**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 – Q**

 

**(MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from                   to                  **

 

**Commission File No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

| **75 Piedmont Avenue, N.E., Atlanta, Georgia** | ** ** | **30303**  |
|------------------------------------------------|------------|------------|
| (Address of principal executive offices)       |       | (Zip Code) |

 

Registrant’s telephone number, including area code: **(404) 659-5959**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe 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 tosuch filing requirements for the past 90 days.  x Yes  o No.

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files.  o Yes  o No

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act)  o Yes  x No

 

SEC1296 (08-03)   **Potential persons who areto respond to the collection of information contained in this form are notrequired to respond unless the form displays a currently valid OMB controlnumber.**

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding for each of the issuer’s classes of commonstock as of the latest practicable date: 2,015,085 shares of Common Stock,$1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par valuewere outstanding on November 12, 2010.

 

 

 

----

 

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

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**SEPTEMBER 30, 2010 AND DECEMBER 31, 2009**

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

 
| ** **                                                                                                         | ** ** | **2010**        | ** ** | **2009**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                         | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                         | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash  and due from banks                                                                                           |       | $               | 5,800      |       | $          | 6,461 |   |
| Interest-bearing  deposits with banks                                                                              |       | 26,338          |       | 20,609     |       |
| Certificates  of deposit                                                                                           |       | 150             |       | 150        |       |
| Investment  securities available for sale, at fair value                                                           |       | 123,432         |       | 112,644    |       |
| Investment  securities held to maturity, at cost                                                                   |       | 3,314           |       | 3,909      |       |
| Other  investments                                                                                                 |       | 2,123           |       | 2,257      |       |
| Loans  receivable, net                                                                                             |       | 193,923         |       | 200,219    |       |
| Premises  and equipment, net                                                                                       |       | 7,647           |       | 7,825      |       |
| Cash  surrender value of life insurance                                                                            |       | 10,767          |       | 10,465     |       |
| Foreclosed  real estate                                                                                            |       | 10,128          |       | 10,837     |       |
| Other  assets                                                                                                      |       | 12,911          |       | 12,163     |       |
|                                                                                                               |       |            |       |       |       |
| Total  assets                                                                                                      |       | $               | 396,533    |       | $          | 387,539 |   |
|                                                                                                               |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                      | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                               |       |            |       |       |       |
| LIABILITIES:                                                                                                       |       |            |       |       |       |
| Noninterest-bearing  deposits                                                                                      |       | $               | 60,294     |       | $          | 58,401 |   |
| Interest-bearing  deposits                                                                                         |       | 282,542         |       | 267,611    |       |
|                                                                                                               |       |            |       |       |       |
| Total  deposits                                                                                                    |       | 342,836         |       | 326,012    |       |
|                                                                                                               |       |            |       |       |       |
| Accrued  expenses and other liabilities                                                                            |       | 5,571           |       | 4,794      |       |
| Advances  from Federal Home Loan Bank                                                                              |       | 332             |       | 14,495     |       |
|                                                                                                               |       |            |       |       |       |
| Total  liabilities                                                                                                 |       | 348,739         |       | 345,301    |       |
|                                                                                                               |       |            |       |       |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                     |       |            |       |       |       |
|                                                                                                               |       |            |       |       |       |
| STOCKHOLDERS’  EQUITY:                                                                                        |       |            |       |       |       |
| Preferred  stock - No par value; 10,000,000 shares authorized; Series A, 7,462  shares issued and outstanding |       | —          |       | 7,462      |       |
| Preferred  stock - No par value; 10,000,000 shares authorized; Series B, 7,462  shares issued and outstanding |       | 7,462           |       | —     |       |
| Preferred  stock - No par value; 10,000,000 shares authorized; Series C, 4,379  shares issued and outstanding |       | 4,379           |       | —     |       |
| Common  stock - $1 par value; 20,000,000 shares authorized; 2,232,616 shares issued  and outstanding               |       | 2,233           |       | 2,230      |       |
| Nonvoting  common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and  outstanding                |       | 90              |       | 90         |       |
| Nonvested  restricted common stock                                                                                 |       | (107            | )          | (52        | )          |
| Additional  paid-in capital                                                                                        |       | 7,799           |       | 7,707      |       |
| Retained  earnings                                                                                                 |       | 25,494          |       | 25,834     |       |
| Treasury  stock at cost, 217,531 shares at September 30, 2010 and  December 31, 2009                     |       | (1,805          | )          | (1,805     | )          |
| Accumulated  other comprehensive income, net of income taxes                                                       |       | 2,249           |       | 772        |       |
|                                                                                                               |       |            |       |       |       |
| Total  stockholders’ equity                                                                                   |       | 47,794          |       | 42,238     |       |
|                                                                                                               |       |            |       |       |       |
|                                                                                                               |       | $               | 396,533    |       | $          | 387,539 |   |

 

Seenotes to consolidated financial statements.

 

1

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited  — Inthousands, except per share data)**

 
| ** **                                            | ** ** | **Three Months********Ended September 30,** | ** ** | **Nine Months********Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                                   | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  income:                                     |       |                                                       |       |                                                      |       |   |   |   |   |
| Loans,  including fees                                |       | $                                                          | 3,490      |                                                      | $          | 3,623 |   | $ | 10,001 |   | $ | 10,655 |   |
| Investment  securities:                               |       |                                                       |       |                                                      |       |   |   |   |   |
| Taxable                                               |       | 616                                                        |       | 874                                                       |       | 1,942 |   | 2,622 |   |
| Tax-exempt                                            |       | 451                                                        |       | 375                                                       |       | 1,361 |   | 945 |   |
| Interest-bearing  deposits                            |       | 25                                                         |       | 13                                                        |       | 67 |   | 44 |   |
| Total  interest income                                |       | 4,582                                                      |       | 4,885                                                     |       | 13,371 |   | 14,266 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Interest  expense:                                    |       |                                                       |       |                                                      |       |   |   |   |   |
| Deposits                                              |       | 601                                                        |       | 894                                                       |       | 1,956 |   | 2,937 |   |
| Other  borrowings                                     |       | —                                                     |       | 24                                                        |       | 16 |   | 93 |   |
| Total  interest expense                               |       | 601                                                        |       | 918                                                       |       | 1,972 |   | 3,030 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net  interest income                                  |       | 3,981                                                      |       | 3,967                                                     |       | 11,399 |   | 11,236 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Provision  for loan losses                            |       | 450                                                        |       | 771                                                       |       | 1,940 |   | 2,147 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net  interest income after provision for loan losses  |       | 3,531                                                      |       | 3,196                                                     |       | 9,459 |   | 9,089 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Noninterest  income:                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Service  charges on deposits                          |       | 974                                                        |       | 1,108                                                     |       | 2,820 |   | 3,078 |   |
| Gain  on sales of securities                          |       | 211                                                        |       | 291                                                       |       | 546 |   | 454 |   |
| Gain  (loss) on sales of assets                       |       | (9                                                         | )          | —                                                    |       | (5 | ) | 2 |   |
| Other  operating income                               |       | 294                                                        |       | 281                                                       |       | 1,083 |   | 942 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Total  noninterest income                             |       | 1,470                                                      |       | 1,680                                                     |       | 4,444 |   | 4,476 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Noninterest  expense:                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Salaries  and employee benefits                       |       | 1,928                                                      |       | 1,862                                                     |       | 5,877 |   | 5,543 |   |
| Net  occupancy and equipment                          |       | 680                                                        |       | 646                                                       |       | 1,952 |   | 1,830 |   |
| Amortization  of core deposit intangible              |       | 118                                                        |       | 131                                                       |       | 372 |   | 276 |   |
| FDIC  insurance                                       |       | 200                                                        |       | 178                                                       |       | 590 |   | 476 |   |
| Other  real estate owned                              |       | 163                                                        |       | 230                                                       |       | 2,010 |   | 447 |   |
| Other  operating expenses                             |       | 1,289                                                      |       | 1,393                                                     |       | 3,735 |   | 4,523 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Total  noninterest expense                            |       | 4,378                                                      |       | 4,440                                                     |       | 14,536 |   | 13,095 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Income  (loss) before income taxes                    |       | 623                                                        |       | 436                                                       |       | (633 | ) | 470 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Income  tax expense (benefit)                         |       | 38                                                         |       | 14                                                        |       | (739 | ) | (171 | ) |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net  income                                           |       | $                                                          | 585        |                                                      | $          | 422 |   | $ | 106 |   | $ | 641 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Preferred  dividends accrued                          |       | 67                                                         |       | 95                                                        |       | 254 |   | 217 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net  income (loss) available to common shareholders   |       | $                                                          | 518        |                                                      | $          | 327 |   | $ | (148 | ) | $ | 424 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net  income (loss) per common share - basic           |       | $                                                          | 0.25       |                                                      | $          | 0.16 |   | $ | (0.07 | ) | $ | 0.20 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net  income (loss) per common share - diluted         |       | $                                                          | 0.24       |                                                      | $          | 0.16 |   | $ | (0.07 | ) | $ | 0.20 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Weighted  average common outstanding shares - basic   |       | 2,105                                                      |       | 2,103                                                     |       | 2,103 |   | 2,102 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Weighted  average common outstanding shares - diluted |       | 2,126                                                      |       | 2,103                                                     |       | 2,103 |   | 2,102 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Dividends  per common share                           |       | $                                                          | —     |                                                      | $          | — |   | $ | 0.08 |   | $ | 0.19 |   |

 

Seenotes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009**

**(Unaudited  — Inthousands, except parenthetical footnotes)**

 
| ** **                                                                                               | ** ** | ** **               | ** ** | ** **            | ** ** | ** **            | ** ** | ** **     | ** ** | ** **    | ** ** | ** **    | ** ** | ** **              | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-----------------------|------------|----------------|------------|---------------|------------|---------------|------------|-------------------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                               | ** ** | ** **               | ** ** | ** **            | ** ** | ** **            | ** ** | ** **     | ** ** | **Nonvoting** | ** ** | **Nonvested** | ** ** | **Additional**          | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **             | ** ** |
| ** **                                                                                               | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Restricted** | ** ** | **Paid-in**   | ** ** | **Retained**  | ** ** | **Treasury Stock** | ** ** | **Comprehensive** | ** ** | ** **   | ** ** |
| ** **                                                                                               | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Shares**    | ** ** | **Amount**    | ** ** | **Stock**               | ** ** | **Capital**       | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| ** **                                                                                               | ** ** | ** **               | ** ** | ** **            | ** ** | ** **            | ** ** | ** **     | ** ** | ** **    | ** ** | ** **    | ** ** | ** **              | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance—December 31,  2008                                                                     |       | —                   |       | $                     | —     |                  | 2,230      |           | $          | 2,230         |       | 90            |       | $                       | 90         |              | $          | —       |       | $          | 7,611      |       | $          | 25,465                 |       | (220       | )          | $ | (1,813 | ) | $ | 75 |   | $ | 33,658 |   |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| Net income                                                                                               |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | 641          |       | —     |       | —     |       | —                 |       | 641        |       |
| Unrealized holding gains  on investment securities available for sale—net of taxes of $1,133,411    |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | —       |       | —     |       | —     |       | 2,200                  |       | 2,200      |       |
| Less reclassification  adjustment for holding gains included in net income—net of taxes of $154,095 |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | —       |       | —     |       | —     |       | (300                   | )          | (300       | )          |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| Comprehensive income                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       | 2,541      |       |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| Issuance of preferred  stock                                                                             |       | 7                        |       | 7,462                 |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | —       |       | —     |       | —     |       | —                 |       | 7,462      |       |
| Stock based compensation  expense                                                                        |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | 34                |       | —       |       | —     |       | —     |       | —                 |       | 34         |       |
| Sale of Treasury stock                                                                                   |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | —       |       | 2          |       | 8          |       | —                 |       | 8          |       |
| Dividends declared -  preferred                                                                          |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | (165         | )          | —     |       | —     |       | —                 |       | (165       | )          |
| Dividends declared -  common                                                                             |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | (399         | )          | —     |       | —     |       | —                 |       | (399       | )          |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| **Balance—September 30,  2009**                                                                | ** ** | **7**                    | ** ** | **$**                 | **7,462**  | ** **            | **2,230**  | ** **     | **$**      | **2,230**     | ** ** | **90**        | ** ** | **$**                   | **90**     | ** **        | **$**      | **—**   | ** ** | **$**      | **7,645**  | ** ** | **$**      | **25,542**             | ** ** | **(218**   | **)**      | **$** | **(1,805** | **)** | **$** | **1,975** | ** ** | **$** | **43,139** | ** ** |
| ** **                                                                                               | ** ** | ** **               | ** ** | ** **            | ** ** | ** **            | ** ** | ** **     | ** ** | ** **    | ** ** | ** **    | ** ** | ** **              | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance—December 31,  2009                                                                     |       | 7                        |       | $                     | 7,462      |                  | 2,230      |           | $          | 2,230         |       | 90            |       | $                       | 90         |              | $          | (52          | )          | $          | 7,707      |       | $          | 25,834                 |       | (218       | )          | $ | (1,805 | ) | $ | 772 |   | $ | 42,238 |   |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| Net income                                                                                               |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | 106          |       | —     |       | —     |       | —                 |       | 106        |       |
| Unrealized holding gains  on investment securities available for sale—net of taxes of $946,932      |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | —       |       | —     |       | —     |       | 1,837                  |       | 1,837      |       |
| Less reclassification  adjustment for holding gains included in net income—net of taxes of $185,552 |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | —       |       | —     |       | —     |       | (360                   | )          | (360       | )          |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| Comprehensive income                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       | 1,583      |       |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| Issuance of preferred  stock, net                                                                        |       | 4                        |       | 4,379                 |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | —       |       | —     |       | —     |       | —                 |       | 4,379      |       |
| Issuance of common stock                                                                                 |       | —                   |       | —                |       | 3                     |       | 3              |       | —        |       | —        |       | —                  |       | —            |       | —       |       | —     |       | —     |       | —                 |       | 3          |       |
| Stock based compensation  expense                                                                        |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | 27                |       | —       |       | —     |       | —     |       | —                 |       | 27         |       |
| Nonvested restricted  stock                                                                              |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | (55                     | )          | 65                |       | —       |       | —     |       | —     |       | —                 |       | 10         |       |
| Dividends declared -  preferred                                                                          |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | (279         | )          | —     |       | —     |       | —                 |       | (279       | )          |
| Dividends declared -  common                                                                             |       | —                   |       | —                |       | —                |       | —         |       | —        |       | —        |       | —                  |       | —            |       | (167         | )          | —     |       | —     |       | —                 |       | (167       | )          |
|                                                                                                     |       |                     |       |                  |       |                  |       |           |       |          |       |          |       |                    |       |              |       |         |       |       |       |       |       |                   |       |       |       |
| **Balance—September 30,  2010**                                                                | ** ** | **11**                   | ** ** | **$**                 | **11,841** | ** **            | **2,233**  | ** **     | **$**      | **2,233**     | ** ** | **90**        | ** ** | **$**                   | **90**     | ** **        | **$**      | **(107**     | **)**      | **$**      | **7,799**  | ** ** | **$**      | **25,494**             | ** ** | **(218**   | **)**      | **$** | **(1,805** | **)** | **$** | **2,249** | ** ** | **$** | **47,794** | ** ** |

 

Seenotes to consolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009**

**(In thousands)**

 
| ** **                                                                                             | ** ** | **2010**        | ** ** | **2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                             | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                              |       |            |       |     |       |
| Net  income                                                                                            |       | $               | 106        |     | $          | 641 |   |
| **Adjustments to reconcile net income to net cash provided by  (used in) operating activities:**       |       |            |       |     |       |
| Provision  for loan losses                                                                             |       | 1,940           |       | 2,147    |       |
| Depreciation                                                                                           |       | 556             |       | 597      |       |
| Amortization  and accretion, net                                                                       |       | 751             |       | 504      |       |
| Provision  for deferred income benefit                                                                 |       | (839            | )          | (2,456   | )          |
| Gains  on sale of assets and investments, net                                                          |       | (541            | )          | (456     | )          |
| Stock  based compensation expense                                                                      |       | 27              |       | 34       |       |
| Restricted  stock based compensation plan                                                              |       | 13              |       | —   |       |
| Change  in other assets                                                                                |       | 423             |       | (3,766   | )          |
| Change  in accrued expenses and other liabilities                                                      |       | 777             |       | 1,407    |       |
|                                                                                                   |       |            |       |     |       |
| Net  cash provided by (used in) operating activities                                                   |       | 3,213           |       | (1,348   | )          |
|                                                                                                   |       |            |       |     |       |
| **INVESTING ACTIVITIES:**                                                                              |       |            |       |     |       |
| Net  cash and cash equivalents acquired from branch purchase                                           |       | —          |       | 45,431   |       |
| Net  change in certificates of deposit                                                                 |       | —          |       | 195      |       |
| Proceeds  from calls and maturities of investment securities held to maturity                          |       | 928             |       | 201      |       |
| Proceeds  from sales and maturities of investment securities available for sale                        |       | 39,532          |       | 36,744   |       |
| Purchases  of investment securities available for sale                                                 |       | (48,159         | )          | (50,207  | )          |
| Net  change in other investments                                                                       |       | —          |       | 30       |       |
| Net  change in loans receivable                                                                        |       | 1,382           |       | (2,494   | )          |
| Proceeds  from the sale of other real estate owned                                                     |       | 1,956           |       | 245      |       |
| Purchases  of premises and equipment, net                                                              |       | (378            | )          | (1,038   | )          |
|                                                                                                   |       |            |       |     |       |
| Net  cash provided by (used in) investing activities                                                   |       | (4,739          | )          | 29,107   |       |
|                                                                                                   |       |            |       |     |       |
| **FINANCING ACTIVITIES:**                                                                              |       |            |       |     |       |
| Net  change in deposits                                                                                |       | 16,824          |       | (14,605  | )          |
| Principal  payments on debt                                                                            |       | —          |       | (240     | )          |
| Net  change in advances from Federal Home Loan Bank                                                    |       | (14,163         | )          | (8,213   | )          |
| Proceeds  from issuance of preferred stock                                                             |       | 4,379           |       | 7,462    |       |
| Sale  of treasury stock activity                                                                       |       | —          |       | 8        |       |
| Dividends  paid - preferred                                                                            |       | (279            | )          | (165     | )          |
| Dividends  paid - common                                                                               |       | (167            | )          | (399     | )          |
|                                                                                                   |       |            |       |     |       |
| Net  cash provided by (used in) financing activities                                                   |       | 6,594           |       | (16,152  | )          |
|                                                                                                   |       |            |       |     |       |
| Net  change in cash and cash equivalents                                                               |       | 5,068           |       | 11,607   |       |
|                                                                                                   |       |            |       |     |       |
| Cash  and cash equivalents, beginning of period                                                        |       | 27,070          |       | 16,146   |       |
|                                                                                                   |       |            |       |     |       |
| Cash  and cash equivalents at end of period                                                            |       | $               | 32,138     |     | $          | 27,753 |   |
|                                                                                                   |       |            |       |     |       |
| **Supplemental disclosures of cash paid during the period  for:**                                      |       |            |       |     |       |
| Interest                                                                                               |       | $               | 2,025      |     | $          | 3,711 |   |
|                                                                                                   |       |            |       |     |       |
| Income  taxes                                                                                          |       | $               | 60         |     | $          | 713 |   |
|                                                                                                   |       |            |       |     |       |
| **Supplemental disclosures of noncash transactions:**                                                  |       |            |       |     |       |
| Real  estate acquired through foreclosure                                                              |       | $               | 3,019      |     | 5,274      |   |
|                                                                                                   |       |            |       |     |       |
| Change  in unrealized gain on investment securities available for sale, net of taxes                   |       | $               | 1,478      |     | $          | 1,901 |   |
|                                                                                                   |       |            |       |     |       |
| Exchange  of Preferred Stock, Series A for Preferred Stock Series B with the  U. S. Treasury |       | $               | 7,462      |     | $          | — |   |

 

Seenotes to consolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

**Notesto the Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

Citizens BancsharesCorporation (the “Company”) is a holding company that provides a full range of commercialand personal banking 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 andserves its customers through eight full-service financial centers inmetropolitan Atlanta, Georgia, one full-service financial center in Columbus,Georgia, one full-service financial center in Birmingham, Alabama, and onefull-service financial center in Eutaw, Alabama.

 

The accompanying unauditedconsolidated financial statements have been prepared pursuant to the rules andregulations for reporting on Form 10-Q. Accordingly, certain disclosures required by generally accepted accountingprinciples are not included herein. These interim statements should be read inconjunction with the financial statements and notes thereto included in theCompany’s latest Annual Report on Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 2009.  The results of operations for the interimperiods reported herein are not necessarily representative of the resultsexpected for the full 2010 fiscal year.

 

The consolidated financialstatements of the Company for the three and nine month periods ended September 30,2010 are unaudited.  In the opinion ofmanagement, all adjustments necessary for a fair presentation of the financialposition and results of operations and cash flows for the three and nine monthperiods have been included.  Alladjustments are of a normal recurring nature. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

**Accounting Policies**

 

The Company’s consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”), whichoften require the judgment of management in the selection and application ofcertain accounting principles and methods. Reference is made to the accounting policies of the Company described inthe notes to the consolidated financial statements contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009.  The Company has followed those policies inpreparing this report.  Managementbelieves that the quality and reasonableness of its most critical policiesenable the fair presentation of its financial position and of its results ofoperations.

 

**Troubled Asset Relief Program**

 

On August 13, 2010, aspart of the U.S. Department of the Treasury (the “Treasury”) Troubled AssetRelief Program (“TARP”) Community Development Capital Initiative, the Companyentered into a Letter Agreement, and an Exchange Agreement—Standard Terms (“ExchangeAgreement”), with the Treasury, pursuant to which the Company agreed toexchange 7,462 shares of the Company’s Fixed Rate Cumulative PerpetualPreferred Stock, Series A (“Series A Preferred Shares”), issued on March 6,2009, pursuant to the Company’s participation in the TARP Capital PurchaseProgram, for 7,462 shares of the Company’s Fixed Rate Cumulative PerpetualPreferred Stock, Series B (“Series B Preferred Shares”), both ofwhich have a liquidation preference of $1,000 (the “Exchange Transaction”).  No new monetary consideration was exchangedin connection with the Exchange Transaction. The Exchange Transaction closed on August 13, 2010 (the “ClosingDate”).

 

5

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On September 17, 2010,the Company issued 4,379 shares of its Series C Preferred Shares to theTreasury as part of its TARP Community Development Capital Initiative for atotal of 11,841 shares of Series B and C Preferred Shares issues toTreasury.  The issuance of the Series Band Series C Preferred Shares was a private placement exempt fromregistration pursuant to Section 4(2) of the Securities Act of 1933,as amended.

 

The Series B and Series CPreferred Shares qualify as Tier 1 capital and will pay cumulative dividends ata rate of 2% per annum for the first eight years after the Closing Dateand 9% per annum thereafter.  TheCompany may, subject to consultation with the Federal Reserve Bank of Atlanta,redeem the Series B and Series C Preferred Shares at any time for itsaggregate liquidation amount plus any accrued and unpaid dividends.

 

**Acquisition**

 

On March 27, 2009, theCompany’s subsidiary, Citizens Trust Bank (“Citizens”), acquired the Lithoniabranch (the “Branch”) of The Peoples Bank, a Georgia state bank (“Peoples”). Citizens acquired the in-market deposits of the Branch which totaledapproximately $50 million. Under the Agreement, Citizens also acquired thebranch office and related real estate and certain personal property at theBranch.  The Company recorded a finite lived intangible asset related tothe value of deposit accounts acquired of approximately $3,303,000 and isamortizing the amount over 7 years.

 

**Recently Issued AccountingStandards**

 

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

 

In July 2010, theReceivables topic of the ASC was amended to require expanded disclosuresrelated to a company’s allowance for credit losses and the credit quality ofits financing receivables. The amendments will require the allowancedisclosures to be provided on a disaggregated basis.  The Company is required to begin to complywith the disclosures in its financial statements for the year ended December 31,2010.

 

On July 21, 2010,President Obama signed into law the Dodd-Frank Wall Street Reform and ConsumerProtection Act (the “Dodd-Frank Act”), which significantly changes theregulation of financial institutions and the financial servicesindustry.  The Dodd-Frank Act includes several provisions that willaffect how community banks, thrifts, and small bank and thrift holdingcompanies will be regulated in the future.  Among other things, theseprovisions abolish the Office of Thrift Supervision and transfer its functionsto the other federal banking agencies, relax rules regarding interstatebranching, allow financial institutions to pay interest on business checkingaccounts, change the scope of federal deposit insurance coverage, and imposenew capital requirements on bank and thrift holding companies.  The Dodd-FrankAct also establishes the Bureau of Consumer Financial Protection as anindependent entity within the Federal Reserve, which will be given theauthority to promulgate consumer protection regulations applicable to allentities offering consumer financial services or products, includingbanks.  Additionally, the Dodd-Frank Act includes a series ofprovisions covering mortgage loan origination standards affecting originatorcompensation, minimum repayment standards, and pre-payments.  Managementis actively reviewing the provisions of the Dodd-Frank Act and assessing itsprobable impact on our business, financial condition, and results ofoperations.

 

In August 2010, twoupdates were issued to amend various SEC rules and schedules pursuant toRelease No. 33-9026: Technical Amendments to Rules, Forms, Schedules andCodification of Financial Reporting Policies and based on the issuance of SECStaff Accounting Bulletin 112.  Theamendments related primarily to business combinations and removed references to“minority interest” and added references to “controlling” and “noncontrollinginterests”.  The updates were effectiveupon issuance but had no impact on the Company’s financial statements.

 

6

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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 or cashflows.

 

**2.INVESTMENTS**

 

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

 
| **At September 30, 2010**     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **          | ** ** |
| Government-sponsored  enterprises securities |       | $                   | 2,000      |                         | $          | 1                             |       | $                   | —     |   | $ | 2,001 |   |
| State,  county, and municipal securities     |       | 47,183              |       | 2,010                        |       | 56                            |       | 49,137              |       |
| Mortgage-backed  securities                  |       | 66,590              |       | 1,778                        |       | 324                           |       | 68,044              |       |
| Corporate  securities                        |       | 4,251               |       | —                       |       | 1                             |       | 4,250               |       |
| Totals                                       |       | $                   | 120,024    |                         | $          | 3,789                         |       | $                   | 381        |   | $ | 123,432 |   |

 
| **At December 31, 2009**      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                         |       |                |       |                         |       |                          |       |                |       |
| Government-sponsored  enterprises securities |       | $                   | 2,999      |                         | $          | 1                             |       | $                   | —     |   | $ | 3,000 |   |
| State,  county, and municipal securities     |       | 43,175              |       | 671                          |       | 379                           |       | 43,467              |       |
| Mortgage-backed  securities                  |       | 57,756              |       | 1,194                        |       | 566                           |       | 58,384              |       |
| Corporate  securities                        |       | 7,545               |       | 248                          |       | —                        |       | 7,793               |       |
| Totals                                       |       | $                   | 111,475    |                         | $          | 2,114                         |       | $                   | 945        |   | $ | 112,644 |   |

 

Investment securities heldto maturity are summarized as follows (in thousands):

 
| **At September 30, 2010** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                     |       |                |       |                         |       |                          |       |                |       |
| State,  county, and municipal securities |       | $                   | 3,295      |                         | $          | 139                           |       | $                   | —     |   | $ | 3,434 |   |
| Mortgage-backed  securities              |       | 19                  |       | 1                            |       | —                        |       | 20                  |       |
|                                     |       |                |       |                         |       |                          |       |                |       |
| Totals                                   |       | $                   | 3,314      |                         | $          | 140                           |       | $                   | —     |   | $ | 3,454 |   |

 
| **At December 31, 2009**  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
|                                     |       |                |       |                         |       |                          |       |                |       |
| State,  county, and municipal securities |       | $                   | 3,585      |                         | $          | 96                            |       | $                   | 13         |   | $ | 3,668 |   |
| Mortgage-backed  securities              |       | 324                 |       | 3                            |       | —                        |       | 327                 |       |
|                                     |       |                |       |                         |       |                          |       |                |       |
| Totals                                   |       | $                   | 3,909      |                         | $          | 99                            |       | $                   | 13         |   | $ | 3,995 |   |

 

7

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Theamortized costs and fair values of investment securities at September 30,2010, by contractual maturity, are shown below. Expected maturities may differfrom contractual maturities because issuers may have the right to call orprepay obligations with and without call or prepayment penalties (inthousands).

** **
| ** **                              | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **Amortized**                    | ** ** | **Fair**                       | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                              | ** ** | **Cost**                         | ** ** | **Value**                      | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                    |       |                             |       |                           |       |   |   |   |   |
| Due  in one year or less                |       | $                                | 855        |                           | $          | 857 |   | $ | — |   | $ | — |   |
| Due  after one year through five years  |       | 5,040                            |       | 5,134                          |       | 911 |   | 939 |   |
| Due  after five years through ten years |       | 24,157                           |       | 24,894                         |       | 2,403 |   | 2,515 |   |
| Due  after ten years                    |       | 89,972                           |       | 92,547                         |       | — |   | — |   |
|                                    |       |                             |       |                           |       |   |   |   |   |
|                                    |       | $                                | 120,024    |                           | $          | 123,432 |   | $ | 3,314 |   | $ | 3,454 |   |

 

Securitieswith carrying values of $72,110,000 and $86,127,000 at September 30, 2010and December 31, 2009 were pledged to secure public deposits, FHLBadvances and a $22 million line of credit at the Federal Reserve Bank discountwindow and for other purposes as required by law.

 

Grossrealized gains on securities were $546,000 and $464,000 at September 30,2010 and 2009, respectively.  Grossrealized losses on securities were $10,000 at September 30, 2009.  There were no gross realized losses onsecurities at September 30, 2010.

 

TheCompany’s investment portfolio consists principally of obligations of theUnited States, its agencies or its corporations, general obligation and revenuemunicipals and corporate securities. In the opinion of management, there is noconcentration of credit risk in its investment portfolio.  The company places its deposits andcorrespondent accounts with and sells its federal funds to high qualityinstitutions.  Management believes creditrisk associated with correspondent accounts is not significant.

 

Thefollowing tables show investments’ gross unrealized losses and fair value,aggregated by investment category and length of time that the individualsecurities have been in a continuous unrealized loss position, at September 30,2010 and December 31, 2009. Except as explicitly identified below, allunrealized losses on investment securities are considered by management to betemporarily impaired given the credit ratings on these investment securitiesand the short duration of the unrealized loss (in thousands).

 

8

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**At September 30, 2010**

 

**Securities Available for Sale**

 
| ** **                  | ** ** | **Securities in a loss position for** | ** ** | **Securities in a loss position for** | ** ** | ** **          | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **less than twelve months**                     | ** ** | **twelve months or more**                       | ** ** | **Total**           | ** ** |
| ** **                  | ** ** | ** **                                                     | ** ** | **Unrealized**                                                 | ** ** | ** **          | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Fair value**                                            | ** ** | **losses**                                                     | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                        |       |                                                           |       |                                                           |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities |       | $                                                              | 7,405      |                                                           | $          | (103                | )          | $ | 3,405 |   | $ | (221 | ) | $ | 10,810 |   | $ | (324 | ) |
|                        |       |                                                           |       |                                                           |       |                |       |   |   |   |   |   |   |
| Municipal  securities       |       | 4,429                                                          |       | (44                                                            | )          | 444                 |       | (12 | ) | 4,873 |   | (56 | ) |
|                        |       |                                                           |       |                                                           |       |                |       |   |   |   |   |   |   |
| Corporate                   |       | 4,250                                                          |       | (1                                                             | )          | —              |       | — |   | 4,250 |   | (1 | ) |
|                        |       |                                                           |       |                                                           |       |                |       |   |   |   |   |   |   |
| Total                       |       | $                                                              | 16,084     |                                                           | $          | (148                | )          | $ | 3,849 |   | $ | (233 | ) | $ | 19,933 |   | $ | (381 | ) |

 

**Securities Held to Maturity**

 

Therewere no securities classified as held to maturity in an unrealized lossposition greater than 12 months at September 30, 2010.

 

**At December 31, 2009**

 

**Securities Available for Sale**

 
| ** **                  | ** ** | **Securities in a loss position for** | ** ** | **Securities in a loss position for** | ** ** | ** **          | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **less than twelve months**                     | ** ** | **twelve months or more**                       | ** ** | **Total**           | ** ** |
| ** **                  | ** ** | ** **                                                     | ** ** | **Unrealized**                                                 | ** ** | ** **          | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Fair value**                                            | ** ** | **losses**                                                     | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                        |       |                                                           |       |                                                           |       |                |       |   |   |   |   |   |   |
| Mortgage-backed  securities |       | $                                                              | 14,781     |                                                           | $          | (128                | )          | $ | 4,832 |   | $ | (438 | ) | $ | 19,613 |   | $ | (566 | ) |
|                        |       |                                                           |       |                                                           |       |                |       |   |   |   |   |   |   |
| Municipal  securities       |       | 13,863                                                         |       | (353                                                           | )          | 284                 |       | (26 | ) | 14,147 |   | (379 | ) |
|                        |       |                                                           |       |                                                           |       |                |       |   |   |   |   |   |   |
| Total                       |       | $                                                              | 28,644     |                                                           | $          | (481                | )          | $ | 5,116 |   | $ | (464 | ) | $ | 33,760 |   | $ | (945 | ) |

 

**Securities Held to Maturity**

 
| ** **            | ** ** | **Securities in a loss position for** | ** ** | **Securities in a loss position for** | ** ** | ** **          | ** ** | ** **     | ** ** |
|-----------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **            | ** ** | **less than twelve months**                     | ** ** | **twelve months or more**                       | ** ** | **Total**           | ** ** |
| ** **            | ** ** | ** **                                                     | ** ** | **Unrealized**                                                 | ** ** | ** **          | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **            | ** ** | **Fair value**                                            | ** ** | **losses**                                                     | ** ** | **Fair value** | ** ** | **losses**     | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                  |       |                                                           |       |                                                           |       |                |       |           |       |   |   |   |   |
| Municipal  securities |       | $                                                              | —     |                                                           | $          | —              |       | $              | 267        |   | $ | (13 | ) | $ | 267 |   | $ | (13 | ) |
|                  |       |                                                           |       |                                                           |       |                |       |           |       |   |   |   |   |
| Total                 |       | $                                                              | —     |                                                           | $          | —              |       | $              | 267        |   | $ | (13 | ) | $ | 267 |   | $ | (13 | ) |

 

AtSeptember 30, 2010 the Company had 7 available for sale securities thatwere in an unrealized loss position for longer than 12 months.  At December 31, 2009, 8 available forsale and held to maturity securities were in an unrealized loss position forlonger than 12 months.  The investment securities in an unrealizedloss position for more than 12 months at September 30, 2010 and December 31,2009 consisted of 4 private label collateralized mortgage obligation (CMO)securities.  The Company reviews thesesecurities for other-than-temporary impairment on a quarterly basis bymonitoring their credit support and coverage, constant payment of thecontractual principal and interest, loan to value and delinquencies ratios.

 

Weuse prices from third party pricing services and, to a lesser extent,indicative (non-binding) quotes from third party brokers, to measure fair valueof our investment securities. Fair values of the investment securitiesportfolio could decline in the future if the underlying performance of the collateralfor collateralized mortgage obligations or other securities deteriorates andthe levels do not provide sufficient protection for contractual principal andinterest. As a result, there is risk that an other-than-temporary impairmentmay occur in the future particularly in light of the current economicenvironment.

 

The Company does not intend to sell these securities and it is morelikely than not that the Company will not be required to sell those securitiesbefore recovery of its amortized cost. The Company believes, based on industryanalyst reports and credit ratings, that it will continue to receive scheduledinterest payments as well as the entire principal balance, and thedeterioration in value is attributable to changes in market interest rates andis not in the credit quality of the issuer and therefore, these losses are notconsidered other-than-temporary.

 

9

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**3. FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

The Company measures or monitors certain of its assets and liabilitieson a fair value basis.  Fair value isused on a recurring basis for assets and liabilities that are elected to beaccounted for under ASC guidance as well as certain assets and liabilities inwhich fair value is the primary basis of accounting.  Depending on the nature of the asset orliability, the Company uses various valuation techniques and assumptions whenestimating fair value, which are in accordance with the guidance fordetermining the fair value of a financial asset when the market for that assetis not active.

 

In accordance with ASC guidance, the Company applied the following fairvalue hierarchy:

 

Level 1—Quoted prices in active markets for identical assets orliabilities. Level 1 assets and liabilities include debt and equity securitiesand derivative contracts that are traded in an active exchange market, as wellas U.S. Treasury and other highly liquid investments that are actively tradedin over-the-counter markets.

 

Level 2—Observable inputs other than Level 1 prices such as quotedprices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the assets orliabilities. Level 2 assets and liabilities include debt securities with quotedprices that are traded less frequently than exchange-traded instruments andderivative contracts whose value is determined using a pricing model withinputs that are observable in the market or can be derived principally from orcorroborated by observable market data. This category generally includes U.S.Government and agency mortgage-backed debt securities, certain derivativecontracts and impaired loans.

 

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

 

InvestmentSecurities Available for Sale—Investment securities available for sale arerecorded at fair value on a recurring basis. Fair value measurement is basedupon quoted prices, if available. If quoted prices are not available, fairvalues are measured using independent pricing models or other model-basedvaluation techniques such as the present value of future cash flows, adjustedfor the security’s credit rating, prepayment assumptions and other factors suchas credit loss assumptions. Level 1 securities include those traded on anactive exchange such as the New York Stock Exchange, Treasury securities thatare traded by dealers or brokers in active over-the counter markets and moneymarket funds. Level 2 securities include mortgage backed securities issued bygovernment sponsored entities, municipal bonds and corporate debt securities.Securities classified as Level 3 include asset-backed securities in less liquidmarkets.

 

Other Real EstateOwned—Foreclosed assets are adjusted to fair value upon transfer of theloans to other real estate owned. Real estate acquired in settlement of loansis recorded initially at estimated fair value of the property less estimatedselling costs at the date of foreclosure. The initial recorded value may besubsequently reduced by additional allowances, which are charges to earnings ifthe estimated fair value of the property less estimated selling costs declinesbelow the initial recorded value. Fair value is based upon independent marketprices, appraised values of the collateral or management’s estimation of thevalue of the collateral. When the fair value of the collateral is based on anobservable market price or a current appraised value, the Company recorded theforeclosed asset as nonrecurring Level 2. When an appraised value is notavailable or management determines

 

10

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the fair value of the collateral is further impaired below theappraised value and there is no observable market price, the Company recordsthe foreclosed asset as nonrecurring Level 3.

 

Loans—The Companydoes not record loans at fair value on a recurring basis, however, from time totime, a loan is considered impaired and an allowance for loan loss isestablished. Loans for which it is probable that payment of interest andprincipal will not be made in accordance with the contractual terms of the loanare considered impaired. Once a loan is identified as individually impaired,management measures impairment. The fair value of impaired loans is estimatedusing one of several methods, including the collateral value, market value ofsimilar debt, enterprise value, liquidation value and discounted cash flows.Those impaired loans not requiring a specific allowance represents loans forwhich the fair value of expected repayments or collateral exceed the recordedinvestment in such loans. At September 30, 2010 and December 31,2009, substantially all of the impaired loans were evaluated based upon thefair value of the collateral. Impaired loans where an allowance is establishedbased on the fair value of collateral require classification in the fair valuehierarchy. When the fair value of the collateral is based on an observablemarket price or a current appraised value, the Company records the loan asnonrecurring Level 2. When an appraised value is not available or managementdetermines the fair value of the collateral is further impaired below theappraised value and there is no observable market price, the Company recordsthe loan as nonrecurring Level 3.

 

Goodwill and Other Intangible Assets—Goodwill and other intangibleassets are measured for impairment on an annual basis or more frequently ifthere is a change in circumstances. If the goodwill or other intangibles exceedthe fair value, an impairment charge is recorded in an amount equal to theexcess. Impairment is tested utilizing accepted valuation techniques utilizingdiscounted cash flows of the business unit, and implied fair value based on amultiple of earnings and tangible book value for merger transactions. Themeasurement of these fair values is considered a Level 3 measurement.

 

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The following tables present financial assets and financial liabilitiesmeasured at fair value on a recurring and nonrecurring basis and the change infair value for those specific financial instruments in which fair value hasbeen elected (in thousands).

 
| ** **                               | ** ** | **Fair Value Measurements at September 30, 2010** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                                                      | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                                                      | ** ** | **In Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                                                      | ** ** | **Markets for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                                                      | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                               | ** ** | **Assets/Liabilities**                                                          | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                               | ** ** | **Measured at**                                                            | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                               | ** ** | **Fair Value**                                                             | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Recurring Basis:**                     | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                               |       |                                                                            |       |   |   |   |   |   |   |
| Securities  available for sale:          |       |                                                                            |       |   |   |   |   |   |   |
| Government-sponsored  enterprises        |       | $                                                                               | 2,001      |   | $ | — |   | $ | 2,001 |   | $ | — |   |
| State,  county, and municipal securities |       | 49,137                                                                          |       | — |   | 49,137 |   | — |   |
| Mortgage-backed  securities              |       | 68,044                                                                          |       | — |   | 68,044 |   | — |   |
| Corporate  securities                    |       | 4,250                                                                           |       | — |   | 4,250 |   | — |   |
|                                     |       |                                                                            |       |   |   |   |   |   |   |
| **Nonrecurring Basis:**                  | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                               |       |                                                                            |       |   |   |   |   |   |   |
| Impaired  loans                          |       | $                                                                               | 27,056     |   | $ | — |   | $ | 27,056 |   | $ | — |   |
| Other  real estate owned                 |       | 10,128                                                                          |       | — |   | 10,128 |   | — |   |
| Goodwill                                 |       | 362                                                                             |       | — |   | — |   | 362 |   |
| Core  deposit intangibles                |       | 2,595                                                                           |       | — |   | — |   | 2,595 |   |

 
| ** **                               | ** ** | **Fair Value Measurements at December 31, 2009** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                                                     | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                                                     | ** ** | **In Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                                                     | ** ** | **Markets for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                                                     | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                               | ** ** | **Assets/Liabilities**                                                         | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                               | ** ** | **Measured at**                                                           | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                               | ** ** | **Fair Value**                                                            | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Recurring Basis:**                     |       |                                                                           |       |   |   |   |   |   |   |
| **Assets**                               |       |                                                                           |       |   |   |   |   |   |   |
| Securities  available for sale:          |       |                                                                           |       |   |   |   |   |   |   |
| Government-sponsored  enterprises        |       | $                                                                              | 3,000      |   | $ | — |   | $ | 3,000 |   | $ | — |   |
| State,  county, and municipal securities |       | 43,467                                                                         |       | — |   | 43,467 |   | — |   |
| Mortgage-backed  securities              |       | 58,384                                                                         |       | — |   | 58,384 |   | — |   |
| Corporate  securities                    |       | 7,793                                                                          |       | — |   | 7,793 |   | — |   |
|                                     |       |                                                                           |       |   |   |   |   |   |   |
| **Nonrecurring Basis:**                  |       |                                                                           |       |   |   |   |   |   |   |
| **Assets**                               |       |                                                                           |       |   |   |   |   |   |   |
| Impaired  loans                          |       | $                                                                              | 47,535     |   | $ | — |   | $ | 47,535 |   | $ | — |   |
| Other  real estate owned                 |       | 10,837                                                                         |       | — |   | 10,837 |   | — |   |
| Goodwill                                 |       | 362                                                                            |       | — |   | — |   | 362 |   |
| Core  deposit intangibles                |       | 2,967                                                                          |       | — |   | — |   | 2,967 |   |

 

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Following are disclosures of fair value information about financialinstruments, whether or not recognized on the balance sheet, for which it ispracticable to estimate that value. The assumptions used in the estimation ofthe fair values are based on estimates using discounted cash flows and othervaluation techniques. The use of discounted cash flows can be significantlyaffected by the assumptions used, including the discount rate and estimates offuture cash flows. The following disclosures should not be considered asurrogate of the liquidation value of the Company, but rather a good-faithestimate of the increase or decrease in the value of financial instruments heldby the Company since purchase, origination, or issuance.

 

***Cash, Due From Banks, Federal Funds Sold, Interest-BearingDeposits With Banks, and Certificates of Deposits***—Carryingamount is a reasonable estimate of fair value due to the short-term nature ofsuch items.

 

***Investment Securities***—Fair value ofinvestment securities are based on quoted market prices.

 

***Other Investments***—The carryingamount of other investments approximates its fair value.

 

***Loans***—The fair value of fixedrate loans is estimated by discounting the future cash flows using the currentrates at which similar loans would be made to borrowers with similar credit ratings.For variable rate loans, the carrying amount is a reasonable estimate of fairvalue.

 

***Cash Surrender Value of Life Insurance***—Cash values oflife insurance policies are carried at the value for which such policies may beredeemed for cash.

 

***Deposits***—The fair value of demanddeposits, savings accounts, and certain money market deposits is the amountpayable on demand at the reporting date. The fair value of fixed ratecertificates of deposit is estimated by discounting the future cash flows usingthe rates currently offered for deposits of similar remaining maturities.

 

***Advances from Federal Home Loan Bank***—The fairvalues of advances from the Federal Home Loan Bank are estimated by discountingthe future cash flows using the rates currently available to the Bank for debtwith similar remaining maturities and terms.

 

***Commitments to Extend Credit and Commercial Lettersof Credit***—Because commitments to extend credit and commercialletters of credit are made using variable rates, or are recently executed, thecontract value is a reasonable estimate of fair value.

 

***Limitations*****—**Fair valueestimates are made at a specific point in time, based on relevant marketinformation and information about the financial instrument. These estimates donot reflect any premium or discount that could result from offering for sale atone time the Company’s entire holdings of a particular financial instrument.Because no market exists for a significant portion of the Company’s financialinstruments, fair value estimates are based on many judgments. These estimatesare subjective in nature and involve uncertainties and matters of significantjudgment and therefore cannot be determined with precision. Changes inassumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on and off-balance-sheetfinancial instruments without attempting to estimate the value of anticipatedfuture business and the value of assets and liabilities that are not consideredfinancial instruments; for example, premises and equipment. In addition, thetax ramifications related to the realization of the unrealized gains and lossescan have a significant effect on fair value estimates and have not beenconsidered in the estimates.

 

13

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The carrying values and estimated fair values of the Company’sfinancial instruments at September 30, 2010 and December 31, 2009 areas follows:

 
| ** **                                     | ** ** | **2010**                | ** ** | **2009**                       | ** ** |
|------------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **Carrying**            | ** ** | **Estimated**                  | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                     | ** ** | **Value**               | ** ** | **Fair Value**            | ** ** | **Value** | ** ** | **Fair Value** | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** | **(in thousands)**        | ** ** |
| Financial  assets:                             |       |                    |       |                           |       |   |   |   |   |
| Cash  and due from banks                       |       | $                       | 5,800      |                           | $          | 5,800 |   | $ | 6,461 |   | $ | 6,461 |   |
| Interest-bearing  deposits with banks          |       | 26,338                  |       | 26,338                         |       | 20,609 |   | 20,609 |   |
| Cetificates  of deposit                        |       | 150                     |       | 150                            |       | 150 |   | 150 |   |
| Investment  securities                         |       | 126,746                 |       | 126,886                        |       | 116,553 |   | 116,639 |   |
| Other  investments                             |       | 2,123                   |       | 2,123                          |       | 2,257 |   | 2,257 |   |
| Loans—net                                 |       | 193,923                 |       | 194,671                        |       | 200,219 |   | 201,840 |   |
| Cash  surrender value of life insurance        |       | 10,767                  |       | 10,767                         |       | 10,465 |   | 10,465 |   |
|                                           |       |                    |       |                           |       |   |   |   |   |
| Financial  liabilities:                        |       |                    |       |                           |       |   |   |   |   |
| Deposits                                       |       | 342,836                 |       | 337,745                        |       | 326,012 |   | 316,301 |   |
| Advances  from Federal Home Loan Bank          |       | 332                     |       | 332                            |       | 14,495 |   | 14,495 |   |
|                                           |       |                    |       |                           |       |   |   |   |   |
| ** **                                     | ** ** | **Notional  amount**    | ** ** | **Estimated  fair value** | ** ** | **Notional  amount** | ** ** | **Estimated  fair value** | ** ** |
| Off-balance-sheet financial  instruments: |       |                    |       |                           |       |   |   |   |   |   |   |
| Commitments  to extend credit                  |       | $                       | 24,048     |                           | —     |   | $ | 24,111 |   | — |   |
| Commercial  letters of credit                  |       | 2,484                   |       | —                         |       | 3,106 |   | — |   |
|                                                |            |                         |            |                                |            |  |  |  |  |  |  |  |  |

 

**4.  OTHER REAL ESTATE OWNED**

 

Other real estate owned isreported at the lower of cost or fair value less estimated disposal costs,determined on the basis of current appraisals, comparable sales, and otherestimates of value obtained principally from independent sources. Any excess ofthe loan balance at the time of foreclosure over the fair value of the realestate held as collateral is treated as a charge-off against the allowance forloan losses. Any subsequent declines in value are charged to earnings.  Transactions in other real estate owned aresummarized below (in thousands):

 
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                              |       |                   |       |                  |       |
| Balance—beginning  of period |       | $                      | 10,837     |                  | $          | 3,874 |   |
| Additions                         |       | 3,019                  |       | 8,263                 |       |
| Sales                             |       | (1,956                 | )          | (1,042                | )          |
| Write  downs                      |       | (1,772                 | )          | (258                  | )          |
|                              |       |                   |       |                  |       |
| Balance—end  of period       |       | $                      | 10,128     |                  | $          | 10,837 |   |

 

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**5.  INTANGIBLE ASSETS**

 

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

 

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

 

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

 
| ** **                                             | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Unamortized  intangible asset: Goodwill                |       | $                                | 362        |                            | $          | — |   | $ | 362 |   | $ | — |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Amortized  intangible assets: Core deposit intangibles |       | $                                | 3,676      |                            | $          | 1,081 |   | $ | 3,676 |   | $ | 709 |   |

 

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

** **
| ** **                                                                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Aggregate  amortization expense of core deposit intangibles:                                                  |       | $                                                    | 118        |                                                | $          | 131 |   | $ | 372 |   | $ | 276 |   |
|                                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Estimated  aggregate amortization expense of core deposit intangibles for the years  ending December 31: |       |                                                 |       |                                                |       |   |   |   |   |
|                                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| 2010                                                                                                          |       | $                                                    | 490        |                                                |       |   |   |   |   |   |
| 2011                                                                                                          |       | $                                                    | 472        |                                                |       |   |   |   |   |   |
| 2012                                                                                                          |       | $                                                    | 472        |                                                |       |   |   |   |   |   |
| 2013                                                                                                          |       | $                                                    | 472        |                                                |       |   |   |   |   |   |
| 2014  and thereafter                                                                                          |       | $                                                    | 1,062      |                                                |       |   |   |   |   |   |
|                                                                                                               |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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**6.  COMPREHENSIVE INCOME**

 

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

 
| ** **                  | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                              | ** ** | **2009**                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                  | ** ** | ** **                                            | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  Income                 |       | $                                                     | 585        |                                                 | $          | 422 |   | $ | 106 |   | $ | 641 |   |
|                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Other  comprehensive income |       | 743                                                   |       | 1,563                                                |       | 1,477 |   | 1,901 |   |
|                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Comprehensive  income       |       | $                                                     | 1,328      |                                                 | $          | 1,985 |   | $ | 1,583 |   | $ | 2,542 |   |

 

**7.  NET INCOME (LOSS) PER COMMON AND COMMONEQUIVALENT SHARE**

 

Basic and diluted net income(loss) per share available to common and potential common stockholders has beencalculated based on the weighted average number of shares outstanding.  The following schedule reconciles thenumerator and denominator of the basic and diluted net income (loss) per shareavailable to common and potential common stockholders for the three and ninemonth periods ended September 30, 2010 and 2009 (in thousands, except pershare data):

 
| ** **                                                        | ** ** | **Net Income** | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                        | ** ** | **(Numerator)**     | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
|                                                              |       |                |       |              |       |               |       |
| **Three Months ended September 30, 2010**                    |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  earnings per share available to common stockholders        |       | $                   | 518        |              | 2,105      |               | $          | 0.25 |   |
| Nonvested  restricted stock grant                                 |       | —              |       | 21                |       | (0.01              | )          |
| Effect  of dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  earnings per share                                       |       | $                   | 518        |              | 2,126      |               | $          | 0.24 |   |
|                                                              |       |                |       |              |       |               |       |
| **Three Months ended September 30, 2009**                    |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  earnings per share available to common stockholders        |       | $                   | 327        |              | 2,103      |               | $          | 0.16 |   |
| Effect  of dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  earnings per share                                       |       | $                   | 327        |              | 2,103      |               | $          | 0.16 |   |
|                                                              |       |                |       |              |       |               |       |
| **Nine Months ended September 30, 2010**                     |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  loss per share available to common stockholders            |       | $                   | (148       | )                 | 2,103      |               | $          | (0.07 | ) |
| Nonvested  restricted stock grant                                 |       | —              |       | —            |       | —             |       |
| Effect  of dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  loss per share                                           |       | $                   | (148       | )                 | 2,103      |               | $          | (0.07 | ) |
|                                                              |       |                |       |              |       |               |       |
| **Nine Months ended September 30, 2009**                     |       |                |       |              |       |               |       |
|                                                              |       |                |       |              |       |               |       |
| Basic  earnings per share available to common stockholders        |       | $                   | 424        |              | 2,102      |               | $          | 0.20 |   |
| Effect  of dilutive securities: options to purchase common shares |       | —              |       | —            |       | —             |       |
|                                                              |       |                |       |              |       |               |       |
| Diluted  earnings per share                                       |       | $                   | 424        |              | 2,102      |               | $          | 0.20 |   |

 

16

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**8.  SUBSEQUENT EVENTS**

 

The Company evaluatedsubsequent events through the date its financial statements were issued.

 

**9.** **RECLASSIFICATIONS**

 

Certain 2009 amounts havebeen reclassified to conform to the 2010 presentation. The reclassificationsdid not impact net income or stockholder’s equity.

 

17

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

 

**INTRODUCTION**

 

Citizens BancsharesCorporation (the “Company”) is a holding company that provides a full range ofcommercial and personal banking services to individuals and corporate customersin its primary market areas, metropolitan Atlanta and Columbus, Georgia, andBirmingham and Eutaw, Alabama through its wholly owned subsidiary, CitizensTrust Bank (the “Bank”).  The Bank is amember of the Federal Reserve System and operates under a state charter.  The Company serves its customers through 11full-service financial centers in Georgia and Alabama.

 

**Forward Looking Statements**

 

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

 

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

 

The following discussion isof the Company’s financial condition as of September 30, 2010 and December 31,2009, and the changes in the financial condition and results of operations forthe three and nine month periods ended September 30, 2010 and 2009.

 

**Critical Accounting Policies**

 

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

 

**Investment Securities**- 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.  The Company had no investment securitiesclassified as trading securities during 2010 or 2009.

 

18

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Premiums and discounts onavailable for sale and held to maturity securities are amortized or accretedusing a method which approximates a level yield.

 

Gains and losses on sales ofinvestment securities are recognized upon disposition, based on the adjustedcost of the specific security.  A declinein market value of any security below cost that is deemed other than temporaryis charged to earnings or OCI resulting in the establishment of a new costbasis for the security.

 

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

 

**Allowance for Loan Losses** - The Companyprovides for estimated losses on loans receivable when any significant andpermanent decline in value occurs.  Theseestimates for losses are based, not only on individual assets and their relatedcash flow forecasts, sales values, and independent appraisals, but also on thevolatility of certain real estate markets, and the concern for disposing ofreal estate in distressed markets.  Forloans that are pooled for purposes of determining the necessary provisions,estimates are based on loan types, history of charge-offs, and otherdelinquency analyses.  Therefore, thevalue used to determine the provision for losses is subject to thereasonableness of these estimates.  Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a semi-annual basis an independent comprehensive review of themethodology and allocation of the allowance for loan losses is performed.  This assessment is made in the context ofhistorical losses as well as existing economic conditions, and individualconcentrations of credit.  Loans arecharged against the allowance when, in the opinion of management, such loansare deemed uncollectible and subsequent recoveries are added to the allowance.

 

**Other Real Estate Owned**-****Other real estate owned is reported at the lower of cost orfair value less estimated disposal costs, determined on the basis of currentappraisals, comparable sales, and other estimates of value obtained principallyfrom independent sources. Any excess of the loan balance at the time offoreclosure over the fair value of the real estate held as collateral istreated as a charge-off against the allowance for loan losses. Any subsequentdeclines in value are charged to earnings.

 

**Income Taxes**- Deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which the assets and liabilities are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income tax expense in the period thatincludes the enactment date.

 

In the event the future taxconsequences of differences between the financial reporting bases and the taxbases of the Company’s assets and liabilities result in deferred tax assets, anevaluation of the probability of being able to realize the future benefitsindicated by such assets is required. A valuation allowance is provided for theportion of a deferred tax asset when it is more likely than not that someportion or all of the deferred tax asset will not be realized. In assessing therealizability of the deferred tax assets, management considers the scheduledreversals of deferred tax liabilities, projected future taxable income, and taxplanning strategies.

 

The Company believes thatits income tax filing positions taken or expected to be taken in its taxreturns will more likely than not be sustained upon audit by the taxingauthorities and does not anticipate any adjustments that will result in amaterial adverse impact on the Company’s

 

19

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financial condition, resultsof operations, or cash flow. Therefore, no reserves for uncertain income taxpositions have been recorded.

 

A description of otheraccounting policies are summarized in Note 1, Summary of Significant AccountingPolicies in the Notes to Consolidated Financial Statements of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009.  The Company has followed those policies inpreparing this report.

 

**FINANCIAL CONDITION**

 

Totalassets at September 30, 2010 increased by 2% or $8,994,000 to $396,533,000compared to $387,539,000 at December 31, 2009.  This increase is primarily due to the Company’ssuccess in the growth of its deposit base. Total deposits grew by $16,824,000 or 5% to $343 million for the firstnine months of the year.

 

Tomanage the Company’s net interest margin and liquidity, the majority of ourdeposit growth was used to pay off $14 million in FHLB advances.  Also, loan balances continued to contractfrom pay offs and paydowns generating additional liquidity that must be reinvested.  As a result, the Company’s investmentsecurities portfolio increased by $10 million and interest-bearing depositswith other banks increased by $6 million for the first nine months of theyear.  These increases were partiallyoffsetting a $6 million decline in net loans receivable.  The Company continues to look for prudent andsafe earning assets in which to invest and meet its liquidity andasset/liability requirements.

 

Loansreceivable, net, the Company’s largest earning asset, decreased by $6,296,000or 3% to $193,923,000 at September 30, 2010 compared to December 31,2009.  While the decline in loan volumehas slowed, the Company continues to find loan demand to be relatively weak dueto the continuing recessionary economic conditions

 

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

 

**INVESTMENT SECURITIES**

 

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

 

With the economy in arecession resulting in weak loan demand, the Company has grown its investmentportfolios to generate earnings to offset the decrease in loan activity andincreased FDIC assessments and credit reserve. At September 30, 2010 and December 31, 2009, the investmentsecurities portfolio represented approximately 33% and 31% of the Company’stotal assets.

 

Other investments consist of Federal Home Loan Bank and Federal ReserveBank stock which are restricted and have no readily determined marketvalue.  The Company is required tomaintain an investment in the FHLB and the FRB as part of its membershipconditions. The level of investments at the FHLB is primarily determined by theamount of outstanding advances. The FRB investment level is 6 percent of thepar value of the bank’s common stock outstanding and paid-in-capital.  These investments are carried at cost.

 

20

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**LOANS**

 

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

 
| ** **                               | ** **                 | **September 30** | ** ** | **December 31,** | ** ** |
|------------------------------------------|----------------------------|-----------------------|------------|-----------------------|------------|
| ** **                               | ** **                 | **2010**              | ** ** | **2009**              | ** ** |
|                                     |                       |                  |       |                  |       |
| Commercial,  financial, and agricultural |                       | $                     | 17,525     |                  | $          | 14,282 |   |
| Installment                              |                       | 8,863                 |       | 9,240                 |       |
| Real  estate - mortgage                  |                       | 154,855               |       | 161,229               |       |
| Real  estate - construction              |                       | 17,383                |       | 19,132                |       |
| Other                                    |                       | 323                   |       | 594                   |       |
|                                     | Loans  receivable          |                  | 198,949    |                  | 204,477    |   |
| Less:                                    | Net  deferred loan fees    |                  | 191        |                  | 164        |   |
|                                     | Allowance  for loan losses |                  | 4,835      |                  | 4,094      |   |
|                                     |                       |                  |       |                  |       |   |
|                                     | Loans  receivable, net     |                  | $          | 193,923               |       | $ | 200,219 |   |

 

The classification Realestate — mortgage consists of home equity loans, mortgages on 1—4 familyresidential, multifamily residential, and nonfarm nonresidential propertiessuch as churches, hotels, and convenience stores.

 

**NONPERFORMING ASSETS**

 

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

 

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

 

The financial and credit markets continued to experience difficultyduring the first nine months of 2010. Although there appears to be some positive signs of recovery and theeconomic outlook appears to be stabilizing, our local markets continue to beimpacted by recessionary conditions which continue to influence the levels ofour nonperforming assets.  For the year,nonperforming assets increased by $1,212,000 to $19,015,000. During the firstnine months of 2010, the Company charged-off $1,315,000 in nonperforming loans,an improvement over the $2,399,000 charged-off for the same period last year.OREO decreased by a nominal $709,000 to $10,128,000 due to the sales offoreclosed properties totaling $1,956,000 and write-downs of $1,772,000,partially offset by additions to OREO of $3,019,000.  The $1,921,000 increase in nonaccrual loansto $8,887,000 was driven by two commercial real estate properties that wereplaced on nonaccrual status during the second quarter of 2010.  At September 30, 2010, nonperformingassets represent 4.80% of total assets compared to 4.59% at December 31,2009.  There were no loans greater than90 days past due and still accruing interest at the end of the third quarter of2010 or at December 31, 2009.  Inaddition, there were 22 and 33 loans restructured or otherwise impairedtotaling $9,329,000 and $15,380,000 at 

 

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September 30, 2010 and December 31, 2009, respectively.  At September 30, 2010, eightrestructured loans totaling $869,000 and two restructured loans totaling$863,000 at December 31, 2009 are included in nonaccrual loans in thetable below.

 

The table below presents asummary of the Company’s nonperforming assets at September 30, 2010 and December 31,2009. 

 
| ** **                                                                                            | ** ** | **September 30,**              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2010**                            | ** ** | **2009**              | ** ** |
| ** **                                                                                            | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                            | ** ** | **financial ratios)**          | ** ** |
| Nonperforming  assets:                                                                                |       |                                |       |                  |       |
| Nonperforming  loans:                                                                                 |       |                                |       |                  |       |
| Nonaccrual  loans                                                                                     |       | $                                   | 8,887      |                  | $          | 6,966 |   |
| Past-due  loans of 90 days or more and still accruing                                                 |       | —                              |       | —                |       |
| Nonperforming  loans                                                                                  |       | 8,887                               |       | 6,966                 |       |
|                                                                                                  |       |                                |       |                  |       |
| Real  estate acquired through foreclosure                                                             |       | 10,128                              |       | 10,837                |       |
| Total  nonperforming assets                                                                           |       | $                                   | 19,015     |                  | $          | 17,803 |   |
|                                                                                                  |       |                                |       |                  |       |
| Ratios:                                                                                               |       |                                |       |                  |       |
| Nonperforming  loans to loans, net of unearned income                                                 |       | 4.47                                | %          | 3.41                  | %          |
|                                                                                                  |       |                                |       |                  |       |
| Nonperforming  assets to loans, net of unearned income, and real estate acquired through  foreclosure |       | 9.10                                | %          | 8.27                  | %          |
|                                                                                                  |       |                                |       |                  |       |
| Nonperforming  assets to total assets                                                                 |       | 4.80                                | %          | 4.59                  | %          |
|                                                                                                  |       |                                |       |                  |       |
| Allowance  for loan losses to nonperforming loans                                                     |       | 54.41                               | %          | 58.77                 | %          |
|                                                                                                  |       |                                |       |                  |       |
| Allowance  for loan losses to nonperforming assets                                                    |       | 25.43                               | %          | 23.00                 | %          |

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

The Company provides forestimated losses on loans receivable when any significant and permanent declinein value occurs.  These estimates forlosses are based on individual assets and their cash flow forecasts, salesvalues, independent appraisals, the volatility of certain real estate markets,and concern for disposing of real estate in distressed markets.  For loans that are pooled for purposes ofdetermining the necessary provisions, estimates are based on loan types,history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine theprovision for losses is subject to the reasonableness of these estimates. Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a semi-annual basis an independent review of the adequacy ofallowance for loan losses is performed. This assessment is made in the context of historical losses as well asexisting economic conditions, and individual concentrations of credit.

 

Loans are charged againstthe allowance when, in the opinion of management, such loans are deemeduncollectible and subsequent recoveries are added to the allowance.  For the first nine months of 2010, aprovision for loan losses of $1,940,000 was charged against operating earningscompared to $2,147,000 for the same period last year. The decrease in theprovision for loan losses in

 

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2010 relates to provisioningimprovement experienced in the third quarter of 2010.  For the third quarter of 2010, based on theCompany’s evaluation, the provision for loan losses charged against operatingearnings decreased $321,000 to $450,000 compared to $771,000 for the same threemonth period last year.

 

The allowance for loanlosses at September 30, 2010 was approximately $4,835,000, representing2.43% of total loans, net of unearned income compared to approximately$4,638,000 for the same period last year, which represented 2.21% of totalloans, net of unearned income. Approximately $3,348,000 of the allowance for loan losses was allocatedto loans management considered impaired at September 30, 2010.

 

At September 30, 2010,management believes the allowance for loan losses is adequate. Management usesavailable information to recognize losses on loans; however, future additionsto the allowance may be necessary based on changes in economic conditions,particularly in the metropolitan Atlanta, Georgia and Birmingham, Alabamaareas. In addition, regulatory agencies, as an integral part of theirexamination process, periodically review the Company’s allowance for loanlosses. Such agencies may require the Company to recognize additions to theallowance based on their judgments about information available to them at thetime of their examination.

 

Also, a substantial portionof the Company’s loan portfolio is collateralized by real estate in metropolitanAtlanta and Birmingham markets. Accordingly, the ultimate collectibility of asubstantial portion of the Company’s loan portfolio is susceptible to changesin market conditions in the metropolitan Atlanta and Birmingham areas.

 

·                  The Company’s loans to areachurches were approximately $44 million and $46 million at September 30,2010 and December 31, 2009, respectively, which are generally secured byreal estate.

 

·                  The Company’s loans to areaconvenience stores were approximately $12 million at September 30, 2010and December 31, 2009.  Loans toconvenience stores are generally secured by real estate.

 

·                  The Company’s loans to areahotels were approximately $20 Million and $18 million at September 30,2010 and December 31, 2009, respectively, which are generally secured byreal estate.

 

Also,1—4 family residential mortgage loans secured by first liens were approximately$36 million at September 30, 2010 and December 31, 2009. The Companyhas no subprime mortgages in its loan portfolio.

 

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The following tablesummarizes loans, changes in the allowance for loan losses arising from loanscharged off, recoveries on loans previously charged off by loan category, andadditions to the allowance which have been charged to operating expense as ofand for the nine month periods ended September 30, 2010 and 2009 (amountin thousands, except financial ratios):

 
| ** **                                                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                        |       |     |       |     |       |
| Loans,  net of unearned income                                                                              |       | $        | 198,758    |     | $          | 209,952 |   |
|                                                                                                        |       |     |       |     |       |
| Average  loans, net of unearned income and the allowance for loan losses                                    |       | $        | 196,143    |     | $          | 207,489 |   |
|                                                                                                        |       |     |       |     |       |
| Allowance  for loan losses at the beginning of period                                                       |       | $        | 4,094      |     | $          | 4,659 |   |
|                                                                                                        |       |     |       |     |       |
| Loans  charged-off:                                                                                         |       |     |       |     |       |
| Commercial,  financial, and agricultural                                                                    |       | 100      |       | 68       |       |
| Real  estate - loans                                                                                        |       | 932      |       | 1,798    |       |
| Installment  loans to individuals                                                                           |       | 283      |       | 533      |       |
| Total  loans charged-off                                                                                    |       | 1,315    |       | 2,399    |       |
|                                                                                                        |       |     |       |     |       |
| Recoveries  of loans previously charged off:                                                                |       |     |       |     |       |
| Commercial,  financial, and agricultural                                                                    |       | 4        |       | 6        |       |
| Real  estate - loans                                                                                        |       | 23       |       | 153      |       |
| Installment  loans to individuals                                                                           |       | 89       |       | 72       |       |
| Total  loans recovered                                                                                      |       | 116      |       | 231      |       |
|                                                                                                        |       |     |       |     |       |
| Net  loans charged-off                                                                                      |       | 1,199    |       | 2,168    |       |
|                                                                                                        |       |     |       |     |       |
| Additions  to allowance for loan losses charged to operating expense                                        |       | 1,940    |       | 2,147    |       |
|                                                                                                        |       |     |       |     |       |
| Allowance  for loan losses at period end                                                                    |       | $        | 4,835      |     | $          | 4,638 |   |
|                                                                                                        |       |     |       |     |       |
| Ratio  of net loans charged-off to average loans, net of unearned income and the  allowance for loan losses |       | 0.61     | %          | 1.04     | %          |
|                                                                                                        |       |     |       |     |       |
| Ratio  of allowance for loan losses to loans, net of unearned income                                        |       | 2.43     |       | 2.21     | %          |

 

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**DEPOSITS**

 

Deposits are the Company’sprimary source of funding loan growth. Total deposits at September 30, 2010 increased 5% or $17 million to$342,836,000 compared to December 31, 2009.  This increase in deposits relates to thecontinued growth in our deposit base as customers seek banks with a strongcapital position and who are financially sound. The Company meets both of these criteria.  Noninterest-bearing deposits increased by 3%or $2 million due to seasonal fluctuations and interest-bearing depositsincreased by 6% or $15 million compared to December 31, 2009.

 

The Company is participatingin the Temporary Liquidity Guarantee Program’s (“TLGP”) full coverage ofnoninterest-bearing deposit transaction accounts and certain interest-bearingchecking accounts regardless of dollar amount. On April 13, 2010, the FDIC extended the TLGP through December 31,2010 and the Company has elected to stay in the TLGP for the extendedperiod.  In addition, the Company participatesin the Certificate of Deposit Account Registry Services (“CDARS”), a programthat allows each of our customers’ access to multi-million-dollar FDICinsurance coverage on CD investments. The Company has deposits in both of these programs from Corporate andGovernmental customers who make sizeable deposits and withdrawals based ontheir budgetary needs.

 

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

 
| ** **                         | ** ** | **September** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|---------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2010**      | ** ** | **2009**              | ** ** |
|                               |       |          |       |                  |       |
| NOW  and money market accounts     |       | $             | 95,869     |                  | $          | 84,432 |   |
| Savings  accounts                  |       | 32,495        |       | 33,039                |       |
| Time  deposits of $100,000 or more |       | 102,083       |       | 94,553                |       |
| Other  time deposits               |       | 52,095        |       | 55,587                |       |
|                               |       | $             | 282,542    |                  | $          | 267,611 |   |

 

**OTHER BORROWED FUNDS**

 

The Company continues toemphasize funding earning asset growth through core deposits; however, theCompany has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal fundspurchased, short-term borrowings and FHLB advances.

 

The Bank had outstandingadvances from the FHLB of $332,000 at September 30, 2010 and $14,495,000at December 31, 2009. These advances are collateralized by FHLB stock, ablanket lien on 1-4 family and multifamily mortgage loans, certain commercialreal estate loans and investment securities. As of September 30, 2010 and December 31, 2009, total loanspledged as collateral was $43,477,000 and $47,494,000, respectively.

 
| **Maturity**                         | ** ** | **Callable** | ** ** | **Type**   | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|--------------|------------|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **   | ** ** | ** ** | ** ** | **(in thousands)**          | ** ** |
|                                 |       |         |       |       |       |                             |       |                            |       |   |   |   |   |
| July 2011                       |       | Daily        |       | Variable   |       | —                           | %          | $                               | —     |   | 0.36 | % | $ | 14,150 |   |
| August 2026                     |       |         |       | (1)        |       | —                           |       | 332                             |       | — |   | 345 |   |
|                                 |       |         |       |       |       |                             |       |                            |       |   |   |   |   |
| Total  Principal Outstanding         |       |         |       |       |       |                             |       | $                               | 332        |   |   |   | $ | 14,495 |   |
| Weighted  Average Rate at Period End |       |         |       |       |       | —                           | %          |                            |       | 0.35 | % |   |   |

 

----

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

 

25

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At September 30, 2010,the Company had a $79 million line of credit facility at the FHLB of which$20.3 million was committed consisting of an advance of $332,000 and a letterof credit to secure public deposits in the amount of $20 million.  The Company also had $22 million of borrowingcapacity at the Federal Reserve Bank discount window.

 

**RESULTS OF OPERATIONS**

 

In summary, the Company’s earnings for the first nine months of 2010were negatively impacted by a significant decline in the appraised value of twoOREO properties resulting in a $1.7 million write-down of their invested valuein the second quarter of 2010.  TheCompany was very conservative in its write downs of the two properties andhopefully will recover some of the value when the properties are sold.  For the three and nine month periods ending September 30,2010, the Company had net income of $585,000 and $106,000, respectively,compared to a net income of $422,000 and $641,000 for the same periods lastyear before preferred dividends.

 

We have positioned ourselves to not only withstand the current economiccycle but prospectively benefit from opportunities created during this economiccycle. Our core operations remain strong as the Company’s emphasis on corefunding and a diversified revenue stream has created an enviable funding mixand complementary fee income sources, which support the Company’s resumption ofsustained, longer-term profitability. Without further declines in market valuations which are beyond ourcontrol, we are optimistic for maintaining positive earnings for the year witha strong capital position and solid core operations.

 

**Net Interest Income:**

 

Net interest income is theprincipal component of a financial institution’s income stream and representsthe difference, or spread, between interest and fee income generated fromearning assets and the interest expense paid on deposits and borrowedfunds.  Fluctuations in interest rates aswell as volume and mix changes in earning assets and interest bearingliabilities can materially impact net interest income.

 

Net interest income was essentially flat for the third quarter of 2010,increasing by a nominal $14,000 to $3,981,000 compared to $3,967,000 reportedfor the same period last year.  Totalinterest income declined by $303,000 for the three month period ended September 30,2010 compared to the same period in 2009. Interest income on loans decreased by $133,000 primarily due to weakloan demand and lower loan yields. Similarly, Interest income oninvestment securities declined by $182,000 compared to the third quarter of2009.  While the Company experiencedgrowth in its investment portfolio, this increase has been in lower yieldinginvestment securities.  Total interestexpense for the period decreased by $317,000 or 35% compared to the same threemonth period in 2009.  Interest expenseon interest-bearing deposits decreased by $293,000 or 33% as the Companylowered its funding cost of interest-bearing deposits and improved its depositmix.  Also, interest expense on other borrowings decreased by $24,000 or100% as the Company had no outstanding interest bearing advances from the FHLBduring the third quarter of 2010.

 

On a year-to-date basis, net interest income increased by $163,000 or1% to $11,399,000 compared to $11,236,000 for the same period in 2009.  Total interest income for this perioddecreased by $895,000 or 6% compared to the same nine month period in 2009 andthe decrease was primarily due to a $654,000 or 6% decline in interest incomeon loans.  Similarly, Interestincome on investment securities declined by $264,000 or 7% compared to the samenine month period in 2009.  The samefactors in the quarterly year-over-year comparison also contributed to the ninemonth decrease in total interest income. Total interest expense for the nine month period decreased by $1,058,000or 35%

 

26

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compared to the same nine month period in 2009.  Interest expense on interest-bearing depositsdecreased by $981,000 or 33% due to lower rates paid on deposit products and animproved deposit mix.  At September 30,2010, the Company had a net interest margin of 4.29% compared to 4.45% for thesame period last year.

 

The Company has anasset/liability management program which monitors the Company’s interest ratesensitivity and ensures the Company is competitive in the loan and depositmarket.  The Company continues to monitorits asset/liability mix and will make changes as appropriate to ensure it isproperly positioned to react to changing interest rates and inflationarytrends.

 

**Provision for loan losses**

 

In the third quarter, the Company’s provision for loan losses decreasedby $410,000 to $450,000 compared to the second quarter of 2010.  The increase in the second quarter of 2010provision for loan losses was driven by two commercial real estate propertiesthat were placed on nonaccrual status during the period.  Compared to the same three month period lastyear, the third quarter of 2010 provision for loan losses represents a decreaseof $321,000.  For the first nine monthsof 2010, the Company recognized a provision for loan losses of $1,940,000, a$207,000 or 10% decline, compared to $2,147,000 for the same period in2009.  The allowance for loan losses was$4,835,000 at September 30, 2010 compared to $4,638,000 at December 31,2009.  At September 30, 2010, theallowance for loan losses was 54% of nonperforming loans compared to 59% at December 31,2009.  The provision for loan losses andthe resulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions. At September 30,2010, the Company considered its allowance for loan losses to be adequate.  Please also see discussion of Allowance ForLoan Losses.

 

**Noninterest income:**

 

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

 

Noninterest income totaled $1,470,000 for the three month period ended September 30,2010, a decrease of $210,000 or 13% compared with the same period lastyear.  This is an improvement over thesecond quarter 2010 results of a $272,000 or 18% decrease compared with thesame period last year.  The decline in thethird quarter of 2010 is primarily attributed to services charges on depositsdecreasing by $134,000 to $974,000 compared to $1,108,000 for the same periodlast year.  Also, the Company realizedgains on the sale of securities totaling $211,000 versus $291,000 for the samethree month period last year, representing a year- over-year decline of$80,000.

 

Year-to-date, noninterest income was essentially flat, decreasing by anominal $32,000 to $4,444,000 compared to $4,476,000 reported for the sameperiod last year.  Service charges ondeposits for the nine month period decreased by $258,000, or 8%, to $2,820,000compared to $3,078,000 last year. Partially offsetting the decrease in service charges on deposits was a$92,000 increase in gains on the sale of securities and a $141,000 increase inother operating income compared to last year. The increase in other operating income is attributed to a $259,000 awardthe Company received for its participation in the U.S. Department of Treasury Bank Enterprise Award (BEA) which provides financialincentives for lending and investmentactivities within economically distressed communities.  TheCompany did not receive the BEA for the same period last year.

 

27

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**Noninterest expense:**

 

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

 

Noninterest expense decreased by $62,000 for the third quarter of 2010compared to the same period last year. The Company’s other operating expenses declined by $104,000 partiallydue to the savings initiative implemented by the Company.  OREO write downs and related expenses also decreasedduring the three month period, declining by $67,000 compared to the same periodlast year.  Offsetting these declineswere a $66,000 increase in salaries and employee benefits cost due to highermedical costs and a $34,000 increase in net occupancy and equipment cost due tohigher real estate taxes, maintenance and insurance costs.

 

For the nine month period ended September 30, 2010, noninterestexpense increased by $1,441,000 or 11% as compared to the same period lastyear. Total OREO expenses increased by $1,563,000 or 350% due to thesignificant declines and subsequent write down of the appraised value of twoOREO properties in the second quarter of 2010. Salaries and employee benefits also increased by $334,000 for the yearprimarily due to higher medical costs and the addition of employees obtainedfrom the Company’s acquisition of a Lithonia, Georgia branch.  Partially offsetting these increases was adecline in other operating expenses of $788,000 or 17% to $3,735,000 on ayear-to-date basis. This decrease is partially due to the savings initiativeimplemented by the Company and several onetime expenses incurred during thefirst quarter of 2009 related to the legal and advisory services required forthe Company’s participation in TARP and the acquisition of its Lithonia,Georgia branch.

 

**INTERESTRATE SENSITIVITY MANAGEMENT**

 

Interest rate sensitivitymanagement involves managing the potential impact of interest rate movements onnet interest income within acceptable levels of risk.  The Company seeks to accomplish this bystructuring the balance sheet so that repricing opportunities exist for bothassets and liabilities in equivalent amounts and time intervals.  Imbalances in these repricing opportunities atany point in time constitute a financial institution’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 theimpact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest ratesensitive assets and interest rate sensitive liabilities at various timeintervals is referred to as the gap.  TheCompany is liability sensitive on a short-term basis as reflected in thefollowing table.  Generally, a netliability sensitive position indicates that there would be a negative impact onnet interest income in an increasing rate environment.  However, interest rate sensitivity gap doesnot necessarily indicate the impact of general interest rate movements on thenet interest margin, since all interest rates and yields do not adjust at thesame velocity and the repricing of various categories of assets and liabilitiesis subject to competitive pressures and the needs of the Company’s customers.  In addition, various assets and liabilitiesindicated as repricing within the same period may in fact reprice at differenttimes within such period and at different rates. The following table shows thecontractual maturities of all interest rate sensitive assets and liabilities atSeptember 30, 2010.  Expectedmaturities may differ from contractual maturities because issuers may have theright to call or prepay obligations with or without call or prepaymentpenalties.  Taking a conservativeapproach, the Company has included demand deposits such as NOW, money market,and savings accounts in the three month category.  However, the actual repricing of theseaccounts may extend beyond twelve months. The interest rate sensitivity gap is only a general indicator ofpotential effects of interest rate changes on net interest income.

 

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The following table setsforth the distribution of the repricing of the Company’s interest ratesensitive assets and interest rate sensitive liabilities as of September 30,2010.

 
| ** **                                                              | ** ** | **Cumulative amounts as of September 30, 2010** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **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                             |       | $                                                                             | 26,338     |   | $ | — |   | $ | — |   | $ | — |   | $ | 26,338 |   |
| Certificates  of deposit                                                |       | —                                                                        |       | 150 |   | — |   | — |   | 150 |   |
| Investments                                                             |       | 355                                                                           |       | 502 |   | 6,045 |   | 119,844 |   | 126,746 |   |
| Loans                                                                   |       | 43,434                                                                        |       | 27,940 |   | 91,198 |   | 36,377 |   | 198,949 |   |
| Total  interest-sensitive assets                                        |       | $                                                                             | 70,127     |   | $ | 28,592 |   | $ | 97,243 |   | $ | 156,221 |   | $ | 352,183 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Deposits  (a)                                                           |       | $                                                                             | 186,676    |   | $ | 79,126 |   | $ | 16,740 |   | $ | — |   | $ | 282,542 |   |
| Other  borrowings                                                       |       | —                                                                        |       | — |   | — |   | 332 |   | 332 |   |
| Total  interest-sensitive liabilities                                   |       | $                                                                             | 186,676    |   | $ | 79,126 |   | $ | 16,740 |   | $ | 332 |   | $ | 282,874 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                                             | (116,549   | ) | $ | (50,534 | ) | $ | 80,503 |   | $ | 155,889 |   | $ | 69,309 |   |
|                                                                    |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (33.09                                                                        | )%         | (47.44 | )% | (24.58 | )% | 19.68 | % | 19.68 | % |

 

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(a) Savings, Now, and moneymarket deposits totaling $128,364 are included in the maturing in 3 monthsclassification.

 

**LIQUIDITY**

 

Liquidity is the ability ofthe Company to convert assets into cash or cash equivalents without significantloss and to raise additional funds by increasing liabilities.  Liquidity management involves maintaining theCompany’s ability to meet the day-to-day cash flow requirements of itscustomers, whether they are depositors wishing to withdraw funds or borrowersrequiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able toperform the primary function of a financial intermediary and would, therefore,not be able to meet the needs of the communities it serves. Additionally, theCompany requires cash for various operating needs including: dividends to shareholders;business combinations; capital injections to its subsidiary; the servicing ofdebt; and the payment of general corporate expenses. The Company has access tovarious capital markets and on March 6, 2009, the Company issued 7,462 sharesof a Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S.Department of the Treasury (“Treasury”) under the TARP Program for aninvestment of $7,462,000.  During thethird quarter of 2010, the Company exchanged the outstanding 7,462 shares ofSeries A Preferred Stock for 7,462 shares of Series B Preferred Stock.  The Company also issued 4,379 shares ofSeries C Preferred Stock to the Treasury for an investment of $4,379,000.  However, the primary source of liquidity forthe Company is dividends from its bank subsidiary.  Statutory and regulatory limitations apply tothe Bank’s payment of dividends to the Company as well as the Company’s paymentof dividends to its stockholders.  TheGeorgia Department of Banking and Finance regulates the Bank’s dividendpayments and must approve dividend payments that exceed 50 percent of the Bank’sprior year net income. The payment of dividends may also be affected or limitedby other factors, such as the requirement by federal agencies to maintainadequate capital above regulatory guidelines and that bank holding companiesand insured banks pay dividends out of current earnings. Currently, the Bankmust receive approval from the Georgia Department of Banking and Finance andthe Company must receive approval from the Federal Reserve Bank of Atlantaprior to the payment of dividends.

 

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Asset and liabilitymanagement functions not only serve to assure adequate liquidity in order tomeet the needs of the Company’s customers, but also to maintain an appropriatebalance between interest-sensitive assets and interest-sensitive liabilities sothat the Company can earn a return that meets the investment requirements ofits shareholders.  Daily monitoring ofthe sources and uses of funds is necessary to maintain an acceptable cashposition that meets both requirements.

 

The asset portion of thebalance sheet provides liquidity primarily through loan principal repayments,maturities of investment securities and, to a lesser extent, sales or paydownsof investment securities available for sale and held to maturity.  Other short-term investments such as federalfunds sold and maturing interest bearing deposits with other banks are additionalsources of liquidity funding.

 

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

 

**CAPITAL RESOURCES**

 

Stockholders’equity increased by $5,556,000 for the nine month period ended September 30,2010. This increase is primarily due to an additional $4,379,000 investment bythe Treasury on September 17, 2010 under the TARP Program. In exchange for thisinvestment, the Company issued 4,379 shares of a Fixed Rate CumulativePerpetual Preferred Stock, Series C, with a $1,000 per share liquidationvalue. Also, accumulated other comprehensive income, net of taxes positivelyimpacted the Company’s capital, increasing by $1,477,000 to $2,249,000. Thisincrease is attributed to the rapid movements in the Treasury markets, wildswings in volatility and credit spreads, and their impact on the Company’savailable for sale securities portfolio. Retained earnings decreased by $340,000 due to a $279,000 preferreddividend paid to the Treasury and a $167,000 dividend paid to commonstockholders, offset by net income of $106,000.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company tomaintain minimum amounts and ratios of total and Tier 1 capital to riskweighted assets, and Tier 1 capital to average assets.  The Company’s total and Tier 1 capital torisk weighted assets and Tier 1 to average assets were 19%, 17% and 11% atSeptember 30, 2010 compared to 16%, 15% and 10% at December 31, 2009,respectively.  At September 30, 2010, theCompany met all capital adequacy requirements to which it is subject and isconsidered to be ‘well capitalized” under regulatory standards.

 

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

 

This information is notrequired since the Company qualifies as a smaller reporting company.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

As of the end of the periodcovered by this report, we conducted, under the supervision of and with theparticipation of our management, including the Company’s Chief ExecutiveOfficer, Chief Operating Officer, and Chief Financial Officer, an evaluation ofthe effectiveness of our disclosure controls and procedures as defined inExchange Act Rule 13a-15(e). Based on this evaluation, the Company’s ChiefExecutive Officer, Chief Operating Officer, and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2010 in accumulating and communicating information to management,including the Chief Executive Officer, the Chief Operating

 

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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 ended September 30, 2010, there have been no changesin the Company’s internal controls over financial reporting or, to the Company’sknowledge, in other factors that could significantly change those internalcontrols subsequent to the date the Company carried out its evaluation thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. However, the design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

**PART II.  OTHER INFORMATION**

 

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

 

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

 

**ITEM 1A.   RISK FACTORS**

 

We believe there have been no material changes fromthe factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Reporton Form 10-K for the year ended December 31, 2009, except for the additionalrisk factor regarding the recently enacted Dodd-Frank Reform Act which is setforth below.  You should carefullyconsider the factors discussed in our Annual Report on Form 10-K, which couldmaterially affect our business, financial condition or future results. Therisks described in our Annual Report on Form 10-K are not the only risks facingus. Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

**Compliance with the recently enacted Dodd-Frank Reform Act mayadversely impact our earnings.**

 

On July 21, 2010, President Obama signed theDodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-FrankReform Act”) into law.  The Dodd-FrankReform Act represents a significant overhaul of many aspects of the regulationof the financial-services industry. Major elements in the Dodd-Frank Reform Act include the following:

 

·                  The establishment of theFinancial Stability Oversight Counsel, which will be responsible foridentifying and monitoring systemic risks posed by financial firms, activities,and practices.

·                  Enhanced supervision oflarge bank holding companies (i.e., those with over $50 billion in totalconsolidated assets), with more stringent supervisory standards to be appliedto them.

·                  The creation of a specialregime to allow for the orderly liquidation of systemically important financialcompanies, including the establishment of an orderly liquidation fund.

 

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·                  The development ofregulations to address derivatives markets, including clearing and exchangetrading requirements and a framework for regulating derivatives-marketparticipants.

·                  Enhanced supervision ofcredit-rating agencies through the Office of Credit Ratings within the SEC.

·                  Increased regulation ofasset-backed securities, including a requirement that issuers of asset-backedsecurities retain at least 5% of the risk of the asset-backed securities.

·                  The establishment of aBureau of Consumer Financial Protection, within the Federal Reserve, to serveas a dedicated consumer-protection regulatory body.

·                  Amendments to the Truth inLending Act aimed at improving consumer protections with respect to mortgageoriginations, including originator compensation, minimum repayment standards,and prepayment considerations.

 

The majority of the provisions in the Dodd-FrankReform Act are aimed at financial institutions that are significantly largerthan the Company or the Bank.  Nonetheless,there are provisions with which we will have to comply now that the Dodd-FrankReform Bill is signed into law.  As rulesand regulations are promulgated by the federal agencies responsible forimplementing and enforcing the provisions in the Dodd-Frank Reform Act, we willhave to work to apply resources to ensure that we are in compliance with allapplicable provisions, which may adversely impact our earnings.

 

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

 

None

 

**ITEM 3.     DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM 4.     REMOVED AND RESERVED**

 

**ITEM 5.     OTHER INFORMATION**

 

None

 

**ITEM 6.     EXHIBITS**

 

**Exhibit 31**

 

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

 

**Exhibit 32**

 

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

 

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**SIGNATURES**

 

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

 

 

**CITIZENSBANCSHARES CORPORATION**

 

 
| Date:  November 15, 2010       | By:                                    | /s/ James E. Young |
|-------------------------------------|----------------------------------------|--------------------|
|                                | James E. Young                         |
|                                | President and Chief  Executive Officer |
|                                |                                   |
|                                |                                   |
| Date:   November 15, 2010 | By:                                    | /s/ Cynthia N. Day |
|                                | Cynthia N. Day                         |
|                                | Senior Executive Vice  President and   |
|                                | Chief Operating Officer                |
|                                |                                   |
|                                |                                   |
| Date:   November 15, 2010 | By:                                    | /s/ Samuel J. Cox  |
|                                | Samuel J. Cox                          |
|                                | Executive Vice President  and          |
|                                | Chief Financial Officer                |

 

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