** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 - Q**

 

**(Mark One)**

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

 

**Commission File No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

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

 

Registrant’s telephone number, including areacode:           **(678) 406 - 4000**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                    xYes   o No.

 

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

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether registrant has filed all documents andreports required to be filed by Sections 12, 13, or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.            oYes    oNo.

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding for each of the issuer’sclasses of common stock as of the latest practicable date: 2,002,548 shares ofCommon Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00par value outstanding on October 31, 2007.

 

 

----

** **
| **PART  1.** | **FINANCIAL  INFORMATION** |
|--------------|----------------------------|
|         |                       |
| **ITEM  1.** | **Financial  statements**  |

** **

** **

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**SEPTEMBER30, 2007 AND DECEMBER 31, 2006**

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

** **
| ** **                                                                                         | ** ** | **2007**        | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                         | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                         | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                               |       |            |       |       |       |   |   |
| Cash and due from banks                                                                            |       | $               | 6,253      |       | $          | 8,615 |   |
| Interest-bearing deposits with banks                                                               |       | 450             |       | 4,589      |       |
| Certificates of deposit                                                                            |       | 100             |       | 100        |       |
| Investment securities available for sale,  at fair value                                           |       | 60,442          |       | 70,348     |       |
| Investment securities held to maturity, at  cost                                                   |       | 8,019           |       | 8,175      |       |
| Other investments                                                                                  |       | 1,897           |       | 2,246      |       |
| Loans receivable, net                                                                              |       | 233,143         |       | 218,003    |       |
| Premises and equipment, net                                                                        |       | 7,884           |       | 7,850      |       |
| Cash surrender value of life insurance                                                             |       | 9,644           |       | 9,364      |       |
| Foreclosed real estate                                                                             |       | 3,097           |       | 130        |       |
| Other assets                                                                                       |       | 6,157           |       | 5,765      |       |
|                                                                                               |       |            |       |       |       |
| Total assets                                                                                       |       | $               | 337,086    |       | $          | 335,185 |   |
|                                                                                               |       |            |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                     | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                               |       |            |       |       |       |
| LIABILITIES:                                                                                       |       |            |       |       |       |
| Noninterest-bearing deposits                                                                       |       | $               | 53,747     |       | $          | 60,262 |   |
| Interest-bearing deposits                                                                          |       | 228,403         |       | 208,758    |       |
|                                                                                               |       |            |       |       |       |
| Total deposits                                                                                     |       | 282,150         |       | 269,020    |       |
|                                                                                               |       |            |       |       |       |
| Accrued expenses and other liabilities                                                             |       | 3,708           |       | 3,774      |       |
| Federal funds purchased                                                                            |       | 1,000           |       | —     |       |
| Notes payable                                                                                      |       | 340             |       | 340        |       |
| Junior subordinated debentures                                                                     |       | —          |       | 5,155      |       |
| Advances from Federal Home Loan Bank                                                               |       | 18,184          |       | 26,746     |       |
|                                                                                               |       |            |       |       |       |
| Total liabilities                                                                                  |       | 305,382         |       | 305,035    |       |
|                                                                                               |       |            |       |       |       |
| COMMITMENTS  AND CONTINGENCIES                                                                     |       |            |       |       |       |
|                                                                                               |       |            |       |       |       |
| STOCKHOLDERS’  EQUITY:                                                                        |       |            |       |       |       |
| Common stock - $1 par value; 20,000,000  shares authorized; 2,230,065 shares issued                |       | 2,230           |       | 2,230      |       |
| Nonvoting common stock - $1 par value;  5,000,000 shares authorized; 90,000 issued and outstanding |       | 90              |       | 90         |       |
| Additional paid-in capital                                                                         |       | 7,539           |       | 7,497      |       |
| Retained earnings                                                                                  |       | 24,089          |       | 22,786     |       |
| Treasury stock at cost, 227,517 shares at  September 30, 2007 and 234,442 at December 31, 2006     |       | (1,859          | )          | (1,915     | )          |
| Accumulated other comprehensive loss, net  of income taxes                                         |       | (385            | )          | (538       | )          |
|                                                                                               |       |            |       |       |       |
| Total stockholders’ equity                                                                    |       | 31,704          |       | 30,150     |       |
|                                                                                               |       |            |       |       |       |
|                                                                                               |       | $               | 337,086    |       | $          | 335,185 |   |

 

See notes to consolidated financialstatements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                           | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  income:                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Loans, including fees                                |       | $                                                    | 4,875      |                                                | $          | 4,461 |   | $ | 13,888 |   | $ | 13,439 |   |
| Investment securities:                               |       |                                                 |       |                                                |       |   |   |   |   |
| Taxable                                              |       | 637                                                  |       | 673                                                 |       | 1,977 |   | 1,932 |   |
| Tax-exempt                                           |       | 201                                                  |       | 226                                                 |       | 633 |   | 667 |   |
| Interest-bearing deposits                            |       | 32                                                   |       | 14                                                  |       | 291 |   | 38 |   |
| Total interest income                                |       | 5,745                                                |       | 5,374                                               |       | 16,789 |   | 16,076 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Deposits                                             |       | 1,909                                                |       | 1,433                                               |       | 5,496 |   | 4,069 |   |
| Other borrowings                                     |       | 237                                                  |       | 475                                                 |       | 810 |   | 1,312 |   |
| Total interest expense                               |       | 2,146                                                |       | 1,908                                               |       | 6,306 |   | 5,381 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income                                  |       | 3,599                                                |       | 3,466                                               |       | 10,483 |   | 10,695 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision  for loan losses                           |       | —                                               |       | —                                              |       | — |   | 30 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest  income after provision for loan losses |       | 3,599                                                |       | 3,466                                               |       | 10,483 |   | 10,665 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  income:                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Service charges on deposits                          |       | 823                                                  |       | 834                                                 |       | 2,290 |   | 2,559 |   |
| Gain (loss) on sales of securities                   |       | 3                                                    |       | —                                              |       | (30 | ) | 126 |   |
| Gain (loss) on sales of assets                       |       | —                                               |       | (23                                                 | )          | 64 |   | — |   |
| Other operating income                               |       | 284                                                  |       | 337                                                 |       | 1,032 |   | 1,086 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest income                             |       | 1,110                                                |       | 1,148                                               |       | 3,356 |   | 3,771 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  expense:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and employee benefits                       |       | 1,918                                                |       | 1,857                                               |       | 5,742 |   | 5,857 |   |
| Net occupancy and equipment                          |       | 635                                                  |       | 568                                                 |       | 1,774 |   | 1,738 |   |
| Other operating expenses                             |       | 1,314                                                |       | 1,375                                               |       | 4,004 |   | 4,181 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total noninterest expense                            |       | 3,867                                                |       | 3,800                                               |       | 11,520 |   | 11,776 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income before income taxes                           |       | 842                                                  |       | 814                                                 |       | 2,319 |   | 2,660 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  expense                                  |       | 174                                                  |       | 151                                                 |       | 446 |   | 537 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                                    | 668        |                                                | $          | 663 |   | $ | 1,873 |   | $ | 2,123 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  per share - basic                        |       | $                                                    | 0.32       |                                                | $          | 0.32 |   | $ | 0.90 |   | $ | 1.02 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  per share - diluted                      |       | $                                                    | 0.32       |                                                | $          | 0.32 |   | $ | 0.90 |   | $ | 1.02 |   |
| ** **                                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted  average outstanding shares - basic         |       | 2,092                                                |       | 2,085                                               |       | 2,089 |   | 2,088 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted  average outstanding shares - diluted       |       | 2,092                                                |       | 2,085                                               |       | 2,089 |   | 2,088 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Dividends  per common share                          |       | $                                                    | —     |                                                | $          | — |   | $ | 0.19 |   | $ | 0.17 |   |

 

Seenotes to consolidated financial statements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATION**

**AND SUBSIDIARY**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,2007 AND 2006**

**(Unaudited - In thousands, except parentheticalfootnotes)**

 
| ** **                                                                                               | ** ** | ** **      | ** ** | ** **      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|----------------|------------|-------------------|------------|-------------------|------------|------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                                                                               | ** ** | ** **      | ** ** | ** **      | ** ** | **Nonvoting** | ** ** | **Additional** | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **       | ** ** |
| ** **                                                                                               | ** ** | **CommonStock** | ** ** | **CommonStock** | ** ** | **Paid-in**   | ** ** | **Retained**   | ** ** | **TreasuryStock** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** ** | **Shares**      | ** ** | **Amount**      | ** ** | **Shares**    | ** ** | **Amount**     | ** ** | **Capital**       | ** ** | **Earnings**      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income(Loss)** | ** ** | **Total**  | ** ** |
| ** **                                                                                               | ** ** | ** **      | ** ** | ** **      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
| Balance—December  31, 2005                                                                          |       | 2,230           |       | $               | 2,230      |          | 90         |           | $          | 90                |       | $                 | 7,439      |       | $          | 20,138     |       | (231             | )          | $          | (1,896     | ) | $ | (787 | ) | $ | 27,214 |   |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| Net income                                                                                               |       | —          |       | —          |       | —        |       | —         |       | —            |       | 2,123             |       | —     |       | —     |       | —           |       | 2,123      |       |
| Unrealized  holding losses on investment securities available for sale—net of taxes of  $59,592     |       | —          |       | —          |       | —        |       | —         |       | —            |       | —            |       | —     |       | —     |       | 116              |       | 116        |       |
| Less  reclassification adjustment for holding gains included in net income—net of  taxes of $42,017 |       | —          |       | —          |       | —        |       | —         |       | —            |       | —            |       | —     |       | —     | #          | (84              | )          | (84        | )          |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| Comprehensive  loss                                                                                      |       | —          |       | —          |       | —        |       | —         |       | —            |       | —            |       | —     |       | —     |       | —           |       | 2,155      |       |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| Purchase of treasury stock                                                                               |       | —          |       | —          |       | —        |       | —         |       | 2                 |       | —            |       | (3         | )          | (33        | )          | —           |       | (31        | )          |
| Stock based compensation expense                                                                         |       | —          |       | —          |       | —        |       | —         |       | 36                |       | —            |       | —     |       | —     |       | —           |       | 36         |       |
| Reclassification adjustment of treasury stock                                                            |       | —          |       | —          |       | —        |       | —         |       | 6                 |       | —            |       | —     |       | 14         |       | —           |       | 20         |       |
| Dividends declared                                                                                       |       | —          |       | —          |       | —        |       | —         |       | —            |       | (355              | )          | —     |       | —     |       | —           |       | (355       | )          |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| **Balance—September  30, 2006**                                                                     | ** ** | **2,230**       | ** ** | **$**           | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**            | ** ** | **$**             | **7,483**  | ** ** | **$**      | **21,906** | ** ** | **(234**         | **)**      | **$**      | **(1,915** | **)** | **$** | **(755** | **)** | **$** | **29,039** | ** ** |
| ** **                                                                                               | ** ** | ** **      | ** ** | ** **      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
| Balance—December  31, 2006                                                                          |       | 2,230           |       | $               | 2,230      |          | 90         |           | $          | 90                |       | $                 | 7,497      |       | $          | 22,786     |       | (234             | )          | $          | (1,915     | ) | $ | (538 | ) | $ | 30,150 |   |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| Net income                                                                                               |       | —          |       | —          |       | —        |       | —         |       | —            |       | 1,873             |       | —     |       | —     |       | —           |       | 1,873      |       |
| Unrealized  holding gains on investment securities available for sale—net of taxes of  $68,293      |       | —          |       | —          |       | —        |       | —         |       | —            |       | —            |       | —     |       | —     |       | 133              |       | 133        |       |
| Less reclassification  adjustment for holding losses included in net income—net of taxes of $10,302 |       | —          |       | —          |       | —        |       | —         |       | —            |       | —            |       | —     |       | —     |       | 20               |       | 20         |       |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| Comprehensive  income                                                                                    |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       | 2,026      |       |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| Cumulative effect of adoption of fair value option                                                       |       | —          |       | —          |       | —        |       | —         |       | —            |       | (173              | )          | —     |       | —     |       | —           |       | (173       | )          |
| Stock based compensation expense                                                                         |       | —          |       | —          |       | —        |       | —         |       | 39                |       | —            |       | —     |       | —     |       | —           |       | 39         |       |
| Sale of Treasury stock                                                                                   |       | —          |       | —          |       | —        |       | —         |       | 3                 |       | —            |       | 7          |       | 56         |       | —           |       | 59         |       |
| Dividends declared                                                                                       |       | —          |       | —          |       | —        |       | —         |       | —            |       | (397              | )          | —     |       | —     |       | —           |       | (397       | )          |
|                                                                                                     |       |            |       |            |       |          |       |           |       |              |       |              |       |       |       |       |       |             |       |       |       |
| **Balance—September  30, 2007**                                                                     | ** ** | **2,230**       | ** ** | **$**           | **2,230**  | ** **    | **90**     | ** **     | **$**      | **90**            | ** ** | **$**             | **7,539**  | ** ** | **$**      | **24,089** | ** ** | **(227**         | **)**      | **$**      | **(1,859** | **)** | **$** | **(385** | **)** | **$** | **31,704** | ** ** |

 

Seenotes to consolidated financial statements.

 

4

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

**(In thousands)**

 
| ** **                                                                             | ** ** | **2007**        | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                             | ** ** | **(Unaudited)** | ** ** |
| **OPERATING  ACTIVITIES:**                                                             |       |            |       |     |       |
| Net income                                                                             |       | $               | 1,873      |     | $          | 2,123 |   |
| **Adjustments to reconcile net income to net  cash provided by operating activities:** |       |            |       |     |       |
| Provision for loan losses                                                              |       | —          |       | 30       |       |
| Depreciation                                                                           |       | 581             |       | 487      |       |
| Amortization and accretion, net                                                        |       | 213             |       | 296      |       |
| Provision for deferred income taxes  (benefit)                                         |       | 145             |       | 204      |       |
| Gain on sale of assets and investments                                                 |       | (34             | )          | (126     | )          |
| Stock based compensation expense                                                       |       | 39              |       | 36       |       |
| Change in  other assets                                                                |       | (1,034          | )          | (494     | )          |
| Change in  accrued expenses and other liabilities                                      |       | (66             | )          | (186     | )          |
|                                                                                   |       |            |       |     |       |
| Net cash provided by operating activities                                              |       | 1,717           |       | 2,370    |       |
|                                                                                   |       |            |       |     |       |
| **INVESTING  ACTIVITIES:**                                                             |       |            |       |     |       |
| Proceeds from calls and maturities of  investment securities held to maturity          |       | 149             |       | 598      |       |
| Proceeds from sales and maturities of  investment securities available for sale        |       | 11,019          |       | 10,875   |       |
| Purchases of investment securities  available for sale                                 |       | (1,016          | )          | (14,717  | )          |
| Net change in other investments                                                        |       | 349             |       | 616      |       |
| Net change in loans receivable                                                         |       | (18,360         | )          | 3,714    |       |
| Net proceeds (premiums paid) on life  insurance policy                                 |       | (28             | )          | 84       |       |
| Net proceeds from the sale of foreclosed  properties                                   |       | 310             |       | 762      |       |
| Purchases of premises and equipment, net                                               |       | (788            | )          | (204     | )          |
| Proceeds from the sale of premises and  equipment, net                                 |       | 179             |       | —   |       |
| Net change in interest bearing deposits  with banks                                    |       | 4,139           |       | (4,831   | )          |
|                                                                                   |       |            |       |     |       |
| Net cash used by investing activities                                                  |       | (4,047          | )          | (3,103   | )          |
|                                                                                   |       |            |       |     |       |
| **FINANCING  ACTIVITIES:**                                                             |       |            |       |     |       |
| Net change in deposits                                                                 |       | 13,130          |       | 10,057   |       |
| Sale (purchase) of treasury stock activity                                             |       | 56              |       | (19      | )          |
| Payoff of junior subordinated debentures,  net                                         |       | (5,000          | )          | —   |       |
| Net change in additional paid-in-capital                                               |       | 3               |       | 44       |       |
| Principal payments on debt                                                             |       | —          |       | (100     | )          |
| Net change in advances from Federal Home  Loan Bank                                    |       | (8,824          | )          | (12,049  | )          |
| Increase in federal funds purchased                                                    |       | 1,000           |       | —   |       |
| Dividends paid                                                                         |       | (397            | )          | (355     | )          |
|                                                                                   |       |            |       |     |       |
| Net cash used in financing activities                                                  |       | (32             | )          | (2,422   | )          |
|                                                                                   |       |            |       |     |       |
| Net change in cash and cash equivalents                                                |       | (2,362          | )          | (3,155   | )          |
|                                                                                   |       |            |       |     |       |
| Cash and and  cash equivalents, beginning of period                                    |       | 8,615           |       | 11,289   |       |
|                                                                                   |       |            |       |     |       |
| Cash and and  cash equivalents at end of period                                        |       | $               | 6,253      |     | $          | 8,134 |   |
|                                                                                   |       |            |       |     |       |
| **Supplemental  disclosures of cash paid during the period for:**                      |       |            |       |     |       |
| Interest                                                                               |       | $               | 6,336      |     | $          | 5,429 |   |
|                                                                                   |       |            |       |     |       |
| Income taxes                                                                           |       | $               | 511        |     | $          | 677 |   |
|                                                                                   |       |            |       |     |       |
| **Supplemental  disclosures of noncash transactions:**                                 |       |            |       |     |       |
| Real estate  acquired through foreclosure                                              |       | $               | 3,217      |     | —     |   |
|                                                                                   |       |            |       |     |       |
| Change in  unrealized gain on investment securities available for sale, net of taxes   |       | $               | 153        |     | $          | 32 |   |
|                                                                                   |       |            |       |     |       |
| Cumulative  effect of adoption of fair value option (charged to Retained earnings)     |       | $               | 173        |     | $          | — |   |

 

See notes to consolidated financialstatements.

 

5

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

**Notes to the Consolidated FinancialStatements**

(Unaudited)

 

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

Citizens Bancshares Corporation (the “Company”)is a holding company that provides a full range of commercial banking andmortgage brokerage services to individual and corporate customers inmetropolitan Atlanta and Columbus, Georgia, and in Birmingham and Eutaw,Alabama, through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).The Bank operates under a state charter and serves its customers through sevenfull-service financial centers in metropolitan Atlanta, Georgia, onefull-service financial center in Columbus, Georgia, one full-service financialcenter in Birmingham, Alabama, and one full-service financial center in Eutaw,Alabama. On June 26, 2007, the Company exercised its option to have its juniorsubordinated debentures issued through a wholly owned subsidiary grantor trust,Citizens (GA) Statutory Trust I (the “Trust”) redeemed and retired. Uponcompletion of the junior subordinated debentures redemption and windup of Trustactivities, the Trust subsidiary was dissolved.

 

The accompanying unaudited consolidatedfinancial statements have been prepared pursuant to the rules and regulationsfor reporting on Form 10-Q. Accordingly, certain disclosures required bygenerally accepted accounting principles are not included herein. These interimstatements should be read in conjunction with the financial statements and notesthereto included in the Company’s latest Annual Report on Form 10-K filed withthe Securities and Exchange Commission for the year ended December 31, 2006. Theresults of operations for the interim periods reported herein are notnecessarily representative of the results expected for the full 2007 fiscalyear.

 

The consolidated financial statements of theCompany for the three and nine month periods ended September 30, 2007 areunaudited. In the opinion of management, all adjustments necessary for a fairpresentation of the financial position and results of operations and cash flowsfor the nine month period have been included. All adjustments are of a normalrecurring nature. All significant intercompany accounts and transactions havebeen eliminated in consolidation.

 

**Accounting Policies**

 

The Company’s consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”), which oftenrequire the judgment of management in the selection and application of certainaccounting principles and methods. Reference is made to the accounting policiesof the Company described in the notes to the consolidated financial statementscontained in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006. The Company has followed those policies in preparing thisreport. Management believes that the quality and reasonableness of its mostcritical policies enable the fair presentation of its financial position and ofits results of operations.

 

6

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**Recently Issued Accounting Standards**

 

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

 

In September 2006, the FASB issued SFAS No.158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans”**(“SFAS 158”),which amends SFAS 87 and SFAS 106 to require recognition of the overfunded orunderfunded status of pension and other postretirement benefit plans on thebalance sheet. Under SFAS 158, gains and losses, prior service costs andcredits, and any remaining transition amounts under SFAS 87 and SFAS 106 thathave not yet been recognized through net periodic benefit cost will berecognized in accumulated other comprehensive income, net of tax effects, untilthey are amortized as a component of net periodic cost. The measurement date —the date at which the benefit obligation and plan assets are measured — isrequired to be the company’s fiscal year end. SFAS 158 is effective forpublicly-held companies for fiscal years ending after December 15, 2006,except for the measurement date provisions, which are effective for fiscalyears ending after December 15, 2008. The Company does not have a definedbenefit pension plan. Therefore, SFAS 158 will not impact the Company’sfinancial condition or results of operations.

 

In September, 2006, The FASB ratified theconsensuses reached by the FASB’s Emerging Issues Task Force (“EITF”) relatingto EITF 06-4 “Accounting for the Deferred Compensation and PostretirementBenefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. EITF06-4 addresses employer accounting for endorsement split-dollar life insurancearrangements that provide a benefit to an employee that extends topostretirement periods should recognize a liability for future benefits inaccordance with SFAS No. 106, “Employers’ Accounting for PostretirementBenefits Other Than Pensions”*,*or AccountingPrinciples Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967”*.*EITF 06-4 is effective for fiscal years beginning afterDecember 15, 2007. Entities should recognize the effects of applying this Issuethrough either (a) a change in accounting principle through a cumulative-effectadjustment to retained earnings or to other components of equity or net assetsin the statement of financial position as of the beginning of the year ofadoption or (b) a change in accounting principle through retrospectiveapplication to all prior periods. The Company is currently analyzing the effectof the adoption of EITF 06-4 on its financial position, results of operationsand cash flows.

 

In September 2006, the FASB ratified theconsensus reached related to EITF 06-5,**“Accountingfor Purchases of Life Insurance—Determining the Amount That Could Be Realizedin Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchasesof Life Insurance.”  EITF 06-5 states that a policyholder should considerany additional amounts included in the contractual terms of the insurancepolicy other than the cash surrender value in determining the amount that couldbe realized under the insurance contract.  EITF 06-5 also states that apolicyholder should determine the amount that could be realized under the lifeinsurance contract assuming the surrender of an individual-life byindividual-life policy (or certificate by certificate in a group policy). EITF06-5 is effective for fiscal years beginning after December 15, 2007.  TheCompany is currently analyzing the effect of the adoption of EITF 06-5 on itsfinancial position, results of operations and cash flows.

 

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

 

7

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**2.  ADOPTIONOF STOCK STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 159 (SFAS 159) “THEFAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES”**

 

To improve the financialreporting of its financial liabilities, the Company has elected to adopt SFAS159 early. The Company has several types of advances from the Federal Home LoanBank (FHLB), which are reflected on its balance sheet as a mixture of fairvalue and book value. The early adoption of SFAS 159 allows the Company toreflect its total outstanding advances at fair value. The fair valuepresentation of FHLB advances is consistent with the reporting of the Company’sother borrowed funds, which approximate fair value.

 
| **Description**                                                                       | ** ** | **Balance at   1/1/07   prior to   Adoption** | ** ** | **Net Loss   upon   Adoption** | ** ** | **Balance at   1/1/07   after   Adoption** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
|                                                                                  |       |                                                                   |       |                                          |       |                                                           |       |
| Advances  from Federal Home Loan Bank                                                 |       | $                                                                      | 10,000     |                                          | $          | 262                                                            |       | $ | 10,262 |   |
|                                                                                  |       |                                                                   |       |                                          |       |                                                           |       |
| Pretax  cumulative effect of adoption of the fair value option                        |       |                                                                   |       | 262                                           |       |                                                           |       |
|                                                                                  |       |                                                                   |       |                                          |       |                                                           |       |
| Decrease in  deferred tax asset                                                       |       |                                                                   |       | (89                                           | )          |                                                           |       |
|                                                                                  |       |                                                                   |       |                                          |       |                                                           |       |
| Cumulative  effect of adoption of the fair value option (charge to retained earnings) |       |                                                                   |       | $                                             | 173        |                                                           |       |   |
|                                                                                       |            |                                                                        |            |                                               |            |                                                                |            |  |  |  |

 

In connection with the adoption of SFAS 159the Company was required to adopt Statement of Financial Accounting StandardsNo. 157, “Fair Value Measurement” (SFAS 157). SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. OnJuly 2, 2007, the Company retired its fixed rate FHLB advance as part of acontinual effort to manage the interest rate sensitivity of its assets andliabilities.

 

The following tables reflect the changes infair values for the nine month period ended September 30, 2007 and where thesechanges are included in the income statement. There were no changes in fairvalue for the three month period ended September 30, 2007.

 

**Nine Months ended September 30, 2007**

 
| **Description**                           | ** ** | **Noninterest   income** | ** ** | **Total change in   Fair Value   included in   current earnings** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | ** **                    | ** ** | ** **                                                                                                | ** ** |
| **Nine  Months ended September 30, 2007** |       |                          |       |                                                                                                      |       |
|                                      |       |                          |       |                                                                                                      |       |
| FHLB  Advances                            |       | $                             | 99         |                                                                                                      | $          | 99 |   |
|                                      |       |                          |       |                                                                                                      |       |
| Total                                     |       | $                             | 99         |                                                                                                      | $          | 99 |   |

 

8

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**3. INTANGIBLE ASSETS**

 

Finite lived intangible assets of the Companyrepresent deposit assumption premiums recorded upon the purchase of certainassets and liabilities from other financial institutions. 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 fair value-basedimpairment test to the carrying value of goodwill on an annual basis and on aninterim basis if certain events or circumstances indicate that an impairmentloss may have been incurred.

 

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

 
| ** **                    | ** ** | **September 30, 2007** | ** ** | **December 31, 2006**     | ** ** |
|-------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated   Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated   Amortization** | ** ** |
|                          |       |                             |       |                                |       |   |   |   |   |
| Unamortized intangible asset: |       |                             |       |                                |       |   |   |   |   |
| Goodwill                      |       | $                                | 362        |                                | $          | — |   | $ | 362 |   | $ | — |   |
|                          |       |                             |       |                                |       |   |   |   |   |
| Amortized intangible assets:  |       |                             |       |                                |       |   |   |   |   |
| Core deposit  intangibles     |       | $                                | 2,836      |                                | $          | 2,699 |   | $ | 2,836 |   | $ | 2,600 |   |

 

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

 
| ** **                                                                                                    | ** ** | **For the 3 months  ended  September 30,  2007** | ** ** | **For the 9 months  ended  September 30,  2007** | ** ** | **For the 3 months   ended   September 30,  2006** | ** ** | **For the 9 months   ended   September 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
|                                                                                                          |       |                                                                 |       |                                                                 |       |                                                                             |       |                                                                             |       |
| Aggregate  amortization expense of core deposit intangibles:                                                  |       | $                                                                    | 14         |                                                                 | $          | 99                                                                               |       | $                                                                                | 101        |   | $ | 303 |   |
|                                                                                                          |       |                                                                 |       |                                                                 |       |                                                                             |       |                                                                             |       |
| Estimated  aggregate amortization expense of core deposit intangibles for the years  ending December 31: |       |                                                                 |       |                                                                 |       |                                                                             |       |                                                                             |       |
| 2007                                                                                                          |       | $                                                                    | 112        |                                                                 |       |                                                                             |       |                                                                             |       |   |
| 2008                                                                                                          |       | $                                                                    | 53         |                                                                 |       |                                                                             |       |                                                                             |       |   |
| 2009                                                                                                          |       | $                                                                    | 53         |                                                                 |       |                                                                             |       |                                                                             |       |   |
| 2010                                                                                                          |       | $                                                                    | 18         |                                                                 |       |                                                                             |       |                                                                             |       |   |
|                                                                                                               |            |                                                                      |            |                                                                      |            |                                                                                  |            |                                                                                  |            |  |  |  |  |

 

9

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**4. COMPREHENSIVE INCOME**

 

Comprehensive income includes: (1) reportednet income and (2) unrealized gains and losses on marketable securities. Thefollowing table shows our comprehensive income (in thousands):

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                         |       | $                                                    | 668        |                                                | $          | 663 |   | $ | 1,873 |   | $ | 2,123 |   |
|                               |       |                                                 |       |                                                |       |   |   |   |   |
| Other  comprehensive income (loss) |       | 615                                                  |       | 712                                                 |       | 153 |   | 32 |   |
|                               |       |                                                 |       |                                                |       |   |   |   |   |
| Comprehensive  income              |       | $                                                    | 1,283      |                                                | $          | 1,375 |   | $ | 2,026 |   | $ | 2,155 |   |

 

**5.**     **STOCK OPTIONS**

** **

**2007 Option**—On April 25, 2007, the Companygranted its president and certain officers options to purchase 34,500 shares ofcommon stock of the Company at an exercise price of $10.50 per share (the “2007Option”), as compared to trades of stock at $10.50 per share on the date ofgrant. The 2007 Option vests at a rate of 33.3% per year, commencing on April25, 2008. The option’s term is ten years from the date of grant, and at September30, 2007, 34,500 options to purchase shares under the 2007 Option remainedoutstanding. There were no options issued in the third quarter of 2007.

 

The fair value of the 2007 Option grant was estimated on the date ofgrant using the Black-Scholes option-pricing model with the followingassumptions: dividend yield of 1.74%; expected volatility of 29%; risk freeinterest rate of 4.66% and an expected life of six years. The fair value of the2007 Option grant was approximately $68,000 which includes options that areexpected to be forfeited.

 

A summary of the status of the Company’s stock options is presentedbelow. There was no stock option activity during the third quarter of 2007.

 
| ** **                           | ** ** | **For the 9 months ended** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|
| ** **                           | ** ** | **September 30, 2007**               | ** ** |
| ** **                           | ** ** | ** **                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                           | ** ** | ** **                                     | ** ** | **Weighted** | ** ** | **Average** | ** ** |
| ** **                           | ** ** | ** **                                     | ** ** | **Average** | ** ** | **Remaining** | ** ** |
| ** **                           | ** ** | ** **                                     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** |
| ** **                           | ** ** | **Shares**                                     | ** ** | **Price** | ** ** | **Life** | ** ** |
| Outstanding—beginning of period |       | 73,176                                         |       | $ | 10.92 |   | 6.92 years |   |
| Granted                              |       | 34,500                                         |       | 10.50 |   |   |   |
| Expired/Terminated                   |       | —                                         |       | — |   |   |   |
| Outstanding—end of period       |       | 107,676                                        |       | $ | 10.80 |   | 7.39 years |   |
| Options exercisable at end of period |       | 57,676                                         |       | $ | 10.63 |   |   |   |

 

10

----

 

The following table summarizesinformation about stock options outstanding under the Company’s plan at September30, 2007:

 
| ** **                          | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Aggregate** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Average Grant Day** | ** ** | **Intrinsic** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Value** | ** ** |
|                                |       |       |       |   |   |   |   |
| Non-vested—beginning  of year  |       | 30,667     |       | $ | 4.35 |   | $ | 79,677 |   |
|                                |       |       |       |   |   |   |   |   |   |
| Outstanding—beginning  of year |       | 73,176     |       |   |   |   |   |
|                                |       |       |       |   |   |   |   |
| Granted                             |       | 34,500     |       | $ | 3.27 |   |   |   |
| Exercised                           |       | —     |       |   |   |   |   |
| Expired/Terminated                  |       | —     |       |   |   |   |   |
|                                |       |       |       |   |   |   |   |
| Outstanding—end  of year       |       | 107,676    |       |   |   | $ | 39,547 |   |
|                                |       |       |       |   |   |   |   |   |
| Exercisable                         |       | 57,676     |       |   |   | $ | 39,547 |   |
|                                |       |       |       |   |   |   |   |   |
| Non-vested—at  year-end        |       | 50,000     |       | $ | 3.61 |   |   |   |

 

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

 

11

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

 

Basic and diluted net income per common andpotential common share has been calculated based on the weighted average numberof shares outstanding. The following schedule reconciles the numerator anddenominator of the basic and diluted net income per common and potential commonshare for the three and nine month periods ended September 30, 2007 and 2006(in thousands, except per share data):

 
| ** **                                                        | ** ** | **Net Income** | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                        | ** ** | **(Numerator)**     | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
|                                                              |       |                |       |              |       |               |       |
| **Three  Months ended September 30, 2007**                        |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  earnings per share                                         |       | $                   | 668        |              | 2,092      |               | $          | 0.32 |   |
| Effect of  dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  earnings per share                                       |       | $                   | 668        |              | 2,092      |               | $          | 0.32 |   |
|                                                              |       |                |       |              |       |               |       |
| **Three  Months ended September 30, 2006**                        |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  earnings per share                                         |       | $                   | 663        |              | 2,085      |               | $          | 0.32 |   |
| Effect of  dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  earnings per share                                       |       | $                   | 663        |              | 2,085      |               | $          | 0.32 |   |
|                                                              |       |                |       |              |       |               |       |
| **Nine  Months ended September 30, 2007**                         |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  earnings per share                                         |       | $                   | 1,873      |              | 2,089      |               | $          | 0.90 |   |
| Effect of  dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  earnings per share                                       |       | $                   | 1,873      |              | 2,089      |               | $          | 0.90 |   |
|                                                              |       |                |       |              |       |               |       |
| **Nine  Months ended September 30, 2006**                         |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  earnings per share                                         |       | $                   | 2,123      |              | 2,088      |               | $          | 1.02 |   |
| Effect of  dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  earnings per share                                       |       | $                   | 2,123      |              | 2,088      |               | $          | 1.02 |   |

 

**RECLASSIFICATIONS**

 

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

 

12

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

 

**INTRODUCTION**

 

Citizens Bancshares Corporation (the “Company”)is a holding company that provides a full range of commercial banking andmortgage brokerage services to individuals and corporate customers in itsprimary market areas, metropolitan Atlanta and Columbus, Georgia, andBirmingham and Eutaw, Alabama through its wholly owned subsidiary, CitizensTrust Bank (the “Bank”). The Bank is a member of the Federal Reserve System andoperates under a state charter. The Company serves its customers through 10full-service financial centers in Georgia and Alabama.

 

**Forward Looking Statements**

 

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

 

Forward-looking statements are based oncurrent management expectations and, by their nature, are subject to risk anduncertainties because of the possibility of changes in underlying factors andassumptions. Actual conditions, events or results could differ materially fromthose contained in or implied by such forward-looking statements for a varietyof reasons, including: sharp and/or rapid changes in interest rates; significantchanges in the economic scenario from the current anticipated scenario whichcould materially change anticipated credit quality trends and the ability togenerate loans and gather deposits; significant delay in or inability toexecute strategic initiatives designed to grow revenues and/or controlexpenses; unanticipated issues during the integration of acquisitions; andsignificant changes in accounting, tax or regulatory practices or requirements.The Company undertakes no obligation to, nor does it intend to, updateforward-looking statements to reflect circumstances or events that occur afterthe date hereof or to reflect the occurrence of unanticipated events.

 

The following discussion is of the Company’sfinancial condition as of September 30, 2007 and the changes in the financialcondition and results of operations for the three and nine month periods ended September30, 2007 and 2006.

 

**Critical Accounting Policies**

 

In response to the Securities and ExchangeCommission’s (“SEC”) Release No. 33-8040, Cautionary Advice RegardingDisclosure About Critical Accounting Policies, the Company has identified thefollowing as the most critical accounting policies upon which its financialstatus depends. The critical policies were determined by considering accountingpolicies that involve the most complex or subjective decisions or assessments. TheCompany’s most critical accounting policies relate to:

 

**InvestmentSecurities**- The Companyclassifies investments in one of three categories based on management’s intentupon purchase: held to maturity securities which are reported at amortizedcost, trading securities which are reported at fair value with unrealizedholding gains and losses included in earnings, and available for salesecurities which are recorded at fair value with unrealized holding gains andlosses included as a component of accumulated other comprehensive income. TheCompany had no investment securities classified as trading

 

13

----

 

securitiesduring 2007 or 2006.

 

Premiums anddiscounts on available for sale and held to maturity securities are amortizedor accreted using a method which approximates a level yield.

 

Gains andlosses on sales of investment securities are recognized upon disposition, basedon the adjusted cost of the specific security. A decline in market value of anysecurity below cost that is deemed other than temporary is charged to earningsresulting in the establishment of a new cost basis for the security.

 

**Loans**  - Loans are reportedat principal amounts outstanding less unearned income and the allowance forloan losses. Interest income on loans is recognized on a level-yield basis.Loan fees and certain direct origination costs are deferred and amortized overthe estimated terms of the loans using the 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 estimatedlosses on loans receivable when any significant and permanent decline in valueoccurs. These estimates for losses are based, not only on individual assets andtheir related cash flow forecasts, sales values, and independent appraisals,but also on the volatility of certain real estate markets, and the concern fordisposing of real estate in distressed markets. For loans that are pooled forpurposes of determining the necessary provisions, estimates are based on loantypes, history of charge-offs, and other delinquency analyses. Therefore, thevalue used to determine the provision for losses is subject to thereasonableness of these estimates. The adequacy of the allowance for loanlosses is reviewed on a monthly basis by management and the Board of Directors.On a semi-annual basis an independent comprehensive review of the adequacy ofthe allowance for loan losses is performed. This assessment is made in thecontext of historical losses as well as existing economic conditions, andindividual concentrations of credit. Loans are charged against the allowancewhen, in the opinion of management, such loans are deemed uncollectible andsubsequent recoveries are added to the allowance.

 

A description of other accounting policiesare summarized in Note 1, Summary of Significant Accounting Policies in theNotes to Consolidated Financial Statements of the Company’s Annual Report onForm 10-K for the year ended December 31, 2006. The Company has followed thosepolicies in preparing this report.

 

**FINANCIAL CONDITION**

 

At September30, 2007, the Company’s loans receivable, net increased by $15 million or 7% to$233,143,000 compared to the year ended December 31, 2006 despite not renewingtwo significant lending relationships totaling over $4.2 million due toweakening financial conditions of the borrowers and the transfer of a $2.6million loan to foreclosed real estate during the first quarter of 2007. Due tothe current economic conditions, the Company has been conservative in itslending criteria and is actively managing its loan portfolio to preventsignificant losses. This increase in Loans receivable, net was partially offsetby a $4 million decrease in Interest-bearing deposits with banks and $10million in investment securities as these funds were shifted into loans whichoffer higher yields.

 

The increasein foreclosed real estate, as mentioned above, is primarily due to thecollateral seized on a $2.6 million troubled loan. The collateral has an “as is”liquidated value of $3,039,000 and an “as is” value of $3,971,000. The Companyis in the process of selling the collateral.

 

Total liabilities were flat at $305 million, increasingby only $347,000 at September 30, 2007 compared to December 31, 2006. However,the make up of the Company’s liabilities changed significantly as the Companyrestructured its liabilities to lower funding cost. Total deposits increased by$13 million,

 

14

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partially offset by Advances from FederalHome Loan Bank (FHLB), another significant component of total liabilities, whichdecreased $9 million or 32% to $18 million. In June 2007, the Company alsoretired its outstanding Junior subordinated debentures in the amount of $5.2million. The Company used the excess liquidity generated from its depositgrowth to paydown its outstanding advances from the FHLB and to retire itsJunior subordinated debentures to reduce the yield its pays on interest-bearingliabilities.

 

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. Year-to-date, the Company’s net interestmargin has declined by 0.23% to 4.60%, which represents a 0.07% increasecompared to June 30, 2007.

 

**INVESTMENT SECURITIES**

 

The composition of the Company’s investmentsecurities portfolio reflects the Company’s investment strategy of maximizingportfolio yields commensurate with risk and liquidity considerations. Theprimary objectives of the Company’s investment strategy are to maintain anappropriate level of liquidity and provide a tool to assist in controlling theCompany’s interest rate sensitivity position, while at the same time producingadequate levels of interest income.

 

The Company invests a portion of its assetsin U.S. government sponsored agency securities, state, county and municipalsecurities, and mortgage backed bonds. At September 30, 2007 and December 31,2006, the Company’s investment securities portfolio represented approximately 21%and 24%, respectively, of total assets.

 

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

 
| **At September 30, 2007**     | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|
|                                         |       |                      |       |                                     |       |                                      |       |                |       |
| Government-sponsored  enterprises securities |       | $                         | 6,944      |                                     | $          | 5                                         |       | $                   | 64         |   | $ | 6,885 |   |
| State,  county, and municipal securities     |       | 13,805                    |       | 77                                       |       | 72                                        |       | $                   | 13,810     |   |
| Mortgage-backed  securities                  |       | 40,277                    |       | 74                                       |       | 604                                       |       | $                   | 39,747     |   |
| Totals                                       |       | $                         | 61,026     |                                     | $          | 156                                       |       | $                   | 740        |   | $ | 60,442 |   |

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

 

15

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

 
| **At September 30, 2007**     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| Government-sponsored  enterprises securities |       | $                   | 3,000      |                         | $          | —                        |       | $                   | 38         |   | $ | 2,962 |   |
| State,  county, and municipal securities     |       | 4,257               |       | 73                           |       | —                        |       | 4,330               |       |
| Mortgage-backed  securities                  |       | 762                 |       | —                       |       | 23                            |       | 739                 |       |
|                                         |       |                |       |                         |       |                          |       |                |       |
| Totals                                       |       | $                   | 8,019      |                         | $          | 73                            |       | $                   | 61         |   | $ | 8,031 |   |

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

 

Securities classified as available-for-sale are recorded at fair marketvalue and held-to-maturity securities are recorded at amortized cost. TheCompany evaluates its investment portfolio periodically to identify any impairmentthat is other than temporary. At September 30, 2007, the Company had severaldebt securities that have been in an unrealized loss position for twelve monthsor more. The Company has the ability and intent to hold these securities untilsuch time as the value recovers or the securities mature. The Company believes,based on industry analyst reports and credit ratings, that the deterioration invalue is attributable to changes in market interest rates and is not in thecredit quality of the issuer and therefore, these losses are not consideredother 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 andcorrespondent accounts with and sells its federal funds to high qualityinstitutions. Management believes credit risk associated with correspondentaccounts is not significant.

 

Other investments consist of Federal HomeLoan Bank and Federal Reserve Bank stock which are restricted and have noreadily determined market value. The Company is required to maintain aninvestment in the FHLB and FRB as part of its membership conditions. The levelof investments is determined by the amount of outstanding advances at the FHLBand 6 percent of the par value of the bank’s common stock outstanding andpaid-in-capital. These investments are carried at cost.

 

16

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##### ** **

##### **LOANS**

##### ** **

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

 
| ** **                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                           |       |                   |       |                  |       |
| Commercial,  financial, and agricultural       |       | $                      | 12,133     |                  | $          | 15,486 |   |
| Installment                                    |       | 12,513                 |       | 12,244                |       |
| Real estate  - mortgage                        |       | 170,977                |       | 162,092               |       |
| Real estate  - construction                    |       | 38,706                 |       | 29,386                |       |
| Other                                          |       | 2,069                  |       | 2,229                 |       |
| Loans  receivable                              |       | 236,398                |       | 221,437               |       |
| Less:   Net  deferred loan fees |       | 307                    |       | 325                   |       |
| Allowance  for loan losses                     |       | 2,948                  |       | 3,109                 |       |
|                                           |       |                   |       |                  |       |
| Loans  receivable, net                         |       | $                      | 233,143    |                  | $          | 218,003 |   |

 

The classification Real estate – mortgageconsists of home equity loans, mortgages on 1–4 family residential, multifamilyresidential, and nonfarm residential properties such as churches, hotels, andconvenience stores.

 

**NONPERFORMING ASSETS**

 

Nonperforming assets include nonperformingloans, real estate acquired through foreclosure, and repossessed assets. At September30, 2007 there were no repossessed assets. Nonperforming loans consist of loansthat are past due with respect to principal or interest more than 90 days and havebeen placed on nonaccrual status.

 

With the exception of the loans includedwithin nonperforming assets in the table below, management is not aware of anyloans classified for regulatory purposes as loss, doubtful, substandard, orspecial mention that have not been disclosed which (1) represent or result fromtrends or uncertainties which management reasonably expects will materiallyimpact future operating results, liquidity, or capital resources, or (2)represent any information on material credits of which management is aware thatcauses management to have serious doubts as to the abilities of such borrowersto comply with the loan repayment terms.

 

Nonperforming assets increased during the ninemonths of 2007 by $3,408,000 to $7,257,000 at September 30, 2007 from$3,848,000 at December 31, 2006. This increase is primarily related to a $2.6million loan secured by real estate that the Company foreclosed and transferredto foreclosed real estate. The value of the collateral pledged to this loan hasan “as is” liquidated value of $3,039,000 and an “as is” value of $3,971,000. TheCompany is in the process of selling the collateral. The remaining increase innonperforming assets relates to nonperforming 1—4 family residential,multifamily residential, and nonfarm residential mortgage loans. Management isin the process of foreclosing and liquidating these properties. The Companydoes not expect significant losses as these properties have private mortgageinsurance and/or sufficient market value to offset the principal balanceoutstanding. Also, $1,762,000 of the $4,160,000 in nonperforming loans isguaranteed by the U.S. Government through the Small Business AdministrationProgram.

 

17

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Nonperforming assets represents 3.03% ofloans, net of unearned income, discounts, and real estate acquired throughforeclosure at September 30, 2007 as compared to 1.74% at December 31, 2006.

 

The table below presents a summary of theCompany’s nonperforming assets at September 30, 2007 and December 31, 2006.

 
| ** **                                                                                                       | ** ** | **September 30,**              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2007**                            | ** ** | **2006**              | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                                       | ** ** | **financial ratios)**          | ** ** |
| Nonperforming  assets:                                                                                           |       |                                |       |                  |       |
| Nonperforming  loans:                                                                                            |       |                                |       |                  |       |
| Nonaccrual  loans                                                                                                |       | $                                   | 4,160      |                  | $          | 3,718 |   |
| Past-due  loans of 90 days or more                                                                               |       | —                              |       | —                |       |
| Nonperforming  loans                                                                                             |       | 4,160                               |       | 3,718                 |       |
|                                                                                                             |       |                                |       |                  |       |
| Real estate  acquired through foreclosure                                                                        |       | 3,097                               |       | 130                   |       |
| Total  nonperforming assets                                                                                      |       | $                                   | 7,257      |                  | $          | 3,848 |   |
|                                                                                                             |       |                                |       |                  |       |   |   |
| Ratios:                                                                                                          |       |                                |       |                  |       |
| Nonperforming  loans to loans, net of unearned income and discount on loans                                      |       | 1.76                                | %          | 1.68                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Nonperforming  assets to loans, net of unearned income, discounts, and real estate acquired  through foreclosure |       | 3.03                                | %          | 1.74                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Nonperforming  assets to total assets                                                                            |       | 2.15                                | %          | 1.15                  | %          |
|                                                                                                             |       |                                |       |                  |       |
| Allowance  for loan losses to nonperforming loans                                                                |       | 70.87                               | %          | 83.61                 | %          |
|                                                                                                             |       |                                |       |                  |       |
| Allowance  for loan losses to nonperforming assets                                                               |       | 40.62                               | %          | 80.78                 | %          |
|                                                                                                                  |            |                                     |            |                       |            |  |  |  |  |

 

**ALLOWANCE FOR LOAN LOSSES**

 

The allowance for loan losses is primarilyavailable to absorb losses inherent in the loan portfolio. Credit exposuresdeemed uncollectible are charged against the allowance for loan losses.

 

The Company provides for estimated losses onloans receivable when any significant and permanent decline in value occurs. Theseestimates for losses are based on individual assets and their cash flowforecasts, sales values, independent appraisals, the volatility of certain realestate markets, and concern for disposing of real estate in distressed markets.For loans that are pooled for purposes of determining the necessary provisions,estimates are based on loan types, history of charge-offs, and otherdelinquency analyses. Therefore, the value used to determine the provision forlosses is subject to the reasonableness of these estimates. The adequacy of theallowance for loan losses is reviewed on a monthly basis by management and theBoard of Directors. On a semi-annual basis an independent review of theadequacy of allowance for loan losses is performed. 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 of management, such loans are deemed uncollectible andsubsequent recoveries are added to the allowance. For the nine month periodended September 30, 2007, management determined that no additions to theprovision for loan losses were necessary. For the same period in 2006, theCompany added $30,000 to the provision for loan losses.

 

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The allowance for loan losses at September 30,2007 was approximately $2,948,000, representing 1.25% of total loans, net ofunearned income and discounts compared to approximately $3,109,000 at December31, 2006, which represented 1.50% of total loans, net of unearned income anddiscounts.

 

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

 

A substantial portion of the Company’s loanportfolio is secured by real estate in the metropolitan Atlanta and Birmingham markets,including a concentration of loans to churches and convenience stores. TheCompany’s outstanding church loans were approximately $47 million at September30, 2007 compared to $38 million at December 31, 2006. The Company’s loans toarea convenience stores were approximately $13 million at September 30, 2007and December 31, 2006, respectively. These concentrations of loans areperforming in accordance with their respective loan agreements.

 

Also at September 30, 2007, 1–4 familyresidential mortgage loans, secured by first liens, were approximately $43million. The Company’s 1–4 family residential lending philosophy is fairlyconservative, requiring a minimum of 10 percent equity and Private MortgageInsurance on any loan with a loan-to-value ratio higher than 80 percent thatwas originated over the last several years. The Company brokered or sold 1–4family residential mortgage loans that required origination into the moreexotic products such as interest-only, step-payment, stated-income, or reduceddocumentation loans without recourse. As a result, 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.

 

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The following table summarizes loans, changesin the allowance for loan losses arising from loans charged off, recoveries onloans previously charged off by loan category, and additions to the allowancewhich have been charged to operating expense as of and for the nine monthperiods ended September 30, 2007 and 2006 (amount in thousands, exceptfinancial ratios):

 
| ** **                                                                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| Loans, net of unearned income and discounts                                                                            |       | $        | 236,091    |     | $          | 214,471 |   |
|                                                                                                                   |       |     |       |     |       |
| Average loans, net of unearned income, discounts and the allowance  for loan losses                                    |       | $        | 220,191    |     | $          | 215,232 |   |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at the beginning of period                                                                   |       | $        | 3,109      |     | $          | 3,327 |   |
|                                                                                                                   |       |     |       |     |       |
| Loans charged-off:                                                                                                     |       |     |       |     |       |
| Commercial,  financial, and agricultural                                                                               |       | 53       |       | 17       |       |
| Real estate  - loans                                                                                                   |       | 193      |       | 160      |       |
| Installment  loans to individuals                                                                                      |       | 144      |       | 162      |       |
| Total loans charged-off                                                                                                |       | 390      |       | 339      |       |
|                                                                                                                   |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                            |       |     |       |     |       |
| Commercial,  financial, and agricultural                                                                               |       | 67       |       | 66       |       |
| Real estate  - loans                                                                                                   |       | 108      |       | 84       |       |
| Installment  loans to individuals                                                                                      |       | 54       |       | 51       |       |
| Total loans recovered                                                                                                  |       | 229      |       | 201      |       |
|                                                                                                                   |       |     |       |     |       |
| Net loans charged-off                                                                                                  |       | 161      |       | 138      |       |
|                                                                                                                   |       |     |       |     |       |
| Additions to allowance for loan losses charged to operating expense                                                    |       | —   |       | 30       |       |
|                                                                                                                   |       |     |       |     |       |
| Allowance for loan losses at period end                                                                                |       | $        | 2,948      |     | $          | 3,219 |   |
|                                                                                                                   |       |     |       |     |       |
| Ratio of net loans charged-off to average loans, net of unearned  income, discounts, and the allowance for loan losses |       | 0.07     | %          | 0.06     | %          |
|                                                                                                                   |       |     |       |     |       |
| Ratio of allowance for loan losses to loans, net of unearned income  and discounts                                     |       | 1.25     | %          | 1.50     | %          |

 

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**DEPOSITS**

 

Deposits are the Company’s primary source offunding loan growth. Total deposits at September 30, 2007 increased by 5% or $13,130,000to $282,150,000, driven by interest-bearing deposits which increased by 9% or $19,645,000compared to December 31, 2006. The increase in total deposits is primarilyattributed to Corporate and Governmental customers who make significant monthlydeposits and withdrawals based on their budgetary needs. In addition, theCompany has an ongoing sales program which places specific emphasis on depositgrowth.

 

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

 
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                              |       |                   |       |                  |       |
| NOW and money market accounts     |       | $                      | 71,300     |                  | $          | 64,850 |   |
| Savings accounts                  |       | 33,985                 |       | 36,101                |       |
| Time deposits of $100,000 or more |       | 67,247                 |       | 51,650                |       |
| Other time deposits               |       | 55,871                 |       | 56,157                |       |
|                              |       | $                      | 228,403    |                  | $          | 208,758 |   |

 

**OTHER BORROWED FUNDS**

 

While the Company continues to emphasizefunding earning asset growth through deposits, the Company has relied on otherborrowings as a supplemental funding source. Other borrowings consist of Federalfunds purchased, short-term borrowings and Federal Home Loan Bank (the “FHLB”)advances. In 2002, the Company issued pooled trust preferred securities used toacquire another financial institution, which were redeemed on June 26, 2007.

 

Federal funds purchased represent unsecuredborrowings from other banks and generally mature daily. At September 30, 2007 the company had$1,000,000 outstanding at a rate of 5.15%. At December 31, 2006, the Companyhad no amounts outstanding.

 

The Company had an unsecured note payable ofapproximately $340,000 at September 30, 2007 and December 31, 2006. The note bearsinterest at a rate of 7.25% (the lender’s prime rate minus 50 basis points).

 

The Bank had outstanding advances from theFHLB of $18,184,000 at September 30, 2007 compared to $26,746,000 at December31, 2006. The following advances are collateralized by a blanket lien on theCompany’s 1-4 family mortgage loans. In the third quarter 2007, the Companyretired its FHLB fixed rate advance which carried an interest rate of 5.82% ina continual effort to manage the interest rate sensitivity of its assets andliabilities.

 

21

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| **Maturity**                        | ** ** | **Callable** | ** ** | **Type**   | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2008                           |       | Daily        |       | Variable   |       | 5.44                             | %          | $17,800,000                     |       | 5.50 | % | $16,350,000 |   |
| April 2010                          |       | Quarterly    |       | Fixed      |       | —                           |       | —                          |       | 5.82 | % | 10,000,000 |   |
| August 2026                         |       |         |       |       | (1)        | —                           |       | 384,000                         |       |   |   | 396,000 |   |
|                                |       |         |       |       |       |                             |       |                            |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |       |       |                             |       | $18,184,000                     |       |   |   | $26,746,000 |   |
|                                |       |         |       |       |       |                             |       |                            |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |       |       | 5.33                             | %          |                            |       | 5.54 | % |   |   |

 

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(1)   Represents an Affordable Housing Program (AHP) awardused to subsidized loans for homeownership or rental initiatives. The AHP is aprincipal reducing credit, scheduled to mature on August 17, 2026 with aninterest rate of zero.

 

**RESULTS OF OPERATIONS**

 

**Net Interest Income:**

 

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

 

The Company made several changes to the mix ofits earning assets and interest bearing liabilities which impacted thirdquarter 2007 net interest income. For the three month period, net interestincome increased by $133,000 or 4% to $3,599,000 compared to $3,466,000 for thesame period in 2006. On a year-to-date basis, net interest income decreased by$212,000 or 2% to $10,483,000. The year-to-date decrease is the result of theCompany operating in a difficult interest rate environment of a flat toinverted yield curve throughout 2007, which has increased the Company’s fundingcost and lowered its net margin to 4.60% for the nine month period compared to 4.86%at December 31, 2006.

 

For the third quarter of 2007, the Companyexperienced growth in its earnings assets and total interest income increasedby $371,000 which was partially offset by a $238,000 increase in total interestexpense driven by increases in deposit costs. Similarly, for the nine monthperiod ended September 30, 2007, total interest income increased by $713,000 or4% and was offset by a $925,000 or 17% increase in total interest expensecompared to the same period in 2006.

 

The Company has an asset/liability managementprogram which monitors the Company’s interest rate sensitivity and ensures theCompany is competitive in the loans and deposit market. As a result of itsasset/liability management program, on June 26, 2007 the Company retired itsjunior subordinated debentures which carried an interest rate of 8.82 percentduring 2007. The Company also retired its FHLB fixed rate advance with aninterest rate of 5.82% in third quarter of 2007. The Company continues tomonitor its asset/liability mix and will make changes as appropriate to ensureit is properly positioned to react to changing interest rates and inflationarytrends.

 

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** **

**Provision for loan losses**

 

For the nine months period in 2007, management determined that noadditions to the provision for loan losses were necessary compared to a $30,000provision for the same period in 2006. No provisions for loan losses were madein the third quarter of 2007 or 2006. The provision for loan losses and theresulting 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. The allowance for loan losses was $2,948,000at September 30, 2007 compared to $3,109,000 at December 31, 2006. At September30, 2007, the allowance for loan losses was 71 percent of thenonperforming loans compared to 84 percent at December 31, 2006. At September30, 2007, 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 profits and commissions earned through securities andinsurance sales. In addition, gains and losses realized from the sale ofinvestment portfolio securities and sales of assets are included in noninterestincome.

 

Noninterest income totaled $1,110,000 for the threemonth period ended September 30, 2007, a small decrease of $38,000 or 3%compared with the same period ended September 30, 2006. This decrease isprimarily attributed to a decrease of $53,000 in other non-interest income. Othernon-interest income consists of various recurring and nonrecurringmiscellaneous items which fluctuate monthly.

 

For the nine month period ended September 30, 2007,noninterest income decreased by $415,000 to $3,356,000. This reduction isprimarily due to a decrease in overdraft fees which are a significant componentof service charges on deposits. Overdrafts fees decreased by $164,000 to $1,361,000compared to $1,525,000 for the same nine month period last year. Overdraftfees, due to their nature, fluctuate monthly based on the short-term loan needsof the customers. In September 2007, the Company implemented a new product linewhich is expected to enhance service charges income on deposits. Gains on thesales of securities also decreased in the nine month period of 2007 by $156,000.The Company swapped the tail-end of several mortgage-backed securities at aloss of $33,000, partially offset by a $3,000 gain in 2007, and placed the fundsinto higher yielding earning assets. By comparison, the Company experienced again on the sale of securities of $126,000 for the same period last year.

 

**Noninterest expense**:

 

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

 

Noninterest expense was basically flat,increasing by only $67,000 for the third quarter and decreasing by $256,000 forthe nine months of 2007 compared to the same periods last year. The decrease isdue to the Company’s strategy started last year to reduce overhead costs andimprove the efficiency throughout its financial centers network.

 

Noninterest expense totaled $3,867,000 for the threemonth period ended September 30, 2007 compared to $3,800,000 for the sameperiod last year. The increase of $67,000 is attributed to a $67,000 increasein net occupancy and equipment. The Company relocated its Columbus branch inthe third quarter of 2007 to a larger facility which is closer to the Company’scustomers and has more

 

23

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growth opportunities. The Company also installedplasma televisions in each of its branches to improve the marketing of itsproducts to retail customers. Salaries and employee benefits increased by $61,000or 3% due to an increase in medical claims expense which was offset by a $61,000or 4% decrease in other noninterest expense.

 

For the nine month period ended September 30,2007, noninterest expense decreased $256,000 or 2% compared to the same periodlast year. Salaries and employee benefits decreased $115,000 as the Companyreduced its average full-time employees to 134 compared to an average of 140full-time employees during the same period last year. Occupancy and equipmentexpenses increased $36,000 for the nine month period due to expendituresassociated with relocating our Columbus branch, adding new equipment to improvethe Company’s marketing channel to its retail customers and the replacement ofseveral ATMs. Other operating expenses decreased $177,000 compared to the sameperiod last year. Other operating expenses includes a $200,000 award leviedagainst the Company by the Superior Court of DeKalb County, Georgia forattorney fees associated with a former court case decided against the Company. 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.

 

**INTEREST RATE SENSITIVITY MANAGEMENT**

 

Interest rate sensitivity management involvesmanaging the potential impact of interest rate movements on net interest incomewithin 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 inthese repricing opportunities at any point in time constitute a financialinstitution’s interest rate risk. The Company’s ability to reprice assets andliabilities in the same dollar amounts and at the same time minimizes interestrate risk.

 

One method of measuring the impact ofinterest rate sensitivity is the cumulative gap analysis. The differencebetween interest rate sensitive assets and interest rate sensitive liabilitiesat various time intervals is referred to as the gap. The Company is liabilitysensitive on a short-term basis as reflected in the following table. Generally,a net liability sensitive position indicates that there would be a negativeimpact on net interest income in an increasing 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 assetsand liabilities indicated as repricing within the same period may in factreprice at different times within such period and at different rates. Thefollowing table shows the contractual maturities of all interest rate sensitiveassets and liabilities at September 30, 2007. Expected maturities may differfrom contractual maturities because issuers may have the right to call orprepay obligations with or without call or prepayment penalties. Forconservative purposes, the Company has included demand deposits such as NOW,money market, and savings accounts in the three month category. However, theactual repricing of these accounts may extend beyond twelve months. Theinterest rate sensitivity gap is only a general indicator of potential effectsof interest rate changes on net interest income.

 

24

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The following table sets forth thedistribution of the repricing of the Company’s interest rate sensitive assetsand interest rate sensitive liabilities as of September 30, 2007.

 
| ** **                                                              | ** ** | **Cumulative amounts as of September 30, 2007** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **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                             |       | $                                                                             | 450        |   | $ | — |   | $ | — |   | $ | — |   | $ | 450 |   |
| Certificates  of deposit                                                |       | —                                                                        |       | 100 |   | — |   | — |   | 100 |   |
| Investments                                                             |       | —                                                                        |       | 2,234 |   | 12,162 |   | 54,065 |   | 68,461 |   |
| Loans                                                                   |       | 53,708                                                                        |       | 57,206 |   | 84,344 |   | 41,140 |   | 236,398 |   |
| Total  interest-sensitive assets                                        |       | $                                                                             | 54,158     |   | $ | 59,540 |   | $ | 96,506 |   | $ | 95,205 |   | $ | 305,409 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                                             | 123,117    |   | $ | 33,985 |   | $ | 24,608 |   | $ | 46,693 |   | $ | 228,403 |   |
| Notes  payable                                                          |       | —                                                                        |       | 340 |   | — |   | — |   | 340 |   |
| Fed funds  purchased                                                    |       | 1,000                                                                         |       | — |   | — |   | — |   | 1,000 |   |
| Other  borrowings                                                       |       | 17,800                                                                        |       | — |   | — |   | 384 |   | 18,184 |   |
| Total  interest-sensitive liabilities                                   |       | $                                                                             | 141,917    |   | $ | 34,325 |   | $ | 24,608 |   | $ | 47,077 |   | $ | 247,927 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                                             | (87,759    | ) | $ | 25,215 |   | $ | 71,898 |   | $ | 48,128 |   | $ | 57,482 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (28.73                                                                        | )%         | (20.48 | )% | 3.06 | % | 18.82 | % | 18.82 | % |

 

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(a) Savings, Now, and money market depositstotaling $105,285 are included in the maturing in 3 months classification.

 

**LIQUIDITY**

 

Liquidity is the ability of the Company toconvert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities. Liquidity management involvesmaintaining the Company’s ability to meet the day-to-day cash flow requirementsof its customers, whether they are depositors wishing to withdraw funds orborrowers requiring funds to meet their credit needs. Without proper liquidity management,the Company would not be able to perform the primary function of a financialintermediary and would, therefore, not be able to meet the needs of thecommunities it serves. Additionally, the Company requires cash for variousoperating needs including: dividends to shareholders; business combinations;capital injections to its subsidiary; the servicing of debt; and the payment ofgeneral corporate expenses. The Company has access to various capital markets. However,the primary source of liquidity for the Company is dividends from its banksubsidiary. The Georgia Department of Banking and Finance regulates thedividend payments and must approve dividend payments that exceed 50 percent ofthe Bank’s prior year net income. As of September 30, 2007, this amount wasapproximately $1,731,000. The payment of dividends may also be affected orlimited by other factors, such as the requirement to maintain adequate capitalabove regulatory guidelines. On June 26, 2007, the Georgia Department ofBanking and Finance approved a special dividend of $5,155,000 which was used bythe Company to redeem its outstanding Junior Subordinated Debentures.

 

Asset and liability management functions notonly serve to assure adequate liquidity in order to meet the needs of the Company’scustomers, 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 the sources and uses of funds is

 

25

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necessary to maintain an acceptable cashposition that meets both requirements.

 

The asset portion of the balance sheet providesliquidity primarily through loan principal repayments, maturities of investmentsecurities and, to a lesser extent, sales or paydowns of investment securitiesavailable for sale and held to maturity. Other short-term investments such asfederal funds sold and maturing interest bearing deposits with other banks, areadditional sources of liquidity funding.

 

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

 

**CAPITAL RESOURCES**

 

Stockholders’ equity increased by $1,554,000 for the nine months periodended September 30, 2007, primarily due to earnings. Retained earningsincreased by net income of $1,873,000, reduced by a cumulative effectadjustment in the amount of $173,000 as a result of the early adoption of SFASNo. 159, “The Fair Value Option for Financial Assets and Financial Liabilities –Including an amendment of FASB Statement No. 115” and dividend payments of $397,000. Accumulatedother comprehensive loss, net of taxes also decreased during the nine month periodby $153,000 to $385,000. These losses are attributed to the rapid movements inthe Treasury markets, wild swings in volatility and credit spreads, and theirimpact on the Company’s available for sale securities portfolio.

 

Quantitative measures established byregulation to ensure capital adequacy require the Company to maintain minimumamounts and ratios of total and Tier 1 capital to risk weighted assets, andTier 1 capital to average assets. As of September 30, 2007 the Bank’s total andTier 1 capital to risk weighted assets and Tier 1 to average assets were 13%,12% and 9% respectively compared to 16%, 15% and 11% respectively at December31, 2006. The decrease in the Bank’s September 30, 2007 capital ratios isattributed to a special dividend paid to the Company on June 26, 2007. With theapproval of the Georgia Department of Banking and Finance, the Bank paid a$5,155,000 dividend used by the Company to redeem its outstanding JuniorSubordinated Debentures. The Debentures were issued to the Company’s Trustsubsidiary for the net proceeds obtained from the issuance of pooled trustpreferred securities. The pooled trust preferred securities provided additionalcapital that was required to complete a 2003 bank acquisition. Based oninternal of growth of the Bank’s capital position since the acquisition,Management determined that the additional capital provided by the pool trustsecurities at a current rate of 9% was no longer required. At September 30,2007, the Company met all capital adequacy requirements to which it is subjectand is considered to be ‘well capitalized” under regulatory standards.

 

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

 

Market risk is the risk of loss from adversechanges in market prices and interest rates. Our market risk arises principallyfrom interest rate risk inherent in our lending, deposit, and borrowingactivities. Although we manage certain other risks, such as credit quality andliquidity risk, in the normal course of business we consider interest rate riskto be our most significant market risk and the risk that could potentially havethe largest material effect on our financial condition and results ofoperations. We do not maintain a trading portfolio or deal in internationalinstruments, and therefore, other types of market risks, such as foreigncurrency risk and commodity price risk, do not arise in the normal course ofour business activities.

 

26

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Quantitative information about the Company’smarket risk at September 30, 2007 is as follows (in thousands):

 
| ** **                            | ** ** | **2007**     | ** ** |
|---------------------------------------|------------|--------------|------------|
| ** **                            | ** ** | **Carrying** | ** ** | **Estimated** | ** ** | **Down** | ** ** | **Up** | ** ** |
| ** **                            | ** ** | **Value**    | ** ** | **Fair Value** | ** ** | **100 bp** | ** ** | **100 bp** | ** ** |
| ** **                            | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Financial  assets:                    |       |         |       |   |   |   |   |   |   |
| Interest-bearing  deposits with banks |       | $            | 450        |   | $ | 450 |   | — | % | — | % |
| Certificates  of deposit              |       | 100          |       | 99 |   | 0.35 |   | (0.35 | ) |
| Investment  securities                |       | 68,461       |       | 68,473 |   | 2.54 |   | (3.34 | ) |
| Loans  receivable, net                |       | 233,143      |       | 230,776 |   | 1.26 |   | (1.34 | ) |
|                                  |       |         |       |   |   |   |   |   |   |
| Financial  liabilities:               |       |         |       |   |   |   |   |   |   |
| Interest-bearing  deposits            |       | 228,402      |       | 219,878 |   | 0.99 |   | (1.03 | ) |
| Federal  funds purchased              |       | 1,000        |       | 1,000 |   | — |   | — |   |
| Notes  payable                        |       | 340          |       | 340 |   | — |   | — |   |
| Advances  from Federal Home Loan Bank |       | 18,184       |       | 18,190 |   | 0.08 |   | (0.46 | ) |
|                                       |            |              |            |  |  |  |  |  |  |  |  |

 

The Company has adopted an asset/liabilitymanagement program to monitor the Company’s interest rate sensitivity and toensure that the Company is competitive in the loan and deposit markets. Managementseeks to manage the relationship between interest-sensitive assets andliabilities in order to protect against wide interest rate fluctuations,including those resulting from inflation. The Company has not entered into anyderivative financial instruments such as futures, forwards, swaps or options. Additionally,refer to our interest rate sensitivity management and liquidity disclosureswithin Part 1, Item 2, of this Form 10-Q.

 

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

 

As of the end of the period covered by thisreport, we conducted, under the supervision of and with the participation ofour management, including the Company’s Chief Executive Officer, ChiefOperating Officer, and Chief Financial Officer, an evaluation of theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e). Based on this evaluation, the Company’s Chief ExecutiveOfficer, Chief Operating Officer, and Chief Financial Officer have concludedthat our disclosure controls and procedures were effective as of September 30,2007 in accumulating and communicating information to management, including theChief Executive Officer, the Chief Operating Officer, and the Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures of that information under the SEC’s rules and forms and that theCompany’s disclosure controls and procedures are designed to ensure that theinformation required to be disclosed in reports filed or submitted by theCompany under the Securities Exchange Act is recorded, processed, summarizedand reported within the specified time periods. During the quarter endedSeptember 30, 2007, there have been no changes in the Company’s internalcontrols over financial reporting or, to the Company’s knowledge, in otherfactors that could significantly change those internal controls subsequent tothe date the Company carried out its evaluation that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

27

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**PART II. OTHER INFORMATION**

 
| **ITEM 1.**    | **LEGAL PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | The Company and the Bank are involved in various claims and legal  actions arising in the ordinary course of business. In the opinion of  management, based in part on the advice of counsel, the ultimate disposition  of these matters will not have a material adverse impact on the Company’s  consolidated financial position.                                                                                                                                                                                                                                                                                         |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **ITEM 1A.**   | **RISK FACTORS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | In addition to the other information set forth in this report, you  should carefully consider the factors discussed in Part I, “Item 1A. Risk  Factors” in our Annual Report on Form 10-K for the year ended December 31,  2006, which could materially affect our business, financial condition or  future results. The risks described in our Annual Report on Form 10-K are not  the only risks we face. Additional risks and uncertainties not currently  known to us or that we currently deem to be immaterial also may materially adversely  affect our business, financial condition and/or operating results. |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **ITEM 2.**    | **UNREGISTERED SALE OF EQUITY SECURITIES AND USE  OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **ITEM 3.**    | **DEFAULTS UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **ITEM 4.**    | **SUBMISSION OF MATTERS TO VOTE OF SECURITY  HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **ITEM 5.**    | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **ITEM 6.**    | **EXHIBITS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Exhibit 31** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Exhibit 32** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

 

28

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**SIGNATURES**

 

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

 

 

**CITIZENS BANCSHARES CORPORATION**

 

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

 

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