**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended March 31, 2009**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thetransition period from            to            **

 

**CommissionFile No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

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

 

| **175 John  Wesley Dobbs Avenue, N.E., Atlanta, Georgia** | ** ** | **30303**  |
|-----------------------------------------------------------|------------|------------|
| (Address of principal  executive offices)                 |       | (Zip Code) |

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  x Yes o No.

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

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

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding for each ofthe issuer’s classes of common stock as of the latest practicable date:2,012,534 shares of Common Stock, $1.00 par value, 90,000 shares of Non-VotingCommon Stock, $1.00 par value and 7,462 shares of Preferred Stock, Series A,no par value were outstanding on May 11, 2009.

 

 

 

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**PART 1.             FINANCIALINFORMATION**

 

**ITEM 1.             Financialstatements**

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARY**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2009 AND DECEMBER 31, 2008**

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

 
| ** **                                                                                                         | ** ** | **2009**        | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                         | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                         | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash and due from banks                                                                                            |       | $               | 7,238      |       | $          | 6,870 |   |
| Interest-bearing deposits with banks                                                                               |       | 56,174          |       | 9,276      |       |
| Certificates of deposit                                                                                            |       | 396             |       | 345        |       |
| Investment securities available for sale,  at fair value                                                           |       | 92,059          |       | 87,961     |       |
| Investment securities held to maturity, at  cost                                                                   |       | 4,532           |       | 4,583      |       |
| Other investments                                                                                                  |       | 2,282           |       | 2,287      |       |
| Loans receivable, net                                                                                              |       | 208,626         |       | 210,306    |       |
| Premises and equipment, net                                                                                        |       | 8,254           |       | 7,537      |       |
| Cash surrender value of life insurance                                                                             |       | 10,166          |       | 10,080     |       |
| Foreclosed real estate                                                                                             |       | 4,605           |       | 3,874      |       |
| Other assets                                                                                                       |       | 9,760           |       | 4,976      |       |
| Total assets                                                                                                       |       | $               | 404,092    |       | $          | 348,095 |   |
|                                                                                                               |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                      | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                               |       |            |       |       |       |
| LIABILITIES:                                                                                                       |       |            |       |       |       |
| Noninterest-bearing deposits                                                                                       |       | $               | 65,798     |       | $          | 54,786 |   |
| Interest-bearing deposits                                                                                          |       | 265,235         |       | 227,127    |       |
| Total deposits                                                                                                     |       | 331,033         |       | 281,913    |       |
|                                                                                                               |       |            |       |       |       |
| Accrued expenses and other liabilities                                                                             |       | 4,256           |       | 3,571      |       |
| Federal funds purchased                                                                                            |       | —          |       | —     |       |
| Notes payable                                                                                                      |       | 240             |       | 240        |       |
| Advances from Federal Home Loan Bank                                                                               |       | 27,108          |       | 28,713     |       |
| Total liabilities                                                                                                  |       | 362,637         |       | 314,437    |       |
|                                                                                                               |       |            |       |       |       |
| 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           |       | —     |       |
| Common stock - $1 par value; 20,000,000  shares authorized; 2,230,065 shares issued and outstanding                |       | 2,230           |       | 2,230      |       |
| Nonvoting common stock - $1 par value;  5,000,000 shares authorized; 90,000 issued and outstanding                 |       | 90              |       | 90         |       |
| Additional paid-in capital                                                                                         |       | 7,626           |       | 7,611      |       |
| Retained earnings                                                                                                  |       | 25,350          |       | 25,465     |       |
| Treasury stock at cost, 218,058 shares at  March 31, 2009 and 219,913 at December 31, 2008               |       | (1,809          | )          | (1,813     | )          |
| Accumulated other comprehensive income (loss),  net of income taxes                                                |       | 506             |       | 75         |       |
| Total stockholders’ equity                                                                                    |       | 41,455          |       | 33,658     |       |
|                                                                                                               |       | $               | 404,092    |       | $          | 348,095 |   |

 

See notes to consolidated financial statements.

 

2

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                            | ** ** | **Three Months  Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Interest income:                                      |       |                                   |       |   |   |
| Loans, including fees                                 |       | $                                      | 3,523      |   | $ | 4,377 |   |
| Investment securities:                                |       |                                   |       |   |   |
| Taxable                                               |       | 850                                    |       | 673 |   |
| Tax-exempt                                            |       | 254                                    |       | 177 |   |
| Interest-bearing deposits                             |       | 5                                      |       | 54 |   |
| Total interest income                                 |       | 4,632                                  |       | 5,281 |   |
|                                                  |       |                                   |       |   |   |
| Interest expense:                                     |       |                                   |       |   |   |
| Deposits                                              |       | 941                                    |       | 1,761 |   |
| Other borrowings                                      |       | 40                                     |       | 150 |   |
| Total interest expense                                |       | 981                                    |       | 1,911 |   |
| Net interest income                                   |       | 3,651                                  |       | 3,370 |   |
| Provision for loan losses                             |       | 438                                    |       | 105 |   |
| Net interest income after provision for  loan losses  |       | 3,213                                  |       | 3,265 |   |
|                                                  |       |                                   |       |   |   |
| Noninterest income:                                   |       |                                   |       |   |   |
| Service charges on deposits                           |       | 957                                    |       | 976 |   |
| Gain on sales of securities                           |       | 23                                     |       | 27 |   |
| Loss on sales of assets                               |       | (2                                     | )          | — |   |
| Other operating income                                |       | 327                                    |       | 328 |   |
| Total noninterest income                              |       | 1,305                                  |       | 1,331 |   |
|                                                  |       |                                   |       |   |   |
| Noninterest expense:                                  |       |                                   |       |   |   |
| Salaries and employee benefits                        |       | 1,836                                  |       | 1,845 |   |
| Net occupancy and equipment                           |       | 595                                    |       | 578 |   |
| Other real estate owned                               |       | 37                                     |       | 5 |   |
| Other operating expenses                              |       | 1,754                                  |       | 1,202 |   |
| Total noninterest expense                             |       | 4,222                                  |       | 3,630 |   |
| Income before income taxes                            |       | 296                                    |       | 966 |   |
| Income tax expense                                    |       | 12                                     |       | 253 |   |
| Net income                                            |       | $                                      | 284        |   | $ | 713 |   |
| Preferred dividends accrued                           |       | 27                                     |       | — |   |
| Net income available to common stockholders           |       | $                                      | 257        |   | $ | 713 |   |
| Net income per common share - basic                   |       | $                                      | 0.12       |   | $ | 0.34 |   |
| Net income per common share - diluted                 |       | $                                      | 0.12       |   | $ | 0.34 |   |
| Weighted average common outstanding shares  - basic   |       | 2,101                                  |       | 2,093 |   |
| Weighted average common outstanding shares  - diluted |       | 2,101                                  |       | 2,093 |   |
| Dividends per common share                            |       | $                                      | 0.19       |   | $ | — |   |

 

See notes to consolidated financial statements.

 

3

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**CITIZENS BANCSHARES CORPORATION**

**AND SUBSIDIARY**

 

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

**FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008**

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

 
| ** **                                                                                               | ** ** | ** **          | ** ** | ** **        | ** ** | ** **        | ** ** | ** **  | ** ** | ** **    | ** ** | ** **          | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**    | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|-------------------|------------|-------------|------------|---------------|------------|---------------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                               | ** ** | ** **          | ** ** | ** **        | ** ** | ** **        | ** ** | ** **  | ** ** | **Nonvoting** | ** ** | **Additional**      | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **         | ** ** |
| ** **                                                                                               | ** ** | **Preferred Stock** | ** ** | **Common  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Retained**  | ** ** | **Treasury  Stock** | ** ** | **Comprehensive** | ** ** | ** **   | ** ** |
| ** **                                                                                               | ** ** | **Shares**          | ** ** | **Amount**        | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Shares**    | ** ** | **Amount**          | ** ** | **Capital**       | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income  (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                                     |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       |       |       |
| Balance—December  31, 2007                                                                          |       | —              |       | $                 | —     |              | 2,230      |        | $          | 2,230         |       | 90                  |       | $                 | 90         |         | $          | 7,554      |       | $          | 25,071     |               | (227       | )          | $          | (1,859 | ) | $ | 47 |   | $ | 33,133 |   |
|                                                                                                     |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       |       |       |
| Net income                                                                                               |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | 713          |       | —     |       | —     |       | —             |       | 713        |       |
| Unrealized  holding gains on investment securities available for sale—net of taxes of $117,026      |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | —     |       | —     |       | 227                |       | 227        |       |
| Less  reclassification adjustment for holding losses included in net income—net of  taxes of $9,288 |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | —     |       | —     |       | (18                | )          | (18        | )          |
|                                                                                                     |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       |       |       |
| Comprehensive  loss                                                                                      |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | —     |       | —     |       | —             |       | 922        |       |
|                                                                                                     |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       |       |       |
| Cumulative effect  of adoption of EITF 06-4, net of taxes                                                |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | (192         | )          | —     |       | —     |       | —             |       | (192       | )          |
| Stock based  compensation expense                                                                        |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | 14                |       | —       |       | —     |       | —     |       | —             |       | 14         |       |
| Purchase of  treasury stock                                                                              |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | (2         | )          | (15        | )          | —             |       | (15        | )          |
| Sale of Treasury  stock                                                                                  |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | 4          |       | 32         |       | —             |       | 32         |       |
| Balance—March 31,  2008                                                                             |       | —              |       | $                 | —     |              | 2,230      |        | $          | 2,230         |       | 90                  |       | $                 | 90         |         | $          | 7,568      |       | $          | 25,592     |               | (225       | )          | $          | (1,842 | ) | $ | 256 |   | $ | 33,894 |   |
|                                                                                                     |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       |       |       |
| 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 gains included in net income—net of  taxes of $7,967  |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | —     |       | —     |       | (342               | )          | (342       | )          |
|                                                                                                     |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       |       |       |
| Comprehensive  income (loss)                                                                             |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       | 715        |       |
|                                                                                                     |       |                |       |              |       |              |       |        |       |          |       |                |       |              |       |         |       |       |       |       |       |               |       |       |       |
| Issuance of  preferred stock                                                                             |       | 7,462               |       | 7,462             |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | —     |       | —     |       | —             |       | 7,462      |       |
| Stock based  compensation expense                                                                        |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | 15                |       | —       |       | —     |       | —     |       | —             |       | 15         |       |
| Sale of treasury  stock                                                                                  |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | —       |       | 2          |       | 4          |       | —             |       | 4          |       |
| Dividends  declared                                                                                      |       | —              |       | —            |       | —            |       | —      |       | —        |       | —              |       | —            |       | (399         | )          | —     |       | —     |       | —             |       | (399       | )          |
| Balance—March 31,  2009                                                                             |       | 7,462               |       | $                 | 7,462      |              | 2,230      |        | $          | 2,230         |       | 90                  |       | $                 | 90         |         | $          | 7,626      |       | $          | 25,350     |               | (218       | )          | $          | (1,809 | ) | $ | 506 |   | $ | 41,455 |   |

 

See notes to consolidated financialstatements.

 

4

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008**

**(In thousands)**

 
| ** **                                                                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                           | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                            |       |            |       |     |       |
| Net income                                                                           |       | $               | 284        |     | $          | 713 |   |
| **Adjustments to reconcile net  income to net cash used by operating activities:**   |       |            |       |     |       |
| Provision for loan losses                                                            |       | 438             |       | 105      |       |
| Depreciation                                                                         |       | 190             |       | 200      |       |
| Amortization and accretion, net                                                      |       | 76              |       | 66       |       |
| Provision for deferred income taxes (benefit)                                        |       | (248            | )          | (129     | )          |
| Gains on sale of assets and investments                                              |       | (21             | )          | (27      | )          |
| Stock based compensation expense                                                     |       | 15              |       | 14       |       |
| Change in other assets                                                               |       | (4,859          | )          | (915     | )          |
| Change in accrued expenses and other liabilities                                     |       | 685             |       | (198     | )          |
|                                                                                 |       |            |       |     |       |
| Net cash used by operating activities                                                |       | (3,440          | )          | (171     | )          |
|                                                                                 |       |            |       |     |       |
| **INVESTING ACTIVITIES:**                                                            |       |            |       |     |       |
| Proceeds from calls and maturities of investment  securities held to maturity        |       | 50              |       | 2,667    |       |
| Proceeds from sales and maturities of investment  securities available for sale      |       | 3,276           |       | 10,618   |       |
| Purchases of investment securities available for  sale                               |       | (6,735          | )          | (28,583  | )          |
| Net change in other investments                                                      |       | 5               |       | 739      |       |
| Net change in loans receivable                                                       |       | (245            | )          | 10,373   |       |
| Net proceeds from the sale of foreclosed  properties                                 |       | 731             |       | —   |       |
| Purchases of premises and equipment, net                                             |       | (907            | )          | (196     | )          |
| Net change in interest bearing deposits with banks                                   |       | (46,898         | )          | (6,302   | )          |
| Net change in certificates of deposit                                                |       | (51             | )          | —   |       |
|                                                                                 |       |            |       |     |       |
| Net cash used in investing activities                                                |       | (50,774         | )          | (10,684  | )          |
|                                                                                 |       |            |       |     |       |
| **FINANCING ACTIVITIES:**                                                            |       |            |       |     |       |
| Net change in deposits                                                               |       | 49,120          |       | 33,906   |       |
| Net change in Federal funds purchased                                                |       | —          |       | (2,000   | )          |
| Net change in advances from Federal Home Loan Bank                                   |       | (1,605          | )          | (16,569  | )          |
| Proceeds from issuance of preferred stock                                            |       | 7,462           |       | —   |       |
| Sale of treasury stock activity                                                      |       | 4               |       | 17       |       |
| Dividends paid                                                                       |       | (399            | )          | —   |       |
|                                                                                 |       |            |       |     |       |
| Net cash provided in financing activities                                            |       | 54,582          |       | 15,354   |       |
|                                                                                 |       |            |       |     |       |
| Net change in cash and cash equivalents                                              |       | 368             |       | 4,499    |       |
|                                                                                 |       |            |       |     |       |
| Cash and cash equivalents, beginning of period                                       |       | 6,870           |       | 8,188    |       |
|                                                                                 |       |            |       |     |       |
| Cash and cash equivalents at end of period                                           |       | $               | 7,238      |     | $          | 12,687 |   |
|                                                                                 |       |            |       |     |       |
| **Supplemental disclosures of  cash paid during the period for:**                    |       |            |       |     |       |
| Interest                                                                             |       | $               | 994        |     | $          | 2,086 |   |
|                                                                                 |       |            |       |     |       |
| Income taxes                                                                         |       | $               | 415        |     | $          | 415 |   |
|                                                                                 |       |            |       |     |       |
| **Supplemental disclosures of  noncash transactions:**                               |       |            |       |     |       |
| Real estate acquired through foreclosure                                             |       | $               | 1,462      |     | 571        |   |
|                                                                                 |       |            |       |     |       |
| Change in unrealized gain on investment securities  available for sale, net of taxes |       | $               | 431        |     | $          | 209 |   |
|                                                                                 |       |            |       |     |       |
| Cumulative effect of change in accounting  principle                                 |       | $               | —     |     | $          | 192 |   |

 

Seenotes to consolidated financial statements.

 

5

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

**Notes tothe Consolidated Financial Statements**

(Unaudited)

 

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

CitizensBancshares Corporation (the “Company”) is a holding company that provides afull range of commercial and personal banking services to individual andcorporate customers in metropolitan Atlanta and Columbus, Georgia, and inBirmingham and Eutaw, Alabama, through its wholly owned subsidiary, CitizensTrust Bank (the “Bank”). The Bank operates under a state charter and serves itscustomers through eight full-service financial centers in metropolitan Atlanta,Georgia, one full-service financial center in Columbus, Georgia, onefull-service financial center in Birmingham, Alabama, and one full-servicefinancial center in Eutaw, Alabama.

 

Theaccompanying unaudited consolidated financial statements have been preparedpursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,certain disclosures required by generally accepted accounting principles arenot included herein. These interim statements should be read in conjunctionwith the financial statements and notes thereto included in the Company’slatest Annual Report on Form 10-K filed with the Securities and ExchangeCommission for the year ended December 31, 2008. The results of operationsfor the interim periods reported herein are not necessarily representative ofthe results expected for the full 2009 fiscal year.

 

Theconsolidated financial statements of the Company for the three month periodended March 31, 2009 are unaudited. In the opinion of management, alladjustments necessary for a fair presentation of the financial position andresults of operations and cash flows for the three month period have beenincluded. All adjustments are of a normal recurring nature. All significantintercompany accounts and transactions have been eliminated in consolidation.

 

**Accounting Policies**

 

TheCompany’s consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”),which often require the judgment of management in the selection and applicationof certain accounting principles and methods. Reference is made to theaccounting policies of the Company described in the notes to the consolidatedfinancial statements contained in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The Company has followed thosepolicies in preparing this report. Management believes that the quality andreasonableness of its most critical policies enable the fair presentation ofits financial position and of its results of operations.

 

**Troubled Asset Relief Program**

 

OnMarch 6, 2009, as part of the U.S. Department of the Treasury (the “Treasury”)Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Companyentered into a Letter Agreement and a Securities Purchase Agreement with theTreasury, pursuant to which the Company agreed to issue and sell, and theTreasury agreed to purchase 7,462 shares (the “Preferred Shares”) of theCompany’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.

 

Thistransaction closed on March 6, 2009. The issuance and sale of thesesecurities was a private placement exempt from registration pursuant to Section 4(2) ofthe Securities Act of 1933. The Preferred Shares qualify as Tier 1 capital andwill pay cumulative dividends at a rate of 5% per annum for the first fiveyears and 9% per annum thereafter. The Company may, subject to

 

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consultationwith the Federal Reserve Bank of Atlanta, redeem the Preferred Shares at anytime for its aggregate liquidation amount plus any accrued and unpaid dividendswithout first raising additional capital in an equity offering.

 

**Acquisition**

 

OnMarch 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 the Branchwhich totaled approximately $50 million. Under the Agreement, Citizens alsoacquired the branch office and related real estate and certain personalproperty at the Branch. The Company recorded a finite lived intangible assetrelated to the value of deposit accounts acquired of approximately $3,303,000and 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:

 

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FSPEITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,”(“FSP EITF 99-20-1”) was issued in January 2009. Prior to the FSP,other-than-temporary impairment was determined by using either Emerging IssuesTask Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income andImpairment on Purchased Beneficial Interests and Beneficial Interests thatContinue to be Held by a Transferor in Securitized Financial Assets,” (“EITF99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt andEquity Securities,” (“SFAS 115”) depending on the type of security. EITF 99-20required the use of market participant assumptions regarding future cash flowsregarding the probability of collecting all cash flows previously projected. SFAS115 determined impairment to be other than temporary if it was probable thatthe holder would be unable to collect all amounts due according to thecontractual terms. To achieve a more consistent determination ofother-than-temporary impairment, the FSP amends EITF 99-20 to determine anyother-than-temporary impairment based on the guidance in SFAS 115, allowingmanagement to use more judgment in determining any other-than-temporaryimpairment. The FSP was effective for reporting periods ending after December 15,2008. Management has reviewed the Company’s security portfolio and evaluatedthe portfolio for any other-than-temporary impairments.

 

OnApril 9, 2009, the FASB issued three staff positions related to fair valuewhich are discussed below.

 

FSPSFAS 115-2 and SFAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments,” (“FSP SFAS 115-2 and SFAS 124-2”)categorizes losses on debt securities available-for-sale or held-to-maturitydetermined by management to be other-than-temporarily impaired into losses dueto credit issues and losses related to all other factors. Other-than-temporaryimpairment (OTTI) exists when it is more likely than not that the security willmature or be sold before its amortized cost basis can be recovered. An OTTIrelated to credit losses should be recognized through earnings. An OTTI relatedto other factors should be recognized in other comprehensive income. The FSPdoes not amend existing recognition and measurement guidance related toother-than-temporary impairments of equity securities. Annual disclosuresrequired in SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required forinterim periods (including the aging of securities with unrealized losses).

 

FSPSFAS 157-4, “Determining Fair Value When the Volume and Level of Activity forthe Asset or Liability Have Significantly Decreased and IdentifyingTransactions That are Not Orderly” recognizes that quoted prices may not bedeterminative of fair value when the volume and level of trading activity hassignificantly decreased. The evaluation of certain factors may necessitate thatfair value be determined using a different valuation technique. Fair valueshould be the price that would be received to sell an asset or paid to transfera liability in an orderly transaction, not a forced liquidation or distressedsale. If a transaction is considered to not be orderly, little, if any, weightshould be placed on the transaction price. If there is not sufficientinformation to conclude as to whether or not the transaction is orderly, thetransaction price should be considered when estimating fair value. An entity’sintention to hold an asset or liability is not relevant in determining fairvalue. Quoted prices provided by pricing services may still be used whenestimating fair value in accordance with SFAS 157; however, the entity shouldevaluate whether the quoted prices are based on current information and orderlytransactions. Inputs and valuation techniques are required to be disclosed inaddition to any changes in valuation techniques.

 

FSPSFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of FinancialInstruments” requires disclosures about the fair value of financial instrumentsfor interim reporting periods of publicly traded companies as well as in annualfinancial statements and also requires those disclosures in summarizedfinancial information at interim reporting periods A publicly traded

 

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companyincludes any company whose securities trade in a public market on either astock exchange or in the over-the-counter market, or any company that is aconduit bond obligor. Additionally, when a company makes a filing with aregulatory agency in preparation for sale of its securities in a public marketit is considered a publicly traded company for this purpose.

 

Thethree staff positions are effective for periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009, in which case all three must be adopted. The Company will adopt the staffpositions for its second quarter 10-Q but does not expect the staff positionsto have a material impact on the consolidated financial statements.

 

Alsoon April 1, 2009, the FASB issued FSP SFAS 141(R)-1, “Accounting forAssets Acquired and Liabilities Assumed in a Business Combination That Arisefrom Contingencies.” The FSP requires that assets acquired and liabilitiesassumed in a business combination that arise from a contingency be recognizedat fair value. If fair value cannot be determined during the measurement periodas determined in SFAS 141 (R), the asset or liability can still be recognizedif it can be determined that it is probable that the asset existed or theliability had been incurred as of the measurement date and if the amount of theasset or liability can be reasonably estimated. If it is not determined to beprobable that the asset/liability existed/was incurred or no reasonable amountcan be determined, no asset or liability is recognized. The entity shoulddetermine a rational basis for subsequently measuring the acquired assets andassumed liabilities. Contingent consideration agreements should be recognizedinitially at fair value and subsequently reevaluated in accordance withguidance found in paragraph 65 of SFAS 141 (R). The FSP is effective forbusiness combinations with an acquisition date on or after the beginning of theCompany’s first annual reporting period beginning on or after December 15,2008. The Company will assess the impact of the FSP if and when a futureacquisition occurs.

 

TheSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”)No. 111 on April 9, 2009 to amend Topic 5.M., “Other Than TemporaryImpairment of Certain Investments in Debt and Equity Securities” and tosupplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the staff’sprevious views related to equity securities; however debt securities areexcluded from its scope. The SAB provides that “other-than-temporary”impairment is not necessarily the same as “permanent” impairment and unlessevidence exists to support a value equal to or greater than the carrying valueof the equity security investment, a write-down to fair value should berecorded and accounted for as a realized loss. The SAB was effective uponissuance and had no impact on the Company’s financial position.

 

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.

 

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**2. FAIR VALUE OF FINANCIALINSTRUMENTS**

 

TheCompany measures or monitors certain of its assets and liabilities on a fairvalue basis. Fair value is used on a recurring basis for assets and liabilitiesthat are elected to be accounted for under SFAS 159 as well as certain assetsand liabilities in which fair value is the primary basis of accounting. Dependingon the nature of the asset or liability, the Company uses various valuation techniquesand assumptions when estimating fair value, which are in accordance with SFAS157 and FSP FAS 157-3, “Determining the Fair Value of a Financial Asset Whenthe Market for that Asset is Not Active,” when applicable.

 

Inaccordance with SFAS 157, the Company applied the following fair valuehierarchy:

 

Level1—Quoted prices in active markets for identical assets or liabilities. Level 1assets and liabilities include debt and equity securities and derivativecontracts that are traded in an active exchange market, as well as U.S.Treasury and other highly liquid investments are actively traded inover-the-counter markets.

 

Level2—Observable inputs other than Level 1 prices such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities. Level 2 assets andliabilities include debt securities with quoted prices that are traded lessfrequently than exchange-traded instruments and derivative contracts whosevalue is determined using a pricing model with inputs that are observable inthe market or can be derived principally from or corroborated by observablemarket data. This category generally includes U.S. Government and agencymortgage-backed debt securities, certain derivative contracts and impairedloans.

 

Level3—Unobservable inputs that are supported by little or no market activity andthat are significant to the fair value of the assets or liabilities. Level 3assets and liabilities include financial instruments whose value is determinedusing pricing models, discounted cash flow methodologies, or similartechniques, as well as instruments for which the determination of fair valuerequires significant management judgment or estimation. For example, thiscategory generally includes certain private equity investments, retainedresidual interests in securitizations, residential mortgage servicing rights, intangiblesand highly-structured or long-term derivative contracts.

 

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Thefollowing tables present financial assets and financial liabilities measured atfair value on a recurring basis and the change in fair value for those specificfinancial instruments in which fair value has been elected. This disclosuresshould not be considered a surrogate of the liquidation value for thosespecific financial instruments, but rather a good-faith estimate of theincrease or decrease in their value since purchase, origination, or issuance(in thousands).

 
| ** **                    | ** ** | **Fair Value Measurements at  March 31, 2009** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | ** **                                          | ** ** | **Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                                          | ** ** | **Prices In** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                                          | ** ** | **Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                                          | ** ** | **Markets for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Assets/Liabilities**                              | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                    | ** ** | **Measured at**                                     | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                    | ** ** | **Fair Value**                                      | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                    | ** ** | **March 31, 2009**                             | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Recurring Basis:**          |       |                                                |       |   |   |   |   |   |   |
| **Assets**                    |       |                                                |       |   |   |   |   |   |   |
| Securities available for sale |       | $                                                   | 92,059     |   | $ | — |   | $ | 92,059 |   | $ | — |   |
|                          |       |                                                |       |   |   |   |   |   |   |
| **Liabilities**               |       |                                                |       |   |   |   |   |   |   |
| FHLB Advances                 |       | 27,108                                              |       | — |   | 27,108 |   | — |   |
|                          |       |                                                |       |   |   |   |   |   |   |
| **Nonrecurring Basis:**       |       |                                                |       |   |   |   |   |   |   |
| **Assets**                    |       |                                                |       |   |   |   |   |   |   |
| Impaired loans                |       | $                                                   | 26,568     |   | $ | — |   | $ | 26,568 |   | $ | — |   |
| Foreclosed real estate        |       | $                                                   | 4,605      |   | $ | — |   | $ | 4,605 |   | $ | — |   |
| Goodwill                      |       | 362                                                 |       | — |   | — |   | 362 |   |
| Core deposit intangibles      |       | 3,361                                               |       | — |   | — |   | 3,361 |   |

 
| ** **                    | ** ** | **Fair Value Measurements at  December 31, 2008** | ** ** |
|-------------------------------|------------|--------------------------------------------------------|------------|
| ** **                    | ** ** | ** **                                             | ** ** | **Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                                             | ** ** | **Prices In** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                                             | ** ** | **Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                                             | ** ** | **Markets for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Assets/Liabilities**                                 | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                    | ** ** | **Measured at**                                        | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                    | ** ** | **Fair Value**                                         | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                    | ** ** | **December 31, 2008**                             | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Recurring Basis:**          |       |                                                   |       |   |   |   |   |   |   |
| **Assets**                    |       |                                                   |       |   |   |   |   |   |   |
| Securities available for sale |       | $                                                      | 87,961     |   | $ | — |   | $ | 87,961 |   | $ | — |   |
|                          |       |                                                   |       |   |   |   |   |   |   |
| **Liabilities**               |       |                                                   |       |   |   |   |   |   |   |
| FHLB Advances                 |       | 28,713                                                 |       | — |   | 28,713 |   | — |   |
|                          |       |                                                   |       |   |   |   |   |   |   |
| **Nonrecurring Basis:**       |       |                                                   |       |   |   |   |   |   |   |
| **Assets**                    |       |                                                   |       |   |   |   |   |   |   |
| Impaired loans                |       | $                                                      | 22,489     |   | $ | — |   | $ | 22,489 |   | $ | — |   |
| Foreclosed real estate        |       | $                                                      | 3,874      |   | $ | — |   | $ | 3,874 |   | $ | — |   |
| Goodwill                      |       | 362                                                    |       | — |   | — |   | 362 |   |
| Core deposit intangibles      |       | 71                                                     |       | — |   | — |   | 71 |   |

 

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TheCompany is predominantly an asset based lender with real estate serving ascollateral on a majority of its loans. The fair value of collateral dependentloans is based on the fair value of the collateral securing these loans. Substantiallyall impaired loans are secured by real estate. The fair value of this realestate is generally determined based upon appraisals performed by a certifiedor licensed appraiser using inputs such as absorption rates, capitalizationrates, and comparables. Management also considers other factors or recentdevelopments that could result in adjustments to the collateral value estimatesindicated in the appraisals such as changes in absorption rates or marketconditions from the time of valuation. These measurements are classified asLevel 2 within the valuation hierarchy.

 

TheFederal Home Loan Bank (the “FHLB”) Advance balance outstanding at March 31,2009 and 2008 consist of a Daily Rate Credit advance, which is priced daily offof the Fed Funds rates and an Affordable Housing Program (AHP) award used tosubsidized loans for homeownership or rental initiatives. At March 31,2009, there were no changes in fair values that were included in currentearnings.

 

**3. INTANGIBLE ASSETS**

 

Finitelived intangible assets of the Company represent deposit assumption premiumsrecorded upon the purchase of certain assets and liabilities from otherfinancial institutions. Deposit assumption premiums are amortized over seven years,the estimated average lives of the deposit bases acquired, using thestraight-line method and are included within other assets on the ConsolidatedBalance Sheets.

 

TheCompany applies a fair value-based impairment test to the carrying value ofgoodwill on an annual basis and on an interim basis if certain events orcircumstances indicate that an impairment loss may have been incurred.

 

Thefollowing table presents information about the Company’s intangible assets at(in thousands):

 
| ** **                    | ** ** | **March 31, 2009**    | ** ** | **December 31, 2008**    | ** ** |
|-------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                          |       |                       |       |                          |       |   |   |   |   |
| Unamortized intangible asset: |       |                       |       |                          |       |   |   |   |   |
| Goodwill                      |       | $                          | 362        |                          | $          | — |   | $ | 362 |   | $ | — |   |
|                          |       |                       |       |                          |       |   |   |   |   |
| Amortized intangible assets:  |       |                       |       |                          |       |   |   |   |   |
| Core deposit intangibles      |       | $                          | 3,676      |                          | $          | 315 |   | $ | 373 |   | $ | 302 |   |

 

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Thefollowing table presents information about aggregate amortization expense (inthousands):

** **
| ** **                                                                                                   | ** ** | **For the 3   months ended  March 31, 2009** | ** ** | **For the 3   months ended  March 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
|                                                                                                         |       |                                              |       |                                              |       |
| Aggregate amortization expense of core deposit intangibles:                                                  |       | $                                                 | 13         |                                              | $          | 13 |   |
|                                                                                                         |       |                                              |       |                                              |       |
| Estimated aggregate amortization expense of core deposit intangibles  for the years ending December 31: |       |                                              |       |                                              |       |
|                                                                                                         |       |                                              |       |                                              |       |
| 2009                                                                                                         |       | $                                                 | 407        |                                              |       |   |
| 2010                                                                                                         |       | $                                                 | 490        |                                              |       |   |
| 2011                                                                                                         |       | $                                                 | 472        |                                              |       |   |
| 2012                                                                                                         |       | $                                                 | 472        |                                              |       |   |
| 2013                                                                                                         |       | $                                                 | 472        |                                              |       |   |
| 2014 and thereafter                                                                                          |       | $                                                 | 1,062      |                                              |       |   |
|                                                                                                              |            |                                                   |            |                                                   |            |  |  |

 

**4.  COMPREHENSIVE INCOME**

 

Comprehensiveincome includes: (1) reported net income and (2) unrealized gains andlosses on marketable securities.  Thefollowing table shows our comprehensive income (in thousands):

 
| ** **                        | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Net Income                        |       | $                                    | 284        |   | $ | 713 |   |
|                              |       |                                 |       |   |   |
| Other comprehensive income (loss) |       | 431                                  |       | 209 |   |
|                              |       |                                 |       |   |   |
| Comprehensive income              |       | $                                    | 715        |   | $ | 922 |   |

 

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

 

Basic and diluted net income available tocommon and potential common shares per share has been calculated based on theweighted average number of shares outstanding. The following schedule reconciles the numerator and denominator of thebasic and diluted net income available to common and potential common sharesper share for the three month period ended March 31, 2009 and 2008 (inthousands, except per share data):

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

 

**RECLASSIFICATIONS**

 

Certain2008 amounts have been reclassified to conform to the 2009 presentation.

 

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

 

**INTRODUCTION**

 

CitizensBancshares Corporation (the “Company”) is a holding company that provides afull range of commercial and personal banking services to individuals andcorporate customers in its primary market areas, metropolitan Atlanta andColumbus, Georgia, and Birmingham and Eutaw, Alabama through its wholly ownedsubsidiary, Citizens Trust Bank (the “Bank”). The Bank is a member of the Federal Reserve System and operates under astate charter.  The Company serves itscustomers through 11 full-service financial centers in Georgia and Alabama.

 

**ForwardLooking Statements**

 

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

 

Forward-lookingstatements are based on current management expectations and, by their nature,are subject to risk and uncertainties because of the possibility of changes inunderlying factors and assumptions. Actual conditions, events or results coulddiffer materially from those contained in or implied by such forward-lookingstatements for a variety of reasons, including: sharp and/or rapid changes ininterest rates; significant changes in the economic scenario from the currentanticipated scenario which could materially change anticipated credit qualitytrends and the ability to generate loans and gather deposits; significant delayin or inability to execute strategic initiatives designed to grow revenues and/orcontrol expenses; unanticipated issues during the integration of acquisitions;and significant changes in accounting, tax or regulatory practices orrequirements. The Company undertakes no obligation to, nor does it intend to,update forward-looking statements to reflect circumstances or events that occurafter the date hereof or to reflect the occurrence of unanticipated events.

 

Thefollowing discussion is of the Company’s financial condition as of March 31,2009 and December 31, 2008, and the changes in the financial condition andresults of operations for the three month periods ended March 31, 2009 and2008.

 

**Critical Accounting Policies**

 

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

 

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

 

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securities during 2009 or 2008.

 

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

 

Gains and losses on sales of investment securitiesare recognized upon disposition, based on the adjusted cost of the specificsecurity.  A decline in market value ofany security below cost that is deemed other than temporary is charged toearnings resulting in the establishment of a new cost basis for the security.

 

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

 

**Allowance for Loan Losses** - The 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 other delinquencyanalyses.  Therefore, the value used todetermine the provision for losses is subject to the reasonableness of theseestimates.  The adequacy of the allowancefor loan losses is reviewed on a monthly basis by management and the Board ofDirectors.  On a semi-annual basis anindependent comprehensive review of the adequacy of the allowance for loanlosses is performed.  This assessment ismade in the context of historical losses as well as existing economicconditions, and individual concentrations of credit.  Loans are charged against the allowance when,in the opinion of management, such loans are deemed uncollectible andsubsequent recoveries are added to the allowance.

 

Adescription of other accounting policies are summarized in Note 1, Summary ofSignificant Accounting Policies in the Notes to Consolidated FinancialStatements of the Company’s Annual Report on Form 10-K for the year ended December 31,2008.  The Company has followed thosepolicies in preparing this report.

 

**FINANCIALCONDITION**

 

Totalassets at March 31, 2009 increased by 16% or $55,997,000 to $404,092,000compared to $348,095,000 at December 31, 2008.  This increase is primarily due to a branchacquisition the completed on March 27, 2009.   The Company’s subsidiary, Citizens TrustBank (“Citizens”), acquired approximately $50 million of in-market deposits ofThe Peoples Bank, a Georgia state bank. Premises and equipment and other assets were both impacted by the branchacquisition, increasing by $717,000 and $4,784,000, respectively.  Citizens acquired the branch office andrelated real estate at a fair value of $750,000 and certain personal propertyat the Branch with a fair value of $64,000. Citizens also recorded a finite lived intangible asset related to thevalue of deposit accounts acquired of approximately $3,303,000.

 

Theacquired deposits are temporarily invested in interest-bearing deposits withbanks, which increased by $46,898,000 during the first quarter of 2009.  In the short-term, the Company plans toinvest these deposits in qualified investments to increase interestincome.  During the first quarter of2009, investment securities and other investments increased by $4,042,000. Inthe long-term, the Company expects to utilize the majority of the deposits tofund prudent loan growth.

 

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Loansreceivable, the Company’s largest earning asset, decreased by $1,680,000 orless than 1% to $208,626,000 at March 31, 2009 compared to December 31,2008.  In the first quarter of 2008,loans receivables decreased by $10,506,000 or 4%.  While the decline in loan volume appears tohave slowed, the Company continues to be negatively impacted by thedeterioration of economic conditions within the markets its serves. Real estateand other collateral values continue to decline. Many consumers areexperiencing reduced levels of disposable incomes as a result of increasedunemployment due to layoffs and plant closures. Also, commercial customers haveseen an overall drop in business activity due to the recessionary affects of theeconomy. Due to the current slowdown in economic conditions, the Company’s loanofficers are spending more time with their loan portfolios to spotdeterioration and intervene timely to curtail significant losses.

 

Totalliabilities at the end of the first quarter of 2009 were $362,637,000,increasing by $48,200,000 or 15% compared to December 31, 2008. Totaldeposits increased by $49,120,000 to $331,033,000, which was partially offsetby a decrease in Advances from the Federal Home Loan Bank of $1,605,000 to$27,108,000.

 

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

 

**INVESTMENT SECURITIES**

 

Thecomposition of the Company’s investment securities portfolio reflects theCompany’s investment strategy of maximizing portfolio yields commensurate withrisk and liquidity considerations. The primary objectives of the Company’sinvestment strategy is to maintain an appropriate level of liquidity andprovide a tool to assist in controlling the Company’s interest rate sensitivityposition, while at the same time producing adequate levels of interest income.

 

TheCompany invests a portion of its assets in U.S. government sponsored agencysecurities, state, county and municipal securities, and mortgage backedbonds.  At March 31, 2009 and December 31,2008, the Company’s investment securities portfolio represented approximately24% and 27%, respectively, of total assets. The decrease of the investment securities portfolio to total assets isdue to the $56 million or 16% increase in total assets during the first quarterof 2009.

 

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

 
| **At March 31, 2009**              | ** ** | **Amortized  Cost** | ** ** | **Gross   Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                          |       |                          |       |           |       |
| State, county, and municipal securities |       | $                   | 22,504     |                          | $          | 457                           |       | $              | 234        |   | $ | 22,727 |   |
| Mortgage-backed securities              |       | 68,788              |       | 1,224                         |       | 680                           |       | $              | 69,332     |   |
| Totals                                  |       | $                   | 91,292     |                          | $          | 1,681                         |       | $              | 914        |   | $ | 92,059 |   |

 
| **At December 31, 2008**           | ** ** | **Amortized  Cost** | ** ** | **Gross   Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                          |       |                          |       |           |       |
| State, county, and municipal securities |       | $                   | 21,207     |                          | $          | 313                           |       | $              | 155        |   | $ | 21,365 |   |
| Mortgage-backed securities              |       | 66,640              |       | 702                           |       | 746                           |       | 66,596         |       |
| Totals                                  |       | $                   | 87,847     |                          | $          | 1,015                         |       | $              | 901        |   | $ | 87,961 |   |

 

17

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

 
| **At March 31, 2009**              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| State, county, and municipal securities |       | $                   | 4,002      |                         | $          | 95                            |       | $              | 20         |   | $ | 4,077 |   |
| Mortgage-backed securities              |       | 530                 |       | 6                            |       | —                        |       | 536            |       |
| Totals                                  |       | $                   | 4,532      |                         | $          | 101                           |       | $              | 20         |   | $ | 4,613 |   |

 
| **At December 31, 2008**           | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                    |       |                |       |                         |       |                          |       |           |       |
| State, county, and municipal securities |       | $                   | 4,003      |                         | $          | 118                           |       | $              | 11         |   | $ | 4,110 |   |
| Mortgage-backed securities              |       | 580                 |       | 7                            |       | —                        |       | 587            |       |
| Totals                                  |       | $                   | 4,583      |                         | $          | 125                           |       | $              | 11         |   | $ | 4,697 |   |

 

Securitiesclassified as available-for-sale are recorded at fair market value andheld-to-maturity securities are recorded at amortized cost.  The Company evaluates its investmentportfolio periodically to identify any impairment that is other thantemporary.  At March 31, 2009, theCompany had several debt securities that have been in an unrealized lossposition for twelve months or more.  TheCompany has the ability and intent to hold these securities until such time asthe value recovers or the securities mature. The Company believes, based on industry analyst reports and creditratings, that the deterioration in value is attributable to changes in marketinterest rates and is not in the credit quality of the issuer and therefore,these losses are not considered other than temporary.

 

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.

 

Otherinvestments consist of Federal Home Loan Bank and Federal Reserve Bank stockwhich are restricted and have no readily determined market value.  The Company is required to maintain aninvestment in the FHLB and the FRB as part of its membership conditions. Thelevel of investments at the FHLB is primarily determined by the amount ofoutstanding advances. The FRB investment level is 6 percent of the par value ofthe bank’s common stock outstanding and paid-in-capital.  These investments are carried at cost.

 

Securitieswith carrying values of $46,407,000 and $88,964,000 at March 31, 2009 and December 31,2008 were pledged to secure public deposits as required by law.

 

18

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##### **LOANS**

#####  

Loansoutstanding, by classification, are summarized as follows (in thousands):

 
| ** **                              | ** **                | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|---------------------------|---------------|------------|------------------|------------|
| ** **                              | ** **                | **2009**      | ** ** | **2008**         | ** ** |
|                                    |                      |          |       |             |       |
| Commercial, financial, and agricultural |                      | $             | 13,724     |             | $          | 15,827 |   |
| Installment                             |                      | 9,949         |       | 10,582           |       |
| Real estate - mortgage                  |                      | 162,321       |       | 164,822          |       |
| Real estate - construction              |                      | 22,960        |       | 21,526           |       |
| Other                                   |                      | 4,843         |       | 2,400            |       |
|                                    | Loans receivable          |          | 213,797    |             | 215,157    |   |
| Less:                                   | Net deferred loan fees    |          | 241        |             | 192        |   |
|                                    | Allowance for loan losses |          | 4,930      |             | 4,659      |   |
|                                    |                      |          |       |             |       |   |
|                                    | Loans receivable, net     |          | $          | 208,626          |       | $ | 210,306 |   |

 

Theclassification Real estate — mortgage consists of home equity loans, mortgageson 1—4 family residential, multifamily residential, and nonfarm residentialproperties such as churches, hotels, and convenience stores.

 

**NONPERFORMING ASSETS**

 

Nonperformingassets include nonperforming loans, real estate acquired through foreclosure,and repossessed assets.  Nonperformingloans consist of loans that are past due with respect to principal or interestmore than 90 days and have been placed on nonaccrual status.

 

Withthe exception of the loans included within nonperforming assets in the tablebelow, management is not aware of any loans classified for regulatory purposesas loss, doubtful, substandard, or special mention that have not been disclosedwhich (1) represent or result from trends or uncertainties whichmanagement reasonably expects will materially impact future operating results,liquidity, or capital resources, or (2) represent any information onmaterial credits of which management is aware that causes management to haveserious doubts as to the abilities of such borrowers to comply with the loanrepayment terms.

 

Thechallenging financial and credit markets continued to experience difficulty inthe first three months of 2009.  As theeconomic outlook appears to be stabilizing in the first quarter of 2009, themarket continues to experience declines in real estate values and increases indelinquency levels which impact the levels of our nonperforming assets.  However, there was some improvement in thefirst quarter of 2009 as nonperforming assets decreased by $665,000 to$19,387,000 at March 31, 2009 from $20,052,000 at December 31,2008.  At March 31, 2009,nonperforming assets represents 8.89% of loans, net of unearned income, andreal estate acquired through foreclosure as compared to 9.16% at December 31,2008.  Nonaccrual loans were $14,782,000at March 31, 2009 compared to $16,178,000 at December 31, 2008. Therewere no loans greater than 90 days past due and still accruing interest at theend of the first quarter of 2009 or at December 31, 2008.

 

19

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Thetable below presents a summary of the Company’s nonperforming assets at March 31,2009 and December 31, 2008.

 
| ** **                                                                                           | ** ** | **March 31,**        | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2009**                  | ** ** | **2008**              | ** ** |
| ** **                                                                                           | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                           | ** ** | **financial ratios)**     | ** ** |
| Nonperforming assets:                                                                                |       |                      |       |                  |       |
| Nonperforming loans:                                                                                 |       |                      |       |                  |       |
| Nonaccrual loans                                                                                     |       | $                         | 14,782     |                  | $          | 16,178 |   |
| Past-due loans of 90 days or more                                                                    |       | —                    |       | —                |       |
| Nonperforming loans                                                                                  |       | 14,782                    |       | 16,178                |       |
|                                                                                                 |       |                      |       |                  |       |
| Real estate acquired through foreclosure                                                             |       | 4,605                     |       | 3,874                 |       |
| Total nonperforming assets                                                                           |       | $                         | 19,387     |                  | $          | 20,052 |   |
|                                                                                                 |       |                      |       |                  |       |
| Ratios:                                                                                              |       |                      |       |                  |       |
| Nonperforming loans to loans, net of unearned income and discount on  loans                          |       | 6.92                      | %          | 7.53                  | %          |
|                                                                                                 |       |                      |       |                  |       |
| Nonperforming assets to loans, net of unearned income, and real  estate acquired through foreclosure |       | 8.89                      | %          | 9.16                  | %          |
|                                                                                                 |       |                      |       |                  |       |
| Nonperforming assets to total assets                                                                 |       | 4.80                      | %          | 5.76                  | %          |
|                                                                                                 |       |                      |       |                  |       |
| Allowance for loan losses to nonperforming loans                                                     |       | 33.35                     | %          | 28.80                 | %          |
|                                                                                                 |       |                      |       |                  |       |
| Allowance for loan losses to nonperforming assets                                                    |       | 25.43                     | %          | 23.23                 | %          |

 

**ALLOWANCE FOR LOAN LOSSES**

 

Theallowance for loan losses is primarily available to absorb losses inherent inthe loan portfolio. Credit exposures deemed uncollectible are charged againstthe allowance for loan losses.

 

TheCompany provides for estimated losses on loans receivable when any significantand permanent decline in value occurs. These estimates for losses are based on individual assets and their cashflow forecasts, sales values, independent appraisals, the volatility of certainreal estate markets, and concern for disposing of real estate in distressedmarkets.  For loans that are pooled forpurposes of determining the necessary provisions, estimates are based on loantypes, history of charge-offs, and other delinquency analyses.  Therefore, the value used to determine theprovision for losses is subject to the reasonableness of these estimates. Theadequacy of the allowance for loan losses is reviewed on a monthly basis bymanagement and the Board of Directors. On a semi-annual basis an independent review of the adequacy ofallowance for loan losses is performed. This assessment is made in the context of historical losses as well asexisting economic conditions, and individual concentrations of credit.

 

Loansare charged against the allowance when, in the opinion of management, suchloans are deemed uncollectible and subsequent recoveries are added to theallowance.  For the first three months of2009, based on the Company’s evaluation, a provision for loan losses of$438,000 was charged against operating earnings compared to $105,000 for thesame period last year.  The increase inthe provision for loan losses for 2009 relates to the continued deteriorationof liquidity of the borrowers and the collateral value securing the loans dueto current economic conditions.

 

Theallowance for loan losses at March 31, 2009 was approximately $4,930,000,representing 2.31% of total loans, net of unearned income compared toapproximately $4,659,000 at December 31, 2008,

 

20

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whichrepresented 2.17% of total loans, net of unearned income.  Approximately $2,932,000 of the allowance forloan losses was allocated to loans management considered impaired at March 31,2009, compared to $2,504,000 at December 31, 2008.

 

AtMarch 31, 2009, management believes the allowance for loan losses isadequate. Management uses available information to recognize losses on loans;however, future additions to the allowance may be necessary based on changes ineconomic conditions, particularly in the metropolitan Atlanta, Georgia andBirmingham, Alabama areas. In addition, regulatory agencies, as an integralpart of their examination process, periodically review the Company’s allowancefor loan losses. Such agencies may require the Company to recognize additionsto the allowance based on their judgments about information available to themat the time of their examination.

 

Asubstantial portion of the Company’s loan portfolio is secured by real estatein the metropolitan Atlanta and Birmingham markets, including a concentrationof loans to churches, convenience stores and hotels. The ultimatecollectibility of a significant portion of the Company’s loan portfolio issusceptible to changes in market conditions in the metropolitan Atlanta andBirmingham areas.

 

·                  The Company’soutstanding church loans were approximately $42 million at March 31, 2009and December 31, 2008.  Loans tochurches are generally secured by real estate.

 

·                  The Company’sloans to area convenience stores were approximately $12 million and $13 millionat March 31, 2009 and December 31, 2008, respectively.  Loans to convenience stores are generallysecured by real estate.

 

·                  The Company’sloans to area hotels were approximately $20 million at March 31, 2009 and December 31,2008.  Loans to hotels are generallysecured by real estate.

 

Also, 1–4 family residential mortgage loans secured by first liens wereapproximately $41 million and $42 million at March 31, 2009 and December 31,2008, respectively. The Company has no subprime mortgages in its portfolio andexited the mortgage origination business in the third quarter of 2007.

 

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Thefollowing table summarizes loans, changes in the allowance for loan lossesarising from loans charged off, recoveries on loans previously charged off byloan category, and additions to the allowance which have been charged tooperating expense as of and for the three month periods ended March 31,2009 and 2008 (amount in thousands, except financial ratios):

 
| ** **                                                                                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                       |       |     |       |     |       |
| Loans, net of unearned income                                                                              |       | $        | 213,556    |     | $          | 227,667 |   |
|                                                                                                       |       |     |       |     |       |
| Average loans, net of unearned income and the allowance for loan  losses                                   |       | $        | 209,365    |     | $          | 231,094 |   |
|                                                                                                       |       |     |       |     |       |
| Allowance for loan losses at the beginning of period                                                       |       | $        | 4,659      |     | $          | 2,848 |   |
|                                                                                                       |       |     |       |     |       |
| Loans charged-off:                                                                                         |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                    |       | —   |       | —   |       |
| Real estate - loans                                                                                        |       | 46       |       | 52       |       |
| Installment loans to individuals                                                                           |       | 149      |       | 121      |       |
| Total loans charged-off                                                                                    |       | 195      |       | 173      |       |
|                                                                                                       |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                    |       | 2        |       | 11       |       |
| Real estate - loans                                                                                        |       | 4        |       | 8        |       |
| Installment loans to individuals                                                                           |       | 22       |       | 10       |       |
| Total loans recovered                                                                                      |       | 28       |       | 29       |       |
|                                                                                                       |       |     |       |     |       |
| Net loans charged-off                                                                                      |       | 167      |       | 144      |       |
|                                                                                                       |       |     |       |     |       |
| Additions to allowance for loan losses charged to operating expense                                        |       | 438      |       | 105      |       |
|                                                                                                       |       |     |       |     |       |
| Allowance for loan losses at period end                                                                    |       | $        | 4,930      |     | $          | 2,809 |   |
|                                                                                                       |       |     |       |     |       |
| Ratio of net loans charged-off to average loans, net of unearned  income and the allowance for loan losses |       | 0.08     | %          | 0.06     | %          |
|                                                                                                       |       |     |       |     |       |
| Ratio of allowance for loan losses to loans, net of unearned income  and discounts                         |       | 2.31     | %          | 1.23     | %          |

 

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**DEPOSITS**

 

Depositsare the Company’s primary source of funding loan growth.  Total deposits in the first quarter of 2009increased 17% or $49 million to $331,033,000. This increase is primarily due to the acquisition of a local branchwhich had approximately $50 million of in-market deposits.  Noninterest-bearing deposits increased by 20%or $11 million and interest-bearing deposits increased by 17% or $38 millionwhen compared to December 31, 2008.

 

TheCompany is participating in the Temporary Liquidity Guarantee Program’s fullcoverage of noninterest-bearing deposit transaction accounts and certaininterest-bearing checking accounts (for which the rate paid will not exceed 50basis points) regardless of dollar amount through December 31, 2009. Inaddition, the Company participates in Certificate of Deposit Account RegistryServices (CDARS”), a program that allows its customers the ability to benefitfrom full FDIC insurance on CD investments of up to $250 million.

 

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

 
| ** **                        | ** ** | **March 31,** | ** **    | **December 31,** | ** ** |
|-----------------------------------|------------|--------------------|---------------|-----------------------|------------|
| ** **                        | ** ** | **2009**           | ** **    | **2008**              | ** ** |
|                              |       |               |          |                  |       |
| NOW and money market accounts     |       | $                  | 76,180        |                  | $          | 72,429 |   |
| Savings accounts                  |       | 34,626             |          | 32,221                |       |
| Time deposits of $100,000 or more |       | 109,533            |          | 76,072                |       |
| Other time deposits               |       | 44,896             |          | 46,405                |       |
|                              |       | $                  |  265,235 |                  | $          | 227,127 |   |

 

**OTHER BORROWED FUNDS**

 

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

 

TheCompany had an unsecured note payable of approximately $240,000 at March 31,2009 and December 31, 2008.  Thenote bears an interest rate of 2.75% at March 31, 2009 and December 31,2008 (the lender’s prime rate minus 50 basis points).

 

TheBank had outstanding advances from the FHLB of $27,108,000 at March 31,2009 compared to $28,713,000 at December 31, 2008.   The following advances are collateralized bya blanket lien on the Company’s 1-4 family mortgage loans, multifamily mortgageloans, commercial real estate loans and investment securities (amounts inthousands).

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type**   | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------|------------|--------------|------------|------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| July 2009                      |       | Daily        |       | Variable   |       | 0.45                    | %          | $                          | 26,750     |   | 0.46 | % | $ | 28,350 |   |
| August 2026                    |       |         |       | (1         | )          | —                  |       | 358                        |       | — |   | 363 |   |
|                                |       |         |       |       |       |                    |       |                       |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |       |       |                    |       | $                          | 27,108     |   |   |   | $ | 28,713 |   |
|                                |       |         |       |       |       |                    |       |                       |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |       |       | 0.44                    | %          |                       |       | 0.45 | % |   |   |

 

----

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

 

23

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**RESULTS OFOPERATIONS**

 

**Net Interest Income:**

 

Netinterest income is the principal component of a financial institution’s incomestream and represents the difference, or spread, between interest and feeincome generated from earning assets and the interest expense paid on depositsand borrowed funds.  Fluctuations ininterest rates as well as volume and mix changes in earning assets and interestbearing liabilities can materially impact net interest income.

 

Forthe three month period ended March 31, 2009, net interest income increasedby $281,000 to $3,651,000 compared to $3,370,000 reported for the same periodlast year.  Total interest incomedecreased by $649,000 or 12% compared to the same three month period in 2008and was primarily due to an $854,000 decrease in interest income on loans as aresult of lowered yields, volume and nonaccrual loans.  Total interest expense for the perioddecreased by $930,000 or 49% compared to the same three month period in2008.  Interest expense oninterest-bearing deposits decreased by $820,000 or 47%, as the Company was ableto lower rates on some of its deposit products and increased its mix of noninterest-bearingdeposits.  Also, interest expense onother borrowings decreased by $110,000 or 73% as a result of lower interestrates paid on the Company’s outstanding borrowings in 2009.  As a result, the Company’s net interestmargin increased by 0.28% to 4.66%.

 

TheCompany has an asset/liability management program which monitors the Company’sinterest rate sensitivity and ensures the Company is competitive in the loansand deposit market.  The Companycontinues to monitor its asset/liability mix and will make changes asappropriate to ensure it is properly positioned to react to changing interestrates and inflationary trends.

 

**Provision for loan losses**

 

Duringthe three months period of 2009, the Company recognized a provision for loanlosses of $438,000 compared to $105,000 for the same period in 2008.  Nonaccrual loans decreased $1,396,000 fromDecember 31, 2008 due to increased collection efforts and the transfer ofseveral loans to OREO.  The allowance for loan losses increased to $4,930,000 at March 31,2009 compared to $4,659,000 at December 31, 2008.  At March 31, 2009, the allowancefor loan losses was 33% of the nonperforming loans compared to 29% at December 31,2008.  The provision for loan losses andthe resulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions. At March 31,2009, the Company considered its allowance for loan losses to be adequate.

 

24

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**Noninterest income:**

 

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.

 

Noninterestincome totaled $1,305,000 for the three month period ended March 31, 2009,representing a decrease of $26,000 or 2% compared with the same period ended March 31,2008. This decrease is primarily attributed to a reduction of service chargeson deposit income of $19,000. Service charges on checking accounts decreased by$18,000 compared to the same three month period last year due to a decline indebit card revenues.

 

Netgains on the sales of securities and assets totaled $21,000 during the firstthree months of 2009. The Company realized gains in its investment portfolio of$23,000 and losses totaling $2,000 from the liquidation of foreclosedproperties.  By comparison, the Companyexperienced a gain on the sale of securities of $27,000 for the same threemonth period last year. There were no sales of assets in the first quarter of2008.

 

**Noninterest expense**:

 

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

 

Noninterestexpense increased by $592,000 to $4,222,000 or 16% in the first quarter of 2009compared to the same period last year.

 

Forthe three month period ended March 31, 2009, salaries and employee benefitsdecreased by $9,000 and occupancy and equipment expenses increased by$17,000.  OREO related expenses for thethree month period increased by $32,000 due to real estate taxes, repair costand upkeep of the various real estate properties.

 

Otheroperating expenses increased by $552,000 compared to the same period lastyear.  In the first quarter of 2009, theCompany expensed approximately $152,000 in legal and advisory services costrelated to the acquisition of its Lithonia, Georgia branch.  The Company also incurred approximately $32,000in marketing and training cost related to the acquisition.  A judgment in the amount of $64,000 waslevied against the Company for lender liability in the first quarter of2009.  This amount was expensed and paidduring the quarter. Also, due to an increased FDIC deposit insurance assessmentand the increase in deposits, the Company expensed approximately $111,000 indeposit insurance assessments through March 31, 2009 representing anincrease of $102,000 compared to the same period in 2008.  

 

25

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**INTEREST RATE SENSITIVITY MANAGEMENT**

 

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

 

Onemethod of measuring the impact of interest rate sensitivity is the cumulativegap analysis.  The difference betweeninterest rate sensitive assets and interest rate sensitive liabilities atvarious time intervals is referred to as the gap.  The Company is liability sensitive on ashort-term basis as reflected in the following table.  Generally, a net liability sensitive positionindicates that there would be a negative impact on net interest income in anincreasing rate environment.  However,interest rate sensitivity gap does not necessarily indicate the impact ofgeneral interest rate movements on the net interest margin, since all interestrates and yields do not adjust at the same velocity and the repricing ofvarious categories of assets and liabilities is subject to competitivepressures and the needs of the Company’s customers.  In addition, various assets and liabilitiesindicated as repricing within the same period may in fact reprice at differenttimes within such period and at different rates. The following table shows the contractualmaturities of all interest rate sensitive assets and liabilities at March 31,2009.  Expected maturities may differfrom contractual maturities because issuers may have the right to call orprepay 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.

 

Thefollowing table sets forth the distribution of the repricing of the Company’sinterest rate sensitive assets and interest rate sensitive liabilities as of March 31,2009.

 
| ** **                                                              | ** ** | **Cumulative amounts as of March 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **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                              |       | $                                                | 56,174     |   | $ | — |   | $ | — |   | $ | — |   | $ | 56,174 |   |
| Certificates of deposit                                                 |       | 246                                              |       | 150 |   | — |   | — |   | 396 |   |
| Investments                                                             |       | —                                           |       | — |   | 6,433 |   | 90,158 |   | 96,591 |   |
| Loans                                                                   |       | 57,026                                           |       | 37,519 |   | 84,876 |   | 34,376 |   | 213,797 |   |
| Total interest-sensitive assets                                         |       | $                                                | 113,446    |   | $ | 37,669 |   | $ | 91,309 |   | $ | 124,534 |   | $ | 366,958 |   |
|                                                                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |       |                                             |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                | 157,563    |   | $ | 92,881 |   | $ | 11,865 |   | $ | 2,926 |   | $ | 265,235 |   |
| Notes payable                                                           |       | —                                           |       | 240 |   | — |   | — |   | 240 |   |
| Other borrowings                                                        |       | —                                           |       | — |   | 26,750 |   | 358 |   | 27,108 |   |
| Total interest-sensitive liabilities                                    |       | $                                                | 157,563    |   | $ | 93,121 |   | $ | 38,615 |   | $ | 3,284 |   | $ | 292,583 |   |
|                                                                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |       | $                                                | (44,117    | ) | $ | (55,452 | ) | $ | 52,694 |   | $ | 121,250 |   | $ | 74,375 |   |
|                                                                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Cumulative interest-sensitivity gap to total interest-sensitive  assets |       | (12.02                                           | )%         | (27.13 | )% | (12.77 | )% | 20.27 | % | 20.27 | % |

 

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(a) Savings,Now, and money market deposits totaling $110,806 are included in the maturing in 3 months classification. 

 

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** **

**LIQUIDITY**

 

Liquidityis the ability of the Company to convert assets into cash or cash equivalentswithout significant loss and to raise additional funds by increasingliabilities.  Liquidity managementinvolves maintaining the Company’s ability to meet the day-to-day cash flowrequirements of its customers, whether they are depositors wishing to withdrawfunds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, theCompany would not be able to perform the primary function of a financialintermediary and would, therefore, not be able to meet the needs of thecommunities it serves. Additionally, the Company requires cash for variousoperating needs including: dividends to shareholders; business combinations;capital injections to its subsidiary; the servicing of debt; and the payment ofgeneral corporate expenses. The Company has access to various capitalmarkets.  On March 6, 2009, theCompany issued 7,462 shares of a Fixed Rate Cumulative Perpetual PreferredStock, Series A, to the U.S. Department of the Treasury (“Treasury”) underthe TARP Capital Purchase Program (the “CPP”) for an investment of $7,462,000.However, the primary source of liquidity for the Company is dividends from itsbank subsidiary.  The Georgia Departmentof Banking and Finance regulates the dividend payments and must approvedividend payments that exceed 50 percent of the Bank’s prior year net income.The payment of dividends may also be affected or limited by other factors, suchas the requirement to maintain adequate capital above regulatoryguidelines.  The amount of dividendsavailable from the Bank without prior approval from the regulators for paymentin 2009 is approximately $603,000.

 

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

 

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

 

Theliability portion of the balance sheet provides liquidity through variouscustomers’ 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 $7,797,000 for the three month period ended March 31,2009.  This increase is primarily due toa $7,462,000 investment on March 6, 2009 by the U.S. Department of theTreasury (“Treasury”) under the TARP Capital Purchase Program (the “CPP”). Inexchange for this investment, the Company issued 7,462 shares of a Fixed RateCumulative Perpetual Preferred Stock, Series A, with a $1,000 per shareliquidation value.  Also, accumulatedother comprehensive income, net of taxes increased by $431,000 to $506,000during the first quarter of 2009.  Thisincrease is attributed to the rapid movements in the Treasury markets, wildswings in volatility and credit spreads, and their impact on the Company’savailable for sale securities portfolio. Partially offsetting these increasesto stockholders’ equity, was a decrease of $115,000 to retained earnings as aresult  of an increase in net income of$284,000 partially offset by a dividend of $0.19 per common share tostockholders totaling $399,000.

 

27

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Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total and Tier 1 capital torisk weighted assets, and Tier 1 capital to average assets.  The Company’s total and Tier 1 capital torisk weighted assets and Tier 1 to average assets were 16%, 14% and 11% at March 31,2009 compared to 15%, 13% and 10% at December 31, 2008, respectively.  At March 31, 2009, the Company met allcapital adequacy requirements to which it is subject and is considered to be ‘wellcapitalized” under regulatory standards.

 

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

 

This information is not required since theCompany qualifies as a smaller reporting company.

 

**ITEM 4T.           CONTROLSAND PROCEDURES**

 

Asof the end of the period covered by this report, we conducted, under thesupervision of and with the participation of our management, including theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer, an evaluation of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e). Based on thisevaluation, the Company’s Chief Executive Officer, Chief Operating Officer, andChief Financial Officer have concluded that our disclosure controls andprocedures were effective as of March 31, 2009 in accumulating andcommunicating information to management, including the Chief Executive Officer,the Chief Operating Officer, and the Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosures of that informationunder the SEC’s rules and forms and that the Company’s disclosure controlsand procedures are designed to ensure that the information required to bedisclosed in reports filed or submitted by the Company under the SecuritiesExchange Act is recorded, processed, summarized and reported within thespecified time periods.  During thequarter ended March 31, 2009, there have been no changes in the Company’sinternal controls over financial reporting or, to the Company’s knowledge, inother factors that could significantly change those internal controlssubsequent to the date the Company carried out its evaluation that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. However, the design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.**     **LEGALPROCEEDINGS**

 

The Company and the Bank are involved in variousclaims and legal actions arising in the ordinary course of business.  In the opinion of management, based in parton the advice of counsel, the ultimate disposition of these matters will nothave a material adverse impact on the Company’s consolidated financialposition.

 

**ITEM 1A.   RISK FACTORS**

 

We believe there have been no material changes fromthe factors discussed in Part I, “Item 1A. Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2008.  You should carefully consider the factorsdiscussed in our Annual Report on Form 10-K, which could materially affectour business, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing us. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

28

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

 

On March 6, 2009, the Company issued 7,462 sharesof a Fixed Rate Cumulative Perpetual Preferred Stock, Series A, with a$1,000 per share liquidation value to the U.S. Department of the Treasury (“Treasury”)in exchange for a $7.462 million investment from the Treasury under the TARPCapital Purchase Program (the “CPP”).

 

At a special meeting of shareholders held on March 2,2009, the Company received shareholder approval to amend its Amended andRestated Articles of Incorporation to authorize the issuance of 10,000,000shares of preferred stock. The authorized preferred stock allowed the Companyto participate in the CPP.

 

The CPP is a voluntary program designed to assistfinancial institutions in increasing the flow of financing to U.S. businessesand consumers as a way of stimulating the U.S. economy.

 

**ITEM 3.     DEFAULTS UPON SENIOR SECURITIES**

 

      None

 

**ITEM 4.     SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS**

 

TheCompany held a Special Shareholders’ Meeting on Monday, March 2, 2009, at10:00 a.m., at the Atlanta Life Financial Group, Herndon Plaza, 100 AuburnAvenue, N.E., Atlanta, Georgia.  Thefollowing present the matters voted on and the results of the shareholders voteat the Special Shareholders’ Meeting:

 

1.              To amend theArticles of Incorporation to approve a proposed amendment to the Company’sAmended and Restated Articles of Incorporation authorizing a class of10,000,000 shares of preferred stock, no par value, as set forth in AppendixA to the Proxy Statement

 
| **For**   | ** ** | **Withhold** | ** ** | **Abstain** | ** ** |
|-----------|------------|--------------|------------|-------------|------------|
|      |       |         |       |        |       |
| 1,296,257 |       | 29,636       |       | 3,555       |       |

 

1.              To authorizemanagement of the Company to adjourn the Meeting to another time and date ifsuch action is necessary to solicit additional proxies or attendance at theMeeting.

 
| **For**   | ** ** | **Withhold** | ** ** | **Abstain** | ** ** |
|-----------|------------|--------------|------------|-------------|------------|
|      |       |         |       |        |       |
| 1,110,198 |       | 216,284      |       | 2,956       |       |

 

29

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| **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. |

 

**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

**CITIZENSBANCSHARES CORPORATION**

 

 
| Date:  | May 15, 2009 | By:                                   | /s/ James E. Young |
|--------|-------------------|---------------------------------------|--------------------|
|   |              | James E. Young                        |
|   |              | President and Chief Executive Officer |
|   |              |                                  |
|   |              |                                  |
| Date:  | May 15, 2009 | By:                                   | /s/ Cynthia N. Day |
|   |              | Cynthia N. Day                        |
|   |              | Senior Executive Vice President and   |
|   |              | Chief Operating Officer               |
|   |              |                                  |
|   |              |                                  |
| Date:  | May 15, 2009 | By:                                   | /s/ Samuel J. Cox  |
|   |              | Samuel J. Cox                         |
|   |              | Executive Vice President and          |
|   |              | Chief Financial Officer               |

 

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