**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10– Q**

 

**(MarkOne)**

 
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31, 2010**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom            to            **

 

**Commission File No:  0 - 14535**

 

**CITIZENSBANCSHARES 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.

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files.  o Yes o No

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 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 in Rule 12b-2of the Exchange Act)  o Yes x No

 

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

 

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: 2,012,534 shares of Common Stock,$1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par valuewere outstanding on May 13, 2010.

 

 

 

----

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

 

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**MARCH 31,2010 AND DECEMBER 31, 2009**

**(Inthousands, except share data)**

 
| ** **                                                                                                          | ** ** | **2010**        | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                          | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                          | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash and due from banks                                                                                             |       | $               | 5,050      |       | $          | 6,461 |   |
| Interest-bearing deposits  with banks                                                                               |       | 46,625          |       | 20,609     |       |
| Certificates of deposit                                                                                             |       | 150             |       | 150        |       |
| Investment securities  available for sale, at fair value                                                            |       | 115,796         |       | 112,644    |       |
| Investment securities held  to maturity, at cost                                                                    |       | 3,870           |       | 3,909      |       |
| Other investments                                                                                                   |       | 2,257           |       | 2,257      |       |
| Loans receivable, net                                                                                               |       | 198,195         |       | 200,219    |       |
| Premises and equipment, net                                                                                         |       | 7,796           |       | 7,825      |       |
| Cash surrender value of life  insurance                                                                             |       | 10,544          |       | 10,465     |       |
| Foreclosed real estate                                                                                              |       | 11,657          |       | 10,837     |       |
| Other assets                                                                                                        |       | 11,824          |       | 12,163     |       |
|                                                                                                                |       |            |       |       |       |
| Total assets                                                                                                        |       | $               | 413,764    |       | $          | 387,539 |   |
|                                                                                                                |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                       | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                                |       |            |       |       |       |
| LIABILITIES:                                                                                                        |       |            |       |       |       |
| Noninterest-bearing deposits                                                                                        |       | $               | 67,670     |       | $          | 58,401 |   |
| Interest-bearing deposits                                                                                           |       | 284,564         |       | 267,611    |       |
|                                                                                                                |       |            |       |       |       |
| Total deposits                                                                                                      |       | 352,234         |       | 326,012    |       |
|                                                                                                                |       |            |       |       |       |
| Accrued expenses and other  liabilities                                                                             |       | 4,371           |       | 4,794      |       |
| Advances from Federal Home  Loan Bank                                                                               |       | 14,491          |       | 14,495     |       |
|                                                                                                                |       |            |       |       |       |
| Total liabilities                                                                                                   |       | 371,096         |       | 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           |       | 7,462      |       |
| Common stock - $1 par value;  20,000,000 shares authorized; 2,230,065 shares issued and outstanding                 |       | 2,230           |       | 2,230      |       |
| Nonvoting common stock - $1  par value; 5,000,000 shares authorized; 90,000 issued and outstanding                  |       | 90              |       | 90         |       |
| Nonvested restricted common  stock                                                                                  |       | (51             | )          | (52        | )          |
| Additional paid-in capital                                                                                          |       | 7,722           |       | 7,707      |       |
| Retained earnings                                                                                                   |       | 26,366          |       | 25,834     |       |
| Treasury stock at cost,  217,531 shares at March 31, 2010 andDecember 31, 2009                            |       | (1,805          | )          | (1,805     | )          |
| Accumulated other  comprehensive income, net of income taxes                                                        |       | 654             |       | 772        |       |
|                                                                                                                |       |            |       |       |       |
| Total stockholders’ equity                                                                                     |       | 42,668          |       | 42,238     |       |
|                                                                                                                |       |            |       |       |       |
|                                                                                                                |       | $               | 413,764    |       | $          | 387,539 |   |

 

See notes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

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

 
| ** **                                            | ** ** | **Three  Months********Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| Interest income:                                      |       |                                           |       |   |   |
| Loans, including fees                                 |       | $                                              | 3,348      |   | $ | 3,523 |   |
| Investment securities:                                |       |                                           |       |   |   |
| Taxable                                               |       | 681                                            |       | 850 |   |
| Tax-exempt                                            |       | 455                                            |       | 254 |   |
| Interest-bearing deposits                             |       | 21                                             |       | 5 |   |
| Total interest income                                 |       | 4,505                                          |       | 4,632 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Interest expense:                                     |       |                                           |       |   |   |
| Deposits                                              |       | 688                                            |       | 941 |   |
| Other borrowings                                      |       | 14                                             |       | 40 |   |
| Total interest expense                                |       | 702                                            |       | 981 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net interest income                                   |       | 3,803                                          |       | 3,651 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Provision for loan losses                             |       | 630                                            |       | 438 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net interest income after  provision for loan losses  |       | 3,173                                          |       | 3,213 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Noninterest income:                                   |       |                                           |       |   |   |
| Service charges on deposits                           |       | 906                                            |       | 957 |   |
| Gain on sales of securities                           |       | 333                                            |       | 23 |   |
| Gain (loss) on sales of  assets                       |       | 4                                              |       | (2 | ) |
| Other operating income                                |       | 513                                            |       | 327 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Total noninterest income                              |       | 1,756                                          |       | 1,305 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Noninterest expense:                                  |       |                                           |       |   |   |
| Salaries and employee  benefits                       |       | 1,962                                          |       | 1,836 |   |
| Net occupancy and equipment                           |       | 624                                            |       | 595 |   |
| Amortization of core deposit  intangible              |       | 131                                            |       | 13 |   |
| FDIC insurance                                        |       | 182                                            |       | 111 |   |
| Other real estate owned                               |       | 131                                            |       | 37 |   |
| Other operating expenses                              |       | 1,215                                          |       | 1,630 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Total noninterest expense                             |       | 4,245                                          |       | 4,222 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Income before income taxes                            |       | 684                                            |       | 296 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Income tax expense                                    |       | 59                                             |       | 12 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net income                                            |       | $                                              | 625        |   | $ | 284 |   |
| Preferred dividends accrued                           |       | 93                                             |       | 27 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net income available to  common shareholders          |       | $                                              | 532        |   | $ | 257 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net income per common share  - basic and diluted      |       | $                                              | 0.25       |   | $ | 0.12 |   |
| ** **                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Weighted average common  outstanding shares - basic   |       | 2,103                                          |       | 2,101 |   |
|                                                  |       |                                           |       |   |   |
| Weighted average common  outstanding shares - diluted |       | 2,113                                          |       | 2,101 |   |
|                                                  |       |                                           |       |   |   |
| Dividends per common share                            |       | $                                              | —     |   | $ | 0.19 |   |

 

See notes toconsolidated financial statements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARY**

 

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

**FOR THETHREE MONTHS ENDED MARCH 31, 2010 AND 2009**

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

 
| ** **                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|------------------|------------|----------------|------------|---------------|------------|--------------|------------|--------------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | **Nonvoting** | ** ** | ** **   | ** ** | **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                                                                                               |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | 284          |       | —     |       | —     |       | —            |       | 284        |       |
| Unrealized  holding gains on investment securities available for sale—net of taxes of  $230,183      |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | 773               |       | 773        |       |
| Less  reclassification adjustment for holding losses included in net income—net of  taxes of $7,967  |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | (342              | )          | (342       | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Comprehensive  loss                                                                                       |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       | 715        |       |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Issuance  of preferred stock                                                                              |       | 7                   |       | 7,462            |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | —            |       | 7,462      |       |
| Stock  based compensation expense                                                                         |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | 15                |       | —       |       | —     |       | —     |       | —            |       | 15         |       |
| Sale  of Treasury stock                                                                                   |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | 2          |       | 4          |       | —            |       | 4          |       |
| Dividends  declared - common                                                                              |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | (399         | )          | —     |       | —     |       | —            |       | (399       | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| **Balance—March 31, 2009**                                                                      | ** ** | **7**               | ** ** | **$**            | **7,462**  | ** **       | **2,230**  | ** **     | **$**      | **2,230**     | ** ** | **90**       | ** ** | **$**              | **90**     | ** **        | **$**      | **—**   | ** ** | **$**      | **7,626**  | ** ** | **$**      | **25,350**        | ** ** | **(218**   | **)**      | **$**      | **(1,809** | **)**      | **$**      | **506**    | ** ** | **$**      | **41,455** | ** ** |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| 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                                                                                               |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | 625          |       | —     |       | —     |       | —            |       | 625        |       |
| Unrealized  holding gains on investment securities available for sale—net of taxes of  $52,765       |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | 102               |       | 102        |       |
| Less  reclassification adjustment for holding gains included in net income—net of  taxes of $113,323 |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | (220              | )          | (220       | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Comprehensive  income (loss)                                                                              |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       | 507        |       |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Stock  based compensation expense                                                                         |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | 15                |       | —       |       | —     |       | —     |       | —            |       | 15         |       |
| Nonvested  restricted stock                                                                               |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | 1                  |       | —            |       | —       |       | —     |       | —     |       | —            |       | 1          |       |
| Sale  of treasury stock                                                                                   |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | —            |       | —     |       |
| Dividends  declared - preferred                                                                           |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | (93          | )          | —     |       | —     |       | —            |       | (93        | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| **Balance—March 31, 2010**                                                                      | ** ** | **7**               | ** ** | **$**            | **7,462**  | ** **       | **2,230**  | ** **     | **$**      | **2,230**     | ** ** | **90**       | ** ** | **$**              | **90**     | ** **        | **$**      | **(51**      | **)**      | **$**      | **7,722**  | ** ** | **$**      | **26,366**        | ** ** | **(218**   | **)**      | **$**      | **(1,805** | **)**      | **$**      | **654**    | ** ** | **$**      | **42,668** | ** ** |

 

See notes to consolidated financial statements.

 

4

----

 

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THETHREE MONTHS ENDED MARCH 31, 2010 AND 2009**

**(Inthousands)**

 
| ** **                                                                                          | ** ** | **2010**        | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                           |       |            |       |     |       |
| Net income                                                                                          |       | $               | 625        |     | $          | 284 |   |
| **Adjustments to reconcile net income****to net cash provided  by (used in) operating activities:** |       |            |       |     |       |
| Provision for loan losses                                                                           |       | 630             |       | 438      |       |
| Depreciation                                                                                        |       | 176             |       | 190      |       |
| Amortization and accretion, net                                                                     |       | 271             |       | 76       |       |
| Provision for deferred income taxes (benefit)                                                       |       | 35              |       | (248     | )          |
| Gains on sale of assets and investments                                                             |       | (337            | )          | (21      | )          |
| Stock based compensation expense                                                                    |       | 15              |       | 15       |       |
| Restricted stock based compensation plan                                                            |       | 1               |       | —   |       |
| Change in other assets                                                                              |       | 182             |       | (4,859   | )          |
| Change in accrued expenses and other liabilities                                                    |       | (425            | )          | 685      |       |
|                                                                                                |       |            |       |     |       |
| Net cash provided by (used in) operating activities                                                 |       | 1,173           |       | (3,440   | )          |
|                                                                                                |       |            |       |     |       |
| **INVESTING ACTIVITIES:**                                                                           |       |            |       |     |       |
| Net cash and cash equivalents acquired from branch  purchase                                        |       | —          |       | 45,431   |       |
| Net change in certificates of deposit                                                               |       | —          |       | (51      | )          |
| Proceeds from calls and maturities of investment  securities held to maturity                       |       | 39              |       | 50       |       |
| Proceeds from sales and maturities of investment  securities available for sale                     |       | 16,637          |       | 3,276    |       |
| Purchases of investment securities available for sale                                               |       | (19,761         | )          | (6,735   | )          |
| Net change in other investments                                                                     |       | —          |       | 5        |       |
| Net change in loans receivable                                                                      |       | 456             |       | (245     | )          |
| Net proceeds from the sale of foreclosed properties                                                 |       | 83              |       | 731      |       |
| Purchases of premises and equipment, net                                                            |       | (147            | )          | (907     | )          |
|                                                                                                |       |            |       |     |       |
| Net cash provided by (used in) investing activities                                                 |       | (2,693          | )          | 41,555   |       |
|                                                                                                |       |            |       |     |       |
| **FINANCING ACTIVITIES:**                                                                           |       |            |       |     |       |
| Net change in deposits                                                                              |       | 26,222          |       | 3,689    |       |
| Net change in advances from Federal Home Loan Bank                                                  |       | (4              | )          | (1,605   | )          |
| Proceeds from issuance of preferred stock                                                           |       | —          |       | 7,462    |       |
| Sale (purchase) of treasury stock activity                                                          |       | —          |       | 4        |       |
| Dividends paid - preferred                                                                          |       | (93             | )          | —   |       |
| Dividends paid - common                                                                             |       | —          |       | (399     | )          |
|                                                                                                |       |            |       |     |       |
| Net cash provided by financing activities                                                           |       | 26,125          |       | 9,151    |       |
|                                                                                                |       |            |       |     |       |
| Net change in cash and cash equivalents                                                             |       | 24,605          |       | 47,266   |       |
|                                                                                                |       |            |       |     |       |
| Cash and cash equivalents, beginning of period                                                      |       | 27,070          |       | 16,146   |       |
|                                                                                                |       |            |       |     |       |
| Cash and cash equivalents at end of period                                                          |       | $               | 51,675     |     | $          | 63,412 |   |
|                                                                                                |       |            |       |     |       |
| **Supplemental disclosures of cash paid  during the period for:**                                   |       |            |       |     |       |
| Interest                                                                                            |       | $               | 700        |     | $          | 994 |   |
|                                                                                                |       |            |       |     |       |
| Income taxes                                                                                        |       | $               | 15         |     | $          | 415 |   |
|                                                                                                |       |            |       |     |       |
| **Supplemental disclosures of noncash  transactions:**                                              |       |            |       |     |       |
| Real estate acquired through foreclosure                                                            |       | $               | 929        |     | 1,462      |   |
|                                                                                                |       |            |       |     |       |
| Change in unrealized gain on investment securities  available for sale, net of taxes                |       | $               | (118       | )        | $          | 431 |   |

 

See notes to consolidated financial statements.

 

5

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

**Notes to the Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**Basis of Presentation**

 

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

 

The accompanying unaudited consolidated financial statements have beenprepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required bygenerally accepted accounting principles are not included herein. These interimstatements should be read in conjunction with the financial statements andnotes thereto included in the Company’s latest Annual Report on Form 10-Kfiled with the Securities and Exchange Commission for the year ended December 31,2009.  The results of operations for theinterim periods reported herein are not necessarily representative of theresults expected for the full 2010 fiscal year.

 

The consolidated financial statements of the Company for the threemonth period ended March 31, 2010 are unaudited.  In the opinion of management, all adjustmentsnecessary for a fair presentation of the financial position and results ofoperations and cash flows for the three month period have been included.  All adjustments are of a normal recurringnature.  All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

**Accounting Policies**

 

The Company’s consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”), which often require the judgment of management in theselection and application of certain accounting principles and methods.  Reference is made to the accounting policiesof the Company described in the notes to the consolidated financial statementscontained in the Company’s Annual Report on Form 10-K for the year ended December 31,2009.  The Company has followed thosepolicies in preparing 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 March 6, 2009, as part of the U.S. Department of the Treasury(the “Treasury”) Troubled Asset Relief Program (“TARP”) Capital PurchaseProgram, the Company entered into a Letter Agreement and a Securities PurchaseAgreement with the Treasury, pursuant to which the Company agreed to issue andsell, and the Treasury agreed to purchase 7,462 shares (the “Preferred Shares”)of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A,having a liquidation preference of $1,000, for an aggregate purchase price of$7,462,000 in cash.

 

The Preferred Shares qualify as Tier 1 capital and will pay cumulativedividends at a rate of 5% per annum for the first five years and9% per annum thereafter.  The Company may, subject to consultationwith the Federal Reserve Bank of Atlanta, redeem the Preferred Shares at anytime for its 

 

6

----

 

aggregate liquidation amount plus any accrued and unpaid dividendswithout first raising additional capital in an equity offering.

 

**Acquisition**

 

On March 27, 2009, the Company’s subsidiary, Citizens Trust Bank (“Citizens”),acquired the Lithonia branch (the “Branch”) of The Peoples Bank, a Georgiastate bank (“Peoples”).  Citizens acquired the in-market deposits of theBranch which totaled approximately $50 million. Under the Agreement, Citizensalso acquired the branch office and related real estate and certain personalproperty at the Branch.  The Company recorded a finite lived intangibleasset related to the value of deposit accounts acquired of approximately$3,303,000 and is amortizing the amount over 7 years.

 

**Recently Issued Accounting Standards**

 

Thefollowing is a summary of recent authoritative pronouncements that could affectthe accounting, reporting, and disclosure of financial information by theCompany:

 

In January 2010,fair value guidance was amended to require disclosures for significant amountstransferred in and out of Levels 1 and 2 and the reasons for such transfers andto require that gross amounts of purchases, sales, issuances and settlements beprovided in the Level 3 reconciliation. The new disclosures are effective for the Company for the currentquarter and have been reflected in the Fair Value footnote.

 

Guidance related tosubsequent events was amended in February 2010 to remove the requirementfor an SEC filer to disclose the date through which subsequent events wereevaluated.  The amendments were effectiveupon issuance and had no significant impact on the Company’s financialstatements.

 

Otheraccounting standards that have been issued or proposed by the FASB or otherstandards-setting bodies are not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**2. INVESTMENTS**

 

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

 
| **At March 31, 2010**                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                        |       |                |       |                         |       |                          |       |           |       |
| Government-sponsored enterprises securities |       | $                   | 1,499      |                         | $          | —                        |       | $              | —     |   | $ | 1,499 |   |
| State, county, and municipal securities     |       | 43,672              |       | 597                          |       | 316                           |       | 43,953         |       |
| Mortgage-backed securities                  |       | 69,634              |       | 1,350                        |       | 640                           |       | 70,344         |       |
|                                        |       |                |       |                         |       |                          |       |           |       |
| Totals                                      |       | $                   | 114,805    |                         | $          | 1,947                         |       | $              | 956        |   | $ | 115,796 |   |

 

7

----

 
| **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 held to maturity are summarized as follows (inthousands):

 
| **At March 31, 2010**              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| State, county, and municipal securities |       | $                   | 3,584      |                         | $          | 92                            |       | $              | 13         |   | $ | 3,663 |   |
| Mortgage-backed securities              |       | 286                 |       | 2                            |       | —                        |       | 288            |       |
|                                    |       |                |       |                         |       |                          |       |           |       |
| Totals                                  |       | $                   | 3,870      |                         | $          | 94                            |       | $              | 13         |   | $ | 3,951 |   |

 
| **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 |   |

 

##### **Theamortized costs and fair values of investment securities at March 31,2010, 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 (in thousands).**

 
| ** **                             | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **Amortized**          | ** ** | **Fair**             | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
|                                   | ** ** | **Cost**               | ** ** | **Value**            | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Due in one year or less                |       | $                      | 858        |                 | $          | 863 |   | $ | 261 |   | $ | 262 |   |
| Due after one year through five years  |       | 3,074                  |       | 3,141                |       | 225 |   | 234 |   |
| Due after five years through ten years |       | 20,008                 |       | 20,353               |       | 3,384 |   | 3,455 |   |
| Due after ten years                    |       | 90,865                 |       | 91,439               |       | — |   | — |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
|                                   |       | $                      | 114,805    |                 | $          | 115,796 |   | $ | 3,870 |   | $ | 3,951 |   |

 

Securities with carryingvalues of $85,687,000 and $86,127,000 at March 31, 2010 and December 31,2009 were pledged to secure public deposits, FHLB advances and a $22.3 millionline of credit at the Federal Reserve Bank discount window and for otherpurposes as required by law.

 

Gross realized gains onsecurities were $333,000 and $23,000 at March 31, 2010 and 2009, respectively.  There were no gross realized losses onsecurities at March 31, 2010 and 2009.

 

8

----

 

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

 

##### **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 March 31,2010 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).**

 

**At March 31, 2010**

 

**SecuritiesAvailable 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 |       | $                                     | 23,290     |                                  | $          | (245           | )          | $              | 4,390      |   | $ | (395 | ) | $ | 27,680 |   | $ | (640 | ) |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Municipal securities        |       | 13,102                                |       | (204                                  | )          | 1,096          |       | (112           | )          | 14,198 |   | (316 | ) |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Total                       |       | $                                     | 36,392     |                                  | $          | (449           | )          | $              | 5,486      |   | $ | (507 | ) | $ | 41,878 |   | $ | (956 | ) |

 

**SecuritiesHeld 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 | ) |

 

**At December 31, 2009**

 

**SecuritiesAvailable 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 | ) |

 

**SecuritiesHeld 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 | ) |

 

##### **At March 31, 2010 and December 31,2009, the Company had 8 available-for-sale securities that were in anunrealized loss position for longer than 12 months.  Of the 8investment securities that were in an unrealized loss position for more than 12months, 5 were 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 delinquenciesratios.  **

 

##### **We use prices from third party pricingservices and, to a lesser extent, indicative (non-binding) quotes from thirdparty brokers, to measure fair value of our investment securities. Fair valuesof the investment securities portfolio could decline in the future if theunderlying performance of the collateral for collateralized mortgageobligations or other securities deteriorates and the levels do not providesufficient protection for contractual principal and interest. As a result,there is risk that an other-than-temporary impairment may occur in the futureparticularly in light of the current economic environment.**

 

##### **The Company does not intend to sell thesesecurities and it is more likely than not that the Company will not be requiredto sell those securities before recovery of its amortized cost. The Companybelieves, based on industry analyst reports and credit ratings, that it willcontinue to receive scheduled interest payments as well as the entire principalbalance, and the deterioration in value is attributable to changes in marketinterest rates and is not in the credit quality of the issuer and therefore,these losses are not considered other-than-temporary.**

 

9

----

 

**3. FAIR VALUE OF FINANCIALINSTRUMENTS**

 

The Company measures or monitors certain ofits assets and liabilities on a fair value basis.  Fair value is used on a recurring basis forassets and liabilities that are elected to be accounted for under ASC guidanceas well as certain assets and liabilities in which fair value is the primarybasis of accounting.  Depending on thenature of the asset or liability, the Company uses various valuation techniquesand assumptions when estimating fair value, which are in accordance with theguidance for determining the fair value of a financial asset when the marketfor that asset is not active.

 

In accordance with ASC guidance, the Companyapplied the following fair value hierarchy:

 

Level 1—Quoted prices in active markets foridentical assets or liabilities. Level 1 assets and liabilities include debtand equity securities and derivative contracts that are traded in an activeexchange market, as well as U.S. Treasury and other highly liquid investmentsthat are actively traded in over-the-counter markets.

 

Level 2—Observable inputs other than Level 1prices such as quoted prices for similar assets or liabilities; quoted pricesin markets that are not active; or other inputs that are observable or can becorroborated by observable market data for substantially the full term of theassets or liabilities. Level 2 assets and liabilities include debt securitieswith quoted prices that are traded less frequently than exchange-tradedinstruments and derivative contracts whose value is determined using a pricingmodel with inputs that are observable in the market or can be derivedprincipally from or corroborated by observable market data. This categorygenerally includes U.S. Government and agency mortgage-backed debt securities,certain derivative contracts and impaired loans.

 

Level 3—Unobservable inputs that aresupported by little or no market activity and that are significant to the fairvalue of the assets or liabilities. Level 3 assets and liabilities includefinancial instruments whose value is determined using pricing models,discounted cash flow methodologies, or similar techniques, as well asinstruments for which the determination of fair value requires significantmanagement judgment or estimation. For example, this category generallyincludes certain private equity investments, retained residual interests insecuritizations, residential mortgage servicing rights, and highly structuredor long-term derivative contracts.

 

10

----

 

The following tables present financial assetsand financial liabilities measured at fair value on a recurring andnonrecurring basis and the change in fair value for those specific financialinstruments in which fair value has been elected (in thousands).

 
| ** **                               | ** ** | **Fair Value Measurements at March 31, 2010**    | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                            | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                            | ** ** | **In Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                            | ** ** | **Markets for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Assets/Liabilities**                                | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                               | ** ** | **Measured at**                                       | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                               | ** ** | **Fair Value**                                        | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                               | ** ** | **March 31, 2010**                               | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Recurring Basis:**                     | ** ** | ** **                                            | ** ** |   |   |   |   |   |   |
| **Assets**                               |       |                                                  |       |   |   |   |   |   |   |
| Securities  available for sale:          |       |                                                  |       |   |   |   |   |   |   |
| Government-sponsored  enterprises        |       | $                                                     | 1,499      |   | $ | — |   | $ | 1,499 |   | $ | — |   |
| State,  county, and municipal securities |       | 43,953                                                |       | — |   | 43,953 |   | — |   |
| Mortgage-backed  securities              |       | 70,344                                                |       | — |   | 70,344 |   | — |   |
|                                     |       |                                                  |       |   |   |   |   |   |   |
| **Liabilities**                          |       |                                                  |       |   |   |   |   |   |   |
| FHLB  Advances                           |       | 14,491                                                |       | — |   | 14,491 |   | — |   |
|                                     |       |                                                  |       |   |   |   |   |   |   |
| **Nonrecurring Basis:**                  | ** ** | ** **                                            | ** ** |   |   |   |   |   |   |
| **Assets**                               |       |                                                  |       |   |   |   |   |   |   |
| Impaired  loans                          |       | $                                                     | 47,600     |   | $ | — |   | $ | 47,600 |   | $ | — |   |
| Other  real estate owned                 |       | 11,657                                                |       | — |   | 11,657 |   | — |   |
| Goodwill                                 |       | 362                                                   |       | — |   | — |   | 362 |   |
| Core  deposit intangibles                |       | 2,836                                                 |       | — |   | — |   | 2,836 |   |
|                                     |       |                                                  |       |   |   |   |   |   |   |
| ** **                               | ** ** | **Fair Value Measurements at December 31, 2009** | ** ** |
| ** **                               | ** ** | ** **                                            | ** ** | **Quoted Prices** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                            | ** ** | **In Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                            | ** ** | **Markets for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Assets/Liabilities**                                | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                               | ** ** | **Measured at**                                       | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                               | ** ** | **Fair Value**                                        | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                               | ** ** | **December 31, 2009**                            | ** ** | **(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 |   | — |   |
|                                     |       |                                                  |       |   |   |   |   |   |   |
| **Liabilities**                          |       |                                                  |       |   |   |   |   |   |   |
| FHLB  Advances                           |       | 14,495                                                |       | — |   | 14,495 |   | — |   |
|                                     |       |                                                  |       |   |   |   |   |   |   |
| **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 |   |
|                                     |       |                                                  |       |   |   |   |   |   |   |

 

11

----

 

Following are disclosures of fair valueinformation about financial instruments, whether or not recognized on thebalance sheet, for which it is practicable to estimate that value. Theassumptions used in the estimation of the fair values are based on estimatesusing discounted cash flows and other valuation techniques. The use ofdiscounted cash flows can be significantly affected by the assumptions used,including the discount rate and estimates of future cash flows. The followingdisclosures should not be considered a surrogate of the liquidation value ofthe Company, but rather a good-faith estimate of the increase or decrease inthe value of financial instruments held by the Company since purchase,origination, or issuance.

 

***Cash, Due From Banks, FederalFunds Sold, Interest-Bearing Deposits 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 valueof fixed rate loans is estimated by discounting the future cash flows using thecurrent rates at which similar loans would be made to borrowers with similarcredit ratings. For variable rate loans, the carrying amount is a reasonableestimate of fair value.

 

***Cash Surrender Value of LifeInsurance***—Cash values of life insurance policies are carriedat the value for which such policies may be redeemed for cash.

 

***Deposits***—The fair valueof demand deposits, savings accounts, and certain money market deposits is theamount payable 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.

 

***Notes Payable***—Notes payablebear a variable interest rate and the carrying value approximates fair value.

 

***Advances from Federal Home LoanBank***—The fair values of advances from the Federal HomeLoan Bank are estimated by discounting the future cash flows using the ratescurrently available to the Bank for debt with similar remaining maturities andterms.

 

***Commitments to Extend Credit andCommercial Letters of Credit***—Because commitments toextend credit and commercial letters of credit are made using variable rates,or are recently executed, the contract value is a reasonable estimate of fairvalue.

 

***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 arebased on existing on and off-balance-sheet financial instruments withoutattempting to estimate the value of anticipated future business and the valueof assets and liabilities that are not considered financial instruments; forexample, premises and equipment. In addition, the tax ramifications related tothe realization of the unrealized gains and losses can have a significanteffect on fair value estimates and have not been considered in the estimates.

 

12

----

 

The carrying values and estimated fair valuesof the Company’s financial instruments at March 31, 2010 and December 31,2009 are as follows:

 
| ** **                               | ** ** | **2010**           | ** ** | **2009**           | ** ** |
|------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                               | ** ** | **Carrying**       | ** ** | **Estimated**      | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Value**          | ** ** | **Fair Value**     | ** ** | **Value** | ** ** | **Fair Value** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Financial assets:                        |       |               |       |               |       |   |   |   |   |
| Cash and due from banks                  |       | $                  | 5,050      |               | $          | 5,050 |   | $ | 6,461 |   | $ | 6,461 |   |
| Interest-bearing deposits with banks     |       | 46,625             |       | 46,625             |       | 20,609 |   | 20,609 |   |
| Cetificates of deposit                   |       | 150                |       | 150                |       | 150 |   | 150 |   |
| Investment securities                    |       | 119,666            |       | 119,747            |       | 116,553 |   | 116,639 |   |
| Other investments                        |       | 2,257              |       | 2,257              |       | 2,257 |   | 2,257 |   |
| Loans—net                           |       | 198,195            |       | 199,574            |       | 200,219 |   | 201,840 |   |
| Cash surrender value of life insurance   |       | 10,544             |       | 10,544             |       | 10,465 |   | 10,465 |   |
|                                     |       |               |       |               |       |   |   |   |   |
| Financial liabilities:                   |       |               |       |               |       |   |   |   |   |
| Deposits                                 |       | 352,234            |       | 374,261            |       | 326,012 |   | 316,301 |   |
| Advances from Federal Home Loan Bank     |       | 14,491             |       | 14,491             |       | 14,495 |   | 14,495 |   |
|                                     |       |               |       |               |       |   |   |   |   |
| ** **                               | ** ** | **Notional**       | ** ** | **Estimated**      | ** ** | **Notional** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **amount**         | ** ** | **fair value**     | ** ** | **amount** | ** ** | **fair value** | ** ** |
| Off-balance-sheet financial instruments: |       |               |       |               |       |   |   |   |   |
| Commitments to extend credit             |       | $                  | 22,936     |               | —     |   | $ | 24,111 |   | — |   |
| Commercial letters of credit             |       | 2,481              |       | —             |       | 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):

 
| ** **                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                           |       |               |       |                  |       |
| Balance—beginning of year |       | $                  | 10,837     |                  | $          | 3,874 |   |
| Additions                      |       | 929                |       | 8,263                 |       |
| Sales                          |       | (83                | )          | (1,042                | )          |
| Write downs                    |       | (26                | )          | (258                  | )          |
|                           |       |               |       |                  |       |
| Balance—end of year       |       | $                  | 11,657     |                  | $          | 10,837 |   |

 

13

----

 

**5.  INTANGIBLE ASSETS**

 

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

 

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

 

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

 
| ** **                     | ** ** | **March 31, 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      |                          | $          | 840 |   | $ | 3,676 |   | $ | 709 |   |

 

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

 
| ** **                                                                                                   | ** ** | **Three months  ended March 31,  2010** | ** ** | **Three months  ended March 31,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
|                                                                                                         |       |                                         |       |                                         |       |
| Aggregate amortization  expense of core deposit intangibles:                                                 |       | $                                            | 131        |                                         | $          | 13 |   |
|                                                                                                         |       |                                         |       |                                         |       |
| 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      |                                         |       |   |
|                                                                                                              |            |                                              |            |                                              |            |  |  |

 

14

----

 

**6.  COMPREHENSIVE INCOME**

 

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

 
| ** **                        | ** ** | **Three Months Ended March 31,** | ** ** | ** ** |       |       |
|-----------------------------------|------------|---------------------------------------|------------|------------|------------|------------|
| ** **                        | ** ** | **2010**                              | ** ** | **2009**   | ** ** | ** ** |   |   |
| ** **                        | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** |   |   |
| Net Income                        |       | $                                     | 625        |       | $          | 284        |   |   |   |   |
|                              |       |                                  |       |       |       |       |   |   |
| Other comprehensive income (loss) |       | (118                                  | )          | 431        |       |       |   |   |
|                              |       |                                  |       |       |       |       |   |   |
| Comprehensive income              |       | $                                     | 507        |       | $          | 715        |   |   |   |   |

 

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

 

Basic and diluted net income per share available to common andpotential common stockholders has been calculated based on the weighted averagenumber of shares outstanding.  Thefollowing schedule reconciles the numerator and denominator of the basic anddiluted net income per share available to common and potential commonstockholders for the three month period ended March 31, 2010 and 2009 (inthousands, except per share data):

 
| ** **                                                        | ** ** | **Net Income**  | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|
| ** **                                                        | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**    | ** ** |
|                                                              |       |            |       |              |       |          |       |
| **Three  Months ended March 31, 2010**                       |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per  share available to common stockholders        |       | $               | 532        |              | 2,103      |          | $          | 0.25 |   |
| Nonvested restricted  stock grant                                 |       | —          |       | 10                |       | —        |       |
| Effect of dilutive  securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per  share                                       |       | $               | 532        |              | 2,113      |          | $          | 0.25 |   |
|                                                              |       |            |       |              |       |          |       |
| **Three  Months ended March 31, 2009**                       |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per  share available to common stockholders        |       | $               | 257        |              | 2,101      |          | $          | 0.12 |   |
| Effect of dilutive  securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per  share                                       |       | $               | 257        |              | 2,101      |          | $          | 0.12 |   |

 

8**. SUBSEQUENT EVENTS**

 

In preparing thesefinancial statements, subsequent events were evaluated through the time thefinancial statements were issued. Financial statements are considered issuedwhen they are widely distributed to all shareholders and other financialstatement users, or filed with the Securities and Exchange Commission. Inconjunction with applicable accounting standards, all material subsequentevents have been either recognized in the financial statements or disclosed inthe notes to the financial statements.

 

**9.  RECLASSIFICATIONS**

 

Certain 2009 amounts have been reclassified to conform to the 2010presentation.

 

15

----

 

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

 

**INTRODUCTION**

 

Citizens Bancshares Corporation (the “Company”) is a holding companythat provides a full range of commercial and personal banking services toindividuals and corporate customers in its primary market areas, metropolitanAtlanta and Columbus, Georgia, and Birmingham and Eutaw, Alabama through itswholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 11 full-service financialcenters in Georgia and Alabama.

 

**Forward Looking Statements**

 

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

 

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

 

The following discussion is of the Company’s financial condition as of March 31,2010 and December 31, 2009, and the changes in the financial condition andresults of operations for the three month period ended March 31, 2010 and2009.

 

**Critical Accounting Policies**

 

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

 

**Investment Securities**- The 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.

 

Premiums and discounts onavailable for sale and held to maturity securities are amortized or 

 

16

----

 

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

 

**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 forreasonableness.  This assessment is madein the context of historical losses as well as existing economic conditions,and individual concentrations of credit. Loans are charged against the allowance when, in the opinion ofmanagement, such loans are deemed uncollectible and subsequent recoveries areadded to the allowance.

 

A description of other accounting policies are summarized in Note 1,Summary of Significant Accounting Policies in the Notes to ConsolidatedFinancial Statements of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2009.  TheCompany has followed those policies in preparing this report.

 

**FINANCIAL CONDITION**

 

Total assets at March 31,2010 increased by 7% or $26,225,000 to $413,764,000 compared to $387,539,000 atDecember 31, 2009.  This increase isprimarily due to the Company’s continued success in the growth of its depositbase in the first quarter of 2010.  Totaldeposits grew by $26 million or 8% to $352 million.  At quarter end, the majority of these fundswere temporarily invested in interest-bearing deposits with other banks.  The investment securities portfolio increasedby $3 million, partially offsetting the 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.

 

Loans receivable, theCompany’s largest earning asset, decreased by $2,024,000 or 1% to $198,195,000at March 31, 2010 compared to December 31, 2009.  In the previous quarter ended December 31,2009, loan receivables declined by $5,095,000. While the decline in loan volume has slowed, the Company continues tofind new loan demand to be relatively weak due to the continuing recessionaryeconomic conditions.

 

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

 

17

----

 

**INVESTMENT SECURITIES**

 

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

 

With the economy in a recession resulting in weak loan demand, theCompany has grown its investment portfolios to generate earnings to offset boththe decrease in loan activity, increased FDIC assessments and credit reserve.  At March 31, 2010 and December 31,2009, the Company’s investment securities portfolio represented approximately29% and 31%, respectively, of total assets.

 

Other investments consist of Federal HomeLoan Bank and Federal Reserve Bank stock which are restricted and have noreadily determined market value.  TheCompany is required to maintain an investment in the FHLB and the FRB as partof its membership conditions. The level of investments at the FHLB is primarilydetermined by the amount of outstanding advances. The FRB investment level is 6percent of the par value of the bank’s common stock outstanding andpaid-in-capital.  These investments arecarried at cost.

 

##### **LOANS**

##### ** **

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

 
| ** **                               | ** **                 | **March 31** | ** ** | **December 31,** | ** ** |
|------------------------------------------|----------------------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** **                 | **2010**          | ** ** | **2009**              | ** ** |
|                                     |                       |              |       |                  |       |
| Commercial,  financial, and agricultural |                       | $                 | 14,232     |                  | $          | 14,282 |   |
| Installment                              |                       | 8,664             |       | 9,240                 |       |
| Real estate -  mortgage                  |                       | 166,454           |       | 161,229               |       |
| Real estate -  construction              |                       | 12,993            |       | 19,132                |       |
| Other                                    |                       | 337               |       | 594                   |       |
|                                     | Loans receivable           |              | 202,680    |                  | 204,477    |   |
| Less:                                    | Net deferred loan  fees    |              | 158        |                  | 164        |   |
|                                     | Allowance for loan  losses |              | 4,327      |                  | 4,094      |   |
|                                     |                       |              |       |                  |       |   |
|                                     | Loans receivable, net      |              | $          | 198,195               |       | $ | 200,219 |   |

 

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

 

**NONPERFORMING ASSETS**

 

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

 

With the exception of the loans included within nonperforming assets inthe table below, management is not aware of any loans classified for regulatorypurposes as loss, doubtful, substandard, or special 

 

18

----

 

mention that have not been disclosed which (1) represent or resultfrom 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.

 

Thefinancial and credit markets continued to experience difficulty in the firstthree months of 2010.  Although theeconomic outlook appears to be stabilizing the local markets continue to beimpacted by recessionary conditions which continue to influence the levels ofour nonperforming assets.  For the firstquarter of 2010, nonperforming assets wasrelatively flat compared to December 31, 2009, decreasing by anominal $55,000 to $17,748,000. The Company charged-off $437,000 innonperforming loans and wrote down foreclosed assets by $26,000 to theirestimated fair value during the period. While real estate acquired through foreclosure (OREO) increased by $820,000to $11,657,000, it was offset by a decline of $$875,000 in nonaccrualloans.  Nonaccrual loans were $6,091,000at March 31, 2010 compared to $6,966,000 at December 31, 2009.  At March 31, 2010, nonperforming assetsrepresents 4.29% of total assets compared to 4.59% at December 31, 2009which represents a 30 basis point improvement. There were no loans greater than 90 days past due and still accruinginterest at the end of the first quarter of 2010 or at December 31, 2009.

 

The table belowpresents a summary of the Company’s nonperforming assets at March 31, 2010and December 31, 2009.

 
|                                                                                                  |   | **March 31,  2010**                     |   | **December 31,  2009** |   |
|-------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|-----------------------------|--------|
|                                                                                                  |   | **(in thousands, except  financial ratios)** |   |
| Nonperforming assets:                                                                                 |   |                                         |   |                        |   |
| Nonperforming loans:                                                                                  |   |                                         |   |                        |   |
| Nonaccrual loans                                                                                      |   | $                                            | 6,091  |                        | $      | 6,966 |   |
| Past-due loans of 90 days or more                                                                     |   | —                                       |   | —                      |   |
| Nonperforming loans                                                                                   |   | 6,091                                        |   | 6,966                       |   |
|                                                                                                  |   |                                         |   |                        |   |
| Real estate acquired through foreclosure                                                              |   | 11,657                                       |   | 10,837                      |   |
| Total nonperforming assets                                                                            |   | $                                            | 17,748 |                        | $      | 17,803 |   |
|                                                                                                  |   |                                         |   |                        |   |
| Ratios:                                                                                               |   |                                         |   |                        |   |
| Nonperforming loans to loans, net of unearned  income                                                 |   | 3.01                                         | %      | 3.41                        | %      |
|                                                                                                  |   |                                         |   |                        |   |
| Nonperforming  assets to loans, net of unearned income, and real estate acquired through  foreclosure |   | 8.29                                         | %      | 8.27                        | %      |
|                                                                                                  |   |                                         |   |                        |   |
| Nonperforming assets to total assets                                                                  |   | 4.29                                         | %      | 4.59                        | %      |
|                                                                                                  |   |                                         |   |                        |   |
| Allowance for loan losses to nonperforming loans                                                      |   | 71.04                                        | %      | 58.77                       | %      |
|                                                                                                  |   |                                         |   |                        |   |
| Allowance for loan losses to nonperforming assets                                                     |   | 24.38                                        | %      | 23.00                       | %      |

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

The Company provides for estimated losses on loans receivable when anysignificant and permanent decline in value occurs.  These estimates for losses are based onindividual assets and their cash flow 

 

19

----

 

forecasts, sales values, independent appraisals, the volatility ofcertain real estate markets, and concern for disposing of real estate indistressed markets.  For loans that arepooled for purposes of determining the necessary provisions, estimates arebased on loan types, history of charge-offs, and other delinquencyanalyses.  Therefore, the value used todetermine the provision for losses is subject to the reasonableness of theseestimates. The adequacy of the allowance for loan losses is reviewed on amonthly basis by management and the Board of Directors.  On a semi-annual basis an independent reviewof the adequacy of allowance for loan losses is performed.  This assessment is made in the context ofhistorical losses as well as existing economic conditions, and individualconcentrations of credit.

 

Loans are charged against the allowance when, in the opinion ofmanagement, such loans are deemed uncollectible and subsequent recoveries areadded to the allowance.  For the firstthree months of 2010, based on the Company’s evaluation, a provision for loanlosses of $630,000 was charged against operating earnings compared to $438,000for the same period last year.  Theincrease in the provision for loan losses in 2010 relates to the continueddeterioration of liquidity of the borrowers due to job loss and of thecollateral value securing the loans due to current economic conditions.

 

The allowance for loan losses at March 31, 2010 was approximately$4,327,000, representing 2.14% of total loans, net of unearned income comparedto approximately $4,930,000 for the same period last year, which represented2.31% of total loans, net of unearned income. Approximately $2,590,000 of the allowance for loan losses was allocatedto loans management considered impaired at March 31, 2010.

 

At March 31, 2010, management believes the allowance for loanlosses is adequate. Management uses available information to recognize losseson loans; however, future additions to the allowance may be necessary based onchanges in economic conditions, particularly in the metropolitan Atlanta,Georgia and Birmingham, Alabama areas. In addition, regulatory agencies, as anintegral part of their examination process, periodically review the Company’sallowance for loan losses. Such agencies may require the Company to recognizeadditions to the allowance based on their judgments about information availableto them at the time of their examination.

 

Also, a substantial portion of the Company’s loan portfolio is collateralizedby real estate in metropolitan Atlanta and Birmingham markets. Accordingly, theultimate collectibility of a substantial portion of the Company’s loanportfolio is susceptible to changes in market conditions in the metropolitanAtlanta and Birmingham areas.

 

·                  The Company’s loans to area churches wereapproximately $42.3 million and $45.5 million at March 31, 2010 and December 31,2009, respectively, which are generally secured by real estate.

 

·                  The Company’s loans to area conveniencestores were approximately $11.9 million at March 31, 2010 and December 31,2009, respectively.  Loans to conveniencestores are generally secured by real estate.

 

·                  The Company’s loans to area hotels wereapproximately $18.3 million and $18.4 million at March 31, 2010 and December 31,2009, respectively, which are generally secured by real estate.

 

Also, 1—4 family residentialmortgage loans secured by first liens were approximately $38 million at March 31,2010 and December 31, 2009, respectively. The Company has no subprime mortgagesin its loan portfolio.

 

20

----

 

The following table summarizes loans, changes in the allowance for loanlosses arising from loans charged off, recoveries on loans previously chargedoff by loan category, and additions to the allowance which have been charged tooperating expense as of and for the three month periods ended March 31,2010 and 2009 (amount in thousands, except financial ratios):

 
| ** **                                                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                        |       |     |       |     |       |
| Loans, net of unearned income                                                                               |       | $        | 202,522    |     | $          | 213,556 |   |
|                                                                                                        |       |     |       |     |       |
| Average  loans, net of unearned income and the allowance for loan losses                                    |       | $        | 199,072    |     | $          | 209,365 |   |
|                                                                                                        |       |     |       |     |       |
| Allowance  for loan losses at the beginning of period                                                       |       | $        | 4,094      |     | $          | 4,659 |   |
|                                                                                                        |       |     |       |     |       |
| Loans charged-off:                                                                                          |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                     |       | 50       |       | —   |       |
| Real estate - loans                                                                                         |       | 309      |       | 46       |       |
| Installment loans to individuals                                                                            |       | 78       |       | 149      |       |
| Total loans charged-off                                                                                     |       | 437      |       | 195      |       |
|                                                                                                        |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                 |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                     |       | 1        |       | 2        |       |
| Real estate - loans                                                                                         |       | 10       |       | 4        |       |
| Installment loans to individuals                                                                            |       | 29       |       | 22       |       |
| Total loans recovered                                                                                       |       | 40       |       | 28       |       |
|                                                                                                        |       |     |       |     |       |
| Net loans charged-off                                                                                       |       | 397      |       | 167      |       |
|                                                                                                        |       |     |       |     |       |
| Additions  to allowance for loan losses charged to operating expense                                        |       | 630      |       | 438      |       |
|                                                                                                        |       |     |       |     |       |
| Allowance for loan losses at period end                                                                     |       | $        | 4,327      |     | $          | 4,930 |   |
|                                                                                                        |       |     |       |     |       |
| Ratio  of net loans charged-off to average loans, net of unearned income and the  allowance for loan losses |       | 0.20     | %          | 0.08     | %          |
|                                                                                                        |       |     |       |     |       |
| Ratio of allowance for loan losses to loans, net  of unearned income                                        |       | 2.14     | %          | 2.31     | %          |

 

21

----

 

**DEPOSITS**

 

Deposits are the Company’s primary source of funding loan growth.  Total deposits at March 31, 2010increased 8% or $26 million to $352,234,000. This increase in deposits relates to the continued growth in our depositbase as customers seek banks with a strong capital position and who arefinancially sound.  The Company meetsboth of these criteria.  Noninterest-bearing deposits increased by 16% or $9 million and interest-bearingdeposits increased by 6% or $17 million when compared to December 31,2009.

 

The Company is participating in the Temporary Liquidity GuaranteeProgram’s (“TLGP”) full coverage of noninterest-bearing deposit transactionaccounts and certain interest-bearing checking accounts regardless of dollaramount.  On April 13, 2010, the FDICextended the TLGP through December 31, 2010 and the Company has elected tostay in the TLGP for the extended period. In addition, the Company participates in the Certificate of DepositAccount Registry Services (CDARS”), a program that allows each of our customers access to multi-million-dollar FDIC insurancecoverageon CD investments.  The Company hasdeposits in both of these programs from Corporate and Governmental customerswho make sizeable deposits and withdrawals based on their budgetary needs.

 

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

 
| ** **                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                              |       |               |       |                  |       |
| NOW and money market accounts     |       | $                  | 89,798     |                  | $          | 84,432 |   |
| Savings accounts                  |       | 33,435             |       | 33,039                |       |
| Time deposits of $100,000 or more |       | 106,565            |       | 94,553                |       |
| Other time deposits               |       | 54,766             |       | 55,587                |       |
|                              |       |               |       |                  |       |
|                              |       | $                  | 284,564    |                  | $          | 267,611 |   |

 

**OTHER BORROWED FUNDS**

 

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

 

The Bank had outstanding advances from the FHLB of $14,491,000 at March 31,2010 and $14,495,000 at December 31, 2009. These advances arecollateralized by FHLB stock, a blanket lien on 1-4 family and multifamilymortgage loans, certain commercial real estate loans and investmentsecurities.  As of March 31, 2010and December 31, 2009, total loans pledged as collateral was $47,494,000, respectively.

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type** | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------|------------|--------------|------------|----------|------------|-------------------------|------------|----------------------------|------------|
|                                |       |         |       |     |       | **(in  thousands)**     |       |
| July 2010                      |       | Daily        |       | Variable |       | 0.36                    | %          | $                          | 14,150     |   | 0.36 | % | $ | 14,150 |   |
| August 2026                    |       |         |       | (1)      |       | —                  |       | 341                        |       | — |   | 345 |   |
|                                |       |         |       |     |       |                    |       |                       |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |     |       |                    |       | $                          | 14,491     |   |   |   | $ | 14,495 |   |
|                                |       |         |       |     |       |                    |       |                       |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |     |       | 0.35                    | %          |                       |       | 0.35 | % |   |   |

 

----

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

 

22

----

 

At March 31,2010, the Company had a $77 million line of credit facility at the FHLB ofwhich $34.5 million was outstanding consisting of an advance of $14.5 millionand a letter of credit to secure public deposits in the amount of $20million.  The Company also had $22.3million of borrowing capacity at the Federal Reserve Bank discount window.

 

**RESULTSOF OPERATIONS**

 

**NetInterest Income:**

 

Net interest incomeis the principal component of a financial institution’s income stream andrepresents the difference, or spread, between interest and fee income generatedfrom earning 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.

 

Forthe three-month period ending March 31, 2010, net interest incomeincreased by $152,000 or 4% to $3,803,000 compared to $3,651,000 reported forthe same period last year.  Totalinterest income declined by $127,000 compared to the same three month period in2009 due to a $175,000 decrease in interest income on loans.  The Company continues to experience lowerloan volume as well as lower loan yields and higher nonaccruing loans duringthe period due to the recessionary conditions. The decrease in interest on loans was partially offset by a $48,000increase in investment income.    Totalinterest expense for the period decreased by $279,000 or 28% compared to thesame three month period in 2009. Interest expense on interest-bearing deposits decreased by $253,000 or27%, as the Company increased its mix of noninterest-bearing deposits andlowered its funding cost of interest-bearing deposits.  Also, interestexpense on other borrowings decreased by $26,000 or 65% due to lower balancesoutstanding and lower interest rates paid on the Company’s advances from theFHLB.  At March 31, 2010, theCompany had a net interest margin of 4.12% compared to 4.65% for the sameperiod 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.

 

**Provisionfor loan losses**

 

Forthe first three months of 2010, the Company recognized a provision for loanlosses of $630,000, a $192,000 or 44% increase, compared to $438,000 for thesame period in 2009.  This increase wasprimarily driven by charge-offs, foreclosures and collateral value impairment.  Theallowance for loan losses was $4,327,000 at March 31, 2010 compared to$4,930,000 at December 31, 2009.  AtMarch 31, 2010, the allowance for loan losses was 71% ofnonperforming loans compared to 59% at December 31, 2009.  The provision for loan losses and theresulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions.  At March 31, 2010, the Companyconsidered its allowance for loan losses to be adequate.

 

**Noninterestincome:**

 

Noninterestincome consists of revenues generated from a broad range of financial servicesand activities, including fee-based services and commissions earned throughinsurance sales.  In addition, gains andlosses realized from the sale of investment portfolio securities and sales ofassets are included in noninterest income.

 

23

----

 

Noninterestincome totaled $1,756,000 for the three month period ended March 31, 2010,an increase of $451,000 or 35% compared to the same period ended March 31,2009.  This increase is primarilyattributed to a $333,000 gain on the sale of securities which was $310,000higher than the same period last year. The Company reduced some of the market risk in its investment portfolioand improved its capital position by selling its corporate bond portfolio andswapped several mortgage-backed securities to position itself for risinginterest rates as part of its asset/liability strategy.  For the same period last year, gain realizedon the sale of securities totaled $23,000.

 

Alsosignificant, other operating income increased by $186,000 or 57% to $513,000compared to the same three month period last year.  This increase is attributed to a $259,000award the 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.

 

**Noninterestexpense:**

 

Noninterestexpense includes compensation and benefits, occupancy expenses, advertising andmarketing, professional fees, office supplies, data processing, telephoneexpenses, miscellaneous items and other losses.

 

Non-interest expense in the first quarter of 2010was relatively flat compared to the same quarter last year, increasing by anominal $23,000.  For the threemonth period ended March 31, 2010, salaries and employee benefitsincreased by $126,000.  This increase isdue to the addition of employees the Company obtained in an acquisition of anin market branch purchased at the end of March 2009.  Also, related to the branch purchase,amortization of core deposits intangible increased by $118,000 compared to thesame period last year.  FDIC insuranceincreased by $71,000 compared to the same period last year due to increased insurancerates and the expiration of a one-time assessment credit that expired duringthe first quarter of 2009.  Expenses onother real estate owned increased by $94,000 due to real estate taxes, repaircost and upkeep of the various real estate properties and writedowns.

 

Partiallyoffsetting these higher operating costs was a decline in the Company’s otheroperating expenses of $415,000.  Thisdecease is partially due to savings initiative implemented by the Company andseveral one time expenses incurred in the first quarter of 2009 related tolegal and advisory services for the Company’s participation in TARP and theacquisition of the Lithonia, Georgia branch. The Company also incurred additional marketing, data processing andtraining cost related to the acquisition. For the same period in 2009 other operating expenses also included ajudgment in the amount of $64,000 which was levied against the Company forlender liability in the first quarter of 2009.

 

24

----

 

**INTEREST RATE SENSITIVITYMANAGEMENT**

 

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

 

One method of measuring the impact of interest rate sensitivity is thecumulative gap analysis.  The differencebetween interest rate sensitive assets and interest rate sensitive liabilitiesat various time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitivepressures and the needs of the Company’s customers.  In addition, various assets and liabilitiesindicated as repricing within the same period may in fact reprice at differenttimes within such period and at different rates. The following table shows thecontractual maturities of all interest rate sensitive assets and liabilities atMarch 31, 2010.  Expected maturitiesmay differ from contractual maturities because issuers may have the right tocall or prepay obligations with or without call or prepayment penalties.  Taking a conservative approach, the Companyhas included demand deposits such as NOW, money market, and savings accounts inthe three month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only ageneral indicator of potential effects of interest rate changes on net interestincome.

 

The following table sets forth the distribution of the repricing of theCompany’s interest rate sensitive assets and interest rate sensitiveliabilities as of March 31, 2010.

 
|                                                                    |   | **Cumulative amounts as of  March 31, 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                              |   | $                                                                                | 46,625     |   | $ | — |   | $ | — |   | $ | — |   | $ | 46,625 |   |
| Certificates of deposit                                                 |   | —                                                                           |       | 150 |   | — |   | — |   | 150 |   |
| Investments                                                             |   | —                                                                           |       | 1,124 |   | 3,366 |   | 115,176 |   | 119,666 |   |
| Loans                                                                   |   | 54,950                                                                           |       | 24,578 |   | 86,089 |   | 36,905 |   | 202,522 |   |
| Total interest-sensitive assets                                         |   | $                                                                                | 101,575    |   | $ | 25,852 |   | $ | 89,455 |   | $ | 152,081 |   | $ | 368,963 |   |
|                                                                    |   |                                                                             |       |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |   |                                                                             |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |   | $                                                                                | 168,630    |   | $ | 102,358 |   | $ | 13,576 |   | $ | — |   | $ | 284,564 |   |
| Other borrowings                                                        |   | 14,150                                                                           |       | — |   | — |   | 341 |   | 14,491 |   |
| Total interest-sensitive liabilities                                    |   | $                                                                                | 182,780    |   | $ | 102,358 |   | $ | 13,576 |   | $ | 341 |   | $ | 299,055 |   |
|                                                                    |   |                                                                             |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |   | $                                                                                | (81,205    | ) | $ | (76,506 | ) | $ | 75,879 |   | $ | 151,740 |   | $ | 69,908 |   |
|                                                                    |   |                                                                             |       |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity  gap to total interest-sensitive assets |   | (22.01                                                                           | )%         | (42.74 | )% | (22.18 | )% | 18.95 | % | 18.95 | % |

 

----

(a) Savings,Now, and money market deposits totaling $123,233 are included in the maturingin 3 months classification.

 

25

----

 

**LIQUIDITY**

 

Liquidity is theability of the Company to convert assets into cash or cash equivalents withoutsignificant loss 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 toshareholders; business combinations; capital injections to its subsidiary; theservicing of debt; and the payment of general corporate expenses. The Companyhas access to various capital markets and on March 6, 2009, the Companyissued 7,462 shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series A,to the U.S. Department of the Treasury (“Treasury”) under the TARP CapitalPurchase Program (the “CPP”) for an investment of $7,462,000. However, theprimary source of liquidity for the Company is dividends from its banksubsidiary.  Statutory and regulatorylimitations apply to the Bank’s payment of dividends to the Company as well asthe Company’s payment of dividends to its stockholders.  The Georgia Department of Banking and Financeregulates the Bank’s dividend payments and must approve dividend payments thatexceed 50 percent of the Bank’s prior year net income. The payment of dividendsmay also be affected or limited by other factors, such as the requirement byfederal agencies to maintain adequate capital above regulatory guidelines andthat bank holding companies and insured banks pay dividends out of currentearnings. Currently, the Bank must receive approval from the Georgia Departmentof Banking and Finance and the Company must receive approval from the FederalReserve Bank of Atlanta prior to the payment of dividends.

 

Asset and liabilitymanagement functions not only serve to assure adequate liquidity in order to meetthe 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 portionof the balance sheet provides liquidity primarily through loan principalrepayments, maturities of investment securities and, to a lesser extent, salesor paydowns of investment securities available for sale and held tomaturity.  Other short-term investmentssuch as federal funds sold and maturing interest bearing deposits with otherbanks are additional sources of liquidity funding.

 

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

 

**CAPITAL RESOURCES**

 

Stockholders’equity increased by $430,000 for the three month period ended March 31,2010.  This increase is primarily due toa $532,000 increase in retained earnings, representing an increase in netincome of $625,000, partially offset by a $93,000 preferred dividend accrued tothe Treasury under the CPP.  Partiallyoffsetting the increase to retained earnings, the Company’s accumulated othercomprehensive income, net of taxes decreased by $118,000 to $654,000.  This decrease is attributed to the rapidmovements in the Treasury markets, wild swings in volatility and creditspreads, and their impact on the Company’s available for sale securitiesportfolio.

 

26

----

 

Quantitative measures established by regulation to ensure capitaladequacy require the Company to maintain minimum amounts and ratios of totaland Tier 1 capital to risk weighted assets, and Tier 1 capital to averageassets.  The Company’s total and Tier 1capital to risk weighted assets and Tier 1 to average assets were 17%, 16% and10% at March 31, 2010 compared to 16%, 15% and 10% at December 31,2009, respectively.  At March 31,2010, the Company met all capital adequacy requirements to which it is subjectand is considered 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  4T.** | **CONTROLS  AND PROCEDURES** |
|---------------|------------------------------|

 

As of the end of the period covered by this report,we conducted, under the supervision of and with the participation of ourmanagement, including the Company’s Chief Executive Officer, Chief OperatingOfficer, and Chief Financial Officer, an evaluation of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).Based on this evaluation, the Company’s Chief Executive Officer, ChiefOperating Officer, and Chief Financial Officer have concluded that ourdisclosure controls and procedures were effective as of March 31, 2010 inaccumulating and communicating information to management, including the ChiefExecutive Officer, the Chief Operating Officer, and the Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures of that information under the SEC’s rules and forms and thatthe Company’s disclosure controls and procedures are designed to ensure thatthe information required to be disclosed in reports filed or submitted by theCompany under the Securities Exchange Act is recorded, processed, summarizedand reported within the specified time periods. During the quarter ended March 31, 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.

 

27

----

 
| **PART II.** | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **ITEM  1.**      | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | The  Company and the Bank are involved in various claims and legal actions arising  in the ordinary course of business.  In  the opinion of management, based in part on the advice of counsel, the  ultimate disposition of these matters will not have a material adverse impact  on the Company’s consolidated financial position.                                                                                                                                                                                                                                                                                                                                                                   |
| ** **        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM  1A.**     | **RISK  FACTORS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | We  believe there have been no material changes from the factors discussed in Part I,  “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year  ended December 31, 2009.  You  should carefully consider the factors discussed in our Annual Report on Form 10-K,  which could materially affect our business, financial condition or future  results. The risks described in our Annual Report on Form 10-K are not  the only risks facing us. Additional risks and uncertainties not currently  known to us or that we currently deem to be immaterial also may materially  adversely affect our business, financial condition and/or operating results. |
| ** **        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM  2.**      | **UNREGISTERED  SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM  3.**      | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM  4.**      | **SUBMISSION  OF MATTERS TO VOTE OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM  5.**      | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM  6.**      | **EXHIBITS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | **Exhibit 31**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** **        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **        | **Exhibit 32**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **        | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **        | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

28

----

 

**SIGNATURES**

 

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

 

 

**CITIZENS BANCSHARES CORPORATION**

 

 
| Date:  May 14, 2010 | By:                                   | /s/ James E. Young |
|------------------------------------|---------------------------------------|--------------------|
|                               | James E. Young                        |
|                               | President and Chief Executive Officer |
|                               |                                  |
|                               |                                  |
| Date:  May 14, 2010 | By:                                   | /s/ Cynthia N. Day |
|                               | Cynthia N. Day                        |
|                               | Senior Executive Vice President and   |
|                               | Chief Operating Officer               |
|                               |                                  |
|                               |                                  |
| Date:  May 14, 2010 | By:                                   | /s/ Samuel J. Cox  |
|                               | Samuel J. Cox                         |
|                               | Executive Vice President and          |
|                               | Chief Financial Officer               |

 

29

----