**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 the quarterly period ended September 30,2009**

 

**OR**

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

 

**For the transition period from                   to               **

 

**Commission File No:  0 - 14535**

 

**CITIZENS BANCSHARES CORPORATION**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files.  o Yes o No

 

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

 

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

 

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

 

SEC 1296 (08-03)   **Potential persons who are to respond to the collection of informationcontained in this form are not required to respond unless the form displays acurrently valid OMB control number.**

 

APPLICABLE ONLY TO CORPORATEISSUERS:

 

Indicate the number of shares outstanding for eachof the 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 September 10, 2009.

 

 

 

----

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

 

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**SEPTEMBER30, 2009 AND DECEMBER 31, 2008**

**(Inthousands, except share data)**

 
| ** **                                                                                                         | ** ** | **2009**        | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                         | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                         | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash and due from banks                                                                                            |       | $               | 5,292      |       | $          | 6,870 |   |
| Interest-bearing deposits with banks                                                                               |       | 22,461          |       | 9,276      |       |
| Certificates of deposit                                                                                            |       | 150             |       | 345        |       |
| Investment securities available for sale, at fair  value                                                           |       | 104,599         |       | 87,961     |       |
| Investment securities held to maturity, at cost                                                                    |       | 4,378           |       | 4,583      |       |
| Other investments                                                                                                  |       | 2,257           |       | 2,287      |       |
| Loans receivable, net                                                                                              |       | 205,314         |       | 210,306    |       |
| Premises and equipment, net                                                                                        |       | 7,978           |       | 7,537      |       |
| Cash surrender value of life insurance                                                                             |       | 10,375          |       | 10,080     |       |
| Foreclosed real estate                                                                                             |       | 8,906           |       | 3,874      |       |
| Other assets                                                                                                       |       | 9,647           |       | 4,976      |       |
|                                                                                                               |       |            |       |       |       |
| Total assets                                                                                                       |       | $               | 381,357    |       | $          | 348,095 |   |
|                                                                                                               |       |            |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                     | ** ** | ** **      | ** ** |       | ** ** |
|                                                                                                               |       |            |       |       |       |
| LIABILITIES:                                                                                                       |       |            |       |       |       |
| Noninterest-bearing deposits                                                                                       |       | $               | 58,112     |       | $          | 54,786 |   |
| Interest-bearing deposits                                                                                          |       | 254,627         |       | 227,127    |       |
|                                                                                                               |       |            |       |       |       |
| Total deposits                                                                                                     |       | 312,739         |       | 281,913    |       |
|                                                                                                               |       |            |       |       |       |
| Accrued expenses and other liabilities                                                                             |       | 4,978           |       | 3,571      |       |
| Notes payable                                                                                                      |       | —          |       | 240        |       |
| Advances from Federal Home Loan Bank                                                                               |       | 20,500          |       | 28,713     |       |
|                                                                                                               |       |            |       |       |       |
| Total liabilities                                                                                                  |       | 338,217         |       | 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                                                                                         |       | 7,645           |       | 7,611      |       |
| Retained earnings                                                                                                  |       | 25,542          |       | 25,465     |       |
| Treasury stock at cost, 217,531 shares at  September 30, 2009 and219,913 at December 31, 2008            |       | (1,805          | )          | (1,813     | )          |
| Accumulated other comprehensive income, net of  income taxes                                                       |       | 1,976           |       | 75         |       |
|                                                                                                               |       |            |       |       |       |
| Total stockholders’ equity                                                                                    |       | 43,140          |       | 33,658     |       |
|                                                                                                               |       |            |       |       |       |
|                                                                                                               |       | $               | 381,357    |       | $          | 348,095 |   |

 

See notes to consolidated financial statements.

 

2

----

 

**CITIZENS BANCSHARES CORPORATION ANDSUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

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

 
| ** **                                                      | ** ** | **Three  Months******** Ended  September 30,** | ** ** | **Nine  Months******** Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                                 | ** ** | **2008**                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest income:                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Loans, including fees                                           |       | $                                                        | 3,623      |                                                    | $          | 3,811 |   | $ | 10,655 |   | $ | 12,166 |   |
| Investment securities:                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Taxable                                                         |       | 874                                                      |       | 874                                                     |       | 2,622 |   | 2,369 |   |
| Tax-exempt                                                      |       | 375                                                      |       | 185                                                     |       | 945 |   | 540 |   |
| Interest-bearing deposits                                       |       | 13                                                       |       | 21                                                      |       | 44 |   | 130 |   |
| Total interest income                                           |       | 4,885                                                    |       | 4,891                                                   |       | 14,266 |   | 15,205 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Interest expense:                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Deposits                                                        |       | 894                                                      |       | 1,453                                                   |       | 2,937 |   | 4,984 |   |
| Other borrowings                                                |       | 24                                                       |       | 84                                                      |       | 93 |   | 238 |   |
| Total interest expense                                          |       | 918                                                      |       | 1,537                                                   |       | 3,030 |   | 5,222 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Net interest income                                             |       | 3,967                                                    |       | 3,354                                                   |       | 11,236 |   | 9,983 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Provision for loan losses                                       |       | 771                                                      |       | 130                                                     |       | 2,147 |   | 1,239 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Net interest income after provision for loan losses             |       | 3,196                                                    |       | 3,224                                                   |       | 9,089 |   | 8,744 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Noninterest income:                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Service charges on deposits                                     |       | 1,108                                                    |       | 1,166                                                   |       | 3,078 |   | 3,178 |   |
| Gain on sales of securities                                     |       | 291                                                      |       | 10                                                      |       | 454 |   | 38 |   |
| Gain on sales of assets                                         |       | —                                                   |       | 22                                                      |       | 2 |   | 32 |   |
| Other operating income                                          |       | 281                                                      |       | 271                                                     |       | 942 |   | 850 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Total noninterest income                                        |       | 1,680                                                    |       | 1,469                                                   |       | 4,476 |   | 4,098 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Noninterest expense:                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Salaries and employee benefits                                  |       | 1,862                                                    |       | 1,813                                                   |       | 5,543 |   | 5,351 |   |
| Net occupancy and equipment                                     |       | 646                                                      |       | 618                                                     |       | 1,830 |   | 1,740 |   |
| Amortization of core deposit intangible                         |       | 131                                                      |       | 13                                                      |       | 276 |   | 40 |   |
| FDIC insurance                                                  |       | 178                                                      |       | 19                                                      |       | 476 |   | 35 |   |
| Other real estate owned                                         |       | 230                                                      |       | 46                                                      |       | 447 |   | 488 |   |
| Other operating expenses                                        |       | 1,393                                                    |       | 1,354                                                   |       | 4,523 |   | 3,781 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Total noninterest expense                                       |       | 4,440                                                    |       | 3,863                                                   |       | 13,095 |   | 11,435 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Income before income taxes                                      |       | 436                                                      |       | 830                                                     |       | 470 |   | 1,407 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Income tax expense (benefit)                                    |       | 14                                                       |       | 212                                                     |       | (171 | ) | 241 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Net income                                                      |       | $                                                        | 422        |                                                    | $          | 618 |   | $ | 641 |   | $ | 1,166 |   |
| Preferred dividends accrued                                     |       | 95                                                       |       | —                                                  |       | 217 |   | — |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Net income available to common shareholders                     |       | $                                                        | 327        |                                                    | $          | 618 |   | $ | 424 |   | $ | 1,166 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Net income per common share - basic and diluted                 |       | $                                                        | 0.16       |                                                    | $          | 0.29 |   | $ | 0.20 |   | $ | 0.56 |   |
| ** **                                                      | ** ** |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average common outstanding shares - basic  and diluted |       | 2,103                                                    |       | 2,096                                                   |       | 2,102 |   | 2,095 |   |
|                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Dividends per common share                                      |       | $                                                        | —     |                                                    | $          | — |   | $ | 0.19 |   | $ | 0.19 |   |

 

See notes to consolidated financial statements.

 

3

----

 

**CITIZENSBANCSHARES CORPORATION**

**ANDSUBSIDIARY**

 

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

**FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2009 AND 2008**

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

 
|                                                                                                     |       | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **  | ** ** | ** **    | ** ** | ** **         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**   |     |      |   |
|----------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|------------------|------------|-------------|------------|---------------|------------|--------------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|-------------------|----------|-----------|--------|
|                                                                                                     |       | ** **          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **  | ** ** | **Nonvoting** | ** ** | **Additional**     | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** | **Other**  |       |
|                                                                                                     |       | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**  | ** ** | **Treasury Stock** | ** ** | **Comprehensive** |       |         |       |
|                                                                                                     |       | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Shares**    | ** ** | **Amount**         | ** ** | **Capital**       | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income (Loss)** |     | **Total** |   |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |   |   |   |   |   |   |   |
| Balance—December 31,  2007                                                                     |       | —              |       | $                | —     |             | 2,230      |        | $          | 2,230         |       | 90                 |       | $                 | 90         |         | $          | 7,554      |       | $          | 25,071     |              | (227     | )         | $      | (1,859 | ) | $ | 47 |   | $ | 33,133 |   |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| Net income                                                                                               |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | 1,166        |       | —     |       | —     |       | —            |     | 1,166     |   |
| Unrealized holding gains on  investment securities available for sale—net of taxes of $383,146      |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | (743              | )        | (743      | )      |
| Less reclassification  adjustment for holding losses included in net income—net of taxes of $12,816 |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | (25               | )        | (25       | )      |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| Comprehensive loss                                                                                       |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | —            |     | 398       |   |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| Cumulative effect of  adoption of EITF 06-4, net of taxes                                                |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | (231         | )          | —     |       | —     |       | —            |     | (231      | )      |
| Stock based compensation  expense                                                                        |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | 43                |       | —       |       | —     |       | —     |       | —            |     | 43        |   |
| Purchase of treasury stock                                                                               |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | 4          |       | (25        | )          | —            |     | (25       | )      |
| Sale of Treasury stock                                                                                   |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       |       |       |              |     |      |   |
| Dividends declared - common                                                                              |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | (398         | )          | —     |       | —     |       | —            |     | (398      | )      |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| **Balance—September 30,  2008**                                                                | ** ** | **—**          | ** ** | **$**            | **—** | ** **       | **2,230**  | ** **  | **$**      | **2,230**     | ** ** | **90**             | ** ** | **$**             | **90**     | ** **   | **$**      | **7,597**  | ** ** | **$**      | **25,608** | ** **        | **(223** | **)**     | **$**  | **(1,884** | **)** | **$** | **(721** | **)** | **$** | **32,920** | ** ** |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| Balance—December 31,  2008                                                                     |       | —              |       | $                | —     |             | 2,230      |        | $          | 2,230         |       | 90                 |       | $                 | 90         |         | $          | 7,611      |       | $          | 25,465     |              | (220     | )         | $      | (1,813 | ) | $ | 75 |   | $ | 33,658 |   |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| Net income                                                                                               |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | 641          |       | —     |       | —     |       | —            |     | 641       |   |
| Unrealized holding gains on  investment securities available for sale—net of taxes of $1,133,411    |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | 2,914             |     | 2,914     |   |
| Less reclassification  adjustment for holding gains included in net income—net of taxes of $154,095 |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | (1,013            | )        | (1,013    | )      |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| Comprehensive income (loss)                                                                              |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     | 2,542     |   |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| Issuance of preferred stock                                                                              |       | 7.462               |       | 7,462            |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | —     |       | —     |       | —            |     | 7,462     |   |
| Stock based compensation  expense                                                                        |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | 34                |       | —       |       | —     |       | —     |       | —            |     | 34        |   |
| Sale of treasury stock                                                                                   |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | —       |       | 2          |       | 8          |       | —            |     | 8         |   |
| Dividends declared - preferred                                                                           |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | (165         | )          | —     |       | —     |       | —            |     | (165      | )      |
| Dividends declared - common                                                                              |       | —              |       | —           |       | —           |       | —      |       | —        |       | —             |       | —            |       | (399         | )          | —     |       | —     |       | —            |     | (399      | )      |
|                                                                                                     |       |                |       |             |       |             |       |        |       |          |       |               |       |              |       |         |       |       |       |       |       |              |     |      |   |
| **Balance—September 30,  2009**                                                                | ** ** | **7.462**           | ** ** | **$**            | **7,462**  | ** **       | **2,230**  | ** **  | **$**      | **2,230**     | ** ** | **90**             | ** ** | **$**             | **90**     | ** **   | **$**      | **7,645**  | ** ** | **$**      | **25,542** | ** **        | **(218** | **)**     | **$**  | **(1,805** | **)** | **$** | **1,976** | ** ** | **$** | **43,140** | ** ** |
|                                                                                                          |            |                     |            |                  |            |                  |            |             |            |               |            |                    |            |                   |            |              |            |            |            |            |            |                   |          |           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

4

----

 

**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2009 AND 2008**

**(Inthousands)**

 
| ** **                                                                             | ** ** | **2009**        | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                             | ** ** | **(Unaudited)** | ** ** |
| **OPERATING  ACTIVITIES:**                                                             |       |            |       |     |       |
| Net income                                                                             |       | $               | 641        |     | $          | 1,166 |   |
| **Adjustments  to reconcile net income****to net  cash used by operating activities:** |       |            |       |     |       |
| Provision for loan losses                                                              |       | 2,147           |       | 1,239    |       |
| Depreciation                                                                           |       | 597             |       | 589      |       |
| Amortization and accretion,  net                                                       |       | 504             |       | 106      |       |
| Provision for deferred  income taxes (benefit)                                         |       | (2,456          | )          | 398      |       |
| Gains on sale of assets and  investments                                               |       | (456            | )          | (70      | )          |
| Stock based compensation  expense                                                      |       | 34              |       | 43       |       |
| Change in other assets                                                                 |       | (3,766          | )          | (200     | )          |
| Change in accrued expenses  and other liabilities                                      |       | 1,407           |       | (804     | )          |
|                                                                                   |       |            |       |     |       |
| Net cash provided by (used  in) operating activities                                   |       | (1,348          | )          | 2,467    |       |
|                                                                                   |       |            |       |     |       |
| **INVESTING  ACTIVITIES:**                                                             |       |            |       |     |       |
| Proceeds from calls and  maturities of investment securities held to maturity          |       | 201             |       | 2,755    |       |
| Proceeds from sales and  maturities of investment securities available for sale        |       | 36,744          |       | 19,521   |       |
| Purchases of investment  securities available for sale                                 |       | (50,207         | )          | (42,494  | )          |
| Net change in other  investments                                                       |       | 30              |       | 227      |       |
| Net change in loans  receivable                                                        |       | (2,494          | )          | 19,714   |       |
| Net proceeds from the sale  of foreclosed properties                                   |       | 245             |       | 1,241    |       |
| Purchases of premises and  equipment, net                                              |       | (1,038          | )          | (417     | )          |
| Net change in interest  bearing deposits with banks                                    |       | (13,185         | )          | (1,746   | )          |
| Net change in certificates  of deposit                                                 |       | 195             |       | —   |       |
|                                                                                   |       |            |       |     |       |
| Net cash used in investing  activities                                                 |       | (29,509         | )          | (1,199   | )          |
|                                                                                   |       |            |       |     |       |
| **FINANCING  ACTIVITIES:**                                                             |       |            |       |     |       |
| Net change in deposits                                                                 |       | 30,826          |       | 7,103    |       |
| Net change in Federal funds  purchased                                                 |       | —          |       | (2,000   | )          |
| Principal payments on debt                                                             |       | (240            | )          | (100     | )          |
| Net change in advances from  Federal Home Loan Bank                                    |       | (8,213          | )          | (7,178   | )          |
| Proceeds from issuance of  preferred stock                                             |       | 7,462           |       | —   |       |
| Sale (purchase) of treasury  stock activity                                            |       | 8               |       | (25      | )          |
| Dividends paid - preferred                                                             |       | (165            | )          | —   |       |
| Dividends paid - common                                                                |       | (399            | )          | (398     | )          |
|                                                                                   |       |            |       |     |       |
| Net cash provided by (used  in) financing activities                                   |       | 29,279          |       | (2,598   | )          |
|                                                                                   |       |            |       |     |       |
| Net change in cash and cash  equivalents                                               |       | (1,578          | )          | (1,330   | )          |
|                                                                                   |       |            |       |     |       |
| Cash and cash equivalents,  beginning of period                                        |       | 6,870           |       | 8,188    |       |
|                                                                                   |       |            |       |     |       |
| Cash and cash equivalents  at end of period                                            |       | $               | 5,292      |     | $          | 6,858 |   |
|                                                                                   |       |            |       |     |       |
| **Supplemental  disclosures of cash paid during the period for:**                      |       |            |       |     |       |
| Interest                                                                               |       | $               | 3,711      |     | $          | 5,547 |   |
|                                                                                   |       |            |       |     |       |
| Income taxes                                                                           |       | $               | 713        |     | $          | 1,009 |   |
|                                                                                   |       |            |       |     |       |
| **Supplemental  disclosures of noncash transactions:**                                 |       |            |       |     |       |
| Real estate acquired  through foreclosure                                              |       | $               | 5,274      |     | 2,449      |   |
|                                                                                   |       |            |       |     |       |
| Change in unrealized gain  on investment securities available for sale, net of taxes   |       | $               | 1,901      |     | $          | (768 | ) |
|                                                                                   |       |            |       |     |       |
| Cumulative effect of change  in accounting principle                                   |       | $               | —     |     | $          | 231 |   |

 

See notes to consolidatedfinancial statements.

 

5

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**CITIZENSBANCSHARES CORPORATION AND SUBSIDIARY**

**Notes to the ConsolidatedFinancial Statements**

(Unaudited)

 

**1.  SUMMARY OF SIGNIFICANTACCOUNTING 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 nine monthperiods ended September 30, 2009 are unaudited.  In the opinion of management, all adjustmentsnecessary for a fair presentation of the financial position and results ofoperations and cash flows for the three and nine month periods have beenincluded.  All adjustments are of a normalrecurring nature.  All significantintercompany accounts and transactions have been eliminated in consolidation.

 

**Accounting Policies**

 

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

 

**Troubled Asset Relief Program**

 

OnMarch 6, 2009, as part of the U.S. Department of the Treasury (the“Treasury”) Troubled Asset Relief Program (“TARP”) Capital Purchase Program,the Company entered into a Letter Agreement and a Securities Purchase Agreementwith the Treasury, pursuant to which the Company agreed to issue and sell, andthe Treasury 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 Georgia state bank (“Peoples”).  Citizens acquired the in-marketdeposits of the Branch which totaled approximately $50 million. Under theAgreement, Citizens also acquired the branch office and related real estate andcertain personal property at the Branch.  The Company recorded a finitelived intangible asset related to the value of deposit accounts acquired ofapproximately $3,303,000 and is amortizing the amount over 7 years.

 

**Recently Issued Accounting Standards**

 

The following is a summary of recentauthoritative pronouncements that could affect the accounting, reporting, anddisclosure of financial information by the Company:

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 168, “The *FASB Accounting Standards Codification*TM and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162,” (“SFAS168”).  SFAS 168 establishes the *FASB Accounting Standards Codification*TM (“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*. Changes to the ASC subsequent to June 30, 2009are referred to as Accounting Standards Updates (“ASU”).

 

Inconjunction with the issuance of SFAS 168, the FASB also issued its firstAccounting Standards Update No. 2009-1, “Topic 105 —Generally AcceptedAccounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entiretyas a transition to the ASC.    ASU 2009-1is effective for interim and annual periods ending after September 15,2009 and will not have an impact on the Company’s financial position or resultsof operations but will change the referencing system for accountingstandards.  Certain of the followingpronouncements were issued prior to the issuance of the ASC and adoption of theASUs. For such pronouncements, citations to the applicable Codification byTopic, Subtopic and Section are provided where applicable in addition tothe original standard type and number.

 

TheFASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfersof Financial Assets — an amendment of FASB Statement No. 140,” (“SFAS166”) in June 2009.  SFAS 166 limitsthe circumstances 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 the Company’sfinancial statements.

 

7

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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 effective date.  TheCompany does not expect the standard to have any impact on the Company’sfinancial position.

 

TheFASB issued ASU 2009—05, “Fair Value Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair Value” in August, 2009 to provide guidance whenestimating the fair value of a liability. When a quoted price in an active market for the identical liability isnot available, fair value should be measured using (a) the quoted price ofan identical liability when traded as an asset; (b) quoted prices forsimilar liabilities or similar liabilities when traded as assets; or (c) anothervaluation technique consistent with the principles of Topic 820 such as anincome approach or a market approach.  Ifa restriction exists that prevents the transfer of the liability, a separateadjustment related to the restriction is not required when estimating fairvalue.  The ASU was effective October 1,2009 for the Company and will have no impact on financial position oroperations.

 

ASU2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments inCertain Entities That Calculate Net Asset Value per Share (or Its Equivalent),”issued in September, 2009, allows a company to measure the fair value of aninvestment that has no readily determinable fair market value on the basis ofthe investee’s net asset value per share as provided by the investee. Thisallowance assumes that the investee has calculated net asset value inaccordance with the GAAP measurement principles of Topic 946 as of thereporting entity’s measurement date.  Examples of such investments include investments in hedge funds, privateequity funds, real estate funds and venture capital funds. The update alsoprovides guidance on how the investment should be classified within the fairvalue hierarchy based on the value for which the investment can beredeemed.  The amendment is effective forinterim and annual periods ending after December 15, 2009 with earlyadoption permitted.  The Company does nothave investments in such entities and, therefore, there will be no impact toour financial statements.

 

IssuedOctober, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements inContemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic470 and provides guidance for accounting and reporting for own-share lendingarrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lendingarrangement entered into on an entity’s own shares should be measured at fairvalue in accordance with Topic 820 and recognized as an issuance cost, with anoffset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per shareunless default of the share-lending arrangement occurs.  The amendments also require severaldisclosures including a description and the terms of the arrangement and thereason for entering into the arrangement. The effective dates of the amendments are dependent upon the date theshare-lending arrangement was entered into and include retrospectiveapplication for arrangements outstanding as of the beginning of fiscal yearsbeginning on or after December 15, 2009.  The Company has no immediate plans to issue convertible debt and,therefore, does not expect the update to have an impact on its financialstatements.

 

8

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Other accounting standards that have been issuedor proposed by the FASB or other standards-setting bodies are not expected tohave a material impact on the Company’s financial position, results ofoperations or cash flows.

 

**2. INVESTMENTS**

 

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

 
| **At  September 30, 2009**         | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|----------------|------------|
|                                    |       |                 |       |                           |       |                            |       |           |       |
| State, county, and municipal securities |       | $                    | 38,884     |                           | $          | 1,990                           |       | $              | 76         |   | $ | 40,798 |   |
| Mortgage-backed securities              |       | 55,196               |       | 1,468                          |       | 633                             |       | 56,031         |       |
| Corporates                              |       | 7,526                |       | 244                            |       | —                          |       | 7,770          |       |
| Totals                                  |       | $                    | 101,606    |                           | $          | 3,702                           |       | $              | 709        |   | $ | 104,599 |   |

 
| **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 |   |

 

Investmentsecurities held to maturity are summarized as follows (in thousands):

 
| **At  September 30, 2009**         | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|----------------|------------|
|                                    |       |                 |       |                           |       |                            |       |           |       |
| State, county, and municipal securities |       | $                    | 4,001      |                           | $          | 156                             |       | $              | 1          |   | $ | 4,156 |   |
| Mortgage-backed securities              |       | 377                  |       | 4                              |       | —                          |       | 381            |       |
| Totals                                  |       | $                    | 4,378      |                           | $          | 160                             |       | $              | 1          |   | $ | 4,537 |   |

 
| **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 |   |

 

9

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##### ***The amortized costs and fair values of investmentsecurities at September 30, 2009, by contractual maturity, are shownbelow. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations with and without callor prepayment penalties.***

##### *** ***

| ** **                             | ** ** | **Available  for Sale** | ** **    | **Held to  Maturity** | ** ** |
|----------------------------------------|------------|-------------------------|---------------|-----------------------|------------|
| ** **                             | ** ** | **Amortized**           | ** **    | **Fair**              | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                             | ** ** | **Cost**                | ** **    | **Value**             | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                   |       |                    |          |                  |       |   |   |   |   |
| Due in one year or less                |       | $                       | 3,530         |                  | $          | 3,642 |   | $ | 348 |   | $ | 350 |   |
| Due after one year through five years  |       | 8,568                   |          | 8,807                 |       | 444 |   | 447 |   |
| Due after five years through ten years |       | 11,711                  |          | 12,312                |       | 3,586 |   | 3,740 |   |
| Due after ten years                    |       | 77,797                  |          | 79,838                |       | — |   | — |   |
|                                   |       |                    |          |                  |       |   |   |   |   |
|                                   |       | $                       |  101,606 |                  | $          | 104,599 |   | $ | 4,378 |   | $ | 4,537 |   |

 

##### ***The Company’s investment portfolio consistsprincipally of obligations of the United States, its agencies or itscorporations, corporate bonds and general obligation municipal securities. Inthe opinion of management, there is no concentration of credit risk in itsinvestment portfolio.  The company placesits deposits and correspondent accounts with and sells its federal funds tohigh quality institutions.  Managementbelieves credit risk associated with correspondent accounts is not significant.***

 

Grossrealized gains on securities were $464,000 and $71,000 at September 30,2009 and 2008, respectively.  Grossrealized losses on securities were $11,000 and $34,000 at September 30,2009 and 2008.

 

Securitieswith carrying values of $51,641,000 and $88,964,000 at September 30, 2009and December 31, 2008 were pledged to secure public deposits as requiredby law.

 

10

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##### ***The following tables show investments’ grossunrealized losses and fair value, aggregated by investment category and lengthof time that the individual securities have been in a continuous unrealizedloss position, at September 30, 2009 and December 31, 2008. Except asexplicitly identified below, all unrealized losses on investment securities areconsidered by management to be temporarily impaired given the credit ratings onthese investment securities and the short duration of the unrealized loss.***

##### *** ***

**At September 30,2009**

 

**SecuritiesAvailable for Sale**

 
| ** **                 | ** ** | **Securities  in a loss position for** | ** ** | **Securities  in a loss position for** | ** ** | ** **     | ** ** |
|----------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------|------------|
| ** **                 | ** ** | **less than  twelve months**           | ** ** | **twelve  months or more**             | ** ** | **Total**      | ** ** |
| ** **                 | ** ** | ** **                             | ** ** | **Unrealized**                         | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                 | ** ** | **Fair value**                         | ** ** | **losses**                             | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
| Mortgage-backed securities |       | $                                      | 1,461      |                                   | $          | (8             | )          | $ | 5,095 |   | $ | (625 | ) | $ | 6,556 |   | $ | (633 | ) |
|                       |       |                                   |       |                                   |       |           |       |   |   |   |   |   |   |
| Municipal securities       |       | 2,535                                  |       | (67                                    | )          | 301            |       | (9 | ) | 2,836 |   | (76 | ) |
|                       |       |                                   |       |                                   |       |           |       |   |   |   |   |   |   |
| Total                      |       | $                                      | 3,996      |                                   | $          | (75            | )          | $ | 5,396 |   | $ | (634 | ) | $ | 9,392 |   | $ | (709 | ) |

 

**SecuritiesHeld to Maturity**

 
| ** **           | ** ** | **Securities  in a loss position for** | ** ** | **Securities  in a loss position for** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------|------------|
| ** **           | ** ** | **less than  twelve months**           | ** ** | **twelve  months or more**             | ** ** | **Total**      | ** ** |
| ** **           | ** ** | ** **                             | ** ** | **Unrealized**                         | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **           | ** ** | **Fair value**                         | ** ** | **losses**                             | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                 |       |                                   |       |                                   |       |           |       |   |   |   |   |   |   |
| Municipal securities |       | $                                      | —     |                                   | $          | —         |       | $ | 279 |   | $ | (1 | ) | $ | 279 |   | $ | (1 | ) |
|                 |       |                                   |       |                                   |       |           |       |   |   |   |   |   |   |
| Total                |       | $                                      | —     |                                   | $          | —         |       | $ | 279 |   | $ | (1 | ) | $ | 279 |   | $ | (1 | ) |

 

**At December 31,2008**

 

**SecuritiesAvailable for Sale**

 
| ** **                 | ** ** | **Securities  in a loss position for** | ** ** | **Securities  in a loss position for** | ** ** | ** **     | ** ** | ** **     | ** ** |
|----------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                 | ** ** | **less than  twelve months**           | ** ** | **twelve  months or more**             | ** ** | **Total**      | ** ** |
| ** **                 | ** ** | ** **                             | ** ** | **Unrealized**                         | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                 | ** ** | **Fair value**                         | ** ** | **losses**                             | ** ** | **Fair value** | ** ** | **losses**     | ** ** | **Fair value** | ** ** | **losses** | ** ** |
|                       |       |                                   |       |                                   |       |           |       |           |       |   |   |   |   |
| Mortgage-backed securities |       | $                                      | 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 | ) |

 

**SecuritiesHeld to Maturity**

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

##### *** ***

##### ***At September 30, 2009, the Company had 9available-for-sale securities security that were in an unrealized loss positionfor longer than 12 months.  At December 31, 2008, the Companyhad 5 available-for-sale securities that were in an unrealized loss positionfor longer 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. FAIR VALUE OF FINANCIALINSTRUMENTS**

 

The Company measures or monitors certain of itsassets and liabilities on a fair value basis. The Company applied the following fair value hierarchy:

 

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

 

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

 

Level 3—Unobservable inputs that are supported bylittle or no market activity and that are significant to the fair value of theassets or liabilities. Level 3 assets and liabilities include financialinstruments whose value is determined using pricing models, discounted cashflow methodologies, or similar techniques, as well as instruments for which thedetermination of fair value requires significant management judgment orestimation. For example, this category generally includes certain privateequity investments, retained residual interests in securitizations, residentialmortgage servicing rights, intangibles and highly structured or long-termderivative contracts.

 

12

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The following tables present financial assets andfinancial liabilities measured at fair value on a recurring and nonrecurringbasis and the change in fair value for those specific financial instruments inwhich fair value has been elected.  Thisdisclosures should not be considered a surrogate of the liquidation value forthose specific financial instruments, but rather a good-faith estimate of theincrease or decrease in their value since purchase, origination, or issuance(in thousands).

 
| ** **                     | ** ** | **Fair Value  Measurements at** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **September 30,  2009**    | ** ** |
| ** **                     | ** ** | ** **                      | ** ** | **Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                      | ** ** | **Prices In** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                      | ** ** | **Active** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                      | ** ** | **Markets for** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Assets/Liabilities**          | ** ** | **Identical** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                     | ** ** | **Measured at**                 | ** ** | **Assets/** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                     | ** ** | **Fair Value**                  | ** ** | **Liabilities** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                     | ** ** | **September 30,  2009**    | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **Recurring  Basis:**          | ** ** | ** **                      | ** ** |   |   |   |   |   |   |
| **Assets**                     |       |                            |       |   |   |   |   |   |   |
| Securities available for  sale |       | $                               | 104,599    |   | $ | — |   | $ | 104,599 |   | $ | — |   |
|                           |       |                            |       |   |   |   |   |   |   |
| **Liabilities**                |       |                            |       |   |   |   |   |   |   |
| FHLB Advances                  |       | 20,500                          |       | — |   | 20,500 |   | — |   |
|                           |       |                            |       |   |   |   |   |   |   |
| **Nonrecurring  Basis:**       | ** ** | ** **                      | ** ** |   |   |   |   |   |   |
| **Assets**                     |       |                            |       |   |   |   |   |   |   |
| Impaired loans                 |       | $                               | 9,971      |   | $ | — |   | $ | 9,971 |   | $ | — |   |
| Foreclosed real estate         |       | 8,906                           |       | — |   | 8,906 |   | — |   |
| Goodwill                       |       | 362                             |       | — |   | — |   | 362 |   |
| Core deposit intangibles       |       | 3,098                           |       | — |   | — |   | 3,098 |   |

 
| ** **                     | ** ** | **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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The Company is predominantly an asset based lender withreal estate serving as collateral on a majority of its loans.  The fair value of collateral dependent loansis based on the fair value of the collateral securing these loans.  Substantially all impaired loans are securedby real estate. The fair value of this real estate is generally determinedbased upon appraisals performed by a certified or licensed appraiser usinginputs such as absorption rates, capitalization rates, and comparables.Management also considers other factors or recent developments that couldresult in adjustments to the collateral value estimates indicated in theappraisals such as changes in absorption rates or market conditions from thetime of valuation.  These measurementsare classified as Level 2 within 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 financialinstruments, fair value estimates are based on many judgments. These estimates

 

14

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are subjective in nature andinvolve uncertainties and matters of significant judgment and therefore cannotbe determined with precision. Changes in assumptions could significantly affectthe estimates.

 

Fair value estimates are basedon existing on and off-balance-sheet financial instruments without attemptingto estimate the value of anticipated future business and the value of assetsand liabilities that are not considered financial instruments; for example,premises and equipment. In addition, the tax ramifications related to therealization of the unrealized gains and losses can have a significant effect onfair value estimates and have not been considered in the estimates.

 

The carrying values andestimated fair values of the Company’s financial instruments at September 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                   |       | $                  | 5,292      |               | $          | 5,292 |   | $ | 6,870 |   | $ | 6,870 |   |
| Interest-bearing deposits with banks      |       | 22,461             |       | 22,461             |       | 9,276 |   | 9,276 |   |
| Cetificates of deposit                    |       | 150                |       | 150                |       | 345 |   | 345 |   |
| Investment securities                     |       | 108,977            |       | 109,136            |       | 92,544 |   | 92,658 |   |
| Other investments                         |       | 2,257              |       | 2,257              |       | 2,287 |   | 2,287 |   |
| Loans—net                            |       | 205,314            |       | 207,482            |       | 210,306 |   | 212,756 |   |
| Cash surrender value of life insurance    |       | 10,375             |       | 10,375             |       | 10,080 |   | 10,080 |   |
|                                      |       |               |       |               |       |   |   |   |   |
| Financial liabilities:                    |       |               |       |               |       |   |   |   |   |
| Deposits                                  |       | 312,739            |       | 299,520            |       | 281,913 |   | 279,323 |   |
| Notes payable                             |       | —             |       | —             |       | 240 |   | 240 |   |
| Advances from Federal Home Loan Bank      |       | 20,500             |       | 20,500             |       | 28,713 |   | 28,713 |   |
|                                      |       |               |       |               |       |   |   |   |   |
| ** **                                | ** ** | **Notional**       | ** ** | **Estimated**      | ** ** | **Notional** | ** ** | **Estimated** | ** ** |
| ** **                                | ** ** | **amount**         | ** ** | **fair value**     | ** ** | **amount** | ** ** | **fair value** | ** ** |
| Off-balance-sheet financial  instruments: |       |               |       |               |       |   |   |   |   |
| Commitments to extend credit              |       | $                  | 33,974     |               | —     |   | $ | 40,175 |   | — |   |
| Commercial letters of credit              |       | 3,929              |       | —             |       | 3,903 |   | — |   |
|                                           |            |                    |            |                    |            |  |  |  |  |  |  |  |  |

 

The Federal Home Loan Bank (the “FHLB”) Advance balance outstanding at September 30,2009 and at December 31, 2008 consist of a Daily Rate Credit advance,which is priced daily off of the Fed Funds rates and an Affordable HousingProgram (AHP) award used to subsidized loans for homeownership or rentalinitiatives.  At September 30, 2009,there were no changes in fair values that were included in current earnings.

 

**4.  INTANGIBLE ASSETS**

 

Finite lived intangible assets of the Companyrepresent deposit assumption premiums recorded upon the purchase of certainassets and liabilities from other financial institutions.  Deposit assumption premiums are amortizedover seven years, the estimated average lives of the deposit bases acquired,using the straight-line method and are included within other assets on theConsolidated Balance Sheets.

 

The Company applies a fair value-basedimpairment test to the carrying value of goodwill on an annual basis and on aninterim basis if certain events or circumstances indicate that an impairmentloss may have been incurred.

 

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The following table presents informationabout the Company’s intangible assets at (in thousands):

 
| ** **                    | ** ** | **September 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      |                          | $          | 578 |   | $ | 373 |   | $ | 302 |   |

 

The following table presents informationabout aggregate amortization expense (in thousands):

** **
| ** **                                                                                                   | ** ** | **Three  months  ended  September 30,  2009** | ** ** | **Nine months  ended  September 30,  2009** | ** ** | **Three  months  ended  September 30,  2008** | ** ** | **Nine months  ended  September 30,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                                         |       |                                               |       |                                             |       |                                               |       |                                             |       |
| Aggregate amortization expense of core deposit intangibles:                                                  |       | $                                                  | 131        |                                             | $          | 276                                                |       | $                                                | 13         |   | $ | 40 |   |
|                                                                                                         |       |                                               |       |                                             |       |                                               |       |                                             |       |
| 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**

 

Comprehensive income includes: (1) reportednet income and (2) unrealized gains and losses on marketablesecurities.  The following table showsour comprehensive income (in thousands):

 
| ** **                        | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | ** **                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                        |       | $                                           | 422        |                                       | $          | 618 |   | $ | 641 |   | $ | 1,166 |   |
|                              |       |                                        |       |                                       |       |   |   |   |   |
| Other comprehensive income (loss) |       | 1,563                                       |       | (169                                       | )          | 1,901 |   | (768 | ) |
|                              |       |                                        |       |                                       |       |   |   |   |   |
| Comprehensive income              |       | $                                           | 1,985      |                                       | $          | 449 |   | $ | 2,542 |   | $ | 398 |   |

 

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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 ninemonth periods ended September 30, 2009 and 2008 (in thousands, except pershare data):

 
| ** **                                                       | ** ** | **Net Income**  | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
|------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|
| ** **                                                       | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**    | ** ** |
|                                                             |       |            |       |              |       |          |       |
| **Three Months ended September 30, 2009**                   |       |            |       |              |       |          |       |
|                                                             |       |            |       |              |       |          |       |
| Basic earnings per share available to common stockholders        |       | $               | 327        |              | 2,103      |          | $          | 0.16 |   |
| Effect of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                             |       |            |       |              |       |          |       |
| Diluted earnings per share                                       |       | $               | 327        |              | 2,103      |          | $          | 0.16 |   |
|                                                             |       |            |       |              |       |          |       |
| **Three Months ended September 30, 2008**                   |       |            |       |              |       |          |       |
|                                                             |       |            |       |              |       |          |       |
| Basic earnings per share available to common stockholders        |       | $               | 618        |              | 2,096      |          | $          | 0.29 |   |
| Effect of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                             |       |            |       |              |       |          |       |
| Diluted earnings per share                                       |       | $               | 618        |              | 2,096      |          | $          | 0.29 |   |
|                                                             |       |            |       |              |       |          |       |
| **Nine Months ended September 30, 2009**                    |       |            |       |              |       |          |       |
|                                                             |       |            |       |              |       |          |       |
| Basic earnings per share available to common stockholders        |       | $               | 424        |              | 2,102      |          | $          | 0.20 |   |
| Effect of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                             |       |            |       |              |       |          |       |
| Diluted earnings per share                                       |       | $               | 424        |              | 2,102      |          | $          | 0.20 |   |
|                                                             |       |            |       |              |       |          |       |
| **Nine Months ended September 30, 2008**                    |       |            |       |              |       |          |       |
|                                                             |       |            |       |              |       |          |       |
| Basic earnings per share available to common stockholders        |       | $               | 1,166      |              | 2,095      |          | $          | 0.56 |   |
| Effect of dilutive securities: options to purchase common shares |       | —          |       | —            |       | —        |       |
|                                                             |       |            |       |              |       |          |       |
| Diluted earnings per share                                       |       | $               | 1,166      |              | 2,095      |          | $          | 0.56 |   |

 

**7. SUBSEQUENT EVENTS**

 

Subsequent events are events or transactionsthat occur after the balance sheet date but before financial statements areissued. Recognized subsequent events are events or transactions that provideadditional evidence about conditions that existed at the date of the balancesheet, including the estimates inherent in the process of preparing financialstatements.  Nonrecognized subsequent events are events that provideevidence about conditions that did not exist at the date of the balance sheetbut arose after that date.  Management has reviewed events occurring throughNovember 13, 2009, the date the financial statements were issued and nosubsequent events occurred requiring accrual or disclosure.

 

**RECLASSIFICATIONS**

 

Certain 2008 amounts have been reclassifiedto conform to the 2009 presentation.

 

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

 

**INTRODUCTION**

 

Citizens Bancshares Corporation (the “Company”)is a holding company that provides a full range of commercial and personalbanking services to individuals and corporate customers in its primary marketareas, metropolitan Atlanta and Columbus, Georgia, and Birmingham and Eutaw,Alabama through its wholly owned subsidiary, Citizens Trust Bank (the “Bank”).  The Bank is a member of the Federal ReserveSystem and operates under a state charter. The Company serves its customers through 11 full-service financialcenters in Georgia and Alabama.

 

**ForwardLooking Statements**

 

In addition to historical information, thisreport on Form 10-Q may contain forward-looking statements. For thispurpose, any statements contained herein, including documents incorporated byreference, that are not statements of historical fact may be deemed to beforward-looking statements. Forward-looking statements are subject to numerousassumptions, risks and uncertainties. Without limiting the foregoing, the words“believe,” “anticipates,” “plan,” expects,” and similar expressions areintended to identify forward-looking statements.

 

Forward-looking statements are based oncurrent management expectations and, by their nature, are subject to risk anduncertainties because of the possibility of changes in underlying factors andassumptions. Actual conditions, events or results could differ materially fromthose contained in or implied by such forward-looking statements for a varietyof reasons, including: sharp and/or rapid changes in interest rates;significant changes in the economic scenario from the current anticipatedscenario which could materially change anticipated credit quality trends and theability to generate loans and gather deposits; significant delay in orinability to execute strategic initiatives designed to grow revenues and/orcontrol expenses; unanticipated issues during the integration of acquisitions;and significant changes in accounting, tax or regulatory practices orrequirements. The Company undertakes no obligation to, nor does it intend to,update forward-looking statements to reflect circumstances or events that occurafter the date hereof or to reflect the occurrence of unanticipated events.

 

The following discussion is of the Company’sfinancial condition as of September 30, 2009 and December 31, 2008,and the changes in the financial condition and results of operations for thenine and three months period ended September 30, 2009 and 2008.

 

**Critical Accounting Policies**

 

In response to the Securities and ExchangeCommission’s (“SEC”) Release No. 33-8040, Cautionary Advice RegardingDisclosure About Critical Accounting Policies, the Company has identified thefollowing as the most critical accounting policies upon which its financialstatus depends.  The critical policieswere determined by considering accounting policies that involve the mostcomplex or subjective decisions or assessments. The Company’s most critical accounting policies relate to:

 

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

 

18

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Premiums anddiscounts on available for sale and held to maturity securities are amortizedor accreted using a method which approximates a level yield.

 

Gains andlosses on sales of investment securities are recognized upon disposition, basedon the adjusted cost of the specific security. A decline in market value of any security below cost that is deemed otherthan temporary is charged to earnings or OCI resulting in the establishment ofa new cost basis for the security.

 

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

 

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

 

A description of other accounting policiesare summarized in Note 1, Summary of Significant Accounting Policies in theNotes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The Company has followed those policies in preparing this report.

 

**FINANCIALCONDITION**

 

Total assetsat September 30, 2009 increased by 10% or $33,262,000 to $381,357,000compared 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.

 

The acquireddeposits were initially invested in interest-bearing deposits with banks, whichincreased by $46,898,000 at the end of the first quarter of 2009.  The Company invested a significant amount ofthese deposits in investment securities and loans to increase interestincome.  Investment securities availablefor sale, net of securities sold, matured and paydowns, increased by$16,638,000.  Due to the current slowdownin economic conditions, the Company has been able to purchase approximately $8million in quality loans from other banks experiencing liquidity and capitalproblems.  The Company continues to lookfor prudent and safe earning assets in which to invest and meet its liquidityand asset/liability requirements.

 

Loansreceivable, the Company’s largest earning asset, decreased by $4,992,000 or 2%to $205,314,000 at September 30, 2009 compared to December 31, 2008.  For the same period in 2008,

 

19

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loansreceivable decreased by $23,387,000 or 10%. While the decline in loan volume has slowed, the Company continues to benegatively impacted by the deterioration of economic conditions within themarkets it serves. Real estate and other collateral values continue to decline.Many consumers are experiencing reduced levels of disposable income as a resultof increased unemployment due to layoffs and plant closures. Also, commercialcustomers have seen an overall drop in business activity due to the recessionaryaffects of the economy.    The Companyhas enacted a continuous monitoring program of its loan portfolio to spotdeterioration and intervene timely to curtail significant losses.

 

Total liabilities at the end of the thirdquarter of 2009 were $338,217,000, increasing by $23,780,000 or 8% compared to December 31,2008. Total deposits increased by $30,826,000 to $312,739,000, which waspartially offset by an $8,213,000 decrease in Advances from Federal Home LoanBank of Atlanta to $20,500,000.

 

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

 

**INVESTMENT SECURITIES**

 

The composition of the Company’s investmentsecurities portfolio reflects the Company’s investment strategy of maximizingportfolio yields commensurate with risk and liquidity considerations. Theprimary objective of the Company’s investment strategy is to maintain anappropriate level of liquidity and provide a tool to assist in controlling theCompany’s interest rate sensitivity position, while at the same time producingadequate levels of interest income.

 

With the economy in a recession resulting inweak loan demand, the Company has grown its investment portfolios to generateearnings to offset both the decrease in loan activity, FDIC special assessmentsand increases in credit reserve.  At September 30,2009 and December 31, 2008, the Company’s investment securities portfoliorepresented approximately 29% and 27%, respectively, of total assets.

 

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

 

20

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##### **LOANS**

##### ** **

Loans outstanding, by classification, are summarizedas follows (in thousands):

 
| ** **                              | ** **                | **September 30** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|---------------------------|-----------------------|------------|-----------------------|------------|
| ** **                              | ** **                | **2009**              | ** ** | **2008**              | ** ** |
|                                    |                      |                  |       |                  |       |
| Commercial, financial, and agricultural |                      | $                     | 13,903     |                  | $          | 15,827 |   |
| Installment                             |                      | 9,516                 |       | 10,582                |       |
| Real estate - mortgage                  |                      | 166,767               |       | 164,822               |       |
| Real estate - construction              |                      | 19,290                |       | 21,526                |       |
| Other                                   |                      | 645                   |       | 2,400                 |       |
|                                    | Loans receivable          |                  | 210,121    |                  | 215,157    |   |
| Less:                                   | Net deferred loan fees    |                  | 169        |                  | 192        |   |
|                                    | Allowance for loan losses |                  | 4,638      |                  | 4,659      |   |
|                                    |                      |                  |       |                  |       |   |
|                                    | Loans receivable, net     |                  | $          | 205,314               |       | $ | 210,306 |   |

 

The classification Real estate — mortgage consistsof home equity loans, mortgages on 1—4 family residential, multifamilyresidential, and nonfarm nonresidential properties such as churches, hotels,and convenience stores.

 

**NONPERFORMING ASSETS**

 

Nonperforming assets include nonperformingloans, real estate acquired through foreclosure, and repossessed assets.  Nonperforming loans consist of loans that arepast due with respect to principal or interest more than 90 days and have beenplaced on nonaccrual status.

 

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

 

The challenging financial and credit markets continued to experiencedifficulty in the first nine months of 2009. As the economic outlook appears to be stabilizing the local marketscontinue to experience declines in real estate values, increases in job lossand delinquency levels which continue to impact the levels of our nonperformingassets.  Nonperforming assets decreasedby $2,317,000 to $17,735,000 at September 30, 2009 from $20,052,000 at December 31,2008.  Year to date, the Company hascharged-off $2,399,000 of nonperforming loans and wrote down foreclosed assetsby $258,000 to their estimated fair value. At September 30, 2009, nonperforming assets represents 8.10% of loans,net of unearned income, and real estate acquired through foreclosure, which isa 1.06% decline from 9.16% at December 31, 2008.  Nonaccrual loans were $8,829,000 at September 30,2009 compared to $16,178,000 at December 31, 2008. There were no loans greaterthan 90 days past due and still accruing interest at the end of the thirdquarter of 2009 or at December 31, 2008.

 

21

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The table below presents a summary of theCompany’s nonperforming assets at September 30, 2009 and December 31,2008.

 
| ** **                                                                                           | ** ** | **September 30,**    | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2009**                  | ** ** | **2008**              | ** ** |
| ** **                                                                                           | ** ** | **(in thousands, except** | ** ** |
| ** **                                                                                           | ** ** | **financial ratios)**     | ** ** |
| Nonperforming assets:                                                                                |       |                      |       |                  |       |
| Nonperforming loans:                                                                                 |       |                      |       |                  |       |
| Nonaccrual loans                                                                                     |       | $                         | 8,829      |                  | $          | 16,178 |   |
| Past-due loans of 90 days or more                                                                    |       | —                    |       | —                |       |
| Nonperforming loans                                                                                  |       | 8,829                     |       | 16,178                |       |
|                                                                                                 |       |                      |       |                  |       |
| Real estate acquired through foreclosure                                                             |       | 8,906                     |       | 3,874                 |       |
| Total nonperforming assets                                                                           |       | $                         | 17,735     |                  | $          | 20,052 |   |
|                                                                                                 |       |                      |       |                  |       |
| Ratios:                                                                                              |       |                      |       |                  |       |
| Nonperforming loans to loans, net of unearned income                                                 |       | 4.21                      | %          | 7.53                  | %          |
|                                                                                                 |       |                      |       |                  |       |
| Nonperforming assets to  loans, net of unearned income, and real estate acquired through foreclosure |       | 8.10                      | %          | 9.16                  | %          |
|                                                                                                 |       |                      |       |                  |       |
| Nonperforming assets to total assets                                                                 |       | 4.65                      | %          | 5.76                  | %          |
|                                                                                                 |       |                      |       |                  |       |
| Allowance for loan losses to nonperforming loans                                                     |       | 52.53                     | %          | 28.80                 | %          |
|                                                                                                 |       |                      |       |                  |       |
| Allowance for loan losses to nonperforming assets                                                    |       | 26.15                     | %          | 23.23                 | %          |

** **

**ALLOWANCE FOR LOAN LOSSES**

 

The allowance for loan losses is primarilyavailable to absorb losses inherent in the loan portfolio. Credit exposuresdeemed uncollectible are charged against the allowance for loan losses.

 

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

 

Loans are charged against the allowance when,in the opinion of management, such loans are deemed uncollectible andsubsequent recoveries are added to the allowance.  For the first nine months of 2009, based onthe Company’s evaluation, a provision for loan losses of $2,147,000 was chargedagainst operating earnings compared to $1,239,000 for the same period lastyear.  The increase in the provision forloan losses in 2009 relates to the continued deterioration of liquidity of theborrowers due to job loss and of the collateral value securing the loans due tocurrent economic conditions.

 

22

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The allowance for loan losses at September 30,2009 was approximately $4,638,000, representing 2.21% of total loans, net ofunearned income compared to approximately $3,529,000 for the same period lastyear, which represented 1.64% of total loans, net of unearned income.  Approximately $2,698,000 of the allowance forloan losses was allocated to loans management considered impaired at September 30,2009.

 

At September 30, 2009, managementbelieves the allowance for loan losses is adequate. Management uses availableinformation to recognize losses on loans; however, future additions to theallowance may be necessary based on changes in economic conditions,particularly in the metropolitan Atlanta, Georgia and Birmingham, Alabamaareas. In addition, regulatory agencies, as an integral part of theirexamination process, periodically review the Company’s allowance for loanlosses. Such agencies may require the Company to recognize additions to theallowance based on their judgments about information available to them at thetime of their examination.

 

A substantial portion of the Company’s loanportfolio is secured by real estate in the metropolitan Atlanta and Birminghammarkets, including a concentration of loans to churches, convenience stores andhotels. The ultimate collectibility of a significant portion of the Company’sloan portfolio is susceptible to changes in market conditions in themetropolitan Atlanta and Birmingham areas.

 

·                  The Company’soutstanding church loans were approximately $44 million at September 30,2009 compared to $42 million at December 31, 2008.  Loans to churches are generally secured byreal estate.

 

·                  The Company’sloans to area convenience stores were approximately $12 million and $13 millionat September 30, 2009 and December 31, 2008, respectively.  Loans to convenience stores are generallysecured by real estate.

 

·                  The Company’sloans to area hotels were approximately $18 million and $20 million at September 30,2009 and December 31, 2008, respectively. Loans to hotels are generally secured by real estate.

 

Also, 1—4family residential mortgage loans secured by first liens were approximately $38million and $42 million at September 30, 2009 and December 31, 2008,respectively. The Company has no subprime mortgages in its portfolio and exitedthe mortgage origination business in the third quarter of 2007.

 

23

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The following table summarizes loans, changesin the allowance for loan losses arising from loans charged off, recoveries onloans previously charged off by loan category, and additions to the allowancewhich have been charged to operating expense as of and for the nine monthperiods ended September 30, 2009 and 2008 (amount in thousands, exceptfinancial ratios):

 
| ** **                                                                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                        |       |     |       |     |       |
| Loans, net of unearned income                                                                               |       | $        | 209,952    |     | $          | 215,505 |   |
|                                                                                                        |       |     |       |     |       |
| Average loans, net of  unearned income and the allowance for loan losses                                    |       | $        | 207,489    |     | $          | 221,610 |   |
|                                                                                                        |       |     |       |     |       |
| Allowance for loan losses  at the beginning of period                                                       |       | $        | 4,659      |     | $          | 2,848 |   |
|                                                                                                        |       |     |       |     |       |
| Loans charged-off:                                                                                          |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                     |       | 68       |       | 118      |       |
| Real estate - loans                                                                                         |       | 1,798    |       | 155      |       |
| Installment loans to individuals                                                                            |       | 533      |       | 377      |       |
| Total loans charged-off                                                                                     |       | 2,399    |       | 650      |       |
|                                                                                                        |       |     |       |     |       |
| Recoveries of loans previously charged off:                                                                 |       |     |       |     |       |
| Commercial, financial, and agricultural                                                                     |       | 6        |       | 24       |       |
| Real estate - loans                                                                                         |       | 153      |       | 37       |       |
| Installment loans to individuals                                                                            |       | 72       |       | 31       |       |
| Total loans recovered                                                                                       |       | 231      |       | 92       |       |
|                                                                                                        |       |     |       |     |       |
| Net loans charged-off                                                                                       |       | 2,168    |       | 558      |       |
|                                                                                                        |       |     |       |     |       |
| Additions to allowance for  loan losses charged to operating expense                                        |       | 2,147    |       | 1,239    |       |
|                                                                                                        |       |     |       |     |       |
| Allowance for loan losses at period end                                                                     |       | $        | 4,638      |     | $          | 3,529 |   |
|                                                                                                        |       |     |       |     |       |
| Ratio of net loans  charged-off to average loans, net of unearned income and the allowance for  loan losses |       | 1.04     | %          | 0.25     | %          |
|                                                                                                        |       |     |       |     |       |
| Ratio of allowance for loan losses to loans, net of unearned income                                         |       | 2.21     | %          | 1.64     | %          |

 

24

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**DEPOSITS**

 

Deposits are the Company’s primary source offunding loan growth.  Total deposits at September 30,2009 increased 11% or $31 million to $312,739,000.  This increase is primarily due to theacquisition of a local branch in the Company’s market.  Noninterest-bearing deposits increased by 6%or $3 million and interest-bearing deposits increased by 12% or $28 millionwhen compared to December 31, 2008.

 

The Company is participating in the TemporaryLiquidity Guarantee Program’s (“TLGP”) full coverage of noninterest-bearingdeposit transaction accounts and certain interest-bearing checking accounts(for which the rate paid will not exceed 50 basis points) regardless of dollaramount through December 31, 2009. On August 26, 2009, the FDICextended the TLGP through June 30, 2010 and the Company has elected tostay in the TLGP for the extended period. In addition, the Company participates in Certificate of Deposit AccountRegistry Services (CDARS”), a program that allows its customers the ability tobenefit from 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 depositsand withdrawals based on their budgetary needs which can result in largefluctuations of deposits balances.

 

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

 
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                              |       |                   |       |                  |       |
| NOW and money market accounts     |       | $                      | 84,351     |                  | $          | 72,429 |   |
| Savings accounts                  |       | 33,337                 |       | 32,221                |       |
| Time deposits of $100,000 or more |       | 77,831                 |       | 76,072                |       |
| Other time deposits               |       | 59,108                 |       | 46,405                |       |
|                              |       | $                      | 254,627    |                  | $          | 227,127 |   |

 

**OTHER BORROWED FUNDS**

 

The Company continues to emphasize fundingearning asset growth through core deposits; however, the Company has relied onother borrowings as a supplemental funding source.  Other borrowings consist of Federal fundspurchased, short-term borrowings and FHLB advances.

 

The Company had an unsecured note payable of$240,000 at December 31, 2008 which had an interest rate of 2.75%. On May 28,2009, the Company retired the outstanding note payable.

 

The Bank had outstanding advances from theFHLB of $20,500,000 at September 30, 2009 compared to $28,713,000 at December 31,2008. Advances are collateralized by a blanket lien on 1-4 family mortgageloans, multifamily mortgage loans, commercial real estate loans and investmentsecurities.

 
| **Maturity**                        | ** ** | **Callable** | ** ** | **Type** | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------|------------|--------------|------------|----------|------------|------------------------------|------------|-----------------------------|------------|
|                                |       |         |       |     |       |                         |       |                        |       |   |   |   |   |
| July 2010                      |       | Daily        |       | Variable |       | 0.35                         | %          | $                           | 20,150     |   | 0.46 | % | $ | 28,350 |   |
| August 2026                    |       |         |       | (1)      |       | —                       |       | 350                         |       | — |   | 363 |   |
|                                |       |         |       |     |       |                         |       |                        |       |   |   |   |   |
| Total Principal Outstanding         |       |         |       |     |       |                         |       | $                           | 20,500     |   |   |   | $ | 28,713 |   |
|                                |       |         |       |     |       |                         |       |                        |       |   |   |   |   |
| Weighted Average Rate at Period End |       |         |       |     |       | 0.34                         | %          |                        |       | 0.45 | % |   |   |

 

----

(1) Represents an Affordable HousingProgram (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.

 

25

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**RESULTS OF OPERATIONS**

 

**Net Interest Income:**

 

Net interest income is the principal componentof a financial institution’s income stream and represents the difference, orspread, between interest and fee income generated from earning assets and theinterest expense paid on deposits and borrowed funds.  Fluctuations in interest rates as well asvolume and mix changes in earning assets and interest bearing liabilities canmaterially impact net interest income.

 

In summary, the Company’s net income for the first nine month of 2009was negatively impacted by slow loan growth, credit quality that required highloan 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 $441,000 over last year.

 

On a year-to-date basis, net interest income increased by $1,253,000 or13% to $11,236,000 compared to $9,983,000 for the same period in 2008.  Total interest income for this perioddecreased by $939,000 or 6% compared to the same nine month period in 2008 andwas primarily due to a $1,511,000 or 12% decrease in interest income onloans.  The decrease in interest incomeon loans is due to lower yields and volume and higher nonaccrued loans comparedto the same period in 2008, and was partially offset by a $658,000 increase ininvestment income. Total interest expense for the nine month period decreasedby $2,192,000 or 42% compared to the same nine month period in 2008.  Interest expense on interest-bearing depositsdecreased by $2,047,000 or 41%, as the Company was able to lower rates on itsdeposit products and increase its mix of noninterest-bearing deposits.  At September 30, 2009, the Company had anet interest margin of 4.45%.

 

For the three-month period ending September 30, 2009, net interestincome increased by $613,000 or 18% to $3,967,000 compared to $3,354,000reported for the same period last year. Total interest income only decreased by $6,000 compared to the samethree month period in 2008.  Totalinterest income on loans declined by $188,000 or 5% as the Company continues toexperience lower loan yields and volume and higher nonaccrued loans during theperiod.  The decrease in interest onloans was offset by a $190,000 increase in investment income.  The Company significantly increased itsinvestment portfolio to increase interest income due to falling loan demand andproblem loans.  Total interest expensefor the period decreased by $619,000 or 40% compared to the same three monthperiod in 2008 primarily due to the lower cost of funding deposits.

 

The Company has an asset/liability managementprogram, which monitors the Company’s interest rate sensitivity and ensures theCompany is competitive in the loan and deposit market.  The Company continues to monitor itsasset/liability mix and will make changes as appropriate to ensure it isproperly positioned to react to changing interest rates and inflationarytrends.

 

**Provision for loan losses**

 

For the first nine months of 2009, the Company recognized a provisionfor loan losses of $2,147,000, a $908,000 or 73% increase, compared to$1,239,000 for the same period in 2008. In the third quarter of 2009, the provision for loan losses increased by$641,000 or 493% compared to $130,000 reported for the same three month periodlast year.  This increase was primarilydriven by foreclosures and collateral value impairment resulting in increasedprovision for loan losses.  Nonaccrualloans decreased by $7,349,000 for the year due to charge-offs, increasedcollection efforts and the transfer of several loans to OREO.  At September 30, 2009, nonperformingassets to loans, net of unearned income and OREO decreased by 1.06% compared toDecember 31, 2008.  The allowance for loan losses was$4,638,000 at September 30, 2009 compared to $4,659,000 at December 31,2008.  At 

 

26

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September 30, 2009, theallowance for loan losses was 53% of nonperforming loans compared to 29% at December 31,2008.  The provision for loan losses andthe resulting allowance for loan losses are based on changes in the size andcharacter of the Company’s loan portfolio, changes in nonperforming and pastdue loans, the existing risk of individual loans, concentrations of loans tospecific borrowers or industries, and economic conditions. At September 30,2009, the Company considered its allowance for loan losses to be adequate.

 

**Noninterest income:**

 

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

 

Noninterest income totaled $1,680,000 for the three month period ended September 30,2009, an increase of $211,000 or 14% compared to the same period ended September 30,2008.  This increase is primarilyattributed to a $291,000 gain on the sale of securities during the period asthe Company fine-tuned its investment portfolio to improve its capital ratiosand swapped the tail-end of several mortgage-backed securities forasset/liability purposes.  For the sameperiod last year, gain realized on the sale of securities totaled $10,000.

 

Year-to-date, noninterest income increased by $378,000 or 9% to$4,476,000 compared to the same period last year. This increase is alsoattributed to gains on the sale of securities which totaled $454,000 for thenine month period.  For the same periodlast year, gain realized on the sale of securities totaled $38,000.

 

**Noninterest expense:**

 

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

 

Noninterest expense increased by $577,000 or 15% for the third quarterof 2009 compared to the same periods last year. For the three month period ended September 30, 2009, salaries andemployee benefits increased by $49,000. This increase is due to the addition of employees the Company obtainedin an acquisition of an in 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 $159,000 due to increasedinsurance rates and the expiration of a one-time assessment credit. Expenses onother real estate owned increased by $184,000 due to additional writedown ofproperty value and maintenance cost.

 

For the nine month period ended September 30, 2009, noninterestexpense increased by $1,660,000 or 15%. Salaries and employee benefits increased by $192,000 and amortization ofcore deposits intangible increased by $236,000 compared to the same period lastyear.  These increases are associatedwith the branch purchased at the end of March 2009.  On a year-to-date basis, FDIC insuranceincreased by $441,000 due to increased insurance rates, the expiration of aone-time assessment credit and a special one-time assessment fee.  Other operating expenses increased by$742,000 compared to the same nine month period last year.  The year over year increase in noninterestexpense is due in part to the expenses the Company incurred in legal andadvisory services costs related to the Company participation in the TARP andthe acquisition of its Lithonia, Georgia branch.  The Company also incurred additionalmarketing, data processing and training cost related to the acquisition.  Benefit expenses associated with participantsremaining in the old indexed retirement plan increased by $257,000 due to achange in the index rate.  Other operatingexpenses also include a judgment in the amount of $64,000 which was leviedagainst the Company for lender liability in the first quarter of 2009 and otherlosses of $222,000.

 

27

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**INTERESTRATE SENSITIVITY MANAGEMENT**

 

Interest rate sensitivity management involvesmanaging the potential impact of interest rate movements on net interest incomewithin acceptable levels of risk.  TheCompany seeks to accomplish this by structuring the balance sheet so thatrepricing opportunities exist for both assets and liabilities in equivalentamounts and time intervals.  Imbalancesin these repricing opportunities at any point in time constitute a financialinstitution’s interest rate risk.  TheCompany’s ability to reprice assets and liabilities in the same dollar amountsand at the same time minimizes interest rate risk.

 

One method of measuring the impact ofinterest rate sensitivity is the cumulative gap analysis.  The difference between interest ratesensitive assets and interest rate sensitive liabilities at various timeintervals is referred to as the gap.  TheCompany is liability sensitive on a short-term basis as reflected in thefollowing table.  Generally, a netliability sensitive position indicates that there would be a negative impact onnet interest income in an increasing rate environment.  However, interest rate sensitivity gap doesnot necessarily indicate the impact of general interest rate movements on thenet interest margin, since all interest rates and yields do not adjust at thesame velocity and the repricing of various categories of assets and liabilitiesis subject to competitive pressures and the needs of the Company’scustomers.  In addition, various assetsand liabilities indicated as repricing within the same period may in factreprice at different times within such period and at different rates. Thefollowing table shows the contractual maturities of all interest rate sensitiveassets and liabilities at September 30, 2009.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.  Taking a conservative approach, the Companyhas included demand deposits such as NOW, money market, and savings accounts inthe three month category.  However, theactual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only a generalindicator of potential effects of interest rate changes on net interest income.

 

The following table sets forth thedistribution of the repricing of the Company’s interest rate sensitive assetsand interest rate sensitive liabilities as of September 30, 2009.

 
| ** **                                                              | ** ** | **Cumulative amounts as of  September 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                              |       | $                                                     | 22,461     |   | $ | — |   | $ | — |   | $ | — |   | $ | 22,461 |   |
| Certificates of deposit                                                 |       | —                                                |       | 150 |   | — |   | — |   | 150 |   |
| Investments                                                             |       | —                                                |       | 3,990 |   | 9,251 |   | 95,736 |   | 108,977 |   |
| Loans                                                                   |       | 51,833                                                |       | 34,450 |   | 87,004 |   | 36,834 |   | 210,121 |   |
| Total interest-sensitive assets                                         |       | $                                                     | 74,294     |   | $ | 38,590 |   | $ | 96,255 |   | $ | 132,570 |   | $ | 341,709 |   |
|                                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Interest-sensitive liabilities:                                         |       |                                                  |       |   |   |   |   |   |   |   |   |
| Deposits (a)                                                            |       | $                                                     | 153,375    |   | $ | 87,001 |   | $ | 14,251 |   | $ | — |   | $ | 254,627 |   |
| Other borrowings                                                        |       | —                                                |       | 20,150 |   | — |   | 350 |   | 20,500 |   |
| Total interest-sensitive liabilities                                    |       | $                                                     | 153,375    |   | $ | 107,151 |   | $ | 14,251 |   | $ | 350 |   | $ | 275,127 |   |
|                                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                                                |       | $                                                     | (79,081    | ) | $ | (68,561 | ) | $ | 82,004 |   | $ | 132,220 |   | $ | 66,582 |   |
|                                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Cumulative  interest-sensitivity gap to total interest-sensitive assets |       | (23.14                                                | )%         | (43.21 | )% | (19.21 | )% | 19.49 | % | 19.49 | % |

 

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(a) Savings, Now, andmoney market deposits totaling $117,688 are included in the maturing in 3months classification.

 

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**LIQUIDITY**

 

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

 

Asset and liability management functions notonly serve to assure adequate liquidity in order to meet the needs of theCompany’s customers, but also to maintain an appropriate balance betweeninterest-sensitive assets and interest-sensitive liabilities so that theCompany can earn a return that meets the investment requirements of itsshareholders.  Daily monitoring of thesources and uses of funds is necessary to maintain an acceptable cash positionthat meets both requirements.

 

The asset portion of the balance sheet providesliquidity primarily through loan principal repayments, maturities of investmentsecurities and, to a lesser extent, sales or paydowns of investment securitiesavailable for sale and held to maturity. Other short-term investments such as federal funds sold and maturinginterest bearing deposits with other banks are additional sources of liquidityfunding.

 

The liability portion of the balance sheetprovides liquidity through various customers’ interest bearing and noninterestbearing deposit accounts.  Federal fundspurchased and other short-term borrowings are additional sources of liquidity and,basically, represent the Company’s incremental borrowing capacity.  These sources of liquidity are short-term innature and are used as necessary to fund asset growth and meet short-termliquidity needs. The Company does not anticipate any liquidity requirements inthe near future that it will not be able to meet.

 

**CAPITAL RESOURCES**

 

Stockholders’ equity increased by $9,482,000 for the nine month periodended September 30, 2009.  Thisincrease is primarily due to a $7,462,000 investment on March 6, 2009 bythe U.S. Department of the Treasury (“Treasury”) under the TARP CapitalPurchase Program (the “CPP”). In exchange for this investment, the Companyissued 7,462 shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series A,with a $1,000 per share liquidation value. Accumulated other comprehensive income, net of taxes increased by$1,901,000 to $1,976,000 during the first nine months of 2009.  This increase is attributed to the rapidmovements in the Treasury markets, wild swings in volatility and creditspreads, and their impact on the Company’s available for sale securitiesportfolio. Retained earnings increased by $77,000 representing an increase innet income of $641,000, partially offset by a dividend of $0.19 

 

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per common share to common stockholders totaling $399,000 and a$165,000 dividend paid to the Treasury under the CPP.

 

Quantitative measures established byregulation to ensure capital adequacy require the Company to maintain minimumamounts and ratios of total and Tier 1 capital to risk weighted assets, andTier 1 capital to average assets.  TheCompany’s total and Tier 1 capital to risk weighted assets and Tier 1 toaverage assets were 16%, 15% and 10% at September 30, 2009 compared to15%, 13% and 10% at December 31, 2008, respectively.  At September 30, 2009, the Company metall capital adequacy requirements to which it is subject and is considered tobe ‘well capitalized” under regulatory standards.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

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

 

**ITEM 4T.               CONTROLS AND PROCEDURES**

 

As of the end of the period covered by thisreport, we conducted, under the supervision of and with the participation ofour management, including the Company’s Chief Executive Officer, ChiefOperating Officer, and Chief Financial Officer, an evaluation of theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e). Based on this evaluation, the Company’s ChiefExecutive Officer, Chief Operating Officer, and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as of September 30,2009 in accumulating and communicating information to management, including theChief Executive Officer, the Chief Operating Officer, and the Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures of that information under the SEC’s rules and forms and thatthe Company’s disclosure controls and procedures are designed to ensure thatthe information required to be disclosed in reports filed or submitted by theCompany under the Securities Exchange Act is recorded, processed, summarizedand reported within the specified time periods. During the quarter ended September 30, 2009, there have been nochanges in the Company’s internal controls over financial reporting or, to theCompany’s knowledge, in other factors that could significantly change thoseinternal controls subsequent to the date the Company carried out its evaluationthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting. However, the design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential future conditions,regardless of how remote.

 

**PART II.  OTHER INFORMATION**

 

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

 

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

 

**ITEM 1A.   RISK FACTORS**

 

We believe there have been no materialchanges from the factors discussed in Part I, “Item 1A. Risk Factors” in ourAnnual Report 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 ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing us. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

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

 

None

 

**ITEM 3.    DEFAULTS UPON SENIOR SECURITIES**

 

None

 

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

 

None

 

**ITEM 5.    OTHER INFORMATION**

 

None

 

**ITEM 6.    EXHIBITS**

 

**Exhibit 31**

 

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

 

**Exhibit 32**

 

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

 

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**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

**CITIZENS BANCSHARES CORPORATION**

 

 
| Date:  November 13, 2009  | By:                                   | /s/ James E. Young |
|-------------------------------------|---------------------------------------|--------------------|
|                                | James E. Young                        |
|                                | President and Chief Executive Officer |
|                                |                                  |
|                                |                                  |
| Date:   November 13, 2009 | By:                                   | /s/ Cynthia N. Day |
|                                | Cynthia N. Day                        |
|                                | Senior Executive Vice President and   |
|                                | Chief Operating Officer               |
|                                |                                  |
|                                |                                  |
| Date:   November 13, 2009 | By:                                   | /s/ Samuel J. Cox  |
|                                | Samuel J. Cox                         |
|                                | Executive Vice President and          |
|                                | Chief Financial Officer               |

 

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