**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 – Q**

 

**(MarkOne)**

 

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

 

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

 

**OR**

 

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

 

**For the transition period from                   to                  **

 

**Commission File No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding for each of the issuer’s classes of commonstock as of the latest practicable date: 2,026,124 shares of Common Stock,$1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par valuewere outstanding on August 13, 2010.

 

 

 

----

 

**PART 1.                FINANCIAL INFORMATION**

 

**ITEM 1.                  FinancialStatements**

** **

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

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

 
| ** **                                                                                                     | ** ** | **2010**        | ** ** | **2009**   | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                     | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                     | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash  and due from banks                                                                                       |       | $               | 5,462      |       | $          | 6,461 |   |
| Interest-bearing  deposits with banks                                                                          |       | 31,925          |       | 20,609     |       |
| Certificates  of deposit                                                                                       |       | 150             |       | 150        |       |
| Investment  securities available for sale, at fair value                                                       |       | 116,296         |       | 112,644    |       |
| Investment  securities held to maturity, at cost                                                               |       | 3,510           |       | 3,909      |       |
| Other  investments                                                                                             |       | 2,257           |       | 2,257      |       |
| Loans  receivable, net                                                                                         |       | 193,788         |       | 200,219    |       |
| Premises  and equipment, net                                                                                   |       | 7,772           |       | 7,825      |       |
| Cash  surrender value of life insurance                                                                        |       | 10,619          |       | 10,465     |       |
| Foreclosed  real estate                                                                                        |       | 8,897           |       | 10,837     |       |
| Other  assets                                                                                                  |       | 13,353          |       | 12,163     |       |
|                                                                                                           |       |            |       |       |       |
| Total  assets                                                                                                  |       | $               | 394,029    |       | $          | 387,539 |   |
|                                                                                                           |       |            |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                  | ** ** | ** **      | ** ** | ** ** |       |
|                                                                                                           |       |            |       |       |       |
| LIABILITIES:                                                                                                   |       |            |       |       |       |
| Noninterest-bearing  deposits                                                                                  |       | $               | 53,305     |       | $          | 58,401 |   |
| Interest-bearing  deposits                                                                                     |       | 293,186         |       | 267,611    |       |
|                                                                                                           |       |            |       |       |       |
| Total  deposits                                                                                                |       | 346,491         |       | 326,012    |       |
|                                                                                                           |       |            |       |       |       |
| Accrued  expenses and other liabilities                                                                        |       | 5,038           |       | 4,794      |       |
| Advances  from Federal Home Loan Bank                                                                          |       | 337             |       | 14,495     |       |
|                                                                                                           |       |            |       |       |       |
| Total  liabilities                                                                                             |       | 351,866         |       | 345,301    |       |
|                                                                                                           |       |            |       |       |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                 |       |            |       |       |       |
|                                                                                                           |       |            |       |       |       |
| STOCKHOLDERS’  EQUITY:                                                                                    |       |            |       |       |       |
| Preferred  stock - No par value; 10,000,000 shares authorized; Series A , 7,462 shares  issued and outstanding |       | 7,462           |       | 7,462      |       |
| Common  stock - $1 par value; 20,000,000 shares authorized; 2,230,065 shares issued  and outstanding           |       | 2,230           |       | 2,230      |       |
| Nonvoting  common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and  outstanding            |       | 90              |       | 90         |       |
| Nonvested  restricted common stock                                                                             |       | (107            | )          | (52        | )          |
| Additional  paid-in capital                                                                                    |       | 7,787           |       | 7,707      |       |
| Retained  earnings                                                                                             |       | 25,000          |       | 25,834     |       |
| Treasury  stock at cost, 217,531 shares at June 30, 2010 and December 31, 2009                                 |       | (1,805          | )          | (1,805     | )          |
| Accumulated  other comprehensive income, net of income taxes                                                   |       | 1,506           |       | 772        |       |
|                                                                                                           |       |            |       |       |       |
| Total  stockholders’ equity                                                                               |       | 42,163          |       | 42,238     |       |
|                                                                                                           |       |            |       |       |       |
|                                                                                                           |       | $               | 394,029    |       | $          | 387,539 |   |

 

See notes to consolidated financialstatements.

 

1

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                                      | ** ** | **Three Months********Ended June 30,** | ** ** | **Six Months********Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                      | ** ** | **2010**                               | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  income:                                               |       |                                   |       |                                 |       |   |   |   |   |
| Loans,  including fees                                          |       | $                                      | 3,163      |                                 | $          | 3,509 |   | $ | 6,511 |   | $ | 7,032 |   |
| Investment  securities:                                         |       |                                   |       |                                 |       |   |   |   |   |
| Taxable                                                         |       | 645                                    |       | 899                                  |       | 1,326 |   | 1,749 |   |
| Tax-exempt                                                      |       | 455                                    |       | 315                                  |       | 910 |   | 569 |   |
| Interest-bearing  deposits                                      |       | 21                                     |       | 26                                   |       | 42 |   | 31 |   |
| Total  interest income                                          |       | 4,284                                  |       | 4,749                                |       | 8,789 |   | 9,381 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Interest  expense:                                              |       |                                   |       |                                 |       |   |   |   |   |
| Deposits                                                        |       | 667                                    |       | 1,102                                |       | 1,355 |   | 2,043 |   |
| Other  borrowings                                               |       | 3                                      |       | 29                                   |       | 17 |   | 69 |   |
| Total  interest expense                                         |       | 670                                    |       | 1,131                                |       | 1,372 |   | 2,112 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Net  interest income                                            |       | 3,614                                  |       | 3,618                                |       | 7,417 |   | 7,269 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Provision  for loan losses                                      |       | 860                                    |       | 938                                  |       | 1,490 |   | 1,376 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Net  interest income after provision for loan losses            |       | 2,754                                  |       | 2,680                                |       | 5,927 |   | 5,893 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Noninterest  income:                                            |       |                                   |       |                                 |       |   |   |   |   |
| Service  charges on deposits                                    |       | 941                                    |       | 1,012                                |       | 1,846 |   | 1,970 |   |
| Gain  on sales of securities                                    |       | 1                                      |       | 139                                  |       | 334 |   | 162 |   |
| Gain  on sales of assets                                        |       | —                                 |       | 4                                    |       | 4 |   | 2 |   |
| Other  operating income                                         |       | 276                                    |       | 335                                  |       | 790 |   | 662 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Total  noninterest income                                       |       | 1,218                                  |       | 1,490                                |       | 2,974 |   | 2,796 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Noninterest  expense:                                           |       |                                   |       |                                 |       |   |   |   |   |
| Salaries  and employee benefits                                 |       | 1,986                                  |       | 1,845                                |       | 3,949 |   | 3,681 |   |
| Net  occupancy and equipment                                    |       | 648                                    |       | 590                                  |       | 1,272 |   | 1,185 |   |
| Amortization  of core deposit intangible                        |       | 122                                    |       | 131                                  |       | 254 |   | 145 |   |
| FDIC  insurance                                                 |       | 209                                    |       | 187                                  |       | 390 |   | 298 |   |
| Other  real estate owned                                        |       | 1,716                                  |       | 180                                  |       | 1,847 |   | 216 |   |
| Other  operating expenses                                       |       | 1,232                                  |       | 1,499                                |       | 2,446 |   | 3,130 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Total  noninterest expense                                      |       | 5,913                                  |       | 4,432                                |       | 10,158 |   | 8,655 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Income  (loss) before income taxes                              |       | (1,941                                 | )          | (262                                 | )          | (1,257 | ) | 34 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Income  tax benefit                                             |       | (837                                   | )          | (197                                 | )          | (778 | ) | (185 | ) |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Net  income (loss)                                              |       | $                                      | (1,104     | )                                    | $          | (65 | ) | $ | (479 | ) | $ | 219 |   |
| Preferred  dividends accrued                                    |       | 94                                     |       | 94                                   |       | 188 |   | 121 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Net  income (loss) available to common shareholders             |       | $                                      | (1,198     | )                                    | $          | (159 | ) | $ | (667 | ) | $ | 98 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Net  income (loss) per common share - basic and diluted         |       | $                                      | (0.57      | )                                    | $          | (0.08 | ) | $ | (0.32 | ) | $ | 0.05 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Weighted  average common outstanding shares - basic and diluted |       | 2,103                                  |       | 2,102                                |       | 2,103 |   | 2,102 |   |
|                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Dividends  per common share                                     |       | $                                      | 0.08       |                                 | $          | — |   | $ | 0.08 |   | $ | 0.19 |   |

 

Seenotes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

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

**FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009**

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

 
| ** **                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|------------------|------------|----------------|------------|---------------|------------|--------------|------------|--------------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | **Nonvoting** | ** ** | ** **   | ** ** | **Additional**     | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **        | ** ** |
| ** **                                                                                                | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Restricted** | ** ** | **Paid-in**   | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Comprehensive** | ** ** | ** **   | ** ** |
| ** **                                                                                                | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **Shares**    | ** ** | **Amount**   | ** ** | **Stock**          | ** ** | **Capital**       | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| ** **                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Balance—December 31,  2008                                                                      |       | —              |       | $                | —     |             | 2,230      |           | $          | 2,230         |       | 90           |       | $                  | 90         |              | $          | —       |       | $          | 7,611      |       | $          | 25,465            |       | (220       | )          | $ | (1,813 | ) | $ | 75 |   | $ | 33,658 |   |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Net  income                                                                                               |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | 219          |       | —     |       | —     |       | —            |       | 219        |       |
| Unrealized  holding gains on investment securities available for sale—net of taxes of  $229,378      |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | 445               |       | 445        |       |
| Less  reclassification adjustment for holding gains included in net income—net of  taxes of $55,124  |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | (107              | )          | (107       | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Comprehensive  income                                                                                     |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       | 557        |       |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Issuance  of preferred stock                                                                              |       | 7                   |       | 7,462            |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | —            |       | 7,462      |       |
| Stock  based compensation expense                                                                         |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | 30                |       | —       |       | —     |       | —     |       | —            |       | 30         |       |
| Sale  of Treasury stock                                                                                   |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | 2          |       | 8          |       | —            |       | 8          |       |
| Dividends  declared - preferred                                                                           |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | (72          | )          | —     |       | —     |       | —            |       | (72        | )          |
| Dividends  declared - common                                                                              |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | (399         | )          | —     |       | —     |       | —            |       | (399       | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| **Balance—June 30, 2009**                                                                       | ** ** | **7**               | ** ** | **$**            | **7,462**  | ** **       | **2,230**  | ** **     | **$**      | **2,230**     | ** ** | **90**       | ** ** | **$**              | **90**     | ** **        | **$**      | **—**   | ** ** | **$**      | **7,641**  | ** ** | **$**      | **25,213**        | ** ** | **(218**   | **)**      | **$** | **(1,805** | **)** | **$** | **413** | ** ** | **$** | **41,244** | ** ** |
| ** **                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Balance—December 31,  2009                                                                      |       | 7                   |       | $                | 7,462      |             | 2,230      |           | $          | 2,230         |       | 90           |       | $                  | 90         |              | $          | (52          | )          | $          | 7,707      |       | $          | 25,834            |       | (218       | )          | $ | (1,805 | ) | $ | 772 |   | $ | 42,238 |   |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Net  loss                                                                                                 |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | (479         | )          | —     |       | —     |       | —            |       | (479       | )          |
| Unrealized  holding gains on investment securities available for sale—net of taxes of  $492,134      |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | 955               |       | 955        |       |
| Less  reclassification adjustment for holding gains included in net income—net of  taxes of $113,626 |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | —       |       | —     |       | —     |       | (221              | )          | (221       | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Comprehensive  income                                                                                     |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       | 255        |       |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Stock  based compensation expense                                                                         |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | 13                |       | —       |       | —     |       | —     |       | —            |       | 13         |       |
| Nonvested  restricted stock                                                                               |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | (55                | )          | 67                |       | —       |       | —     |       | —     |       | —            |       | 12         |       |
| Dividends  declared - preferred                                                                           |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | (188         | )          | —     |       | —     |       | —            |       | (188       | )          |
| Dividends  declared - common                                                                              |       | —              |       | —           |       | —           |       | —         |       | —        |       | —       |       | —             |       | —            |       | (167         | )          | —     |       | —     |       | —            |       | (167       | )          |
|                                                                                                      |       |                |       |             |       |             |       |           |       |          |       |         |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| **Balance—June 30, 2010**                                                                       | ** ** | **7**               | ** ** | **$**            | **7,462**  | ** **       | **2,230**  | ** **     | **$**      | **2,230**     | ** ** | **90**       | ** ** | **$**              | **90**     | ** **        | **$**      | **(107**     | **)**      | **$**      | **7,787**  | ** ** | **$**      | **25,000**        | ** ** | **(218**   | **)**      | **$** | **(1,805** | **)** | **$** | **1,506** | ** ** | **$** | **42,163** | ** ** |

 

Seenotes to consolidated financial statements.

 

3

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009**

**(In thousands)**

 
| ** **                                                                                                 | ** ** | **2010**        | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                                 | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                                  |       |            |       |     |       |
| Net  income (loss)                                                                                         |       | $               | (479       | )        | $          | 219 |   |
| **Adjustments to reconcile net income (loss)****to net cash provided by (used in) operating  activities:** |       |            |       |     |       |
| Provision  for loan losses                                                                                 |       | 1,490           |       | 1,376    |       |
| Depreciation                                                                                               |       | 360             |       | 395      |       |
| Amortization  and accretion, net                                                                           |       | 523             |       | 315      |       |
| Provision  for deferred income taxes (benefit)                                                             |       | (430            | )          | (226     | )          |
| Gains  on sale of assets and investments                                                                   |       | (338            | )          | (164     | )          |
| Stock  based compensation expense                                                                          |       | 13              |       | 30       |       |
| Restricted  stock based compensation plan                                                                  |       | 12              |       | —   |       |
| Change  in other assets                                                                                    |       | 176             |       | (5,202   | )          |
| Change  in accrued expenses and other liabilities                                                          |       | 241             |       | 605      |       |
|                                                                                                       |       |            |       |     |       |
| Net  cash provided by (used in) operating activities                                                       |       | 1,568           |       | (2,652   | )          |
|                                                                                                       |       |            |       |     |       |
| **INVESTING ACTIVITIES:**                                                                                  |       |            |       |     |       |
| Net  cash and cash equivalents acquired from branch purchase                                               |       | —          |       | 45,431   |       |
| Net  change in certificates of deposit                                                                     |       | —          |       | (51      | )          |
| Proceeds  from calls and maturities of investment securities held to maturity                              |       | 397             |       | 133      |       |
| Proceeds  from sales and maturities of investment securities available for sale                            |       | 23,835          |       | 15,327   |       |
| Purchases  of investment securities available for sale                                                     |       | (26,318         | )          | (35,701  | )          |
| Net  change in other investments                                                                           |       | —          |       | 30       |       |
| Net  change in loans receivable                                                                            |       | 3,491           |       | (2,937   | )          |
| Net  proceeds from the sale of other real estate owned                                                     |       | 1,685           |       | 245      |       |
| Purchases  of premises and equipment, net                                                                  |       | (307            | )          | (999     | )          |
|                                                                                                       |       |            |       |     |       |
| Net  cash provided by investing activities                                                                 |       | 2,783           |       | 21,478   |       |
|                                                                                                       |       |            |       |     |       |
| **FINANCING ACTIVITIES:**                                                                                  |       |            |       |     |       |
| Net  change in deposits                                                                                    |       | 20,479          |       | (19,566  | )          |
| Principal  payments on debt                                                                                |       | —          |       | (240     | )          |
| Net  change in advances from Federal Home Loan Bank                                                        |       | (14,158         | )          | (2,209   | )          |
| Proceeds  from issuance of preferred stock                                                                 |       | —          |       | 7,462    |       |
| Sale  of treasury stock activity                                                                           |       | —          |       | 8        |       |
| Dividends  paid - preferred                                                                                |       | (188            | )          | (72      | )          |
| Dividends  paid - common                                                                                   |       | (167            | )          | (399     | )          |
|                                                                                                       |       |            |       |     |       |
| Net  cash provided by (used in) financing activities                                                       |       | 5,966           |       | (15,016  | )          |
|                                                                                                       |       |            |       |     |       |
| Net  change in cash and cash equivalents                                                                   |       | 10,317          |       | 3,810    |       |
|                                                                                                       |       |            |       |     |       |
| Cash  and cash equivalents, beginning of period                                                            |       | 27,070          |       | 16,146   |       |
|                                                                                                       |       |            |       |     |       |
| Cash  and cash equivalents at end of period                                                                |       | $               | 37,387     |     | $          | 19,956 |   |
|                                                                                                       |       |            |       |     |       |
| **Supplemental disclosures of cash paid during the period  for:**                                          |       |            |       |     |       |
| Interest                                                                                                   |       | $               | 1,369      |     | $          | 2,752 |   |
|                                                                                                       |       |            |       |     |       |
| Income  taxes                                                                                              |       | $               | 60         |     | $          | 711 |   |
|                                                                                                       |       |            |       |     |       |
| **Supplemental disclosures of noncash transactions:**                                                      |       |            |       |     |       |
| Real  estate acquired through foreclosure                                                                  |       | $               | 1,461      |     | 7,430      |   |
|                                                                                                       |       |            |       |     |       |
| Change  in unrealized gain on investment securities available for sale, net of taxes                       |       | $               | 734        |     | $          | 338 |   |

 

Seenotes to consolidated financial statements.

 

4

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**CITIZENS BANCSHARES CORPORATIONAND SUBSIDIARY**

**Notes to the Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basisof Presentation**

 

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

 

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

 

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

 

**AccountingPolicies**

 

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

 

**TroubledAsset Relief Program**

 

On March 6, 2009, aspart of the U.S. Department of the Treasury (the “Treasury”) Troubled AssetRelief Program (“TARP”) Capital Purchase Program, the Company entered into a LetterAgreement and a Securities Purchase Agreement with the Treasury, pursuant towhich the Company agreed to issue and sell, and the Treasury agreed to purchase7,462 shares (the “Preferred Shares”) of the Company’s Fixed Rate CumulativePerpetual Preferred Stock, Series A, having a liquidation preference of$1,000, for an aggregate purchase price of $7,462,000 in cash.

 

The Preferred Shares qualifyas Tier 1 capital and will pay cumulative dividends at a rate of 5% perannum for the first five years and 9% per annum thereafter.  TheCompany may, subject to consultation with the Federal Reserve Bank of Atlanta,redeem the Preferred Shares at any time for its aggregate liquidation amountplus any accrued and unpaid dividends without first raising additional capitalin an equity offering.

 

5

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**Acquisition**

 

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

 

**RecentlyIssued Accounting Standards**

 

The following is a summaryof recent authoritative pronouncements that could affect the accounting,reporting, and disclosure of financial information by the Company:

 

Income Tax guidance wasamended in April 2010 to reflect an SEC Staff Announcement after the Presidentsigned the Health Care and Education Reconciliation Act of 2010 on March 30,2010, which amended the Patient Protection and Affordable Care Act signed onMarch 23, 2010.   According to theannouncement, although the bills were signed on separate dates, regulatorybodies would not object if the two Acts were considered together for accountingpurposes. This view is based on the SEC staff’s understanding that the two Actstogether represent the current health care reforms as passed by Congress andsigned by the President.  The amendmenthad no impact on the financial statements.

 

In July 2010, the FASBissued Accounting Standard Codification Update No. 2010-20 concerningdisclosures about the credit quality of financing receivables and the allowancefor credit losses. Update No. 2010-20 is intended to provide additionalinformation to assist financial statement users in assessing an entity’s creditrisk exposures and evaluating the adequacy of its allowance for credit losses.Update No. 2010-20 requires companies to (1) provide enhanceddisclosures around the nature of credit risk inherent in the entity’s portfolioof financing receivables; (2) explain how that risk is analyzed andassessed in arriving at the allowance for credit losses; and (3) explainthe changes and reasons for changes in the allowance for credit losses. Theprovisions of Update No. 2010-20 concerning disclosures for the end of aperiod are effective for interim and annual periods ending on or afterDecember 15, 2010, or December 31, 2010 for the Company. The provisionsof Update No. 2010-20 concerning disclosures about activity that occursduring a reporting period are applicable to the Company for interim and annualperiods beginning on or after December 15, 2010, the interim period endingon March 31, 2011. The adoption of Update No. 2010-20 is expected toprovide the reader of the Company’s financial statements with expanded andenhanced disclosure surrounding the allowance for credit losses.

 

Other accounting standardsthat have been issued or proposed by the FASB or other standards-setting bodiesare not expected to have a material impact on the Company’s financial position,results of operations or cash flows.

 

6

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**2. INVESTMENTS**

 

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

 
| **At June  30, 2010**                        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| ** **                                   | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **     | ** ** |
| Government-sponsored  enterprises securities |       | $                   | 4,000      |                         | $          | 9                             |       | $              | —     |   | $ | 4,009 |   |
| State,  county, and municipal securities     |       | 43,671              |       | 1,067                        |       | 181                           |       | 44,557         |       |
| Mortgage-backed  securities                  |       | 66,343              |       | 1,743                        |       | 356                           |       | 67,730         |       |
| Totals                                       |       | $                   | 114,014    |                         | $          | 2,819                         |       | $              | 537        |   | $ | 116,296 |   |

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

 

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

 
| **At June  30, 2010**                    | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
|                                     |       |                |       |                         |       |                          |       |           |       |
| State,  county, and municipal securities |       | $                   | 3,298      |                         | $          | 106                           |       | $              | 3          |   | $ | 3,401 |   |
| Mortgage-backed  securities              |       | 212                 |       | 2                            |       | —                        |       | 214            |       |
|                                     |       |                |       |                         |       |                          |       |           |       |
| Totals                                   |       | $                   | 3,510      |                         | $          | 108                           |       | $              | 3          |   | $ | 3,615 |   |

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

 

7

----

 

The amortized costs and fair values of investmentsecurities at June 30, 2010, by contractual maturity, are shown below. Expectedmaturities may differ from contractual maturities because issuers may have theright to call or prepay obligations with and without call or prepaymentpenalties (in thousands).

 
| ** **                             | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **Amortized**          | ** ** | **Fair**             | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                             | ** ** | **Cost**               | ** ** | **Value**            | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                   |       |                   |       |                 |       |   |   |   |   |
| Due in one year or less                |       | $                      | 856        |                 | $          | 860 |   | $ | 190 |   | $ | 190 |   |
| Due after one year through five years  |       | 2,809                  |       | 2,882                |       | 915 |   | 941 |   |
| Due after five years through ten years |       | 22,771                 |       | 23,292               |       | 2,405 |   | 2,484 |   |
| Due after ten years                    |       | 87,578                 |       | 89,262               |       | — |   | — |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
|                                   |       | $                      | 114,014    |                 | $          | 116,296 |   | $ | 3,510 |   | $ | 3,615 |   |

 

Securitieswith carrying values of $85,498,000 and $86,127,000 at June 30, 2010 andDecember 31, 2009 were pledged to secure public deposits, FHLB advancesand a $22 million line of credit at the Federal Reserve Bank discount windowand for other purposes as required by law.

 

Grossrealized gains on securities were $334,000 and $162,000 at June 30, 2010 and2009, respectively.  There were no grossrealized losses on securities at June 30, 2010 and 2009.

 

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.

 

The following tables show investments’ grossunrealized losses and fair value, aggregated by investment category and lengthof time that the individual securities have been in a continuous unrealizedloss position, at June 30, 2010 and December 31, 2009. Except as explicitlyidentified below, all unrealized losses on investment securities are consideredby management to be temporarily impaired given the credit ratings on theseinvestment securities and the short duration of the unrealized loss (inthousands).

 

8

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**At June 30, 2010**

 

**SecuritiesAvailable for Sale**

 
| ** **                  | ** ** | **Securities in a loss position for  less than twelve months** | ** ** | **Securities in a loss position for  twelve months or more** | ** ** | **Total**      | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------|------------|
| ** **                  | ** ** | ** **                                                     | ** ** | **Unrealized**                                               | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Fair value**                                                 | ** ** | **losses**                                                   | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
| ** **                  | ** ** | ** **                                                     | ** ** | ** **                                                   | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mortgage-backed  securities |       | $                                                              | 2,670      |                                                         | $          | (17            | )          | $ | 3,464 |   | $ | (339 | ) | $ | 6,134 |   | $ | (356 | ) |
|                        |       |                                                           |       |                                                         |       |           |       |   |   |   |   |   |   |
| Municipal  securities       |       | 4,136                                                          |       | (105                                                         | )          | 1,133          |       | (76 | ) | 5,269 |   | (181 | ) |
|                        |       |                                                           |       |                                                         |       |           |       |   |   |   |   |   |   |
| Total                       |       | $                                                              | 6,806      |                                                         | $          | (122           | )          | $ | 4,597 |   | $ | (415 | ) | $ | 11,403 |   | $ | (537 | ) |

 

**SecuritiesHeld to Maturity**

 
| ** **            | ** ** | **Securities in a loss position for  less than twelve months** | ** ** | **Securities in a loss position for  twelve months or more** | ** ** | **Total**      | ** ** |
|-----------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------|------------|
| ** **            | ** ** | ** **                                                     | ** ** | **Unrealized**                                               | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **            | ** ** | **Fair value**                                                 | ** ** | **losses**                                                   | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                  |       |                                                           |       |                                                         |       |           |       |   |   |   |   |   |   |
| Municipal  securities |       | $                                                              | —     |                                                         | $          | —         |       | $ | 277 |   | $ | (3 | ) | $ | 277 |   | $ | (3 | ) |
|                  |       |                                                           |       |                                                         |       |           |       |   |   |   |   |   |   |
| Total                 |       | $                                                              | —     |                                                         | $          | —         |       | $ | 277 |   | $ | (3 | ) | $ | 277 |   | $ | (3 | ) |

 

**At December 31, 2009**

** **

**SecuritiesAvailable for Sale**

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

 

**SecuritiesHeld to Maturity**

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

 

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

 

We use prices from third party pricing services and,to a lesser extent, indicative (non-binding) quotes from third party brokers,to measure fair value of our investment securities. Fair values of the investmentsecurities portfolio could decline in the future if the underlying performanceof the collateral for collateralized mortgage obligations or other securitiesdeteriorates and the levels do not provide sufficient protection forcontractual principal and interest. As a result, there is risk that another-than-temporary impairment may occur in the future particularly in lightof the current economic environment.

 

The Company does not intendto sell these securities and it is more likely than not that the Company willnot be required to sell those securities before recovery of its amortized cost.The Company believes, based on industry analyst reports and credit ratings,that it will continue to receive scheduled interest payments as well as theentire principal balance, and the deterioration in value is attributable tochanges in market interest rates and is not in the credit quality of the issuerand therefore, these losses are not considered other-than-temporary.

 

9

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**3. FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

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

 

In accordance with ASCguidance, the Company applied the following fair value hierarchy:

 

Level 1—Quoted prices inactive markets for identical assets or liabilities. Level 1 assets andliabilities include debt and equity securities and derivative contracts thatare traded in an active exchange market, as well as U.S. Treasury and otherhighly liquid investments that are actively traded in over-the-counter markets.

 

Level 2—Observable inputsother than Level 1 prices such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputs thatare 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.

 

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

 

Investment Securities Available for Sale—Investmentsecurities available for sale are recorded at fair value on a recurring basis.Fair value measurement is based upon quoted prices, if available. If quotedprices are not available, fair values are measured using independent pricingmodels or other model-based valuation techniques such as the present value offuture cash flows, adjusted for the security’s credit rating, prepaymentassumptions and other factors such as credit loss assumptions. Level 1securities include those traded on an active exchange such as the New YorkStock Exchange, Treasury securities that are traded by dealers or brokers inactive over-the counter markets and money market funds. Level 2 securitiesinclude mortgage backed securities issued by government sponsored entities, municipalbonds and corporate debt securities. Securities classified as Level 3 includeasset-backed securities in less liquid markets.

 

Other Real Estate Owned—Foreclosed assets areadjusted to fair value upon transfer of the loans to other real estate owned.Real estate acquired in settlement of loans is recorded initially at estimatedfair value of the property less estimated selling costs at the date offoreclosure. The initial recorded value may be subsequently reduced byadditional allowances, which are charges to earnings if the estimated fairvalue of the property less estimated selling costs declines below the initialrecorded value. Fair value is based upon independent market prices, appraisedvalues of the collateral or management’s estimation of the value of thecollateral. When the fair value of the collateral is based on an observablemarket price or a current appraised value, the Company recorded the foreclosedasset as nonrecurring Level 2. When an appraised value is not available ormanagement determines 

 

10

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the fair value of thecollateral is further impaired below the appraised value and there is noobservable market price, the Company records the foreclosed asset asnonrecurring Level 3.

 

Loans—The Company does not recordloans at fair value on a recurring basis, however, from time to time, a loan isconsidered impaired and an allowance for loan loss is established. Loans forwhich it is probable that payment of interest and principle will not be made inaccordance with the contractual terms of the loan are considered impaired. Oncea loan is identified as individually impaired, management measures impairment.The fair value of impaired loans is estimated using one of several methods,including the collateral value, market value of similar debt, enterprise value,liquidation value and discounted cash flows. Those impaired loans not requiringa specific allowance represents loans for which the fair value of expectedrepayments or collateral exceed the recorded investment in such loans. At June30, 2010 and December 31, 2009, substantially all of the totally impairedloans were evaluated based upon the fair value of the collateral. Impairedloans where an allowance is established based on the fair value of collateralrequire classification in the fair value hierarchy. When the fair value of thecollateral is based on an observable market price or a current appraised value,the Company records the loan as nonrecurring Level 2. When an appraised valueis not available or management determines the fair value of the collateral isfurther impaired below the appraised value and there is no observable marketprice, the Company records the loan as nonrecurring Level 3.

 

Goodwill and OtherIntangible Assets—Goodwill and other intangible assets are measured forimpairment on an annual basis or more frequently if there is a change incircumstances. If the goodwill or other intangibles exceed the fair value, animpairment charge is recorded in an amount equal to the excess. Impairment istested utilizing accepted valuation techniques utilizing discounted cash flowsof the business unit, and implied fair value based on a multiple of earningsand tangible book value for merger transactions. The measurement of these fairvalues is considered a Level 3 measurement.

 

11

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The following tables presentfinancial assets and financial liabilities measured at fair value on arecurring and nonrecurring basis and the change in fair value for thosespecific financial instruments in which fair value has been elected (inthousands).

 
| ** **                               | ** ** | **Fair  Value Measurements at June 30, 2010** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                         | ** ** | **Quoted  Prices** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                         | ** ** | **In  Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                         | ** ** | **Markets  for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Assets/Liabilities**                             | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                               | ** ** | **Measured at**                                    | ** ** | **Assets/** | ** ** | **Observable** |   | **Unobservable** |   |
| ** **                               | ** ** | **Fair Value**                                     | ** ** | **Liabilities** | ** ** | **Inputs** |   | **Inputs** |   |
| ** **                               | ** ** | **June 30, 2010**                             | ** ** | **(Level  1)** | ** ** | **(Level  2)** |   | **(Level  3)** |   |
| **Recurring Basis:**                     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** |
| **Assets**                               |       |                                               |       |   |   |   |   |   |   |
| Securities  available for sale:          |       |                                               |       |   |   |   |   |   |   |
| Government-sponsored  enterprises        |       | $                                                  | 4,009      |   | $ | — |   | $ | 4,009 |   | $ | — |   |
| State,  county, and municipal securities |       | 44,557                                             |       | — |   | 44,557 |   | — |   |
| Mortgage-backed  securities              |       | 67,730                                             |       | — |   | 67,730 |   | — |   |
|                                     |       |                                               |       |   |   |   |   |   |   |
| **Nonrecurring Basis:**                  | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** |
| **Assets**                               |       |                                               |       |   |   |   |   |   |   |
| Impaired  loans                          |       | $                                                  | 65,333     |   | $ | — |   | $ | 65,333 |   | $ | — |   |
| Other  real estate owned                 |       | 8,897                                              |       | — |   | 8,897 |   | — |   |
| Goodwill                                 |       | 362                                                |       | — |   | — |   | 362 |   |
| Core  deposit intangibles                |       | 2,714                                              |       | — |   | — |   | 2,714 |   |

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

 

12

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

 

***Cash, Due From Banks,Federal Funds Sold, Interest-Bearing Deposits With Banks, and Certificatesof Deposits***—Carrying amount is a reasonable estimate of fairvalue due to the short-term nature of such items.

 

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

 

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

 

***Loans***—The fair valueof fixed rate loans is estimated by discounting the future cash flows using thecurrent rates at which similar loans would be made to borrowers with similarcredit ratings. For variable rate loans, the carrying amount is a reasonableestimate of fair value.

 

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

 

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

 

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

 

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

 

***Limitations*****—**Fair valueestimates are made at a specific point in time, based on relevant marketinformation and information about the financial instrument. These estimates donot reflect any premium or discount that could result from offering for sale atone time the Company’s entire holdings of a particular financial instrument.Because no market exists for a significant portion of the Company’s financialinstruments, fair value estimates are based on many judgments. These estimatesare subjective in nature and involve uncertainties and matters of significantjudgment and therefore cannot be determined with precision. Changes inassumptions could significantly affect the estimates. Fair value estimates arebased on existing on and off-balance-sheet financial instruments withoutattempting to estimate the value of anticipated future business and the valueof assets and liabilities that are not considered financial instruments; forexample, premises and equipment. In addition, the tax ramifications related tothe realization of the unrealized gains and losses can have a significanteffect on fair value estimates and have not been considered in the estimates.

 

13

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The carrying values andestimated fair values of the Company’s financial instruments at June 30,2010 and December 31, 2009 are as follows:

 
| ** **                              | ** ** | **2010**           | ** ** | **2009**           | ** ** |
|-----------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                              | ** ** | **Carrying**       | ** ** | **Estimated**      | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                              | ** ** | **Value**          | ** ** | **Fair Value**     | ** ** | **Value** | ** ** | **Fair Value** | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Financial  assets:                      |       |               |       |               |       |   |   |   |   |
| Cash  and due from banks                |       | $                  | 5,462      |               | $          | 5,462 |   | $ | 6,461 |   | $ | 6,461 |   |
| Interest-bearing  deposits with banks   |       | 31,925             |       | 31,925             |       | 20,609 |   | 20,609 |   |
| Cetificates  of deposit                 |       | 150                |       | 150                |       | 150 |   | 150 |   |
| Investment  securities                  |       | 119,806            |       | 119,911            |       | 116,553 |   | 116,639 |   |
| Other  investments                      |       | 2,257              |       | 2,257              |       | 2,257 |   | 2,257 |   |
| Loans—net                          |       | 193,788            |       | 194,853            |       | 200,219 |   | 201,840 |   |
| Cash  surrender value of life insurance |       | 10,619             |       | 10,619             |       | 10,465 |   | 10,465 |   |
|                                    |       |               |       |               |       |   |   |   |   |
| Financial  liabilities:                 |       |               |       |               |       |   |   |   |   |
| Deposits                                |       | 346,491            |       | 339,508            |       | 326,012 |   | 316,301 |   |
| Advances  from Federal Home Loan Bank   |       | 337                |       | 337                |       | 14,495 |   | 14,495 |   |
|                                         |            |                    |            |                    |            |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Notional** | ** ** | **Estimated**  | ** ** | **Notional** | ** ** | **Estimated**  | ** ** |
|-------------------------------------------|------------|--------------|------------|----------------|------------|--------------|------------|----------------|------------|
| ** **                                | ** ** | **amount**   | ** ** | **fair value** | ** ** | **amount**   | ** ** | **fair value** | ** ** |
| Off-balance-sheet  financial instruments: |       |         |       |           |       |         |       |           |       |
| Commitments  to extend credit             |       | $            | 17,720     |           | —     |         | $          | 24,111         |       | — |   |
| Commercial  letters of credit             |       | 2,484        |       | —         |       | 3,106        |       | —         |       |
|                                           |            |              |            |                |            |              |            |                |            |  |  |

 

**4.  OTHER REAL ESTATE OWNED**

 

Otherreal estate owned is reported at the lower of cost or fair value less estimateddisposal costs, determined on the basis of current appraisals, comparablesales, and other estimates of value obtained principally from independentsources. Any excess of the loan balance at the time of foreclosure over thefair value of the real estate held as collateral is treated as a charge-offagainst the allowance for loan losses. Any subsequent declines in value arecharged to earnings.  Transactions inother real estate owned are summarized below (in thousands):

 
| ** **                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
|                            |       |              |       |                  |       |
| Balance—beginning  of year |       | $                 | 10,837     |                  | $          | 3,874 |   |
| Additions                       |       | 1,465             |       | 8,263                 |       |
| Sales                           |       | (1,685            | )          | (1,042                | )          |
| Write  downs                    |       | (1,720            | )          | (258                  | )          |
|                            |       |              |       |                  |       |
| Balance—end  of year       |       | $                 | 8,897      |                  | $          | 10,837 |   |

 

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** **

**5.  INTANGIBLE ASSETS**

 

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

 

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

 

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

 
| ** **                     | ** ** | **June 30, 2010**     | ** ** | **December 31, 2009**    | ** ** |
|--------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                           |       |                       |       |                          |       |   |   |   |   |
| Unamortized  intangible asset: |       |                       |       |                          |       |   |   |   |   |
| Goodwill                       |       | $                          | 362        |                          | $          | — |   | $ | 362 |   | $ | — |   |
|                           |       |                       |       |                          |       |   |   |   |   |
| Amortized  intangible assets:  |       |                       |       |                          |       |   |   |   |   |
| Core  deposit intangibles      |       | $                          | 3,676      |                          | $          | 962 |   | $ | 3,676 |   | $ | 709 |   |

 

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

** **
| ** **                                                   | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended June  30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **2010**                              | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Aggregate  amortization expense of core deposit intangibles: |       | $                                     | 122        |                           | $          | 131 |   | $ | 253 |   | $ | 145 |   |
|                                                              |            |                                       |            |                                |            |  |  |  |  |  |  |  |  |

 

Estimatedaggregate amortization expense of core deposit intangibles for the years endingDecember 31:

 
| 2010                 |   | $ | 490   |   |   |   |   |   |   |   |
|----------------------|--------|---|-------|--------|--------|--------|--------|--------|--------|--------|
| 2011                 |   | $ | 472   |   |   |   |   |   |   |   |
| 2012                 |   | $ | 472   |   |   |   |   |   |   |   |
| 2013                 |   | $ | 472   |   |   |   |   |   |   |   |
| 2014  and thereafter |   | $ | 1,062 |   |   |   |   |   |   |   |

 

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**6.  COMPREHENSIVE INCOME**

 

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

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                         | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  Income (loss)                 |       | $                                | (1,104     | )                              | $          | (65 | ) | $ | (479 | ) | $ | 219 |   |
|                               |       |                             |       |                           |       |   |   |   |   |
| Other  comprehensive income (loss) |       | 852                              |       | (93                            | )          | 734 |   | 338 |   |
|                               |       |                             |       |                           |       |   |   |   |   |
| Comprehensive  income (loss)       |       | $                                | (252       | )                              | $          | (158 | ) | $ | 255 |   | $ | 557 |   |

 

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

 

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

 
| ** **                                                        | ** ** | **Net Income**  | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|
| ** **                                                        | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**    | ** ** |
|                                                              |       |            |       |              |       |          |       |
| **Three Months ended June 30, 2010**                              |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic  earnings (loss) per share available to common stockholders |       | $               | (1,198     | )                 | 2,103      |          | $          | (0.57 | ) |
| Nonvested  restricted stock grant                                 |       | —          |       | —            |       | —        |       |
| Effect  of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted  earnings (loss) per share                                |       | $               | (1,198     | )                 | 2,103      |          | $          | (0.57 | ) |
|                                                              |       |            |       |              |       |          |       |
| **Three Months ended June 30, 2009**                              |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic  earnings (loss) per share available to common stockholders |       | $               | (159       | )                 | 2,102      |          | $          | (0.08 | ) |
| Effect  of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted  earnings (loss) per share                                |       | $               | (159       | )                 | 2,102      |          | $          | (0.08 | ) |
|                                                              |       |            |       |              |       |          |       |
| **Six Months ended June 30, 2010**                                |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic  earnings (loss) per share available to common stockholders |       | $               | (667       | )                 | 2,103      |          | $          | (0.32 | ) |
| Nonvested  restricted stock grant                                 |       | —          |       | —            |       | —        |       |
| Effect  of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted  earnings (loss) per share                                |       | $               | (667       | )                 | 2,103      |          | $          | (0.32 | ) |
|                                                              |       |            |       |              |       |          |       |
| **Six Months ended June 30, 2009**                                |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic  earnings (loss) per share available to common stockholders |       | $               | 98         |              | 2,102      |          | $          | 0.05 |   |
| Effect  of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted  earnings (loss) per share                                |       | $               | 98         |              | 2,102      |          | $          | 0.05 |   |

 

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** **

**8.  SUBSEQUENT EVENTS**

 

TheCompany evaluated subsequent events through the date its financial statementswere issued.

 

OnAugust 13, 2010, as part of the U.S. Department of the Treasury (the“Treasury”) Troubled Asset Relief Program (“TARP”) Community DevelopmentCapital Initiative, the Company entered into a Letter Agreement, and anExchange Agreement–Standard Terms (“Exchange Agreement”), with the Treasury,pursuant to which the Company agreed to exchange 7,462 shares of the Company’sFixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series APreferred Shares”), issued on March 6, 2009, pursuant to the Company’sparticipation in the TARP Capital Purchase Program, for 7,462 shares of theCompany’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B(“Series B Preferred Shares”), both of which have a liquidation preferenceof $1,000 (the “Exchange Transaction”). No new monetary consideration was exchanged in connection with theExchange Transaction.

 

TheExchange Transaction closed on August 13, 2010 (the “Closing Date”). Theissuance of the Series B Preferred Shares was a private placement exemptfrom registration pursuant to Section 4(2) of the Securities Act of1933, as amended.

 

TheSeries B Preferred Shares qualify as Tier 1 capital and will paycumulative dividends at a rate of 2% per annum for the first eight yearsafter the Closing Date and 9% per annum thereafter.  The Company may, subject to consultation withthe Federal Reserve Bank of Atlanta, redeem the Series B Preferred Sharesat any time for its aggregate liquidation amount plus any accrued and unpaiddividends.

 

** 9.** **RECLASSIFICATIONS**

 

Certain 2009 amounts havebeen reclassified to conform to the 2010 presentation.

 

17

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

 

**INTRODUCTION**

 

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

 

**ForwardLooking Statements**

 

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

 

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

 

The following discussion isof the Company’s financial condition as of June 30, 2010 and December 31, 2009,and the changes in the financial condition and results of operations for thethree and six month periods ended June 30, 2010 and 2009.

 

**CriticalAccounting Policies**

 

In response to theSecurities and Exchange Commission’s (“SEC”) Release No. 33-8040, CautionaryAdvice Regarding Disclosure About Critical Accounting Policies, the Company hasidentified the following as the most critical accounting policies upon whichits financial status depends.  Thecritical policies were determined by considering accounting policies thatinvolve the most complex or subjective decisions or assessments.  The Company’s most critical accountingpolicies relate to:

 

**InvestmentSecurities**- The Company classifiesinvestments in one of three categories based on management’s intent uponpurchase: held to maturity securities which are reported at amortized cost,trading securities which are reported at fair value with unrealized holdinggains and losses included in earnings, and available for sale securities whichare recorded at fair value with unrealized holding gains and losses included asa component of accumulated other comprehensive income.  The Company had no investment securitiesclassified as trading securities during 2010 or 2009.

 

Premiumsand discounts on available for sale and held to maturity securities areamortized or 

 

18

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accretedusing a method which approximates a level yield.

 

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

 

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

 

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

 

**OtherReal Estate Owned**-****Other realestate owned is reported at the lower of cost or fair value less estimateddisposal costs, determined on the basis of current appraisals, comparablesales, and other estimates of value obtained principally from independentsources. Any excess of the loan balance at the time of foreclosure over thefair value of the real estate held as collateral is treated as a charge-offagainst the allowance for loan losses. Any subsequent declines in value arecharged to earnings.

 

**IncomeTaxes**- Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which the assets andliabilities are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income taxexpense in the period that includes the enactment date.

 

Inthe event the future tax consequences of differences between the financialreporting bases and the tax bases of the Company’s assets and liabilitiesresult in deferred tax assets, an evaluation of the probability of being ableto realize the future benefits indicated by such assets is required. Avaluation allowance is provided for the portion of a deferred tax asset when itis more likely than not that some portion or all of the deferred tax asset willnot be realized. In assessing the realizability of the deferred tax assets,management considers the scheduled reversals of deferred tax liabilities,projected future taxable income, and tax planning strategies.

 

TheCompany believes that its income tax filing positions taken or expected to betaken in its tax returns will more likely than not be sustained upon audit bythe taxing authorities and does not anticipate any adjustments that will resultin a material adverse impact on the Company’s financial condition, results ofoperations, or cash flow. Therefore, no reserves for uncertain 

 

19

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incometax positions have been recorded.

 

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

 

**FINANCIALCONDITION**

 

Totalassets at June 30, 2010 increased by 2% or $6,490,000 to $394,029,000 comparedto $387,539,000 at December 31, 2009. This increase is primarily due to the Company’s success in the growth ofits deposit base during the first quarter of 2010.  Total deposits grew by $20 million or 6% to$346 million.  For the second quarter of2010, total assets decreased by $20 million. The decline is primarily due to a $14 million decrease in advances fromthe FHLB to manage the Company’s net interest margin and liquidity.

 

Themajority of our deposit growth was temporarily invested in interest-bearingdeposits with other banks which increased by $11 million for the first sixmonths of the year.  For the secondquarter of 2010, interest-bearing deposits with other banks decreased by $15million as a result of the payoff of $14 million in FHLB advances.  As of June 30, 2010, the investmentsecurities portfolio increased by $3 million compared to December 31, 2009,partially offsetting the decline in net loans receivable.  The Company continues to look for prudent andsafe earning assets in which to invest and meet its liquidity andasset/liability requirements.

 

Loansreceivable, net the Company’s largest earning asset, decreased by $6,431,000 or3% to $193,788,000 at June 30, 2010 compared to December 31, 2009.  While the decline in loan volume has slowed,the Company continues to find new loan demand to be relatively weak due to thecontinuing recessionary economic conditions.

 

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

 

**INVESTMENTSECURITIES**

 

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

 

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

 

Other investments consist ofFederal Home Loan Bank and Federal Reserve Bank stock which are restricted andhave no readily determined market value. The Company is required to maintain an investment in the FHLB and theFRB as part of its membership conditions. The level of investments at the FHLBis primarily determined by the amount of outstanding advances. The FRBinvestment level is 6 percent of the par value of the bank’s common stockoutstanding and paid-in-capital.  Theseinvestments are carried at cost.

 

20

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**LOANS**

 

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

 
| ** **                               | ** **                 | **June  30** | ** ** | **December  31,** | ** ** |
|------------------------------------------|----------------------------|--------------|------------|-------------------|------------|
| ** **                               | ** **                 | **2010**     | ** ** | **2009**          | ** ** |
|                                     |                       |         |       |              |       |
| Commercial,  financial, and agricultural |                       | $            | 13,969     |              | $          | 14,282 |   |
| Installment                              |                       | 8,274        |       | 9,240             |       |
| Real  estate - mortgage                  |                       | 160,980      |       | 161,229           |       |
| Real  estate - construction              |                       | 15,024       |       | 19,132            |       |
| Other                                    |                       | 302          |       | 594               |       |
|                                     | Loans  receivable          |         | 198,549    |              | 204,477    |   |
| Less:                                    | Net  deferred loan fees    |         | 173        |              | 164        |   |
|                                     | Allowance  for loan losses |         | 4,588      |              | 4,094      |   |
|                                     |                       |         |       |              |       |
|                                     | Loans  receivable, net     |         | $          | 193,788           |       | $ | 200,219 |   |

 

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

 

**NONPERFORMINGASSETS**

 

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

 

With the exception of theloans included within nonperforming assets in the table below, management isnot aware of any loans classified for regulatory purposes as loss, doubtful,substandard, or special mention that have not been disclosed which (1)represent or result from trends or uncertainties which management reasonablyexpects will materially impact future operating results, liquidity, or capitalresources, or (2) represent any information on material credits of whichmanagement is aware that causes management to have serious doubts as to theabilities of such borrowers to comply with the loan repayment terms.

 

The financial and creditmarkets continued to experience difficulty during the first six months of2010.  Although there appears to be somepositive signs of recovery and the economic outlook appears to be stabilizing,our local markets continue to be impacted by recessionary conditions whichcontinue to influence the levels of our nonperforming assets.  For the year, nonperforming assets continuesto be relatively flat compared toDecember 31, 2009, increasing by a nominal $124,000 to $17,927,000. During thefirst six months of 2010, the Company charged-off $1,081,000 in nonperformingloans.  The Company also recorded asignificant decline in the appraised value of two of its foreclosed propertiesduring the period which resulted in a $1,720,000 write-down on other realestate owned (OREO).

 

OREO decreased by $1,940,000to $8,897,000 due to the sales of foreclosed properties totaling $1,685,000 andwrite-downs of $1,720,000, partially offset by additions to OREO of$1,465,000.  The $2,064,000 increase innonaccrual loans to $9,030,000 was driven by two commercial real estateproperties that were placed on nonaccrual status during the secondquarter.  At June 30, 2010, nonperformingassets represent 4.55% of total assets compared to 4.59% at December 31, 2009, 

 

21

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representing a slightimprovement of 4 basis points.  Therewere no loans greater than 90 days past due and still accruing interest at theend of the second quarter of 2010 or at December 31, 2009.  In addition, there were 32 and 33 loansrestructured or otherwise impaired totaling $11,014,000 and $15,380,000 at June30, 2010 and December 31, 2009, respectively. At June 30, 2010, 4 restructured loans totaling $977,000 and 2restructured loans totaling $863,000 at December 31, 2009 are included in thenonaccrual loans in the table below.

 

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

 
| ** **                                                                                            | ** ** | **June  30,**                                 | ** ** | **December  31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------|------------|
| ** **                                                                                            | ** ** | **2010**                                      | ** ** | **2009**          | ** ** |
| ** **                                                                                            | ** ** | **(in  thousands, except  financial ratios)** | ** ** |
| ** **                                                                                            | ** ** | ** **                                    | ** ** | ** **        | ** ** |
| Nonperforming  assets:                                                                                |       |                                          |       |              |       |
| Nonperforming  loans:                                                                                 |       |                                          |       |              |       |
| Nonaccrual  loans                                                                                     |       | $                                             | 9,030      |              | $          | 6,966 |   |
| Past-due  loans of 90 days or more and still accruing                                                 |       | —                                        |       | —            |       |
| Nonperforming  loans                                                                                  |       | 9,030                                         |       | 6,966             |       |
|                                                                                                  |       |                                          |       |              |       |
| Real  estate acquired through foreclosure                                                             |       | 8,897                                         |       | 10,837            |       |
| Total  nonperforming assets                                                                           |       | $                                             | 17,927     |              | $          | 17,803 |   |
|                                                                                                  |       |                                          |       |              |       |
| Ratios:                                                                                               |       |                                          |       |              |       |
| Nonperforming  loans to loans, net of unearned income                                                 |       | 4.55                                          | %          | 3.41              | %          |
|                                                                                                  |       |                                          |       |              |       |
| Nonperforming  assets to loans, net of unearned income, and real estate acquired through  foreclosure |       | 8.65                                          | %          | 8.27              | %          |
|                                                                                                  |       |                                          |       |              |       |
| Nonperforming  assets to total assets                                                                 |       | 4.55                                          | %          | 4.59              | %          |
|                                                                                                  |       |                                          |       |              |       |
| Allowance  for loan losses to nonperforming loans                                                     |       | 50.81                                         | %          | 58.77             | %          |
|                                                                                                  |       |                                          |       |              |       |
| Allowance  for loan losses to nonperforming assets                                                    |       | 25.60                                         | %          | 23.00             | %          |

 

**ALLOWANCEFOR LOAN LOSSES**

 

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

 

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

 

Loans are charged againstthe allowance when, in the opinion of management, such loans are 

 

22

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deemed uncollectible andsubsequent recoveries are added to the allowance.  For the second quarter of 2010, based on theCompany’s evaluation, the provision for loan losses charged against operatingearnings decreased $78,000 to $860,000 compared to $938,000 for the same threemonth period last year.  For the firstsix months of 2010, a provision for loan losses of $1,490,000 was chargedagainst operating earnings compared to $1,376,000 for the same period lastyear. The increase in the provision for loan losses in 2010 relates to thecontinued deterioration of liquidity of the borrowers due to job loss anddeclines in the collateral value securing the loans due to current economicconditions.

 

The allowance for loan lossesat June 30, 2010 was approximately $4,588,000, representing 2.31% of totalloans, net of unearned income compared to approximately $4,219,000 for the sameperiod last year, which represented 1.99% of total loans, net of unearnedincome.  Approximately $3,089,000 of theallowance for loan losses was allocated to loans management considered impairedat June 30, 2010.

 

At June 30, 2010, managementbelieves the allowance for loan losses is adequate. Management uses availableinformation to recognize losses on loans; however, future additions to theallowance may be necessary based on changes in economic conditions,particularly in the metropolitan Atlanta, Georgia and Birmingham, Alabamaareas. In addition, regulatory agencies, as an integral part of their examinationprocess, periodically review the Company’s allowance for loan losses. Suchagencies may require the Company to recognize additions to the allowance basedon their judgments about information available to them at the time of theirexamination.

 

Also, a substantial portionof the Company’s loan portfolio is collateralized by real estate inmetropolitan Atlanta and Birmingham markets. Accordingly, the ultimatecollectibility of a substantial portion of the Company’s loan portfolio issusceptible to changes in market conditions in the metropolitan Atlanta andBirmingham areas.

 

·                  The Company’sloans to area churches were approximately $45 million and $46 million at June30, 2010 and December 31, 2009, which are generally secured by real estate.

 

·                  The Company’sloans to area convenience stores were approximately $12 million at June 30,2010 and December 31, 2009.  Loansto convenience stores are generally secured by real estate.

 

·                  The Company’sloans to area hotels were approximately $18 million at June 30, 2010 andDecember 31, 2009, which are generally secured by real estate.

 

Also, 1—4 family residential mortgage loans secured by first liens wereapproximately $37 million at June 30, 2010 and December 31, 2009, respectively.The Company has no subprime mortgages in its loan portfolio.

 

23

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

 
| ** **                                                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                        |       |     |       |     |       |
| Loans,  net of unearned income                                                                              |       | $        | 198,376    |     | $          | 212,066 |   |
|                                                                                                        |       |     |       |     |       |
| Average  loans, net of unearned income and the allowance for loan losses                                    |       | $        | 197,742    |     | $          | 208,203 |   |
|                                                                                                        |       |     |       |     |       |
| Allowance  for loan losses at the beginning of period                                                       |       | $        | 4,094      |     | $          | 4,659 |   |
|                                                                                                        |       |     |       |     |       |
| Loans  charged-off:                                                                                         |       |     |       |     |       |
| Commercial,  financial, and agricultural                                                                    |       | 100      |       | 33       |       |
| Real  estate - loans                                                                                        |       | 796      |       | 1,523    |       |
| Installment  loans to individuals                                                                           |       | 185      |       | 315      |       |
| Total  loans charged-off                                                                                    |       | 1,081    |       | 1,871    |       |
|                                                                                                        |       |     |       |     |       |
| Recoveries  of loans previously charged off:                                                                |       |     |       |     |       |
| Commercial,  financial, and agricultural                                                                    |       | 3        |       | 4        |       |
| Real  estate - loans                                                                                        |       | 21       |       | 8        |       |
| Installment  loans to individuals                                                                           |       | 61       |       | 43       |       |
| Total  loans recovered                                                                                      |       | 85       |       | 55       |       |
|                                                                                                        |       |     |       |     |       |
| Net  loans charged-off                                                                                      |       | 996      |       | 1,816    |       |
|                                                                                                        |       |     |       |     |       |
| Additions  to allowance for loan losses charged to operating expense                                        |       | 1,490    |       | 1,376    |       |
|                                                                                                        |       |     |       |     |       |
| Allowance  for loan losses at period end                                                                    |       | $        | 4,588      |     | $          | 4,219 |   |
|                                                                                                        |       |     |       |     |       |
| Ratio  of net loans charged-off to average loans, net of unearned income and the  allowance for loan losses |       | 0.50     | %          | 0.87     | %          |
|                                                                                                        |       |     |       |     |       |
| Ratio  of allowance for loan losses to loans, net of unearned income                                        |       | 2.31     | %          | 1.99     | %          |

 

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**DEPOSITS**

 

Deposits are the Company’sprimary source of funding loan growth. Total deposits at June 30, 2010 increased 6% or $20 million to$346,491,000.  This increase in depositsrelates to the continued growth in our deposit base as customers seek bankswith a strong capital position and who are financially sound.  The Company meets both of thesecriteria.  Noninterest-bearing depositsdecreased by 9% or $5 million due to seasonal fluctuations and interest-bearingdeposits increased by 8% or $26 million when compared to December 31,2009.

 

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

 

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

 
| ** **                         | ** ** | **June 30** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2010**         | ** ** | **2009**              | ** ** |
|                               |       |             |       |                  |       |
| NOW  and money market accounts     |       | $                | 93,969     |                  | $          | 84,432 |   |
| Savings  accounts                  |       | 33,487           |       | 33,039                |       |
| Time  deposits of $100,000 or more |       | 112,497          |       | 94,553                |       |
| Other  time deposits               |       | 53,233           |       | 55,587                |       |
|                               |       | $                | 293,186    |                  | $          | 267,611 |   |

 

**OTHERBORROWED FUNDS**

 

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

 

The Bank had outstandingadvances from the FHLB of $337,000 at June 30, 2010 and $14,495,000 at December 31,2009. These advances are collateralized by FHLB stock, a blanket lien on 1-4family and multifamily mortgage loans, certain commercial real estate loans andinvestment securities.  As of June 30,2010 and December 31, 2009, total loans pledged as collateral was$43,477,000 and $47,494,000, respectively.

 
| **Maturity**                         | ** ** | **Callable** | ** ** | **Type**   | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|--------------|------------|------------|------------|------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | ** **   | ** ** | ** ** | ** ** | **(in thousands)**     | ** ** |
|                                 |       |         |       |       |       |                   |       |                       |       |   |   |   |   |
| July 2010                       |       | Daily        |       | Variable   |       | —                 | %          | $                          | —     |   | 0.36 | % | $ | 14,150 |   |
| August 2026                     |       |         |       | (1)        |       | —                 |       | 337                        |       | — |   | 345 |   |
|                                 |       |         |       |       |       |                   |       |                       |       |   |   |   |   |
| Total  Principal Outstanding         |       |         |       |       |       |                   |       | $                          | 337        |   |   |   | $ | 14,495 |   |
|                                 |       |         |       |       |       |                   |       |                       |       |   |   |   |   |
| Weighted  Average Rate at Period End |       |         |       |       |       | —                 | %          |                       |       | 0.35 | % |   |   |

 

----

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

 

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At June 30, 2010, theCompany had an $83 million line of credit facility at the FHLB of which $20.3million was committed consisting of an advance of $337,000 and a letter ofcredit to secure public deposits in the amount of $20 million.  The Company also had $22 million of borrowingcapacity at the Federal Reserve Bank discount window.

 

**RESULTSOF OPERATIONS**

 

In summary, the Company’searnings for the first six months of 2010 was negatively impacted by thesignificant decline in the appraised value of two of its OREO properties whichwere the primary cause of $1.7 million in write-downs. For the three and sixmonth periods, as a result of the write downs in OREO values, the Companyexperienced a net loss of $1,104,000 and $479,000, respectively, compared to anet loss of $65,000 and net income of $219,000 for the same periods last yearbefore preferred dividends. Although there appears to be some positive signs ofrecovery, our market remains soft and valuations are deeply discounted.  However, our capital position is strong andour core operations remain solid.

 

**Net Interest Income:**

 

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

 

For the three-month periodended June 30, 2010, net interest income was relatively flat, decreasingby a nominal $4,000 to $3,614,000 compared to $3,618,000 reported for the sameperiod last year.  Total interest incomedeclined by $465,000 compared to the same three month period in 2009 due to a$346,000 decrease in interest income on loans. The Company continues to experience lower loan volume as well as lowerloan yields and higher nonaccrual loans during the period due to therecessionary conditions.  Total interestexpense for the period decreased by $461,000 or 41% compared to the same threemonth period in 2009.  Interest expenseon interest-bearing deposits decreased by $435,000 or 39%, as the Companylowered its funding cost of interest-bearing deposits.  Also, interestexpense on other borrowings decreased by $26,000 or 90% due to lower balancesoutstanding and lower interest rates paid on the Company’s advances from theFHLB.

 

On a year-to-date basis, netinterest income increased by $148,000 or 2% to $7,417,000 compared to$7,269,000 for the same period in 2009. Total interest income for this period decreased by $592,000 or 6%compared to the same six month period in 2009 and the decrease was primarilydue to a $521,000 or 7% decrease in interest income on loans.  The same factors in the quarterlyyear-over-year comparison also contributed to the six month decrease in totalinterest income.  Total interest expensefor the six month period decreased by $740,000 or 35% compared to the same sixmonth period in 2009.  Interest expense oninterest-bearing deposits decreased by $688,000 or 34%, as the Company has beensuccessful in lowering rates on its deposit products.  At June 30, 2010, the Company had a netinterest margin of 4.17% compared to 4.34% for the same period last year.

 

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

 

26

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**Provision for loan losses**

 

In the second quarter, theCompany’s provision for loan losses increased by $230,000 to $860,000 comparedto the first quarter of 2010.  Thisincrease was driven by two commercial real estate properties that were placedon nonaccrual status during the second quarter. Compared to the same three month period last year, the second quarter2010 provision for loan losses represents a decrease of $78,000.  For the first six months of 2010, the Companyrecognized a provision for loan losses of $1,490,000, an $114,000 or 8%increase, compared to $1,376,000 for the same period in 2009.  The allowance for loan losses was $4,588,000at June 30, 2010 compared to $4,094,000 at December 31, 2009.  At June 30, 2010, the allowance for loanlosses was 51% of nonperforming loans compared to 59% at December 31,2009.  The provision for loan losses andthe resulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions. At June 30,2010, the Company considered its allowance for loan losses to be adequate.

 

**Noninterest income:**

 

Noninterest income consistsof revenues generated from a broad range of financial services and activities,including fee-based services and commissions earned through insurancesales.  In addition, gains and lossesrealized from the sale of investment portfolio securities and sales of assetsare included in noninterest income.

 

Noninterest income totaled$1,218,000 for the three month period ended June 30, 2010, a decrease of$272,000 or 18% compared with the same period last year.  This decrease is primarily attributed to theCompany realizing only a $1,000 gain on the sale of securities versus a$139,000 gain on the sale of securities realized for the same three monthperiod last year.  Services charges ondeposits also decreased during the three month period by $71,000 to $941,000compared to $1,012,000 for the same period last year.

 

Year-to-date, noninterestincome increased by $178,000 or 6% to $2,974,000 compared to the same periodlast year. This increase is also attributed to gains on the sale of securitieswhich totaled $334,000 for the six month period compared to $162,000 lastyear.  Also significant, other operatingincome increased by $128,000 or 19% to $790,000 compared to the same six monthperiod last year, partially offset by a decrease of $124,000 in servicescharges on deposits.  This increase isattributed to a $259,000 award the Company received for its participation in theU.S. Department of Treasury Bank EnterpriseAward (BEA) which provides financial incentives for lending and investment activities within economicallydistressed communities.  The Company did not receive the BEA forthe same period last year.

 

**Noninterest expense:**

 

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

 

Noninterest expenseincreased by $1,481,000 or 33% for the second quarter of 2010 compared to thesame period last year. This increase is primarily due to $1,694,000 in writedowns of OREO values during the three month period due to significant declinesin the appraised value of two OREO properties. For the same period last year, write downs of OREO properties totaled$114,000.  Partially offsetting thehigher write downs of OREO property values was a decline in the Company’s otheroperating expenses of $267,000.  Thisdecrease is partially due to the savings initiative implemented by the Companyand several onetime expenses incurred during the first quarter of 2009 relatedto the 

 

27

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legal and advisory servicesrequired for the Company’s participation in TARP and the acquisition of itsLithonia, Georgia branch.

 

For the six month periodended June 30, 2010, noninterest expense increased by $1,503,000 or 17%.The same factors in the quarterly year-over-year comparison also contributed tothe six month increase in total noninterest expense.  Total OREO expenses increased by $1,631,000or 755% due to the significant declines and subsequent write down of theappraised value of two OREO properties. Other operating expenses decreased by $684,000 or 22% to $2,446,000 on ayear-to-date basis due to the same factors stated in the quarterlyyear-over-year comparison.

 

**INTEREST RATE SENSITIVITY MANAGEMENT**

 

Interest rate sensitivitymanagement involves managing the potential impact of interest rate movements onnet interest income within acceptable levels of risk.  The Company seeks to accomplish this bystructuring the balance sheet so that repricing opportunities exist for bothassets and liabilities in equivalent amounts and time intervals.  Imbalances in these repricing opportunities atany point in time constitute a financial institution’s interest rate risk.  The Company’s ability to reprice assets andliabilities in the same dollar amounts and at the same time minimizes interestrate risk.

 

One method of measuring theimpact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest ratesensitive assets and interest rate sensitive liabilities at various timeintervals is referred to as the gap.  TheCompany is liability sensitive on a short-term basis as reflected in thefollowing table.  Generally, a netliability sensitive position indicates that there would be a negative impact onnet interest income in an increasing rate environment.  However, interest rate sensitivity gap doesnot necessarily indicate the impact of general interest rate movements on thenet interest margin, since all interest rates and yields do not adjust at thesame velocity and the repricing of various categories of assets and liabilitiesis subject to competitive pressures and the needs of the Company’scustomers.  In addition, various assetsand liabilities indicated as repricing within the same period may in factreprice at different times within such period and at different rates. Thefollowing table shows the contractual maturities of all interest rate sensitiveassets and liabilities at June 30, 2010. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations with or without callor prepayment penalties.  Taking aconservative approach, the Company has included demand deposits such as NOW,money market, and savings accounts in the three month category.  However, the actual repricing of theseaccounts may extend beyond twelve months. The interest rate sensitivity gap is only a general indicator ofpotential effects of interest rate changes on net interest income.

 

28

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

 
| ** **                                                              | ** ** | **Cumulative  amounts as of June 30, 2010** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **Maturing  and repricing within**               | ** ** |
| ** **                                                              | ** ** | **3**                                            | ** ** | **3 to  12** | ** ** | **1 to  5** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Months**                                       | ** ** | **Months** | ** ** | **Years** | ** ** | **5  Years** | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **(amounts  in thousands, except ratios)**       | ** ** |
| Interest-sensitive  assets:                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits with other banks                             |       | $                                                | 31,925     |   | $ | — |   | $ | — |   | $ | — |   | $ | 31,925 |   |
| Certificates  of deposit                                                |       | —                                           |       | 150 |   | — |   | — |   | 150 |   |
| Investments                                                             |       | 190                                              |       | 860 |   | 3,797 |   | 114,959 |   | 119,806 |   |
| Loans                                                                   |       | 46,975                                           |       | 23,566 |   | 90,763 |   | 37,072 |   | 198,376 |   |
| Total  interest-sensitive assets                                        |       | $                                                | 79,090     |   | $ | 24,576 |   | $ | 94,560 |   | $ | 152,031 |   | $ | 350,257 |   |
|                                                                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                             |       |   |   |   |   |   |   |   |   |
| Deposits  (a)                                                           |       | $                                                | 177,783    |   | $ | 100,147 |   | $ | 15,256 |   | $ | — |   | $ | 293,186 |   |
| Other  borrowings                                                       |       | —                                           |       | — |   | — |   | 337 |   | 337 |   |
| Total  interest-sensitive liabilities                                   |       | $                                                | 177,783    |   | $ | 100,147 |   | $ | 15,256 |   | $ | 337 |   | $ | 293,523 |   |
|                                                                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                                | (98,693    | ) | $ | (75,571 | ) | $ | 79,304 |   | $ | 151,694 |   | $ | 56,734 |   |
|                                                                    |       |                                             |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (28.18                                           | )%         | (49.75 | )% | (27.11 | )% | 16.20 | % | 16.20 | % |

 

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(a) Savings, Now, andmoney market deposits totaling $127,456 are included in the maturing in 3months classification.

 

**LIQUIDITY**

 

Liquidity is the ability ofthe Company to convert assets into cash or cash equivalents without significantloss and to raise additional funds by increasing liabilities.  Liquidity management involves maintaining theCompany’s ability to meet the day-to-day cash flow requirements of itscustomers, whether they are depositors wishing to withdraw funds or borrowersrequiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able toperform the primary function of a financial intermediary and would, therefore,not be able to meet the needs of the communities it serves. Additionally, theCompany requires cash for various operating needs including: dividends toshareholders; business combinations; capital injections to its subsidiary; theservicing of debt; and the payment of general corporate expenses. The Companyhas access to various capital markets and on March 6, 2009, the Companyissued 7,462 shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series A,to the U.S. Department of the Treasury (“Treasury”) under the TARP CapitalPurchase Program (the “CPP”) for an investment of $7,462,000. However, theprimary source of liquidity for the Company is dividends from its banksubsidiary.  Statutory and regulatorylimitations apply to the Bank’s payment of dividends to the Company as well asthe Company’s payment of dividends to its stockholders.  The Georgia Department of Banking and Financeregulates the Bank’s dividend payments and must approve dividend payments thatexceed 50 percent of the Bank’s prior year net income. The payment of dividendsmay also be affected or limited by other factors, such as the requirement byfederal agencies to maintain adequate capital above regulatory guidelines andthat bank holding companies and insured banks pay dividends out of currentearnings. Currently, the Bank must receive approval from the Georgia Departmentof Banking and Finance and the Company must receive approval from the FederalReserve Bank of Atlanta prior to the payment of dividends.

 

Asset and liability managementfunctions not only serve to assure adequate liquidity in order to meet theneeds of the Company’s customers, but also to maintain an appropriate balancebetween interest-

 

29

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sensitive assets andinterest-sensitive liabilities so that the Company can earn a return that meetsthe investment requirements of its shareholders.  Daily monitoring of the sources and uses offunds is necessary to maintain an acceptable cash position that meets bothrequirements.

 

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

 

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

 

**CAPITALRESOURCES**

 

Stockholders’equity decreased by $75,000 for the six month period ended June 30, 2010.This decrease is primarily due to an $834,000 decrease in retained earnings,representing a net loss of $479,000, an $188,000 preferred dividend accrued tothe Treasury under the CPP and a $167,000 dividend paid to common stockholders.Substantially offsetting the decrease to retained earnings, the Company’saccumulated other comprehensive income, net of taxes increased by $734,000 to$1,506,000.  This increase is attributedto the rapid movements in the Treasury markets, wild swings in volatility andcredit spreads, and their impact on the Company’s available for sale securitiesportfolio.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company tomaintain minimum amounts and ratios of total and Tier 1 capital to riskweighted assets, and Tier 1 capital to average assets.  The Company’s total and Tier 1 capital torisk weighted assets and Tier 1 to average assets were 17%, 16% and 9% at June 30,2010 compared to 16%, 15% and 10% at December 31, 2009, respectively.  At June 30, 2010, the Company met allcapital adequacy requirements to which it is subject and is considered to be ‘wellcapitalized” under regulatory standards.

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

 

Thisinformation is not required since the Company qualifies as a smaller reportingcompany.

 
| **ITEM  4.** | **CONTROLS  AND 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 June 30, 2010 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,

 

30

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

 

**PART II.  OTHER INFORMATION**

 
| **ITEM  1.**  | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **    | The  Company and the Bank are involved in various claims and legal actions arising  in the ordinary course of business.  In  the opinion of management, based in part on the advice of counsel, the  ultimate disposition of these matters will not have a material adverse impact  on the Company’s consolidated financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **ITEM  1A.** | **RISK  FACTORS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **    | We  believe there have been no material changes from the factors discussed in Part I,  “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year  ended December 31, 2009, except for the additional risk factor regarding  the recently enacted Dodd-Frank Reform Act which is set forth below.  You should carefully consider the factors  discussed in our Annual Report on Form 10-K, which could materially  affect our business, financial condition or future results. The risks  described in our Annual Report on Form 10-K are not the only risks  facing us. Additional risks and uncertainties not currently known to us or  that we currently deem to be immaterial also may materially adversely affect  our business, financial condition and/or operating results. |
| ** **    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **    | **Compliance  with the recently enacted Dodd-Frank Reform Act may adversely impact our  earnings.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **    | On  July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform  and Consumer Protection Act (the “Dodd-Frank Reform Act”) into law.  The Dodd-Frank Reform Act represents a  significant overhaul of many aspects of the regulation of the  financial-services industry.  Major  elements in the Dodd-Frank Reform Act include the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **    | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The  establishment of the Financial Stability Oversight Counsel, which will be  responsible for identifying and monitoring systemic risks posed by financial  firms, activities, and practices. |
| ** **    | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Enhanced  supervision of large bank holding companies (i.e., those with over $50  billion in total consolidated assets), with more stringent supervisory  standards to be applied to them. |
| ** **    | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The  creation of a special regime to allow for the orderly liquidation of  systemically important financial companies, including the establishment of an  orderly liquidation fund. |
| ** **    | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The  development of regulations to address derivatives markets, including clearing  and exchange trading requirements and a framework for regulating  derivatives-market participants. |
| ** **    | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Enhanced  supervision of credit-rating agencies through the Office of Credit Ratings  within the SEC. |

 

31

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| ** **   | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Increased  regulation of asset-backed securities, including a requirement that issuers  of asset-backed securities retain at least 5% of the risk of the asset-backed  securities.                                      |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | The  establishment of a Bureau of Consumer Financial Protection, within the  Federal Reserve, to serve as a dedicated consumer-protection regulatory body.                                                              |
| ** **   | ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Amendments  to the Truth in Lending Act aimed at improving consumer protections with  respect to mortgage originations, including originator compensation, minimum  repayment standards, and prepayment considerations. |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                    |
| ** **   | The  majority of the provisions in the Dodd-Frank Reform Act are aimed at  financial institutions that are significantly larger than the Company or the  Bank.  Nonetheless, there are  provisions with which we will have to comply now that the Dodd-Frank Reform  Bill is signed into law.  As rules and  regulations are promulgated by the federal agencies responsible for  implementing and enforcing the provisions in the Dodd-Frank Reform Act, we  will have to work to apply resources to ensure that we are in compliance with  all applicable provisions, which may adversely impact our earnings. |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **ITEM  2.** | **UNREGISTERED  SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **ITEM  3.** | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **ITEM  4.** | **SUBMISSION  OF MATTERS TO VOTE OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **ITEM  5.** | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **ITEM  6.** | **EXHIBITS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | **Exhibit 31**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | **Exhibit 32**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** **   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

32

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**SIGNATURES**

 

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

 

 

**CITIZENS BANCSHARES CORPORATION**

 

 
| Date:   August 13, 2010 | By:                                    | /s/  James E. Young |
|-----------------------------------|----------------------------------------|---------------------|
|                              | James  E. Young                        |
|                              | President  and Chief Executive Officer |
|                              |                                   |                |
|                              |                                   |                |
| Date:  August 13, 2010  | By:                                    | /s/  Cynthia N. Day |
|                              | Cynthia  N. Day                        |
|                              | Senior  Executive Vice President and   |
|                              | Chief  Operating Officer               |
|                              |                                   |                |
|                              |                                   |                |
| Date:  August 13, 2010  | By:                                    | /s/  Samuel J. Cox  |
|                              | Samuel  J. Cox                         |
|                              | Executive  Vice President and          |
|                              | Chief Financial Officer                |

 

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