service financial center in Columbus,Georgia, one full-service financial center in Birmingham, Alabama, and onefull-service financial center in Eutaw, Alabama.

 

The accompanying unauditedconsolidated financial statements have been prepared pursuant to the rules andregulations for reporting on Form 10-Q. Accordingly, certain disclosures required by generally acceptedaccounting principles are not included herein. These interim statements shouldbe read in conjunction with the financial statements and notes thereto includedin the Company’s latest Annual Report on Form 10-K filed with theSecurities 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 financialstatements of the Company for the three month period ended March 31, 2008are unaudited.  In the opinion ofmanagement, all adjustments necessary for a fair presentation of the financialposition and results of operations and cash flows for the nine month periodhave been included.  All adjustments areof a normal recurring nature.  Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

**Accounting Policies**

 

The Company’s consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”), whichoften require the judgment of management in the selection and application of certainaccounting principles and methods. Reference is made to the accounting policies of the Company described inthe notes to the consolidated financial statements contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.  The Company has followed those policies inpreparing this report.  Managementbelieves that the quality and reasonableness of its most critical policiesenable the fair presentation of its financial position and of its results ofoperations.

 

6

----

 

**Recently Issued AccountingStandards**

 

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 company is required to record anddisclose business combinations following existing accounting guidance until January 1,2009. The Company will assess the impact of SFAS 141(R) if and when afuture 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 evaluatedseparately under Statement 140.  FSP 140-3 will be effective for financialstatements issued for fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years and earlier application is notpermitted. Accordingly, this FSP is effective for 

 

7

----

 

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

 

In September2006, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting (“SFAS”) No. 157, "Fair Value Measurements"(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. This standard eliminates inconsistencies found in various priorpronouncements but does not require any new fair value measurements.  SFAS 157 is effective for the Company onJanuary 1, 2008. The Company elected to early adopt the provisions of thesestatements effective January 1, 2007. See Note 2, “Fair Value of Financial Instruments” to the ConsolidatedFinancial Statements for related disclosures.

 

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 transactionbetween market participants on the measurement date. SFAS 157 also establishesa fair value hierarchy which requires an entity to maximize the use ofobservable inputs and minimize the use of unobservable inputs when measuringfair value. The standard describes three levels of inputs that may be used tomeasure fair value:

 
| **Level  1** |   | Quoted  prices in active markets for identical assets or liabilities. Level 1 assets  and liabilities include debt and equity securities and derivative contracts  that are traded in an active exchange market, as well as U.S. Treasury and  other highly liquid investments are actively traded in over-the-counter  markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Level  2** |   | Observable  inputs other than Level 1 prices such as quoted prices for similar assets or  liabilities; quoted prices in markets that are not active; or other inputs  that are observable or can be corroborated by observable market data for  substantially the full term of the assets or liabilities. Level 2 assets and  liabilities include debt securities with quoted prices that are traded less  frequently than exchange-traded instruments and derivative contracts whose  value is determined using a pricing model with inputs that are observable in  the market or can be derived principally from or corroborated by observable  market data. This category generally includes U.S. Government and agency  mortgage-backed debt securities, certain derivative contracts and impaired  loans. |
| ** **   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **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 the firstquarter of 2009 with respect to goodwill, other intangible assets, real estateand other assets acquired through foreclosure and other non-financial assetsmeasured at fair value on a nonrecurring basis.

 

During 2007, the FASB’sEmerging Issues Task Force (“EITF”) issued EITF 06-4 “Accounting for theDeferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements”, which requires an employer torecognize a liability for the postretirement death benefits provided underendorsement split-dollar life insurance arrangements.  An endorsement split-dollar life insurancearrangement is where the employer owns a life insurance policy that covers thelife of an employee and, pursuant to a separate agreement, endorses a portionof the policy’s death benefits to the insured employee’s beneficiary.  EITF 06-4 is effective for fiscal yearsbeginning after December 15, 2007. The Company has entered into SupplementalDeath Benefit Agreements with certain executive officers pursuant to which theCompany has agreed to pay a portion of the death benefit to the executives’beneficiaries upon their death. As a result of the adoption of EITF 06-4, theCompany recognized a cumulative effect adjustment to retained earnings of$192,000, net of deferred taxes of $99,000 which represents the $291,000 inadditional liability on January 1, 2008.

 

Other accounting standards that have beenissued or proposed by the FASB or other standards-setting bodies are notexpected to have a material impact on the Company’s financial position, resultsof operations and cash flows.

 

8

----

 

**2. FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Inaccordance with SFAS No. 159, the Company has elected to record specificfinancial assets and financial liabilities at fair value. The following is adescription of each asset and liability class for which fair value has beenelected (in thousands):

 

**AssetsMeasured at Fair Value on a Recurring Basis:**

 
| **Description**                            | ** ** | **3/31/2008** | ** ** | **Quoted  Prices in  Active Markets   for Identical   Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Unobservable    Inputs** | ** ** |
|--------------------------------------------|------------|---------------|------------|----------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | ** **    | ** ** | **(Level 1)**                                                  | ** ** | **(Level  2)**                             | ** ** | **(Level  3)**             |       |
|                                       |       |          |       |                                                           |       |                                       |       |                       |       |
| Investments securities available  for sale |       | $             | 77,965     |                                                           | $          | —                                     |       | $                          | 77,965     |   | $ | — |   |
|                                       |       |          |       |                                                           |       |                                       |       |                       |       |
| Total                                      |       | $             | 77,965     |                                                           | $          | —                                     |       | $                          | 77,965     |   | $ | — |   |

 

**LiabilitiesMeasured at Fair Value on a Recurring Basis:**

 
| **Description** | ** ** | **3/31/2008** | ** ** | **Quoted  Prices in  Active Markets   for Identical   Assets** | ** ** | **Significant  Other Observable Inputs** | ** ** | **Unobservable  Inputs** | ** ** |
|-----------------|------------|---------------|------------|----------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **      | ** ** | ** **    | ** ** | **(Level 1)**                                                  | ** ** | **(Level  2)**                           | ** ** | **(Level 3)**            | ** ** |
|            |       |          |       |                                                           |       |                                     |       |                     |       |
| FHLB Advances   |       | $             | 2,375      |                                                           | $          | —                                   |       | $                        | 2,375      |   | $ | — |   |
|            |       |          |       |                                                           |       |                                     |       |                     |       |
| Total           |       | $             | 2,375      |                                                           | $          | —                                   |       | $                        | 2,375      |   | $ | — |   |

 

The Federal Home Loan Bank (the “FHLB”) Advancebalance outstanding at March 31, 2008 is a Daily Rate Credit advance,which is priced daily off of the Fed Funds rates.  At March 31, 2008, there were no changes infair values that were included in current earnings.

 

9

----

 

**3.  INTANGIBLE ASSETS**

 

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

 

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

 

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

 
| ** **                     | ** ** | **March 31, 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      |                            | $          | 2,725 |   | $ | 2,836 |   | $ | 2,712 |   |

 

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

 
| ** **                                                                                                    | ** ** | **For the 3  months ended  March 31, 2008** | ** ** | **For the 3  months ended  March 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
|                                                                                                          |       |                                                                 |       |                                                                 |       |
| Aggregate amortization  expense of core deposit intangibles:                                                  |       | $                                                                    | 13         |                                                                 | $          | 72 |   |
|                                                                                                          |       |                                                                 |       |                                                                 |       |
| Estimated aggregate  amortization expense of core deposit intangibles for the years ending  December 31: |       |                                                                 |       |                                                                 |       |
|                                                                                                          |       |                                                                 |       |                                                                 |       |
| 2008                                                                                                          |       | $                                                                    | 53         |                                                                 |       |   |
| 2009                                                                                                          |       | $                                                                    | 53         |                                                                 |       |   |
| 2010                                                                                                          |       | $                                                                    | 18         |                                                                 |       |   |
|                                                                                                               |            |                                                                      |            |                                                                      |            |  |  |

 

10

----

 

**4.  COMPREHENSIVE INCOME**

 

Comprehensive incomeincludes: (1) reported net income and (2) unrealized gains and losseson marketable securities.  The followingtable shows our comprehensive income (in thousands):

 
| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net Income                 |       | $                                                    | 713        |   | $ | 535 |   |
|                       |       |                                                 |       |   |   |
| Other comprehensive income |       | 209                                                  |       | 98 |   |
|                       |       |                                                 |       |   |   |
| Comprehensive income       |       | $                                                    | 922        |   | $ | 633 |   |

 

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

 

Basicand diluted net income per common and potential common share has beencalculated based on the weighted average number of shares outstanding.  The following schedule reconciles thenumerator and denominator of the basic and diluted net income per common andpotential common share for the three month period ended March 31, 2008 and2007 (in thousands, except per share data):

 
| ** **                                                        | ** ** | **Net Income** | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                        | ** ** | **(Numerator)**     | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
|                                                              |       |                |       |              |       |               |       |
| **Three Months ended  March 31, 2008**                       |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | 713        |              | 2,093      |               | $          | 0.34 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | 713        |              | 2,093      |               | $          | 0.34 |   |
|                                                              |       |                |       |              |       |               |       |
| **Three Months ended  March 31, 2007**                       |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic earnings per share                                          |       | $                   | 535        |              | 2,086      |               | $          | 0.26 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —              |       | 1                 |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted earnings per share                                        |       | $                   | 535        |              | 2,087      |               | $          | 0.26 |   |

 

**RECLASSIFICATIONS**

 

Certain 2007 amounts havebeen reclassified to conform to the 2008 presentation.

 

11

----

 

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

 

**INTRODUCTION**

 

Citizens BancsharesCorporation (the “Company”) is a holding company that provides a full range ofcommercial and personal banking services to individuals and corporate customersin its primary market areas, metropolitan Atlanta and Columbus, Georgia, andBirmingham and Eutaw, Alabama through its wholly owned subsidiary, CitizensTrust Bank (the “Bank”).  The Bank is amember of the Federal Reserve System and operates under a state charter.  The Company serves its customers through 10full-service financial centers in Georgia and Alabama.

 

**Forward Looking Statements**

 

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

 

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

 

The following discussion isof the Company’s financial condition as of March 31, 2008 and December 31,2007, and the changes in the financial condition and results of operations forthe three month period ended March 31, 2008 and 2007.

 

**Critical AccountingPolicies**

 

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

 

**InvestmentSecurities**- The Company classifiesinvestments in one of three categories based on management’s intent uponpurchase: held to maturity securities which are reported at amortized cost,trading securities which are reported at fair value with unrealized holdinggains and losses included in earnings, and available for sale securities whichare recorded at fair value with unrealized holding gains and losses included asa component of accumulated other comprehensive income.  The Company had no investment securitiesclassified as trading 

 

12

----

 

securitiesduring 2008 or 2007.

 

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

 

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

 

**Loans**  - Loans are reported atprincipal amounts outstanding less unearned income and the allowance for loanlosses.  Interest income on loans isrecognized on a level-yield basis. Loan fees and certain direct originationcosts are deferred and amortized over the estimated terms of the loans usingthe level-yield method.  Discounts onloans purchased are accreted using the level-yield method over the estimatedremaining life of the loan purchased.

 

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

 

A description of otheraccounting policies are summarized in Note 1, Summary of Significant AccountingPolicies in the Notes to Consolidated Financial Statements of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.  The Company has followed those policies inpreparing this report.

 

**FINANCIAL CONDITION**

 

At March 31, 2008, theCompany’s total assets increased by $16 million to $354,575,000.  Interest bearing deposits with banksincreased by $6,301,000 million primarily as a result of a 12 percent increasein deposits.  Cash and due from banksincreased by $4,499,000 primarily due to clearing items deposited in theCompany’s Federal Reserve Bank account that cleared the next business day.

 

Loans receivable, netdecreased by $10,506,000 or 4% to $224,857,000 compared to December 31,2007.  Due to the current slowdown ineconomic conditions in the Company’s target markets lending activity hasdecreased and the Company is being more conservative in its lending criteria.Also, as a strategic risk management decision, the Company discontinued severalborrowing relationships due to the continuing deterioration in the real estatemarket and other economic indicators.  Asa result, the Company’s loans officers are spending more time with their loanportfolios to spot deterioration and intervene timely to curtail significantlosses.  The decrease in Loansreceivable, net was offset by a $15,619,000 increase in investment securities.

 

Total liabilities at the endof the first quarter 2008 were $321 million, increasing by $15 million comparedto December 31, 2007. Total deposits increased $34 million, partiallyoffset by Advances from Federal Home Loan Bank, another significant componentof total liabilities, which decreased by approximately $17 million or 87% to$2.3 million.  The Company used theexcess 

 

13

----

 

liquidity generated from itsdeposit growth to paydown its outstanding advances from the FHLB to reduce theyield it pays on interest-bearing liabilities.

 

The Company’sasset/liability management program, which monitors the Company’s interest ratesensitivity as well as volume and mix changes in earning assets and interestbearing liabilities, may impact the growth of the Company’s balance sheet as itsseeks to maximize net interest income.

 

**INVESTMENT SECURITIES**

 

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

 

The Company invests aportion of its assets in U.S. government sponsored agency securities, state,county and municipal securities, and mortgage backed bonds.  At March 31, 2008 and December 31,2007, the Company’s investment securities portfolio represented approximately24% and 20%, respectively, of total assets. Total assets increased by $16 million for the three month period ended March 31,2008.

 

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

 
| **At March 31, 2008**                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|-----------------------------|------------|------------------------------|------------|-----------------|------------|
|                                         |       |                |       |                        |       |                         |       |            |       |
| Government-sponsored  enterprises securities |       | $                   | 2,961      |                        | $          | 19                           |       | $               | —     |   | $ | 2,980 |   |
| State, county, and  municipal securities     |       | 13,964              |       | 238                         |       | 33                           |       | $               | 14,169     |   |
| Mortgage-backed securities                   |       | 60,660              |       | 464                         |       | 308                          |       | $               | 60,816     |   |
| Totals                                       |       | $                   | 77,585     |                        | $          | 721                          |       | $               | 341        |   | $ | 77,965 |   |

 
| **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 |   |

 

14

----

 

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

 
| **At March 31, 2008**               | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized Gains** | ** ** | **Gross  Unrealized Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|-----------------------------|------------|------------------------------|------------|-----------------|------------|
|                                     |       |                |       |                        |       |                         |       |            |       |
| State, county, and  municipal securities |       | $                   | 4,005      |                        | $          | 121                          |       | $               | —     |   | $ | 4,126 |   |
| Mortgage-backed securities               |       | 700                 |       | —                      |       | 3                            |       | 697             |       |
|                                     |       |                |       |                        |       |                         |       |            |       |
| Totals                                   |       | $                   | 4,705      |                        | $          | 121                          |       | $               | 3          |   | $ | 4,823 |   |

 
| **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 March 31, 2008, theCompany had several debt securities that have been in an unrealized lossposition for twelve months or more.  TheCompany has the ability and intent to hold these securities until such time asthe value recovers or the securities mature. The Company believes, based on industry analyst reports and creditratings, that the deterioration in value is attributable to changes in marketinterest rates and is not in the credit quality of the issuer and therefore,these losses are not considered other than temporary.

 

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 ofFederal Home Loan Bank and Federal Reserve Bank stock which are restricted andhave no readily determined market value. The Company is required to maintain an investment in the FHLB and FRB aspart of its membership conditions. The level of investments at the FHLB isprimarily determined by the amount of outstanding advances and is 6 percent ofthe par value of the bank’s common stock outstanding and paid-in-capital forthe FRB.  These investments are carriedat cost.

 

Securities with carryingvalues of $56,480,000 and $56,329,000 at March 31, 2008 and December 31,2007 were pledged to secure public deposits and other purposes as required bylaw.

 

15

----

 

##### **LOANS**

##### ** **

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

 
| ** **                               | ** **                | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|---------------------------|--------------------|------------|-----------------------|------------|
| ** **                               | ** **                | **2008**           | ** ** | **2007**              | ** ** |
|                                     |                      |               |       |                  |       |
| Commercial, financial, and  agricultural |                      | $                  | 8,917      |                  | $          | 9,317 |   |
| Installment                              |                      | 11,458             |       | 12,233                |       |
| Real estate - mortgage                   |                      | 185,614            |       | 182,120               |       |
| Real estate - construction               |                      | 19,658             |       | 32,453                |       |
| Other                                    |                      | 2,302              |       | 2,387                 |       |
|                                     | Loans receivable          |               | 227,949    |                  | 238,510    |   |
| Less:                                    | Net deferred loan fees    |               | 283        |                  | 299        |   |
|                                     | Allowance for loan losses |               | 2,809      |                  | 2,848      |   |
|                                     |                      |               |       |                  |       |   |
|                                     | Loans receivable, net     |               | $          | 224,857               |       | $ | 235,363 |   |

 

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

 

**NONPERFORMING ASSETS**

 

Nonperforming assets includenonperforming loans, real estate acquired through foreclosure, and repossessedassets.  Nonperforming loans consist ofloans that are past due with respect to principal or interest more than 90 daysand have been placed on nonaccrual status.

 

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

 

The challenging financial and credit marketscontinued to experience difficulty in the first quarter of 2008. As theeconomic outlook became more uncertain due to sharp declines in real estatevalues, and increases in delinquency levels, this economic environment hasimpacted the levels of our nonperforming assets.

 

Nonperforming assetsincreased during the three months of 2008 by $2,356,000 to $10,040,000 at March 31,2008 from $7,684,000 at December 31, 2007. This increase is primarily related to the addition of four commercialcredits totaling approximately $2.4 million, partially offset by a $652,000decrease in nonperforming 1–4 family residential, multifamily residential, andnonfarm residential mortgage loans. Also, added during the quarter wasapproximately $571,000 in loans secured by real estate that the Companyforeclosed and transferred to foreclosed real estate.  At March 31, 2008, $1,892,000 of the$7,046,000 in nonperforming loans is guaranteed by the U.S. Government throughthe Small Business Administration Program. In April 2008, $1,424,000 ofthe nonperforming loans outstanding was paid off.

 

16

----

 

Nonperforming assetsrepresents 4.35% of loans, net of unearned income, discounts, and real estateacquired through foreclosure at March 31, 2008 as compared to 3.19% at December 31,2007.

 

The table belowpresents a summary of the Company’s nonperforming assets at March 31, 2008and December 31, 2007.

 
| ** **                                                                                           | ** ** | **March 31,**                  | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2008**                            | ** ** | **2007**              | ** ** |
| ** **                                                                                           | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                           | ** ** | **financial ratios)**          | ** ** |
| Nonperforming assets:                                                                                |       |                                |       |                  |       |
| Nonperforming loans:                                                                                 |       |                                |       |                  |       |
| Nonaccrual loans                                                                                     |       | $                                   | 7,046      |                  | $          | 5,261 |   |
| Past-due loans of 90 days  or more                                                                   |       | —                              |       | —                |       |
| Nonperforming loans                                                                                  |       | 7,046                               |       | 5,261                 |       |
|                                                                                                 |       |                                |       |                  |       |
| Real estate acquired  through foreclosure                                                            |       | 2,994                               |       | 2,423                 |       |
| Total nonperforming assets                                                                           |       | $                                   | 10,040     |                  | $          | 7,684 |   |
|                                                                                                 |       |                                |       |                  |       |
| Ratios:                                                                                              |       |                                |       |                  |       |
| Nonperforming loans to  loans, net of unearned income and discount on loans                          |       | 3.09                                | %          | 2.21                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Nonperforming assets to  loans, net of unearned income, and real estate acquired through foreclosure |       | 4.35                                | %          | 3.19                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Nonperforming assets to  total assets                                                                |       | 2.83                                | %          | 2.27                  | %          |
|                                                                                                 |       |                                |       |                  |       |
| Allowance for loan losses  to nonperforming loans                                                    |       | 39.87                               | %          | 54.12                 | %          |
|                                                                                                 |       |                                |       |                  |       |
| Allowance for loan losses  to nonperforming assets                                                   |       | 27.98                               | %          | 37.06                 | %          |

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

The Company provides forestimated losses on loans receivable when any significant and permanent declinein value occurs.  These estimates forlosses are based on individual assets and their cash flow forecasts, salesvalues, independent appraisals, the volatility of certain real estate markets,and concern for disposing of real estate in distressed markets.  For loans that are pooled for purposes of determiningthe necessary provisions, estimates are based on loan types, history ofcharge-offs, and other delinquency analyses. Therefore, the value used to determine the provision for losses issubject to the reasonableness of these estimates. The adequacy of the allowancefor loan losses is reviewed on a monthly basis by management and the Board ofDirectors.  On a semi-annual basis anindependent review of 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 againstthe allowance when, in the opinion of management, such loans are deemeduncollectible and subsequent recoveries are added to the allowance.  For the first quarter of 2008, based on theCompany’s evaluation, a provision for loan losses of $105,000 was chargedagainst operating earnings.  For the sameperiod in 2007, the Company determined that no addition to the provision forloan losses was required.

 

17

----

 

The allowance for loanlosses at March 31, 2008 was approximately $2,809,000, representing 1.23%of total loans, net of unearned income compared to approximately $2,848,000 at December 31,2007, which represented 1.20% of total loans, net of unearned income.

 

At March 31, 2008,management believes the allowance for loan losses is adequate. While managementuses available information to recognize losses on loans, future additions to theallowance may be necessary based on changes in economic conditions,particularly in the metropolitan Atlanta area. In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewthe Company’s allowance for loan losses. Such agencies may require the Companyto recognize additions to the allowance based on their judgments aboutinformation available to them at the time of their examination.

 

A substantial portion of theCompany’s loan portfolio is secured by real estate in the metropolitan Atlantaand Birmingham markets, including a concentration of loans to churches andconvenience stores.  The Company’soutstanding church loans were approximately $48 million at March 31, 2008and December 31, 2007, respectively. The Company’s loans to areaconvenience stores were approximately $13 million at March 31, 2008 and December 31,2007, respectively.  Also at March 31,2008, 1–4 family residential mortgage loans, secured by first liens, wereapproximately $44 million. The Company has no subprime mortgages in itsportfolio and exited the mortgage origination business in the third quarter of2007.

 

The ultimate collectibilityof a significant portion of the Company’s loan portfolio is susceptible tochanges in market conditions in the metropolitan Atlanta and Birmingham areas.

 

18

----

 

The followingtable summarizes loans, changes in the allowance for loan losses arising fromloans charged off, recoveries on loans previously charged off by loan category,and additions to the allowance which have been charged to operating expense asof and for the three month period ended March 31, 2008 and 2007 (amount inthousands, except financial ratios):

 
| ** **                                                                                                  | ** ** | **2008**   | ** **    | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|
| ** **                                                                                                  | ** ** | ** ** | ** **    | ** ** | ** ** |
| Loans, net of unearned income                                                           |       | $          |  227,667 |       | $          |  214,292 | ** ** |
|                                                                                                        |       |       |          |       | ** ** |
| Average loans, net of  unearned income and the allowance for loan losses                                    |       | $          | 231,094       |       | $          | 215,508 |   |
|                                                                                                        |       |       |          |       |       |
| Allowance for loan losses at the beginning of period                                                        |       | $          | 2,848         |       | $          | 3,109 |   |
|                                                                                                        |       |       |          |       |       |
| Loans  charged-off:                                                                                         |       |       |          |       |       |
| Commercial,  financial, and agricultural                                                                    |       | —     |          | 34         |       |
| Real estate  - loans                                                                                        |       | 52         |          | 26         |       |
| Installment  loans to individuals                                                                           |       | 121        |          | 53         |       |
| Total loans  charged-off                                                                                    |       | 173        |          | 113        |       |
|                                                                                                        |       |       |          |       |       |
| Recoveries  of loans previously charged off:                                                                |       |       |          |       |       |
| Commercial,  financial, and agricultural                                                                    |       | 11         |          | 15         |       |
| Real estate  - loans                                                                                        |       | 8          |          | 17         |       |
| Installment  loans to individuals                                                                           |       | 10         |          | 16         |       |
| Total loans  recovered                                                                                      |       | 29         |          | 48         |       |
|                                                                                                        |       |       |          |       |       |
| Net loans  charged-off                                                                                      |       | 144        |          | 65         |       |
|                                                                                                        |       |       |          |       |       |
| Additions to allowance for loan losses charged to operating expense                                         |       | 105        |          | —     |       |
|                                                                                                        |       |       |          |       |       |
| Allowance  for loan losses at period end                                                                    |       | $          | 2,809         |       | $          | 3,044 |   |
|                                                                                                        |       |       |          |       |       |
| Ratio of net  loans charged-off to average loans, net of unearned income and the allowance  for loan losses |       | 0.06       | %             | 0.03       | %          |
|                                                                                                        |       |       |          |       |       |
| Ratio of  allowance for loan losses to loans, net of unearned income and discounts                          |       | 1.23       | %             | 1.42       | %          |

 

19

----

 

**DEPOSITS**

 

Deposits arethe Company’s primary source of funding loan growth.  Total deposits at March 31, 2008increased by 12% or $34 million to $313,505,000, driven by interest-bearingdeposits which increased by 12% or $26 million compared to December 31,2007.  The increase in interest-bearingdeposits is primarily attributed to Corporate and Governmental customers whomake significant monthly deposits and withdrawals based on their budgetaryneeds.  Noninterest-bearing deposits alsoincreased during the first quarter of 2008, increasing by 14% or $7 million.The Company has an ongoing sales program which places specific emphasis ondeposit growth.

 

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

 
| ** **                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                               |       |               |       |                  |       |
| NOW and  money market accounts     |       | $                  | 70,984     |                  | $          | 68,728 |   |
| Savings  accounts                  |       | 34,354             |       | 33,136                |       |
| Time  deposits of $100,000 or more |       | 80,404             |       | 61,210                |       |
| Other time  deposits               |       | 66,426             |       | 62,631                |       |
|                               |       |               |       |                  |       |
|                               |       | $                  | 252,168    |                  | $          | 225,705 |   |

 

**OTHERBORROWED FUNDS**

 

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

 

Federal fundspurchased represent unsecured borrowings from other banks and generally maturedaily.  At December 31, 2007 thecompany had $2,000,000 outstanding at a rate of 3.65%.  There was no amount outstanding at March 31,2008.

 

The Company hadan unsecured note payable of approximately $340,000 at March 31, 2008 and December 31,2007.  The note bears an interest rate of4.75% at March 31, 2008 and 6.75% at December 31, 2007 (the lender’sprime rate minus 50 basis points).

 

The Bank hadoutstanding advances from the FHLB of $2,375,000 at March 31, 2008compared to $18,944,000 at December 31, 2007.   The following advances are collateralized bya blanket lien on the Company’s 1-4 family mortgage loans.

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type**   | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2008                      |       | Daily        |       | Variable   |       | 3.00                         | %          | $                               | 2,000,000  |   | 4.40 | % | $ | 18,565,000 |   |
| August 2026                    |       |         |       |       | (1)        | —                       |       | 375,000                         |       | — |   | 379,408 |   |
|                                |       |         |       |       |       |                         |       |                            |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |       |       | $                            | 2,375,000  |                            |       |   | $ | 18,944,408 |   |
|                                |       |         |       |       |       |                         |       |                            |       |   |   |
| Weighted Average Rate at Period End |       |         |       | 2.53       | %          |                         |       | 4.31                            | %          |   |   |

 

----

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

 

20

----

 

**RESULTS OF OPERATIONS**

 

**Net Interest Income:**

 

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.

 

During the first quarter of 2008, the Federal Reserve took significantaction by lowering the Fed funds rate 200 basis points through a series of ratereductions.  This economic environmentaffected our financial results as we experienced sharp reductions in earningasset yields without corresponding levels of reductions in deposit rates due tointense deposit competition and pricing pressure. As a result, theCompany’s net interest margin declined by 0.34% to 4.33% during thequarter.  Net interest income was flat for the first quarter of 2008 compared tothe same period last year, increasing by only $8,000.  Total interest income for the three monthperiod ending March 31, 2008 decreased by $147,000 or 3% and totalinterest expense decreased by $155,000 or 8% compared to the first quarter of2007.  The decrease in interest expenseis due to the payoff of other borrowings in the second and third quarter of2007 which had significant higher rates than our deposit base.

 

The Company has an asset/liabilitymanagement program which monitors the Company’s interest rate sensitivity andensures the Company 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.

 

**Provision for loan losses**

 

During the first quarter of 2008, the Companyrecognized additions to the provision for loan losses of $105,000 compared tono provision for the same period in 2007 as nonaccrual loans increased by$1,785,000 due to deteriorating financial condition of several borrowers.  The allowance for loan losses was $2,809,000 at March 31,2008 compared to $2,848,000 at December 31, 2007.  At March 31, 2008, the allowancefor loan losses was 40% of the nonperforming loans compared to 54% at December 31,2007.  The provision for loan losses andthe resulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions. At March 31,2008, the Company considered its allowance for loan losses to be adequate.

 

**Noninterest income:**

 

Noninterest income consists of revenuesgenerated from a broad range of financial services and activities, includingfee-based services and commissions earned through insurance sales.  In addition, gains and losses realized fromthe sale of investment portfolio securities and sales of assets are included innoninterest income.

 

Noninterest income totaled $1,331,000 forthe three month period ended March 31, 2008, representing an increase of$302,000 or 29% compared with the same period ended March 31, 2007. Thisincrease is primarily attributed to an increase of $275,000 in deposit andservice fee income. Overdraft fees, which are a significant component ofservice charges on deposit, increased by 

 

21

----

 

$302,000 compared to the same three monthperiod last year as a result of a new product implemented in the third quarterof 2007. Overdraft fees, due to their nature, fluctuate monthly based on theshort-term loan need of the customers.

 

Gains on the sales of securities totaled$27,000 during the first three months of 2008. The Company swapped the tail-endof several mortgage-backed securities and placed the funds into higher yieldingearning assets. By comparison, the Company experienced a loss on the sale ofsecurities of $33,000 for the same period last year.

 

**Noninterest expense**:

 

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

 

Total noninterest expense decreased by$121,000 or 3% to $3,659,000 for the three month period ended March 31,2008 compared to the same period last year.

 

For the first quarter of 2008, salariesand employee benefits was flat, increasing by only $3,000 and occupancy andequipment expenses increased by $40,000. The increase in occupancy and equipment expenses is due to therelocation of our Columbus branch in the third quarter of 2007 to a largerfacility which is closer to our customer base and has more growthopportunities. The Company also installed plasma televisions in each of itsbranches to improve the marketing of its products to retail customers.  Other operating expenses decreased by$164,000 compared to the same period last year. The decrease is due to a$200,000 charge incurred in the first quarter of 2007 as a result of an awardlevied against the Company by the Superior Court of DeKalb County, Georgia forattorney fees associated with a former court case decided against the Bank. TheCompany considers the attorney fees awarded to be excessive and unwarrantedconsidering the amount of the judgment awarded by the jury in the case, and isappealing to have the fee reversed.

 

**INTERESTRATE SENSITIVITY MANAGEMENT**

 

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

 

One method ofmeasuring the impact of interest rate sensitivity is the cumulative gapanalysis.  The difference betweeninterest rate sensitive assets and interest rate sensitive liabilities atvarious time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitivepressures and the needs of the Company’s customers.  In addition, various assets and liabilitiesindicated as repricing within the same 

 

22

----

 

period may infact reprice at different times within such period and at different rates. Thefollowing table shows the contractual maturities of all interest rate sensitiveassets and liabilities at March 31, 2008. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations with or without callor prepayment penalties.  Forconservative purposes, the Company has included demand deposits such as NOW,money market, and savings accounts in the three month category.  However, the actual repricing of 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 followingtable sets forth the distribution of the repricing of the Company’s interestrate sensitive assets and interest rate sensitive liabilities as of March 31,2008.

 
| ** **                                                              | ** ** | **Cumulative amounts as of March 31, 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                             |       | $                                                                         | 6,823      |   | $ | — |   | $ | — |   | $ | — |   | $ | 6,823 |   |
| Certificates  of deposit                                                |       | —                                                                    |       | 100 |   | — |   | — |   | 100 |   |
| Investments                                                             |       | 2,254                                                                     |       | 2 |   | 4,872 |   | 75,542 |   | 82,670 |   |
| Loans                                                                   |       | 70,943                                                                    |       | 24,399 |   | 91,844 |   | 40,764 |   | 227,950 |   |
| Total interest-sensitive  assets                                        |       | $                                                                         | 80,020     |   | $ | 24,501 |   | $ | 96,716 |   | $ | 116,306 |   | $ | 317,543 |   |
|                                                                    |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                         | 146,830    |   | $ | 34,354 |   | $ | 21,088 |   | $ | 49,896 |   | $ | 252,168 |   |
| Notes  payable                                                          |       | 340                                                                       |       | — |   | — |   | — |   | 340 |   |
| Other  borrowings                                                       |       | 2,000                                                                     |       | — |   | — |   | 375 |   | 2,375 |   |
| Total  interest-sensitive liabilities                                   |       | $                                                                         | 149,170    |   | $ | 34,354 |   | $ | 21,088 |   | $ | 50,271 |   | $ | 254,883 |   |
|                                                                    |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                                         | (69,150    | ) | $ | (9,853 | ) | $ | 75,628 |   | $ | 66,035 |   | $ | 62,660 |   |
|                                                                    |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (21.78                                                                    | )%         | (24.88 | )% | (1.06 | )% | 19.73 | % | 19.73 | % |

 

----

(a) Savings, Now, and money market deposits totaling  $105,338 are included in the maturing in 3months classification. 

 

**LIQUIDITY**

 

Liquidity is the ability of the Companyto convert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities.  Liquidity management involves maintaining theCompany’s ability to meet the day-to-day cash flow requirements of itscustomers, whether they are depositors wishing to withdraw funds or borrowersrequiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able toperform the primary function of a financial intermediary and would, therefore,not be able to meet the needs of the communities it serves. Additionally, theCompany requires cash for various operating needs including: dividends toshareholders; business combinations; capital injections to its subsidiary; theservicing of debt; and the payment of general corporate expenses. The Companyhas access to various capital markets. However, the primary source of liquidity for the Company is dividendsfrom its bank subsidiary.  The GeorgiaDepartment of Banking and Finance regulates the dividend payments and mustapprove dividend payments that exceed 50 percent of the Bank’s prior year netincome.  As of March 31, 2008, thisamount was approximately $1,604,000. The payment of dividends may also beaffected or limited by other factors, such as the requirement to maintainadequate capital above regulatory guidelines. In 2007, the Georgia Department of Banking and Finance approved aspecial dividend of $5,155,000 which was used by the Company to redeem itsoutstanding Junior 

 

23

----

 

SubordinatedDebentures.

 

Asset and liability management functionsnot only serve to assure adequate liquidity in order to meet the needs of theCompany’s customers, but also to maintain an appropriate balance betweeninterest-sensitive assets and interest-sensitive liabilities so that theCompany can earn a return that meets the investment requirements of itsshareholders.  Daily monitoring of thesources and uses of funds is necessary to maintain an acceptable cash positionthat meets both requirements.

 

The asset portion of the balance sheetprovides liquidity primarily through loan principal repayments, maturities ofinvestment securities and, to a lesser extent, sales or paydowns of investmentsecurities available for sale and held to maturity.  Other short-term investments such as federalfunds sold and maturing interest bearing deposits with other banks, areadditional sources of liquidity funding.

 

The liability portion of the balancesheet provides liquidity through various customers’ interest bearing andnoninterest bearing deposit accounts. Federal funds purchased and other short-term borrowings are additionalsources of liquidity and, basically, represent the Company’s incrementalborrowing capacity.  These sources ofliquidity are short-term in nature and are used as necessary to fund assetgrowth and meet short-term liquidity needs. The Company does not anticipate anyliquidity requirements in the near future that it will not be able to meet.

 

**CAPITALRESOURCES**

 

Stockholders’ equity increased by $761,000for the three month period ended March 31, 2008 primarily due toearnings.  Retained earnings increased bynet income of $713,000, reduced by a cumulative effect adjustment in the amountof $192,000 as a result of the adoption of EITF 06-4, “Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsed Split-Dollar LifeInsurance Arrangements”.  Accumulatedother comprehensive income, net of taxes also increased during the firstquarter of 2008 by $209,000 to $256,000. This increase is attributed to the rapid movements in the Treasurymarkets, wild swings in volatility and credit spreads, and their impact on theCompany’s available for sale securities portfolio.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total and Tier 1 capital torisk weighted assets, and Tier 1 capital to average assets.  The Bank’s total and Tier 1 capital to riskweighted assets and Tier 1 to average assets were 14%, 13% and 10% as of March 31,2008 and December 31, 2007, respectively. At March 31, 2008, the Company met all capital adequacyrequirements to which it is subject and is considered to be ‘well capitalized”under regulatory standards.

 

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

 

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

 

**ITEM 4T.    CONTROLS ANDPROCEDURES**

 

As of the endof the period covered by this report, we conducted, under the supervision ofand with the participation of our management, including the Company’s ChiefExecutive Officer, Chief Operating Officer, and Chief Financial Officer, anevaluation of the effectiveness of our disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e). Based on this evaluation, theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective as of March 31, 2008 in accumulating and communicatinginformation to management, including the Chief Executive Officer, the ChiefOperating Officer, and the Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosures of that information under theSEC’s rules and forms and that the Company’s disclosure controls andprocedures are designed to ensure that the information required to be disclosedin reports filed or submitted by the Company under the Securities Exchange Actis recorded, processed, summarized and reported within the specified timeperiods.  During the quarter ended March 31,2008, there have been no changes in the Company’s internal controls over financialreporting or, to the Company’s knowledge, in other factors that couldsignificantly change those internal controls subsequent to the date the Companycarried out its evaluation that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

24

----

 

**PART II. OTHER INFORMATION**

 

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

 

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

 

**ITEM 1A.   RISK FACTORS**

 

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks we face. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

**ITEM2.       UNREGISTERED SALE OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

None

 

**ITEM3.       DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM4.       SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS**

 

None

 

**ITEM5.       OTHERINFORMATION**

 

None

 

**ITEM6.       EXHIBITS**

 

**Exhibit 31**

 

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

 

**Exhibit 32**

 

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

 

25

----

 

**SIGNATURES**

 

In accordancewith the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

**CITIZENSBANCSHARES CORPORATION**

 

 
| Date:  | May 13,  2008 | By:                                    | /s/ James E.  Young |
|--------|--------------------|----------------------------------------|---------------------|
|   |               | James E.  Young                        |
|   |               | President  and Chief Executive Officer |
|   |               |                                   |
| Date:  | May 13,  2008 | By:                                    | /s/ Cynthia  N. Day |
|   |               | Cynthia N.  Day                        |
|   |               | Senior  Executive Vice President and   |
|   |               | Chief  Operating Officer               |
|   |               |                                   |
|   |               |                                   |
| Date:  | May 13,  2008 | By:                                    | /s/ Samuel  J. Cox  |
|   |               | Samuel J.  Cox                         |
|   |               | Executive  Vice President and          |
|   |               | Chief  Financial Officer               |

 

26

----