**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 – Q**

 

**(Mark One)**

 

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

 

**For thequarterly period ended June 30, 2009**

 

**OR**

 

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

 

**For thetransition period from                         to                          **

 

**CommissionFile No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Georgia**                                                      | ** ** | **58 –  1631302**             |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification No.) |
| ** **                                                       | ** ** | ** **                         |
| **75  Predmont Avenue, N.E., Atlanta, Georgia**                  | ** ** | **30303**                          |
| (Address of principal  executive offices)                        |       | (Zip Code)                         |

 

Registrant’s telephone number, including areacode: **(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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

 

 

----

 

**PART 1.         FINANCIALINFORMATION**

 

**ITEM 1.         Financialstatements**

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARY**

** **

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**JUNE 30,2009 AND DECEMBER 31, 2008**

**(Inthousands, except share data)**

 
| ** **                                                                                                         | ** ** | **2009**        | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                         | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                         |       |            |       |       |       |
| Cash and due from banks                                                                                            |       | $               | 5,225      |       | $          | 6,870 |   |
| Interest-bearing deposits with banks                                                                               |       | 14,731          |       | 9,276      |       |
| Certificates of deposit                                                                                            |       | 396             |       | 345        |       |
| Investment securities available for sale, at fair  value                                                           |       | 108,904         |       | 87,961     |       |
| Investment securities held to maturity, at cost                                                                    |       | 4,447           |       | 4,583      |       |
| Other investments                                                                                                  |       | 2,257           |       | 2,287      |       |
| Loans receivable, net                                                                                              |       | 207,847         |       | 210,306    |       |
| Premises and equipment, net                                                                                        |       | 8,141           |       | 7,537      |       |
| Cash surrender value of life insurance                                                                             |       | 10,300          |       | 10,080     |       |
| Foreclosed real estate                                                                                             |       | 7,589           |       | 3,874      |       |
| Other assets                                                                                                       |       | 9,866           |       | 4,976      |       |
|                                                                                                               |       |            |       |       |       |
| Total assets                                                                                                       |       | $               | 379,703    |       | $          | 348,095 |   |
|                                                                                                               |       |            |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                     | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                                                                               |       |            |       |       |       |
| LIABILITIES:                                                                                                       |       |            |       |       |       |
| Noninterest-bearing deposits                                                                                       |       | $               | 62,418     |       | $          | 54,786 |   |
| Interest-bearing deposits                                                                                          |       | 245,360         |       | 227,127    |       |
|                                                                                                               |       |            |       |       |       |
| Total deposits                                                                                                     |       | 307,778         |       | 281,913    |       |
|                                                                                                               |       |            |       |       |       |
| Accrued expenses and other liabilities                                                                             |       | 4,177           |       | 3,571      |       |
| Notes payable                                                                                                      |       | —          |       | 240        |       |
| Advances from Federal Home Loan Bank                                                                               |       | 26,504          |       | 28,713     |       |
|                                                                                                               |       |            |       |       |       |
| Total liabilities                                                                                                  |       | 338,459         |       | 314,437    |       |
|                                                                                                               |       |            |       |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                                      |       |            |       |       |       |
|                                                                                                               |       |            |       |       |       |
| STOCKHOLDERS’ EQUITY:                                                                                         |       |            |       |       |       |
| Preferred stock - No par value; 10,000,000 shares  authorized; Series A , 7,462 shares issued and outstanding |       | 7,462           |       | —     |       |
| Common stock - $1 par value; 20,000,000 shares authorized;  2,230,065 shares issued and outstanding                |       | 2,230           |       | 2,230      |       |
| Nonvoting common stock - $1 par value; 5,000,000  shares authorized; 90,000 issued and outstanding                 |       | 90              |       | 90         |       |
| Additional paid-in capital                                                                                         |       | 7,641           |       | 7,611      |       |
| Retained earnings                                                                                                  |       | 25,213          |       | 25,465     |       |
| Treasury stock at cost, 217,531 shares at  June 30, 2009 and 219,913 at December 31, 2008                |       | (1,805          | )          | (1,813     | )          |
| Accumulated other comprehensive income, net of  income taxes                                                       |       | 413             |       | 75         |       |
|                                                                                                               |       |            |       |       |       |
| Total stockholders’ equity                                                                                    |       | 41,244          |       | 33,658     |       |
|                                                                                                               |       |            |       |       |       |
|                                                                                                               |       | $               | 379,703    |       | $          | 348,095 |   |

 

See notes to consolidated financial statements.

 

2

----

 

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

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

 

 
| ** **                                                      | ** ** | **Three Months******** Ended  June 30,** | ** ** | **Six Months******** Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                           | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  income:                                               |       |                                               |       |                                             |       |   |   |   |   |
| Loans,  including fees                                          |       | $                                                  | 3,509      |                                             | $          | 3,978 |   | $ | 7,032 |   | $ | 8,355 |   |
| Investment  securities:                                         |       |                                               |       |                                             |       |   |   |   |   |
| Taxable                                                         |       | 899                                                |       | 822                                              |       | 1,749 |   | 1,495 |   |
| Tax-exempt                                                      |       | 315                                                |       | 178                                              |       | 569 |   | 355 |   |
| Interest-bearing  deposits                                      |       | 26                                                 |       | 55                                               |       | 31 |   | 109 |   |
| Total  interest income                                          |       | 4,749                                              |       | 5,033                                            |       | 9,381 |   | 10,314 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense:                                              |       |                                               |       |                                             |       |   |   |   |   |
| Deposits                                                        |       | 1,102                                              |       | 1,771                                            |       | 2,043 |   | 3,531 |   |
| Other  borrowings                                               |       | 29                                                 |       | 3                                                |       | 69 |   | 154 |   |
| Total  interest expense                                         |       | 1,131                                              |       | 1,774                                            |       | 2,112 |   | 3,685 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  interest income                                            |       | 3,618                                              |       | 3,259                                            |       | 7,269 |   | 6,629 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision  for loan losses                                      |       | 938                                                |       | 1,004                                            |       | 1,376 |   | 1,109 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  interest income after provision for loan losses            |       | 2,680                                              |       | 2,255                                            |       | 5,893 |   | 5,520 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  income:                                            |       |                                               |       |                                             |       |   |   |   |   |
| Service  charges on deposits                                    |       | 1,012                                              |       | 1,037                                            |       | 1,970 |   | 2,012 |   |
| Gain  on sales of securities                                    |       | 139                                                |       | —                                           |       | 162 |   | 27 |   |
| Gain  on sales of assets                                        |       | 4                                                  |       | 11                                               |       | 2 |   | 11 |   |
| Other  operating income                                         |       | 335                                                |       | 250                                              |       | 662 |   | 579 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  noninterest income                                       |       | 1,490                                              |       | 1,298                                            |       | 2,796 |   | 2,629 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Noninterest  expense:                                           |       |                                               |       |                                             |       |   |   |   |   |
| Salaries  and employee benefits                                 |       | 1,845                                              |       | 1,691                                            |       | 3,681 |   | 3,537 |   |
| Net  occupancy and equipment                                    |       | 590                                                |       | 545                                              |       | 1,185 |   | 1,122 |   |
| Amortization  of core deposit intangible                        |       | 131                                                |       | 13                                               |       | 145 |   | 27 |   |
| FDIC  insurance                                                 |       | 187                                                |       | 8                                                |       | 298 |   | 17 |   |
| Other  real estate owned                                        |       | 180                                                |       | 438                                              |       | 216 |   | 442 |   |
| Other  operating expenses                                       |       | 1,499                                              |       | 1,246                                            |       | 3,130 |   | 2,427 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  noninterest expense                                      |       | 4,432                                              |       | 3,941                                            |       | 8,655 |   | 7,572 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  (loss) before income taxes                              |       | (262                                               | )          | (388                                             | )          | 34 |   | 577 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  tax expense (benefit)                                   |       | (197                                               | )          | (224                                             | )          | (185 | ) | 29 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income (loss)                                              |       | $                                                  | (65        | )                                                | $          | (164 | ) | $ | 219 |   | $ | 548 |   |
| Preferred  dividends accrued                                    |       | 94                                                 |       | —                                           |       | 121 |   | — |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income (loss) available to common shareholders             |       | $                                                  | (159       | )                                                | $          | (164 | ) | $ | 98 |   | $ | 548 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income (loss) per common share - basic and diluted         |       | $                                                  | (0.08      | )                                                | $          | (0.08 | ) | $ | 0.05 |   | $ | 0.26 |   |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted  average common outstanding shares - basic and diluted |       | 2,102                                              |       | 2,095                                            |       | 2,102 |   | 2,094 |   |
|                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Dividends  per common share                                     |       | $                                                  | —     |                                             | $          | 0.19 |   | $ | 0.19 |   | $ | 0.19 |   |

 

See notes toconsolidated financial statements.

 

3

----

 

**CITIZENSBANCSHARES CORPORATION****ANDSUBSIDIARY**

 

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

**FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008**

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

 
| ** **                                                                                              | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **  | ** ** | ** **    | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|------------------|------------|-------------|------------|---------------|------------|--------------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                              | ** ** | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **  | ** ** | **Nonvoting** | ** ** | **Additional**     | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | **Other**  | ** ** | ** **        | ** ** |
| ** **                                                                                              | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**  | ** ** | **Treasury Stock** | ** ** | **Comprehensive** | ** ** | ** **   | ** ** |
| ** **                                                                                              | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Shares**    | ** ** | **Amount**         | ** ** | **Capital**       | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Balance—December 31, 2007                                                                     |       | —              |       | $                | —     |             | 2,230      |        | $          | 2,230         |       | 90                 |       | $                 | 90         |         | $          | 7,554      |       | $          | 25,071     |              | (227       | )          | $          | (1,859 | ) | $ | 47 |   | $ | 33,133 |   |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Net income                                                                                              |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | 548          |       | —     |       | —     |       | —            |       | 548        |       |
| Unrealized holding gains on investment securities  available for sale—net of taxes of $299,812     |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | (582              | )          | (582       | )          |
| Less reclassification adjustment for holding losses  included in net income—net of taxes of $9,288 |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | (18               | )          | (18        | )          |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Comprehensive loss                                                                                      |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | —            |       | (52        | )          |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Cumulative effect of adoption of EITF 06-4, net of  taxes                                               |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | (192         | )          | —     |       | —     |       | —            |       | (192       | )          |
| Stock based compensation expense                                                                        |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | 29                |       | —       |       | —     |       | —     |       | —            |       | 29         |       |
| Purchase of treasury stock                                                                              |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | (2         | )          | (15        | )          | —            |       | (15        | )          |
| Sale of Treasury stock                                                                                  |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | 4          |       | 32         |       | —            |       | 32         |       |
| Dividends declared - common                                                                             |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | (398         | )          | —     |       | —     |       | —            |       | (398       | )          |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| **Balance—June 30, 2008**                                                                     | ** ** | **—**          | ** ** | **$**            | **—** | ** **       | **2,230**  | ** **  | **$**      | **2,230**     | ** ** | **90**             | ** ** | **$**             | **90**     | ** **   | **$**      | **7,583**  | ** ** | **$**      | **25,029** | ** **        | **(225**   | **)**      | **$**      | **(1,842** | **)** | **$** | **(553** | **)** | **$** | **32,537** | ** ** |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| 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     |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | 1,345             |       | 1,345      |       |
| Less reclassification adjustment for holding gains  included in net income—net of taxes of $55,124 |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | (1,007            | )          | (1,007     | )          |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Comprehensive income (loss)                                                                             |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       | 557        |       |
|                                                                                                    |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |       |       |       |
| Issuance of preferred stock                                                                             |       | 7.462               |       | 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**                                                                     | ** ** | **7.462**           | ** ** | **$**            | **7,462**  | ** **       | **2,230**  | ** **  | **$**      | **2,230**     | ** ** | **90**             | ** ** | **$**             | **90**     | ** **   | **$**      | **7,641**  | ** ** | **$**      | **25,213** | ** **        | **(218**   | **)**      | **$**      | **(1,805** | **)** | **$** | **413** | ** ** | **$** | **41,244** | ** ** |

 

See notes to consolidated financialstatements.

 

4

----

 

**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008**

**(In thousands)**

 
| ** **                                                                                  | ** ** | **2009**        | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                  | ** ** | **(Unaudited)** | ** ** |
| **OPERATING ACTIVITIES:**                                                                   |       |            |       |     |       |
| Net income                                                                                  |       | $               | 219        |     | $          | 548 |   |
| **Adjustments to reconcile net  income****to net cash used  by operating activities:**      |       |            |       |     |       |
| Provision for loan losses                                                                   |       | 1,376           |       | 1,109    |       |
| Depreciation                                                                                |       | 395             |       | 393      |       |
| Amortization and accretion, net                                                             |       | 315             |       | 108      |       |
| Provision for deferred income taxes (benefit)                                               |       | (226            | )          | 239      |       |
| Gains on sale of assets and investments                                                     |       | (164            | )          | (38      | )          |
| Stock based compensation expense                                                            |       | 30              |       | 29       |       |
| Change in other assets                                                                      |       | (5,202          | )          | (854     | )          |
| Change in accrued expenses and other liabilities                                            |       | 605             |       | (550     | )          |
|                                                                                        |       |            |       |     |       |
| Net cash provided by (used in) operating activities                                         |       | (2,652          | )          | 984      |       |
|                                                                                        |       |            |       |     |       |
| **INVESTING ACTIVITIES:**                                                                   |       |            |       |     |       |
| Proceeds from calls and maturities of investment  securities held to maturity               |       | 133             |       | 2,719    |       |
| Proceeds from sales and maturities of investment  securities available for sale             |       | 15,327          |       | 16,045   |       |
| Purchases of investment securities available for  sale                                      |       | (35,701         | )          | (39,865  | )          |
| Net change in other investments                                                             |       | 30              |       | 739      |       |
| Net change in loans receivable                                                              |       | (2,937          | )          | 17,570   |       |
| Net proceeds from the sale of foreclosed properties                                         |       | 245             |       | 1,070    |       |
| Purchases of premises and equipment, net                                                    |       | (999            | )          | (323     | )          |
| Net change in interest bearing deposits with banks                                          |       | (5,455          | )          | (7,300   | )          |
| Net change in certificates of deposit                                                       |       | (51             | )          | —   |       |
|                                                                                        |       |            |       |     |       |
| Net cash used in investing activities                                                       |       | (29,408         | )          | (9,345   | )          |
|                                                                                        |       |            |       |     |       |
| **FINANCING ACTIVITIES:**                                                                   |       |            |       |     |       |
| Net change in deposits                                                                      |       | 25,865          |       | 31,171   |       |
| Net change in Federal funds purchased                                                       |       | —          |       | (2,000   | )          |
| Principal payments on debt                                                                  |       | (240            | )          | (100     | )          |
| Net change in advances from Federal Home Loan Bank                                          |       | (2,209          | )          | (18,573  | )          |
| Proceeds from issuance of preferred stock                                                   |       | 7,462           |       | —   |       |
| Sale of treasury stock activity                                                             |       | 8               |       | 17       |       |
| Dividends paid - preferred                                                                  |       | (72             | )          | —   |       |
| Dividends paid - common                                                                     |       | (399            | )          | (398     | )          |
|                                                                                        |       |            |       |     |       |
| Net cash provided by financing activities                                                   |       | 30,415          |       | 10,117   |       |
|                                                                                        |       |            |       |     |       |
| Net change in cash and cash equivalents                                                     |       | (1,645          | )          | 1,756    |       |
|                                                                                        |       |            |       |     |       |
| Cash and cash equivalents, beginning of period                                              |       | 6,870           |       | 8,188    |       |
|                                                                                        |       |            |       |     |       |
| Cash and cash equivalents at end of period                                                  |       | $               | 5,225      |     | $          | 9,944 |   |
|                                                                                        |       |            |       |     |       |
| **Supplemental disclosures of cash  paid during the period for:**                           |       |            |       |     |       |
| Interest                                                                                    |       | $               | 2,752      |     | $          | 3,878 |   |
|                                                                                        |       |            |       |     |       |
| Income taxes                                                                                |       | $               | 711        |     | $          | 1,009 |   |
|                                                                                        |       |            |       |     |       |
| **Supplemental disclosures of  noncash transactions:**                                      |       |            |       |     |       |
| Real estate acquired through foreclosure                                                    |       | $               | 7,430      |     | 2,130      |   |
|                                                                                        |       |            |       |     |       |
| Change in unrealized gain (loss) on investment  securities available for sale, net of taxes |       | $               | 338        |     | $          | (600 | ) |
|                                                                                        |       |            |       |     |       |
| Cumulative effect of change in accounting principle                                         |       | $               | —     |     | $          | 192 |   |

 

See notes to consolidated financial statements.

 

5

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**CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY**

**Notes tothe Consolidated Financial Statements**

(Unaudited)

 

**1.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

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

 

Theaccompanying unaudited consolidated financial statements have been preparedpursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain disclosures required bygenerally accepted accounting principles are not included herein. These interimstatements should be read in conjunction with the financial statements andnotes thereto included in the Company’s latest Annual Report on Form 10-Kfiled with the Securities and Exchange Commission for the year ended December 31,2008.  The results of operations for theinterim periods reported herein are not necessarily representative of theresults expected for the full 2009 fiscal year.

 

Theconsolidated financial statements of the Company for the three and six monthperiods ended June 30, 2009 are unaudited. In the opinion of management, all adjustments necessary for a fairpresentation of the financial position and results of operations and cash flowsfor the three and six month periods have been included.  All adjustments are of a normal recurringnature.  All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

**Accounting Policies**

 

TheCompany’s consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”),which often require the judgment of management in the selection and applicationof certain accounting principles and methods. Reference is made to 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, 2008.  The Company has followed those policies inpreparing this report.  Managementbelieves that the quality and reasonableness of its most critical policies enablethe fair presentation of its financial position and of its results ofoperations.

 

**Troubled Asset Relief Program**

 

OnMarch 6, 2009, as part of the U.S. Department of the Treasury (the “Treasury”)Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Companyentered into a Letter Agreement and a Securities Purchase Agreement with theTreasury, pursuant to which the Company agreed to issue and sell, and theTreasury agreed to purchase 7,462 shares (the “Preferred Shares”) of theCompany’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A,having a liquidation preference of $1,000, for an aggregate purchase price of$7,462,000 in cash.

 

Thistransaction closed on March 6, 2009. The issuance and sale of these securities was a private placement exemptfrom registration pursuant to Section 4(2) of the Securities Act of1933.  The Preferred Shares qualifies asTier 1 capital and will pay cumulative dividends at a rate of 5% per

 

6

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annumfor the first five years and 9% per annum thereafter.  The Companymay, subject to consultation with the Federal Reserve Bank of Atlanta, redeemthe Preferred Shares at any time for its aggregate liquidation amount plus anyaccrued and unpaid dividends without first raising additional capital in anequity offering.

 

**Acquisition**

 

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

 

**Recently Issued Accounting Standards**

 

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

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 168, “The *FASB Accounting Standards Codification* andthe Hierarchy of Generally Accepted Accounting Principles — a replacement ofFASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the *FASBAccounting Standards Codification* (“Codification”) as the source ofauthoritative generally accepted accounting principles (“GAAP”) fornongovernmental entities.  TheCodification does not change GAAP. Instead, it takes the thousands ofindividual pronouncements that currently comprise GAAP and reorganizes theminto approximately 90 accounting Topics, and displays all Topics using aconsistent structure.  Contents in eachTopic are further organized first by Subtopic, then Section and finallyParagraph. The Paragraph level is the only level that contains substantivecontent. Citing particular content in the Codification involves specifying theunique numeric path to the content through the Topic, Subtopic, Section andParagraph structure. FASB suggests that all citations begin with “FASB ASC,”where ASC stands for *Accounting StandardsCodification*. SFAS 168, (FASB ASC 105-10-05, 10, 15, 65, 70) iseffective for interim and annual periods ending after September 15, 2009and will not have an impact on the Company’s financial position but will changethe referencing system for accounting standards.  The following pronouncements providecitations to the applicable Codification by Topic, Subtopic and Section inaddition to the original standard type and number.

 

FSPEITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,”(FASB ASC 325-40-65) (“FSP EITF 99-20-1”) was issued in January 2009.  Prior to the FSP, other-than-temporaryimpairment was determined by using either Emerging Issues Task Force (“EITF”)Issue No. 99-20, “Recognition of Interest Income and Impairment onPurchased Beneficial Interests and Beneficial Interests that Continue to beHeld by a Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”)depending on the type of security.  EITF99-20 required the use of market participant assumptions regarding future cashflows regarding the probability of collecting all cash flows previouslyprojected.  SFAS 115 determinedimpairment to be other than temporary if it was probable that the holder wouldbe unable to collect all amounts due according to the contractual terms. Toachieve a more consistent determination of other-than-temporary impairment, theFSP amends EITF 99-20 to determine any other-than-temporary impairment based onthe guidance in SFAS 115, allowing management to use more judgment indetermining any other-than-temporary impairment.  The FSP was effective for reporting periodsending after December 15, 2008. Management has reviewed the Company’s security portfolio and evaluatedthe portfolio for any other-than-temporary impairments.

 

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

 

7

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FSPSFAS 115-2 and SFAS 124-2 (FASB ASC 320-10-65), “Recognition and Presentationof Other-Than-Temporary Impairments,” (“FSP SFAS 115-2 and SFAS 124-2”)categorizes losses on debt securities available-for-sale or held-to-maturitydetermined by management to be other-than-temporarily impaired into losses dueto credit issues and losses related to all other factors.  Other-than-temporary impairment (OTTI) existswhen it is more likely than not that the security will mature or be sold beforeits amortized cost basis can be recovered. An OTTI related to credit losses should be recognized throughearnings.  An OTTI related to otherfactors should be recognized in other comprehensive income.  The FSP does not amend existing recognitionand measurement guidance related to other-than-temporary impairments of equitysecurities.  Annual disclosures requiredin SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interimperiods (including the aging of securities with unrealized losses).

 

FSPSFAS 157-4 (FASB ASC 820-10-65), “Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That are Not Orderly” recognizes that quoted pricesmay not be determinative of fair value when the volume and level of tradingactivity has significantly decreased. The evaluation of certain factors may necessitate that fair value bedetermined using a different valuation technique.  Fair value should be the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction, not a forced liquidation or distressed sale.  If a transaction is considered to not beorderly, little, if any, weight should be placed on the transaction price.  If there is not sufficient information toconclude as to whether or not the transaction is orderly, the transaction priceshould be considered when estimating fair value.  An entity’s intention to hold an asset orliability is not relevant in determining fair value.  Quoted prices provided by pricing servicesmay still be used when estimating fair value in accordance with SFAS 157;however, the entity should evaluate whether the quoted prices are based oncurrent information and orderly transactions. Inputs and valuation techniques are required to be disclosed in additionto any changes in valuation techniques.

 

FSPSFAS 107-1 and APB 28-1 (FASB ASC 825-10-65), “Interim Disclosures about FairValue of Financial Instruments” requires disclosures about the fair value offinancial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements and also requires thosedisclosures in summarized financial information at interim reportingperiods  A publicly traded company includesany company whose securities trade in a public market on either a stockexchange or in the over-the-counter market, or any company that is a conduitbond obligor.  Additionally, when acompany makes a filing with a regulatory agency in preparation for sale of itssecurities in a public market it is considered a publicly traded company forthis purpose.

 

Thethree staff positions are effective for periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009.  The Company adopted the staffpositions for its second quarter 10-Q. The staff positions had no material impact on the consolidated financialstatements.  Additional disclosures havebeen provided where applicable.

 

Alsoon April 1, 2009, the FASB issued FSP SFAS 141(R)-1 (FASB ASC 805-20-25,30, 35, 50), “Accounting for Assets Acquired and Liabilities Assumed in aBusiness Combination That Arise from Contingencies.”  The FSP requires that assets acquired andliabilities assumed in a business combination that arise from a contingency berecognized at fair value.  If fair valuecannot be determined during the measurement period as determined in SFAS 141(R), the asset or liability can still be recognized if it can be determinedthat it is probable that the asset existed or the liability had been incurredas of the measurement date and if the amount of the asset or liability can bereasonably estimated.  If it is notdetermined to be probable that the asset/liability existed/was incurred or noreasonable amount can be determined, no asset or liability is recognized. Theentity should determine a rational basis for subsequently measuring theacquired assets and assumed liabilities. Contingent consideration agreements should be recognized initially atfair value and subsequently reevaluated in accordance with guidance found inparagraph 65 of SFAS 141 (R).  The FSP iseffective for business combinations with an acquisition date on or after thebeginning of the Company’s first annual reporting

 

8

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periodbeginning on or after December 15, 2008. The Company will assess the impact of the FSP if and when a futureacquisition occurs.

 

TheSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”)No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M.,“Other Than Temporary Impairment of Certain Investments in Debt and EquitySecurities” and to supplement FSP SFAS 115-2 and SFAS 124-2.  SAB 111 maintains the staff’s previous viewsrelated to equity securities; however debt securities are excluded from itsscope.  The SAB provides that “other-than-temporary”impairment is not necessarily the same as “permanent” impairment and unlessevidence exists to support a value equal to or greater than the carrying valueof the equity security investment, a write-down to fair value should berecorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Company’sfinancial position.

 

SFAS165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), “Subsequent Events,” (“SFAS 165”)was issued in May 2009 and provides guidance on when a subsequent eventshould be recognized in the financial statements.  Subsequent events that provide additionalevidence about conditions that existed at the date of the balance sheet shouldbe recognized at the balance sheet date. Subsequent events that provideevidence about conditions that arose after the balance sheet date but beforefinancial statements are issued, or are available to be issued, are notrequired to be recognized. The date through which subsequent events have beenevaluated must be disclosed as well as whether it is the date the financialstatements were issued or the date the financial statements were available tobe issued.  For nonrecognized subsequentevents which should be disclosed to keep the financial statements from beingmisleading, the nature of the event and an estimate of its financial effect, ora statement that such an estimate cannot be made, should be disclosed.  The standard is effective for interim orannual periods ending after June 15, 2009. For the second quarter of 2009, the Company evaluated subsequent eventsthrough August 14, 2009. Since SFAS No. 165 requires only additionaldisclosures concerning subsequent events, adoption of the standard did notaffect the Company’s financial condition, results of operations or cash flows.

 

TheFASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfersof Financial Assets — an amendment of FASB Statement No. 140,” (“SFAS 166”)in June 2009.  SFAS 166 limits thecircumstances in which a financial asset should be derecognized when thetransferor has not transferred the entire financial asset by taking intoconsideration the transferor’s continuing involvement.  The standard requires that a transferorrecognize and initially measure at fair value all assets obtained (including atransferor’s beneficial interest) and liabilities incurred as a result of atransfer of financial assets accounted for as a sale.  The concept of a qualifying special-purposeentity is removed from SFAS 140 along with the exception from applying FIN46(R).  The standard is effective for thefirst annual reporting period that begins after November 15, 2009, forinterim periods within the first annual reporting period, and for interim andannual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the standard to have any impact on theCompany’s financial position.

 

SFAS167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),”(“SFAS 167”) was also issued in June 2009. The standard amends FIN 46(R) to require a company to analyzewhether its interest in a variable interest entity (“VIE”) gives it acontrolling financial interest.  Acompany must assess whether it has an implicit financial responsibility toensure that the VIE operates as designed when determining whether it has thepower to direct the activities of the VIE that significantly impact itseconomic performance.  Ongoingreassessments of whether a company is the primary beneficiary is also requiredby the standard.  SFAS 167 amends thecriteria to qualify as a primary beneficiary as well as how to determine theexistence of a VIE.  The standard alsoeliminates certain exceptions that were available under FIN 46(R).  SFAS 167 is effective as of the beginning ofeach reporting entity’s first annual reporting period that begins after November 15,2009, for interim periods within that first annual reporting period, and forinterim and annual reporting periods thereafter.  Earlier application is prohibited.  Comparative disclosures will be required forperiods after the

 

9

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effectivedate.  The Company does not expect thestandard to have any impact on the Company’s financial position.

 

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

 

**2. INVESTMENTS**

 

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

 
| **At June 30, 2009**                | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
|                                     |       |                |       |                         |       |                          |       |            |       |
| State,  county, and municipal securities |       | $                   | 32,108     |                         | $          | 340                           |       | $               | 382        |   | $ | 32,066 |   |
| Mortgage-backed  securities              |       | 66,145              |       | 1,276                        |       | 713                           |       | 66,708          |       |
| Corporates                               |       | 10,025              |       | 105                          |       | —                        |       | 10,130          |       |
| Totals                                   |       | $                   | 108,278    |                         | $          | 1,721                         |       | $               | 1,095      |   | $ | 108,904 |   |

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

 

Investment securitiesheld to maturity are summarized as follows (in thousands):

 
| **At June 30, 2009**                | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
|                                     |       |                |       |                         |       |                          |       |            |       |
| State,  county, and municipal securities |       | $                   | 4,001      |                         | $          | 76                            |       | $               | 20         |   | $ | 4,057 |   |
| Mortgage-backed  securities              |       | 446                 |       | 4                            |       | —                        |       | 450             |       |
| Totals                                   |       | $                   | 4,447      |                         | $          | 80                            |       | $               | 20         |   | $ | 4,507 |   |

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

 

The amortized costs and fair values of investment securities atJune 30, 2009, by contractual maturity, are shown below. Expectedmaturities may differ from contractual maturities 

 

10

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because issuers may have the right to call or prepay obligations withand without call or prepayment penalties.

** **
| ** **                              | ** ** | **Available  for Sale** | ** ** | **Held  to Maturity** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **Amortized**           | ** ** | **Fair**              | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                              | ** ** | **Cost**                | ** ** | **Value**             | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                    |       |                    |       |                  |       |   |   |   |   |
| Due  in one year or less                |       | $                       | 4,445      |                  | $          | 4,485 |   | $ | — |   | $ | — |   |
| Due  after one year through five years  |       | 11,756                  |       | 11,924                |       | 860 |   | 866 |   |
| Due  after five years through ten years |       | 14,145                  |       | 14,226                |       | 3,587 |   | 3,641 |   |
| Due  after ten years                    |       | 77,932                  |       | 78,269                |       | — |   | — |   |
|                                    |       | $                       | 108,278    |                  | $          | 108,904 |   | $ | 4,447 |   | $ | 4,507 |   |

** **

The Company’s investment portfolio consists principally of obligationsof the United States, its agencies or its corporations, corporate bonds andgeneral obligation municipal securities. In the opinion of management, there isno concentration of credit risk in its investment portfolio.  The company places its deposits andcorrespondent accounts with and sells its federal funds to high qualityinstitutions.   Management believescredit risk associated with correspondent accounts is not significant.

** **

Gross realized gains on securities were $162,000 and $61,000 atJune 30, 2009 and 2008, respectively. Gross realized losses on securities were $34,000 at June 30,2008.  There were no gross realizedlosses on securities at June 30, 2009.

 

Securities with carrying values of $40,986,000 and $88,964,000 atJune 30, 2009 and December 31, 2008 were pledged to secure publicdeposits as required by law.

 

The following tables show investments’ gross unrealized losses and fairvalue, aggregated by investment category and length of time that the individualsecurities have been in a continuous unrealized loss position, at June 30,2009 and December 31, 2008. Except as explicitly identified below, allunrealized losses on investment securities are considered by management to betemporarily impaired given the credit ratings on these investment securitiesand the short duration of the unrealized loss.

 

**At June 30, 2009**

 

**Securities Available for Sale**

 
| ** **                  | ** ** | **Securities in a loss position for** | ** ** | **Securities in a loss position for** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                  | ** ** | **less than twelve months**           | ** ** | **twelve months or more**             | ** ** | **Total**      | ** ** |
| ** **                  | ** ** | ** **                            | ** ** | **Unrealized**                        | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Fair value**                        | ** ** | **losses**                            | ** ** | **Fair value** | ** ** | **losses**     | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Mortgage-backed  securities |       | $                                     | 5,729      |                                  | $          | (25            | )          | $              | 5,816      |   | $ | (689 | ) | $ | 11,545 |   | $ | (714 | ) |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Municipal  securities       |       | 11,734                                |       | (314                                  | )          | 1,072          |       | (67            | )          | 12,806 |   | (381 | ) |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Total                       |       | $                                     | 17,463     |                                  | $          | (339           | )          | $              | 6,888      |   | $ | (756 | ) | $ | 24,351 |   | $ | (1,095 | ) |

 

**Securities Held to Maturity**

 
| ** **            | ** ** | **Securities in a loss position for** | ** ** | **Securities in a loss position for** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------|------------|---------------------------------------|------------|---------------------------------------|------------|----------------|------------|----------------|------------|
| ** **            | ** ** | **less than twelve months**           | ** ** | **twelve months or more**             | ** ** | **Total**      | ** ** |
| ** **            | ** ** | ** **                            | ** ** | **Unrealized**                        | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **            | ** ** | **Fair value**                        | ** ** | **losses**                            | ** ** | **Fair value** | ** ** | **losses**     | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                  |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Municipal  securities |       | $                                     | 260        |                                  | $          | (20            | )          | $              | —     |   | $ | — |   | $ | 260 |   | $ | (20 | ) |
|                  |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Total                 |       | $                                     | 260        |                                  | $          | (20            | )          | $              | —     |   | $ | — |   | $ | 260 |   | $ | (20 | ) |

 

**At December 31, 2008**

 

**Securities Available for Sale**

 
| ** **                  | ** ** | **Securities in a loss position for** | ** ** | **Securities in a loss position for** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                  | ** ** | **less than twelve months**           | ** ** | **twelve months or more**             | ** ** | **Total**      | ** ** |
| ** **                  | ** ** | ** **                            | ** ** | **Unrealized**                        | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Fair value**                        | ** ** | **losses**                            | ** ** | **Fair value** | ** ** | **losses**     | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Mortgage-backed  securities |       | $                                     | 17,023     |                                  | $          | (719           | )          | $              | 1,337      |   | $ | (27 | ) | $ | 18,360 |   | $ | (746 | ) |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Municipal  securities       |       | 4,016                                 |       | (155                                  | )          | —         |       | —         |       | 4,016 |   | (155 | ) |
|                        |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Total                       |       | $                                     | 21,039     |                                  | $          | (874           | )          | $              | 1,337      |   | $ | (27 | ) | $ | 22,376 |   | $ | (901 | ) |

 

**Securities Held to Maturity**

 
| ** **            | ** ** | **Securities in a loss position for** | ** ** | **Securities in a loss position for** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------|------------|---------------------------------------|------------|---------------------------------------|------------|----------------|------------|----------------|------------|
| ** **            | ** ** | **less than twelve months**           | ** ** | **twelve months or more**             | ** ** | **Total**      | ** ** |
| ** **            | ** ** | ** **                            | ** ** | **Unrealized**                        | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **            | ** ** | **Fair value**                        | ** ** | **losses**                            | ** ** | **Fair value** | ** ** | **losses**     | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                  |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Municipal  securities |       | $                                     | 269        |                                  | $          | (11            | )          | $              | —     |   | $ | — |   | $ | 269 |   | $ | (11 | ) |
|                  |       |                                  |       |                                  |       |           |       |           |       |   |   |   |   |
| Total                 |       | $                                     | 269        |                                  | $          | (11            | )          | $              | —     |   | $ | — |   | $ | 269 |   | $ | (11 | ) |

 

At June 30, 2009, the Company had 10 available-for-sale securitiessecurity that were in an unrealized loss position for longer than 12months.  At December 31, 2008, the Company had 5available-for-sale securities that were in an unrealized loss position forlonger than 12 months.  The Company does not intend to sell thesecurities and it is more likely than not that the Company will not be requiredto sell the securities before recovery of their amortized cost.  The Company believes, based on industryanalyst reports and credit ratings, that the deterioration in value isattributable to changes in market interest rates and is not in the creditquality of the issuer and therefore, these losses are not consideredother-than-temporary.

 

11

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**3. FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

TheCompany measures or monitors certain of its assets and liabilities on a fairvalue basis.  Fair value is used on arecurring basis for assets and liabilities that are elected to be accounted forunder SFAS 159 as well as certain assets and liabilities in which fair value isthe primary basis of accounting. Depending on the nature of the asset or liability, the Company usesvarious valuation techniques and assumptions when estimating fair value, whichare in accordance with SFAS 157 and FSP FAS 157-3 “Determining the Fair Valueof a Financial Asset When the Market for that Asset is Not Active” and FAS157-4, when applicable.

 

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

 

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

 

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

 

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

 

12

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Thefollowing tables present financial assets and financial liabilities measured atfair value on a recurring and nonrecurring basis and the change in fair valuefor those specific financial instruments in which fair value has beenelected.  This disclosures should not beconsidered a surrogate of the liquidation value for those specific financial instruments,but rather a good-faith estimate of the increase or decrease in their valuesince purchase, origination, or issuance (in thousands).

 
| ** **                    | ** ** | **Fair  Value Measurements at** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **June 30,  2009**         | ** ** |
| ** **                    | ** ** | ** **                      | ** ** | **Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |                            | ** ** | **Prices  In** |   |   |   |   |   |
|                          |       |                            | ** ** | **Active** |   |   |   |   |   |
|                          |       |                            | ** ** | **Markets  for** | ** ** | **Significant** |   |   |   |
|                          | ** ** | **Assets/Liabilities**          | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
|                          | ** ** | **Measured  at**                | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
|                          | ** ** | **Fair  Value**                 | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
|                          | ** ** | **June 30,  2009**         | ** ** | **(Level  1)** | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
| **Recurring Basis:**          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                    |       |                            |       |   |   |   |   |   |   |
| Securities available for sale |       | $                               | 108,904    |   | $ | — |   | $ | 108,904 |   | $ | — |   |
|                          |       |                            |       |   |   |   |   |   |   |
| **Liabilities**               |       |                            |       |   |   |   |   |   |   |
| FHLB Advances                 |       | 26,504                          |       | — |   | 26,504 |   | — |   |
|                          |       |                            |       |   |   |   |   |   |   |
| **Nonrecurring Basis:**       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                    |       |                            |       |   |   |   |   |   |   |
| Impaired loans                |       | $                               | 17,559     |   | $ | — |   | $ | 17,559 |   | $ | — |   |
| Foreclosed real estate        |       | 7,589                           |       | — |   | 7,589 |   | — |   |
| Goodwill                      |       | 362                             |       | — |   | — |   | 362 |   |
| Core deposit intangibles      |       | 3,230                           |       | — |   | — |   | 3,230 |   |

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

 

13

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TheCompany is predominantly an asset based lender with real estate serving ascollateral on a majority of its loans. The fair value of collateral dependent loans is based on the fair valueof the collateral securing these loans. Substantially all impaired loans are secured by real estate. The fairvalue of this real estate is generally determined based upon appraisalsperformed by a certified or licensed appraiser using inputs such as absorptionrates, capitalization rates, and comparables. Management also considers otherfactors or recent developments that could result in adjustments to thecollateral value estimates indicated in the appraisals such as changes inabsorption rates or market conditions from the time of valuation.  These measurements are classified as Level 2within the valuation hierarchy.

 

Following are disclosures of fair value informationabout financial instruments, whether or not recognized on the balance sheet,for which it is practicable to estimate that value. The assumptions used in theestimation of the fair values are based on estimates using discounted cashflows and other valuation techniques. The use of discounted cash flows can besignificantly affected by the assumptions used, including the discount rate andestimates of future cash flows. The following disclosures should not beconsidered a surrogate of the liquidation value of the Company, but rather agood-faith estimate of the increase or decrease in the value of financialinstruments held by the Company since purchase, origination, or issuance.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Fair value estimates are based on existing on andoff-balance-sheet financial instruments without attempting to estimate thevalue of anticipated future business and the value of assets and liabilitiesthat are not considered financial instruments; for example, premises andequipment. In addition, the tax ramifications related to the realization of theunrealized gains and losses can have a significant effect on fair valueestimates and have not been considered in the estimates.

 

14

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The carrying values and estimated fair values of theCompany’s financial instruments at June 30, 2009 and December 31,2008 are as follows:

 
| ** **                                | ** ** | **2009**           | ** ** | **2008**           | ** ** |
|-------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                | ** ** | **Carrying**       | ** ** | **Estimated**      | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                | ** ** | **Value**          | ** ** | **Fair Value**     | ** ** | **Value** | ** ** | **Fair Value** | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| Financial assets:                         |       |               |       |               |       |   |   |   |   |
| Cash and due from banks                   |       | $                  | 5,225      |               | $          | 5,225 |   | $ | 6,870 |   | $ | 6,870 |   |
| Interest-bearing deposits  with banks     |       | 14,731             |       | 14,731             |       | 9,276 |   | 9,276 |   |
| Cetificates of deposit                    |       | 396                |       | 396                |       | 345 |   | 345 |   |
| Investment securities                     |       | 113,351            |       | 113,411            |       | 92,544 |   | 92,658 |   |
| Other investments                         |       | 2,257              |       | 2,257              |       | 2,287 |   | 2,287 |   |
| Loans—net                            |       | 207,847            |       | 210,269            |       | 210,306 |   | 212,756 |   |
| Cash surrender value of  life insurance   |       | 10,300             |       | 10,300             |       | 10,080 |   | 10,080 |   |
|                                      |       |               |       |               |       |   |   |   |   |
| Financial liabilities:                    |       |               |       |               |       |   |   |   |   |
| Deposits                                  |       | 307,778            |       | 300,150            |       | 281,913 |   | 279,323 |   |
| Notes payable                             |       | —             |       | —             |       | 240 |   | 240 |   |
| Advances from Federal Home  Loan Bank     |       | 26,504             |       | 26,504             |       | 28,713 |   | 28,713 |   |
|                                      |       |               |       |               |       |   |   |   |   |
| ** **                                | ** ** | **Notional**       | ** ** | **Estimated**      | ** ** | **Notional** | ** ** | **Estimated** | ** ** |
| ** **                                | ** ** | **amount**         | ** ** | **fair value**     | ** ** | **amount** | ** ** | **fair value** | ** ** |
| Off-balance-sheet financial  instruments: |       |               |       |               |       |   |   |   |   |
| Commitments to extend  credit             |       | $                  | 36,803     |               | —     |   | $ | 40,175 |   | — |   |
| Commercial letters of  credit             |       | 4,059              |       | —             |       | 3,903 |   | — |   |
|                                           |            |                    |            |                    |            |  |  |  |  |  |  |  |  |

 

TheFederal Home Loan Bank (the “FHLB”) Advance balance outstanding at June 30,2009 and at December 31, 2008 consist of a Daily Rate Credit advance, which ispriced daily off of the Fed Funds rates and an Affordable Housing Program (AHP)award used to subsidized loans for homeownership or rental initiatives.  At June 30, 2009, there were no changesin fair values that were included in current earnings.

 

**4.  INTANGIBLE ASSETS**

 

Finitelived intangible assets of the Company represent deposit assumption premiumsrecorded upon the purchase of certain assets and liabilities from otherfinancial institutions.  Depositassumption premiums are amortized over seven years, the estimated average livesof the deposit bases acquired, using the straight-line method and are includedwithin other assets on the Consolidated Balance Sheets.

 

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

 

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

 
| ** **                    | ** ** | **June 30, 2009**     | ** ** | **December 31, 2008**    | ** ** |
|-------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                          |       |                       |       |                          |       |   |   |   |   |
| Unamortized intangible asset: |       |                       |       |                          |       |   |   |   |   |
| Goodwill                      |       | $                          | 362        |                          | $          | — |   | $ | 362 |   | $ | — |   |
|                          |       |                       |       |                          |       |   |   |   |   |
| Amortized intangible assets:  |       |                       |       |                          |       |   |   |   |   |
| Core deposit intangibles      |       | $                          | 3,676      |                          | $          | 446 |   | $ | 373 |   | $ | 302 |   |

 

15

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

** **
| ** **                                                                                                   | ** ** | **For the 3  months ended  June 30, 2009** | ** ** | **For the 6  months ended  June 30, 2009** | ** ** | **For the 3  months ended  June 30, 2008** | ** ** | **For the 6  months ended  June 30, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                                                         |       |                                            |       |                                            |       |                                            |       |                                            |       |
| Aggregate amortization expense of core deposit  intangibles:                                                 |       | $                                               | 131        |                                            | $          | 145                                             |       | $                                               | 13         |   | $ | 27 |   |
|                                                                                                         |       |                                            |       |                                            |       |                                            |       |                                            |       |
| Estimated aggregate amortization expense of core  deposit intangibles for the years ending December 31: |       |                                            |       |                                            |       |                                            |       |                                            |       |
|                                                                                                         |       |                                            |       |                                            |       |                                            |       |                                            |       |
| 2009                                                                                                         |       | $                                               | 407        |                                            |       |                                            |       |                                            |       |   |
| 2010                                                                                                         |       | $                                               | 490        |                                            |       |                                            |       |                                            |       |   |
| 2011                                                                                                         |       | $                                               | 472        |                                            |       |                                            |       |                                            |       |   |
| 2012                                                                                                         |       | $                                               | 472        |                                            |       |                                            |       |                                            |       |   |
| 2013                                                                                                         |       | $                                               | 472        |                                            |       |                                            |       |                                            |       |   |
| 2014 and thereafter                                                                                          |       | $                                               | 1,062      |                                            |       |                                            |       |                                            |       |   |
|                                                                                                              |            |                                                 |            |                                                 |            |                                                 |            |                                                 |            |  |  |  |  |

 

**5.  COMPREHENSIVE INCOME**

 

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

 
| ** **                         | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2009**                               | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                         | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  Income                        |       | $                                      | (65        | )                                    | $          | (164 | ) | $ | 219 |   | $ | 548 |   |
|                               |       |                                   |       |                                 |       |   |   |   |   |
| Other  comprehensive income (loss) |       | (93                                    | )          | (809                                 | )          | 338 |   | (600 | ) |
|                               |       |                                   |       |                                 |       |   |   |   |   |
| Comprehensive  income              |       | $                                      | (158       | )                                    | $          | (973 | ) | $ | 557 |   | $ | (52 | ) |

 

16

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** **

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

 

Basic and diluted net income per shareavailable to common and potential common stockholders has been calculated basedon the weighted average number of shares outstanding.  The following schedule reconciles thenumerator and denominator of the basic and diluted net income per shareavailable to common and potential common stockholders for the three and sixmonth periods ended June 30, 2009 and 2008 (in thousands, except per sharedata):

 
| ** **                                                        | ** ** | **Net Income**  | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|
| ** **                                                        | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**    | ** ** |
|                                                              |       |            |       |              |       |          |       |
| **Three Months ended June 30,  2009**                        |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share available to common  stockholders        |       | $               | (159       | )                 | 2,102      |          | $          | (0.08 | ) |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | (159       | )                 | 2,102      |          | $          | (0.08 | ) |
|                                                              |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| **Three Months ended June 30,  2008**                        |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share available to common  stockholders        |       | $               | (164       | )                 | 2,095      |          | $          | (0.08 | ) |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | (164       | )                 | 2,095      |          | $          | (0.08 | ) |
|                                                              |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| **Six Months ended June 30, 2009**                           |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share available to common  stockholders        |       | $               | 98         |              | 2,102      |          | $          | 0.05 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | 98         |              | 2,102      |          | $          | 0.05 |   |
|                                                              |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| **Six Months ended June 30,  2008**                          |       |            |       |              |       |          |       |
|                                                              |       |            |       |              |       |          |       |
| Basic earnings per share available to common  stockholders        |       | $               | 548        |              | 2,094      |          | $          | 0.26 |   |
| Effect of dilutive securities: options to purchase  common shares |       | —          |       | —            |       | —        |       |
|                                                              |       |            |       |              |       |          |       |
| Diluted earnings per share                                        |       | $               | 548        |              | 2,094      |          | $          | 0.26 |   |

 

**RECLASSIFICATIONS**

 

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

 

17

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

 

**INTRODUCTION**

 

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

 

**ForwardLooking Statements**

 

Inaddition to historical information, this report on Form 10-Q may containforward-looking statements. For this purpose, any statements contained herein,including documents incorporated by reference, that are not statements ofhistorical fact may be deemed to be forward-looking statements. Forward-lookingstatements are subject to numerous assumptions, risks and uncertainties. Withoutlimiting the foregoing, the words “believe,” “anticipates,” “plan,” expects,”and similar expressions are intended to identify forward-looking statements.

 

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

 

Thefollowing discussion is of the Company’s financial condition as of June 30,2009 and December 31, 2008, and the changes in the financial condition andresults of operations for the six and three months period ended June 30,2009 and 2008.

 

**Critical Accounting Policies**

 

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

 

**Investment Securities** – The Companyclassifies investments in one of three categories based on management’s intentupon purchase: held to maturity securities which are reported at amortizedcost, trading securities which are reported at fair value with unrealizedholding gains and losses included in earnings, and available for salesecurities which are recorded at fair value with unrealized holding gains andlosses included as a component of accumulated other comprehensive income.  The Company had no investment securities classifiedas trading securities during 2009 or 2008.

 

18

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

 

Gains and losses on sales of investment securitiesare recognized upon disposition, based on the adjusted cost of the specificsecurity.  A decline in market value ofany security below cost that is deemed other than temporary is charged toearnings on OCI based on FSP FAS 115-2 and FAS 124-2 resulting in theestablishment of a new cost basis for the security.

 

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

 

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

 

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

 

**FINANCIALCONDITION**

 

Totalassets at June 30, 2009 increased by 9% or $31,608,000 to $379,703,000compared to $348,095,000 at December 31, 2008.  This increase is primarily due to a branchacquisition completed on March 27, 2009.  The Company’s subsidiary, Citizens Trust Bank (“Citizens”), acquired anin-market branch from The Peoples Bank, a Georgia state bank.  Premises and equipment and other assets wereboth impacted by the branch acquisition. Citizens acquired the branch office and related real estate at a fairvalue of $750,000 and certain personal property at the Branch with a fair valueof $64,000.  Citizens also recorded afinite lived intangible asset related to the value of deposit accounts acquiredof approximately $3,303,000.

 

Theacquired deposits were initially invested in interest-bearing deposits withbanks, which increased by $46,898,000 at the end of the first quarter of2009.  During the second quarter of 2009,the Company invested a significant amount of these deposits in investmentsecurities and loans to increase interest income.  Net of securities sold and paydowns,available for sale investments increased by $21,000,000.  The Company also purchased, at a discount,approximately $6 million in loans.  TheCompany continues to look for prudent and safe earning assets in which toinvest and meet its liquidity and asset/liability requirements.  Long-term, once the economy recovers, theCompany expects to utilize the majority of the deposits to fund prudent loangrowth.

 

19

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Loansreceivable, the Company’s largest earning asset, decreased by $2,459,000 or 1%to $207,847,000 at June 30, 2009 compared to December 31, 2008.  This decrease is primarily due to $1,871,000in loans charged-off and approximately $4 million in loans transferred toOREO.  For the same period in 2008, loansreceivable decreased by $20,831,000 or 9%. While the decline in loan volume appears to have slowed, the Companycontinues to be negatively impacted by the deterioration of economic conditionswithin the markets it serves. Real estate and other collateral values continueto decline. Many consumers are experiencing reduced levels of disposable incomeas a result of increased unemployment due to layoffs and plant closures. Also,commercial customers have seen an overall drop in business activity due to therecessionary affects of the economy.  Dueto the current slowdown in economic conditions, the Company has been able topurchase quality loans at a discount from other banks experiencing liquidityand capital problems.  As mentionedearlier, the Company has purchased approximately $6 million in loans at adiscount. Also, the Company has enacted a continuous monitoring program of itsloan portfolio to spot deterioration and intervene timely to curtailsignificant losses.

 

Totalliabilities at the end of the second quarter of 2009 were $338,459,000,increasing by $24,022,000 or 8% compared to December 31, 2008. Totaldeposits increased by $25,865,000 to $307,778,000, which was partially offsetby a $2,209,000 decrease in Advances from Federal Home Loan Bank of Atlanta to$26,504,000.

 

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

 

**INVESTMENT SECURITIES**

 

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

 

Withthe economy in a recession resulting in weak loan demand, the Company has grownits investment portfolios to generate earnings to offset both the decrease inloan activity, FDIC special assessments and increases in credit reserve.  At June 30, 2009 and December 31,2008, the Company’s investment securities portfolio represented approximately30% and 27%, respectively, of total assets.

 

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

 

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##### *** ***

##### ***LOANS***

##### *** ***

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

 
| ** **                               | ** **                | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|---------------------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** **                | **2009**          | ** ** | **2008**              | ** ** |
|                                     |                      |              |       |                  |       |
| Commercial, financial, and  agricultural |                      | $                 | 10,615     |                  | $          | 15,827 |   |
| Installment                              |                      | 9,419             |       | 10,582                |       |
| Real estate - mortgage                   |                      | 163,946           |       | 164,822               |       |
| Real estate - construction               |                      | 21,706            |       | 21,526                |       |
| Other                                    |                      | 6,574             |       | 2,400                 |       |
|                                     | Loans receivable          |              | 212,260    |                  | 215,157    |   |
| Less:                                    | Net deferred loan fees    |              | 194        |                  | 192        |   |
|                                     | Allowance for loan losses |              | 4,219      |                  | 4,659      |   |
|                                     |                      |              |       |                  |       |   |
|                                     | Loans receivable, net     |              | $          | 207,847               |       | $ | 210,306 |   |

 

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

 

**NONPERFORMING ASSETS**

 

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

 

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

 

Thechallenging financial and credit markets continued to experience difficulty inthe first six months of 2009.  As theeconomic outlook appears to be stabilizing the local markets continue to experiencedeclines in real estate values, increases in job loss and delinquency levelswhich continue to impact the levels of our nonperforming assets.  Nonperforming assets decreased by $2,122,000to $17,930,000 at June 30, 2009 from $20,052,000 at December 31,2008.  Year to date, the Company hascharged-off $1,871,000 of nonperforming loans and wrote down foreclosed assetsby $217,000 to their estimated fair value. At June 30, 2009, nonperforming assets represents 8.16% of loans,net of unearned income, and real estate acquired through foreclosure,representing a 1% decline, compared to 9.16% at December 31, 2008.  Nonaccrual loans were $10,341,000 at June 30,2009 compared to $16,178,000 at December 31, 2008. There were no loansgreater than 90 days past due and still accruing interest at the end of thesecond quarter of 2009 or at December 31, 2008.

 

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Thetable below presents a summary of the Company’s nonperforming assets at June 30,2009 and December 31, 2008.

 
| ** **                                                                                            | ** ** | **June 30,**                             | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2009**                                      | ** ** | **2008**              | ** ** |
| ** **                                                                                            | ** ** | **(in thousands, except   financial ratios)** | ** ** |
| Nonperforming  assets:                                                                                |       |                                          |       |                  |       |
| Nonperforming  loans:                                                                                 |       |                                          |       |                  |       |
| Nonaccrual  loans                                                                                     |       | $                                             | 10,341     |                  | $          | 16,178 |   |
| Past-due  loans of 90 days or more still accruing interest                                            |       | —                                        |       | —                |       |
| Nonperforming  loans                                                                                  |       | 10,341                                        |       | 16,178                |       |
|                                                                                                  |       |                                          |       |                  |       |
| Real  estate acquired through foreclosure                                                             |       | 7,589                                         |       | 3,874                 |       |
| Total  nonperforming assets                                                                           |       | $                                             | 17,930     |                  | $          | 20,052 |   |
|                                                                                                  |       |                                          |       |                  |       |
| Ratios:                                                                                               |       |                                          |       |                  |       |
| Nonperforming  loans to loans, net of unearned income                                                 |       | 4.88                                          | %          | 7.53                  | %          |
|                                                                                                  |       |                                          |       |                  |       |
| Nonperforming  assets to loans, net of unearned income, and real estate acquired through  foreclosure |       | 8.16                                          | %          | 9.16                  | %          |
|                                                                                                  |       |                                          |       |                  |       |
| Nonperforming  assets to total assets                                                                 |       | 4.72                                          | %          | 5.76                  | %          |
|                                                                                                  |       |                                          |       |                  |       |
| Allowance  for loan losses to nonperforming loans                                                     |       | 40.80                                         | %          | 28.80                 | %          |
|                                                                                                  |       |                                          |       |                  |       |
| Allowance  for loan losses to nonperforming assets                                                    |       | 23.53                                         | %          | 23.23                 | %          |

 

**ALLOWANCE FOR LOAN LOSSES**

 

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

 

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

 

Loansare charged against the allowance when, in the opinion of management, suchloans are deemed uncollectible and subsequent recoveries are added to theallowance.  For the first six months of2009, based on the Company’s evaluation, a provision for loan losses of$1,376,000 was charged against operating earnings compared to $1,109,000 forthe same period last year.  The increasein the provision for loan losses in 2009 relates to the continued deteriorationof liquidity of the borrowers due to job loss and the collateral value securingthe loans due to current economic conditions.

 

Theallowance for loan losses at June 30, 2009 was approximately $4,219,000,representing 1.99% of total loans, net of unearned income compared to approximately$3,541,000 for the same period last

 

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year,which represented 1.62% of total loans, net of unearned income.  Approximately $2,272,000 of the allowance forloan losses was allocated to loans management considered impaired at June 30,2009.

 

AtJune 30, 2009, management believes the allowance for loan losses isadequate. Management uses available information to recognize losses on loans;however, future additions to the allowance may be necessary based on changes ineconomic conditions, particularly in the metropolitan Atlanta, Georgia andBirmingham, Alabama areas. In addition, regulatory agencies, as an integralpart of their examination process, periodically review the Company’s allowancefor loan losses. Such agencies may require the Company to recognize additionsto the allowance based on their judgments about information available to themat the time of their examination.

 

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

 

·                  The Company’s outstandingchurch loans were approximately $43 million at June 30, 2009 compared to$42 million at December 31, 2008. Loans to churches are generally secured by real estate.

 

·                  The Company’s loans to areaconvenience stores were approximately $12 million and $13 million at June 30,2009 and December 31, 2008, respectively. Loans to convenience stores are generally secured by real estate.

 

·                  The Company’s loans to areahotels were approximately $20 million at June 30, 2009 and December 31,2008.  Loans to hotels are generallysecured by real estate.

 

Also, 1–4 family residential mortgage loans secured by first liens wereapproximately $39 million and $42 million at June 30, 2009 and December 31,2008, respectively. The Company has no subprime mortgages in its portfolio andexited the mortgage origination business in the third quarter of 2007.

 

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Thefollowing table summarizes loans, changes in the allowance for loan lossesarising from loans charged off, recoveries on loans previously charged off byloan category, and additions to the allowance which have been charged tooperating expense as of and for the six month period ended June 30, 2009and 2008 (amount in thousands, except financial ratios):

 
| ** **                                                                                                 | ** ** | **2009** | ** **    | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|---------------|----------|------------|
|                                                                                                       |       |     |          |     |       |
| Loans, net of unearned income                                                                              |       | $        |  212,066 |     | $          |  218,073 |   |
|                                                                                                       |       |     |          |     |       |
| Average loans, net of unearned income and the  allowance for loan losses                                   |       | $        |  208,203 |     | $          |  225,741 |   |
|                                                                                                       |       |     |          |     |       |
| Allowance for loan losses at the beginning of period                                                       |       | $        |  4,659   |     | $          |  2,848 |   |
|                                                                                                       |       |     |          |     |       |
| Loans charged-off:                                                                                         |       |     |          |     |       |
| Commercial, financial, and agricultural                                                                    |       | 33       |          | 54       |       |
| Real estate - loans                                                                                        |       | 1,523    |          | 149      |       |
| Installment loans to individuals                                                                           |       | 315      |          | 263      |       |
| Total loans charged-off                                                                                    |       | 1,871    |          | 466      |       |
|                                                                                                       |       |     |          |     |       |
| Recoveries of loans previously charged off:                                                                |       |     |          |     |       |
| Commercial, financial, and agricultural                                                                    |       | 4        |          | 14       |       |
| Real estate - loans                                                                                        |       | 8        |          | 14       |       |
| Installment loans to individuals                                                                           |       | 43       |          | 22       |       |
| Total loans recovered                                                                                      |       | 55       |          | 50       |       |
|                                                                                                       |       |     |          |     |       |
| Net loans charged-off                                                                                      |       | 1,816    |          | 416      |       |
|                                                                                                       |       |     |          |     |       |
| Additions to allowance for loan losses charged to  operating expense                                       |       | 1,376    |          | 1,109    |       |
|                                                                                                       |       |     |          |     |       |
| Allowance for loan losses at period end                                                                    |       | $        |  4,219   |     | $          |  3,541 |   |
|                                                                                                       |       |     |          |     |       |
| Ratio of net loans charged-off to average loans, net  of unearned income and the allowance for loan losses |       | 0.87     | %             | 0.18     | %          |
|                                                                                                       |       |     |          |     |       |
| Ratio of allowance for loan losses to loans, net of  unearned income                                       |       | 1.99     | %             | 1.62     | %          |

 

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**DEPOSITS**

 

Depositsare the Company’s primary source of funding loan growth.  Total deposits at June 30, 2009increased 9% or $26 million to $307,778,000. This increase is primarily due to the acquisition of a local branch in theCompany’s market.  Noninterest-bearingdeposits increased by 14% or $8 million and interest-bearing deposits increasedby 8% or $18 million when compared to December 31, 2008.

 

TheCompany is participating in the Temporary Liquidity Guarantee Program’s fullcoverage of noninterest-bearing deposit transaction accounts and certaininterest-bearing checking accounts (for which the rate paid will not exceed 50basis points) regardless of dollar amount through December 31, 2009. Inaddition, the Company participates in Certificate of Deposit Account RegistryServices (CDARS”), a program that allows its customers the ability to benefitfrom full FDIC insurance on CD investments of up to $250 million.  The Company has deposits in both of theseprograms from Corporate and Governmental customers who make sizeable monthlydeposits and withdrawals based on their budgetary needs which can result inlarge fluctuations.

 

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

 
| ** **                        | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                        | ** ** | **2009**          | ** **    | **2008**              | ** ** |
|                              |       |              |          |                  |       |
| NOW and money market accounts     |       | $                 |  70,234  |                  | $          |  72,429 |   |
| Savings accounts                  |       | 34,173            |          | 32,221                |       |
| Time deposits of $100,000 or more |       | 78,877            |          | 76,072                |       |
| Other time deposits               |       | 62,076            |          | 46,405                |       |
|                              |       | $                 |  245,360 |                  | $          |  227,127 |   |

 

**OTHER BORROWED FUNDS**

 

Whilethe Company continues to emphasize funding earning asset growth throughdeposits, the Company has relied on other borrowings as a supplemental funding source.  Other borrowings consist of Federal fundspurchased, short-term borrowings and FHLB advances.

 

TheCompany had an unsecured note payable of approximately $240,000 December 31,2008 which had an interest rate of 2.75%. In June 2009, the Company retiredthe outstanding note payable.

 

TheBank had outstanding advances from the FHLB of $26,504,000 at June 30,2009 compared to $28,713,000 at December 31, 2008.   Advances are collateralized by a blanketlien on the Company’s 1-4 family mortgage loans, multifamily mortgage loans,commercial real estate loans and investment securities.

 
| **Maturity**                         |   | **Callable** |   | **Type** |   | **June 30, 2009** |   | **December 31, 2008** |         |
|--------------------------------------|--------|--------------|--------|----------|--------|------------------------|--------|----------------------------|--------------|
|                                 |   |         |   |     |   |                   |   |                       |         |   |   |   |   |
| July 2009                       |   | Daily        |   | Variable |   | 0.43                   | %      | $                          |  26,150 |   | 0.46 | % | $ |  28,350 |   |
| August 2026                     |   |         |   | (1)      |   | —                 |   | 354                        |         | — |   | 363 |   |
|                                 |   |         |   |     |   |                   |   |                       |         |   |   |   |   |
| Total  Principal Outstanding         |   |         |   |     |   |                   |   | $                          | 26,504       |   |   |   | $ |  28,713 |   |
|                                 |   |         |   |     |   |                   |   |                       |         |   |   |   |   |
| Weighted  Average Rate at Period End |   |         |   |     |   | 0.42                   | %      |                       |         | 0.45 | % |   |   |

 

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

 

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**RESULTS OFOPERATIONS**

 

**Net Interest Income:**

 

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

 

Insummary, the Company’s net income for the first six month of 2009 wasnegatively impacted by slow loan growth, credit quality that required highloans loss provisions and write-downs of the collateral value securing impairedloans and OREO due to market value declines. Also impacting net income, were higher FDIC assessment fees due to arevised pricing structure and a special one-time assessment which resulted inan increase of total assessment fees by $281,000 over last year.

 

Ona year-to-date basis, net interest income increased by $640,000 or 10% to$7,269,000 compared to $6,629,000 for the same period in 2008.  Total interest income for this perioddecreased by $933,000 or 9% compared to the same six month period in 2008 andwas primarily due to a $1,323,000 or 16% decrease in interest income on loans.  The decrease in interest income on loans isdue to lower yields, volume and higher nonaccrued loans compared to the sameperiod in 2008, and was partially offset by a $468,000 increase in investmentincome. Total interest expense for the six month period decreased by $1,573,000or 43% compared to the same six month period in 2008.  Interest expense on interest-bearing depositsdecreased by $1,488,000 or 42%, as the Company was able to lower rates on somedeposit products and increased its mix of noninterest-bearing deposits.  At June 30, 2009, the Company had a netinterest margin of 4.33%.

 

Forthe three-month period ended June 30, 2009, net interest income increasedby $359,000 or 11% to $3,618,000 compared to $3,259,000 reported for the sameperiod last year.  Total interest incomedecreased by $284,000 or 6% compared to the same three month period in 2008 andwas primarily due to a $469,000 or 12% decline in interest income on loans asthe Company continues to experience lower loan yields and volume and highernonaccrued loans during the period.  Thedecrease in interest on loans was partially offset by a $214,000 increase ininvestment income.  Total interestexpense for the period decreased by $643,000 or 36% compared to the same threemonth period in 2008 primarily due to the lower cost of funding deposits.

 

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

 

**Provision for loan losses**

 

Forthe first six months of 2009, the Company recognized a provision for loanlosses of $1,376,000, a $267,000 or 24% increase, compared to $1,109,000 forthe same period in 2008.  In the secondquarter of 2009, the provision for loan losses increased by $500,000 to$938,000 compared to the first quarter of 2009. This increase was primarily driven by the foreclosure of two largecommercial real estate loans as the Company took control of the collateral forthe purpose of liquidation.  The secondquarter 2009 provision for loan losses represents a decrease of $66,000compared to the same three month period last year.  Nonaccrual loans decreased by $5,837,000 dueto charge-offs, increased collection efforts and the transfer of several loansto OREO.  The allowance for loan losses was $4,219,000 at June 30, 2009 comparedto $4,659,000 at December 31, 2008. At June 30, 2009, the allowance for loan losseswas 41% of the nonperforming loans compared to 29% at December 31, 

 

26

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2008.  The provision for loan losses and theresulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions. At June 30,2009, the Company considered its allowance for loan losses to be adequate.

 

**Noninterest income:**

 

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

 

Noninterestincome totaled $1,490,000 for the three month period ended June 30, 2009,an increase of $192,000 or 15% compared with the same period ended June 30,2008.  This increase is primarilyattributed to $139,000 gains on the sale of securities during the period as theCompany swapped the tail-end of several mortgage-backed securities forasset/liability purposes.  There were nogains on sale of securities during the same period last year.

 

Year-to-date,noninterest income increased by $167,000 or 6% to $2,796,000 compared to thesame period last year. This increase is also attributed to gains on the sale ofsecurities which totaled $162,000 for the six month period.  For the same period last year, gain realizedon the sale of securities totaled $27,000.

 

**Noninterest expense:**

 

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

 

Noninterestexpense increased by $491,000 or 12% for the second quarter of 2009 compared tothe same periods last year.  For thethree month period ended June 30, 2009, salaries and employee benefitsincreased by $154,000.  This increase isdue to the addition of employees the Company obtained in an acquisition of anin market branch purchased at the end of March 2009.  Also, due to the branch purchase,amortization of core deposits intangible increased by $118,000 compared to thesame period last year. FDIC insurance increased by $179,000 due to increasedinsurance rates and a special one-time assessment fee. Other operating expensesincreased by $253,000 compared to the same period last year primarily due toadditional costs associated with the branch acquisition which in accordancewith generally accepted accounting principles, FAS 141 (R), were expensed andbenefit expenses associated with the Company’s indexed retirement plan.

 

Forthe six month period ended June 30, 2009, noninterest expense increased by$1,083,000 or 14%.  Salaries and employeebenefits increased by $144,000 and amortization of core deposits intangibleincreased by $118,000 compared to the same period last year.  These increases are associated with thebranch purchased at the end of March 2009. On a year-to-date basis, FDIC insurance increased by $281,000 due toincreased insurance rates and a special one-time assessment fee.  Other operating expenses increased by$151,000 compared to the first quarter of 2009 and $703,000 compared to thesame six month period last year.  The yearover year increase in noninterest expense is due in part to the expenses theCompany incurred in legal and advisory services costs related to theacquisition of its Lithonia, Georgia branch. The Company also incurred additional marketing, data processing andtraining cost related to the acquisition. Benefit expenses associated with participants remaining in the oldindexed retirement plan increased by $171,000 due to a change in the indexrate.  Other operating expenses alsoinclude a judgment in the amount of $64,000 which was levied against theCompany for lender liability in the first quarter of 2009 and other losses of$193,000.

 

27

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**INTEREST RATE SENSITIVITY MANAGEMENT**

 

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

 

Onemethod of measuring the impact of interest rate sensitivity is the cumulativegap analysis.  The difference betweeninterest rate sensitive assets and interest rate sensitive liabilities at varioustime intervals is referred to as the gap. The Company is liability sensitive on a short-term basis as reflected inthe following 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, 2009. Expected maturities may differ from contractual maturities because issuersmay have the right to call or prepay obligations with or without call orprepayment 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.

 

Thefollowing table sets forth the distribution of the repricing of the Company’sinterest rate sensitive assets and interest rate sensitive liabilities as of June 30,2009.

 
| ** **                                                              | ** ** | **Cumulative amounts as of June 30, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                              | ** ** | **Maturing and repricing within**               | ** ** |
| ** **                                                              | ** ** | **3**                                           | ** ** | **3 to 12** | ** ** | **1 to 5** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Months**                                      | ** ** | **Months** | ** ** | **Years** | ** ** | **5 Years** | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **(amounts  in thousands, except ratios)**      | ** ** |
| Interest-sensitive  assets:                                             |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits with other banks                             |       | $                                               | 14,731     |   | $ | — |   | $ | — |   | $ | — |   | $ | 14,731 |   |
| Certificates  of deposit                                                |       | 246                                             |       | 150 |   | — |   | — |   | 396 |   |
| Investments                                                             |       | 2,523                                           |       | 1,963 |   | 12,785 |   | 96,080 |   | 113,351 |   |
| Loans                                                                   |       | 57,335                                          |       | 34,822 |   | 86,034 |   | 34,069 |   | 212,260 |   |
| Total  interest-sensitive assets                                        |       | $                                               | 74,835     |   | $ | 36,935 |   | $ | 98,819 |   | $ | 130,149 |   | $ | 340,738 |   |
|                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-sensitive  liabilities:                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Deposits  (a)                                                           |       | $                                               | 159,886    |   | $ | 70,976 |   | $ | 11,272 |   | $ | 3,226 |   | $ | 245,360 |   |
| Other  borrowings                                                       |       | 26,150                                          |       | — |   | — |   | 354 |   | 26,504 |   |
| Total  interest-sensitive liabilities                                   |       | $                                               | 186,036    |   | $ | 70,976 |   | $ | 11,272 |   | $ | 3,580 |   | $ | 271,864 |   |
|                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity  gap                                               |       | $                                               | (111,201   | ) | $ | (34,041 | ) | $ | 87,547 |   | $ | 126,569 |   | $ | 68,874 |   |
|                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (32.64                                          | )%         | (42.63 | )% | (16.93 | )% | 20.21 | % | 20.21 | % |

 

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(a) Savings,Now, and money market deposits totaling $104,407 are included in the maturingin 3 months classification.

 

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**LIQUIDITY**

 

Liquidityis the ability of the Company to convert assets into cash or cash equivalentswithout significant loss and to raise additional funds by increasingliabilities.  Liquidity managementinvolves maintaining the Company’s ability to meet the day-to-day cash flowrequirements of its customers, whether they are depositors wishing to withdrawfunds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, theCompany would not be able to perform the primary function of a financialintermediary and would, therefore, not be able to meet the needs of thecommunities it serves. Additionally, the Company requires cash for variousoperating needs including: dividends to shareholders; business combinations;capital injections to its subsidiary; the servicing of debt; and the payment ofgeneral corporate expenses. The Company has access to various capital marketsand on March 6, 2009, the Company issued 7,462 shares of a Fixed RateCumulative Perpetual Preferred Stock, Series A, to the U.S. Department ofthe Treasury (“Treasury”) under the TARP Capital Purchase Program (the “CPP”)for an investment of $7,462,000. However, the primary source of liquidity forthe Company is dividends from its bank subsidiary.  Statutory and regulatory limitations apply tothe Bank’s payment of dividends to the Company as well as the Company’s paymentof dividends to its stockholders.  TheGeorgia Department of Banking and Finance regulates the Bank’s dividendpayments and must approve dividend payments that exceed 50 percent of the Bank’sprior year net income. The payment of dividends may also be affected or limitedby other factors, such as the requirement by federal agencies to maintainadequate capital above regulatory guidelines and that bank holding companiesand insured banks pay dividends out of current earnings. Currently, the Bankmust receive approval from the Georgia Department of Banking and Finance andthe Company must receive approval from the Federal Reserve Bank of Atlantaprior to the payment of dividends.

 

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

 

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

 

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

 

**CAPITAL RESOURCES**

 

Stockholders’equity increased by $7,586,000 for the six month period ended June 30,2009.  This increase is primarily due toa $7,462,000 investment on March 6, 2009 by the U.S. Department of theTreasury (“Treasury”) under the TARP Capital Purchase Program (the “CPP”). Inexchange for this investment, the Company issued 7,462 shares of a Fixed RateCumulative Perpetual Preferred Stock, Series A, with a $1,000 per shareliquidation value.  Accumulated othercomprehensive income, net of taxes also increased by $338,000 to $413,000during the first six months of 2009. This increase is attributed to the rapid movements in the Treasurymarkets, wild swings in volatility and credit spreads, and their impact on theCompany’s available for sale securities portfolio. Partially offsetting theseincreases to stockholders’ equity, was a decrease of $252,000 to retainedearnings as a result of an 

 

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increasein net income of $219,000 partially offset by a dividend of $0.19 per commonshare to stockholders totaling $399,000 and a $72,000 dividend paid to theTreasury under the CPP.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total and Tier 1 capital torisk weighted assets, and Tier 1 capital to average assets.  The Company’s total and Tier 1 capital torisk weighted assets and Tier 1 to average assets were 16%, 15% and 10% at June 30,2009 compared to 15%, 13% and 10% at December 31, 2008, respectively.  At June 30, 2009, 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**

 

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

 

**ITEM 4T.****                              ****CONTROLS AND PROCEDURES**

 

Asof the end of the period covered by this report, we conducted, under the supervisionof and with the participation of our management, including the Company’s ChiefExecutive Officer, Chief Operating Officer, and Chief Financial Officer, anevaluation of the effectiveness of our disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e). Based on this evaluation, theCompany’s Chief Executive Officer, Chief Operating Officer, and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective as of June 30, 2009 in accumulating and communicatinginformation to management, including the Chief Executive Officer, the ChiefOperating Officer, and the Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosures of that information under theSEC’s rules and forms and that the Company’s disclosure controls andprocedures are designed to ensure that the information required to be disclosedin reports filed or submitted by the Company under the Securities Exchange Actis recorded, processed, summarized and reported within the specified timeperiods.  During the quarter ended June 30,2009, there have been no changes in the Company’s internal controls overfinancial reporting or, to the Company’s knowledge, in other factors that couldsignificantly change those internal controls subsequent to the date the Companycarried out its evaluation that have materially affected, or are reasonablylikely to materially affect, our internal control over financialreporting.  However, the design of anysystem of controls and procedures is based in part upon certain assumptionsabout the likelihood of future events. There can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions, regardless of how remote.

 

**PART II.  OTHER INFORMATION**

 

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

 

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

 

**ITEM 1A.****              ****RISK FACTORS**

 

We believe there have been no material changes fromthe factors discussed in Part I, “Item 1A. Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2008.  You should carefully consider the factorsdiscussed in our Annual Report on Form

 

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10-K, which could materially affect our business,financial condition or future results. The risks described in our Annual Reporton Form 10-K are not the only risks facing us. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

**ITEM 2.****                       ****UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3.****                       ****DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM 4.****                       ****SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS**

 

TheCompany held it’s Annual Shareholders’ Meeting on Wednesday, May 27, 2009,at 10:30 a.m., at the Loudermilk Conference Center, 40 Courtland Street,N.E., Atlanta, Georgia.  The followingpresent the matters voted on and the results of the shareholders vote at theAnnual Shareholders’ Meeting:

 

1.               To elect the followingpersons to serve as directors for a three-year term until the 2012 annualmeeting:

 
| **Director Nominee** | ** ** | **For**   | ** ** | **Withheld** | ** ** | ** ** |
|----------------------|------------|-----------|------------|--------------|------------|------------|
|                 |       |      |       |         |       |       |
| James E. Young       |       | 1,084,501 |       | 244,646      |       |       |
| Ray Robinson         |       | 1,096,623 |       | 232,524      |       |       |
| H. Jerome Russell    |       | 1,097,158 |       | 231,989      |       |       |

 

2.               To approve the 2009Long-Term Incentive Plan.

 
| **For** | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non Votes** |
|---------|------------|-------------|------------|-------------|------------|---------------|
|    |       |        |       |        |       |          |
| 748,365 |       | 252,665     |       | 1,678       |       |          |

 

 

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3.               To approve the non-bindingresolution regarding executive compensation.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** |   | **Non Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|--------|---------------|------------|
|      |       |        |       |        |   |          |       |
| 1,066,264 |       | 64,730      |       | 198,153     |   | —        |       |

 

| **ITEM 5.** | ** ** | **OTHER INFORMATION**                                                                                                              |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                               |
|        |       | None                                                                                                                               |
|        |       |                                                                                                                               |
| **ITEM 6.** | ** ** | **EXHIBITS**                                                                                                                       |
|        |       |                                                                                                                               |
|        |       | **Exhibit 31**                                                                                                                |
|        |       |                                                                                                                               |
|        |       | Certification pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|        |       |                                                                                                                               |
|        |       | **Exhibit 32**                                                                                                                |
|        |       |                                                                                                                               |
|        |       | Certification pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

** **

**SIGNATURES**

 

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

 

**CITIZENSBANCSHARES CORPORATION**

 

 
| Date:  | August 14, 2009 |   | By:                                   | /s/ James E. Young |
|--------|----------------------|--------|---------------------------------------|--------------------|
|   |                 |   | James E. Young                        |
|   |                 |   | President and Chief Executive Officer |
|   |                 |   |                                  |
|   |                 |   |                                  |
| Date:  | August 14, 2009 |   | By:                                   | /s/ Cynthia N. Day |
|   |                 |   | Cynthia N. Day                        |
|   |                 |   | Senior Executive Vice President and   |
|   |                 |   | Chief Operating Officer               |
|   |                 |   |                                  |
|   |                 |   |                                  |
| Date:  | August 14, 2009 |   | By:                                   | /s/ Samuel J. Cox  |
|   |                 |   | Samuel J. Cox                         |
|   |                 |   | Executive Vice President and          |
|   |                 |   | Chief Financial Officer               |

 

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