Citizens Bancshares 10Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

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

For the quarterly period ended September 30, 2009

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 as specified in its charter)

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of 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 a shell 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 information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding for each of 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-Voting Common 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

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

(In thousands, 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 and 219,913 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.

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(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.

CITIZENS BANCSHARES CORPORATION

AND SUBSIDIARY

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

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Unaudited - In thousands, except parenthetical footnotes)

																				Accumulated
							Nonvoting			Additional										Other
	Preferred Stock			Common Stock			Common Stock			Paid-in		Retained			Treasury Stock					Comprehensive
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Earnings			Shares		Amount			Income (Loss)			Total

Balance—December 31, 2007	—	$	—	2,230	$	2,230	90	$	90	$	7,554	$	25,071		(227	)	$	(1,859	)	$	47		$	33,133

Net income	—	—		—	—		—	—		—		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 consolidated financial statements.

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In thousands)

	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 consolidated financial statements.

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

Notes to the Consolidated Financial Statements

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by generally accepted accounting principles are not included herein. These interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008. The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2009 fiscal year.

The consolidated financial statements of the Company for the three and nine month periods ended September 30, 2009 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the three and nine month periods have been included. All adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation.

Accounting Policies

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

Troubled Asset Relief Program

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

This transaction closed on March 6, 2009. The issuance and sale of these securities was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Preferred Shares qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per

annum for the first five years and 9% per annum thereafter. The Company may, subject to consultation with the Federal Reserve Bank of Atlanta, redeem the Preferred Shares at any time for its aggregate liquidation amount plus any accrued and unpaid dividends without first raising additional capital in an equity offering.

Acquisition

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

Recently Issued Accounting Standards

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

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).

In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 —Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position or results of operations but will change the referencing system for accounting standards. Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable in addition to the original standard type and number.

The FASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009. SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R). The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the standard to have any impact on the Company’s financial statements.

SFAS 167 (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 analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not expect the standard to have any impact on the Company’s financial position.

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

ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in September, 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entity’s measurement date. Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed. The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted. The Company does not have investments in such entities and, therefore, there will be no impact to our financial statements.

Issued October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning 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 financial statements.

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

2. INVESTMENTS

Investment securities 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

Investment securities 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

The amortized costs and fair values of investment securities at September 30, 2009, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with and without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Due in one year or less	$	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 consists principally of obligations of the United States, its agencies or its corporations, corporate bonds and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

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

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

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

At September 30, 2009

Securities Available for Sale

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

Securities Held to Maturity

	Securities in a loss position for				Securities in a loss position for
	less than twelve months				twelve months or more					Total
			Unrealized				Unrealized					Unrealized
	Fair value		losses		Fair value		losses			Fair value		losses

Municipal securities	$	—	$	—	$	279	$	(1	)	$	279	$	(1	)

Total	$	—	$	—	$	279	$	(1	)	$	279	$	(1	)

At December 31, 2008

Securities Available for Sale

	Securities in a loss position for					Securities in a loss position for
	less than twelve months					twelve months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair value		losses			Fair value		losses			Fair value		losses

Mortgage-backed securities	$	17,023	$	(719	)	$	1,337	$	(27	)	$	18,360	$	(746	)

Municipal securities	4,016		(155		)	—		—			4,016		(155		)

Total	$	21,039	$	(874	)	$	1,337	$	(27	)	$	22,376	$	(901	)

Securities Held to Maturity

	Securities in a loss position for					Securities in a loss position for
	less than twelve months					twelve months or more				Total
			Unrealized					Unrealized				Unrealized
	Fair value		losses			Fair value		losses		Fair value		losses

Municipal securities	$	269	$	(11	)	$	—	$	—	$	269	$	(11	)

Total	$	269	$	(11	)	$	—	$	—	$	269	$	(11	)

At September 30, 2009, the Company had 9 available-for-sale securities security that were in an unrealized loss position for longer than 12 months. At December 31, 2008, the Company had 5 available-for-sale securities that were in an unrealized loss position for longer than 12 months. The Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, intangibles and highly structured or long-term derivative contracts.

The following tables present financial assets and financial liabilities measured at fair value on a recurring and nonrecurring basis and the change in fair value for those specific financial instruments in which fair value has been elected. This disclosures should not be considered a surrogate of the liquidation value for those specific financial instruments, but rather a good-faith estimate of the increase 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

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

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

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

Investment Securities—Fair value of investment securities are based on quoted market prices.

Other Investments—The carrying amount of other investments approximates its fair value.

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

Cash Surrender Value of Life Insurance—Cash values of life insurance policies are carried at the value for which such policies may be redeemed for cash.

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

Notes Payable—Notes payable bear a variable interest rate and the carrying value approximates fair value.

Advances from Federal Home Loan Bank—The fair values of advances from the Federal Home Loan Bank are estimated by discounting the future cash flows using the rates currently available to the Bank for debt with similar remaining maturities and terms.

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

Limitations—Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates

are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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

The carrying values and estimated 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 Housing Program (AHP) award used to subsidized loans for homeownership or rental initiatives. 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 Company represent deposit assumption premiums recorded upon the purchase of certain assets and liabilities from other financial institutions. Deposit assumption premiums are amortized over seven years, the estimated average lives of the deposit bases acquired, using the straight-line method and are included within other assets on the Consolidated Balance Sheets.

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

The following table presents information about 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 information about 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) reported net income and (2) unrealized gains and losses on marketable securities. The following table shows our 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

6. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

Basic and diluted net income per share available to common and potential common stockholders has been calculated based on the weighted average number of shares outstanding. The following schedule reconciles the numerator and denominator of the basic and diluted net income per share available to common and potential common stockholders for the three and nine month periods ended September 30, 2009 and 2008 (in thousands, except per share 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 transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through November 13, 2009, the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure.

RECLASSIFICATIONS

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION

Citizens Bancshares Corporation (the “Company”) is a holding company that provides a full range of commercial and personal banking services to individuals and corporate customers in its primary market areas, 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 Reserve System and operates under a state charter. The Company serves its customers through 11 full-service financial centers in Georgia and Alabama.

Forward Looking Statements

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

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

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

Critical Accounting Policies

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

Investment Securities - The Company classifies investments in one of three categories based on management’s intent upon purchase: held to maturity securities which are reported at amortized cost, trading securities which are reported at fair value with unrealized holding gains and losses included in earnings, and available for sale securities which are recorded at fair value with unrealized holding gains and losses included as a component of accumulated other comprehensive income. The Company had no investment securities classified as trading securities during 2009 or 2008.

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

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

Loans - Loans are reported at principal amounts outstanding less unearned income and the allowance for loan losses. Interest income on loans is recognized on a level-yield basis. Loan fees and certain direct origination costs are deferred and amortized over the estimated terms of the loans using the level-yield method. Discounts on loans purchased are accreted using the level-yield method over the estimated remaining life of the loan purchased.

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

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

FINANCIAL CONDITION

Total assets at September 30, 2009 increased by 10% or $33,262,000 to $381,357,000 compared to $348,095,000 at December 31, 2008. This increase is primarily due to a branch acquisition completed on March 27, 2009. The Company’s subsidiary, Citizens Trust Bank (“Citizens”), acquired an in-market branch from The Peoples Bank, a Georgia state bank. Premises and equipment and other assets were both impacted by the branch acquisition. Citizens acquired the branch office and related real estate at a fair value of $750,000 and certain personal property at the Branch with a fair value of $64,000. Citizens also recorded a finite lived intangible asset related to the value of deposit accounts acquired of approximately $3,303,000.

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

Loans receivable, 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,

loans receivable decreased by $23,387,000 or 10%. While the decline in loan volume has slowed, the Company continues to be negatively impacted by the deterioration of economic conditions within the markets it serves. Real estate and other collateral values continue to decline. Many consumers are experiencing reduced levels of disposable income as a result of increased unemployment due to layoffs and plant closures. Also, commercial customers have seen an overall drop in business activity due to the recessionary affects of the economy. The Company has enacted a continuous monitoring program of its loan portfolio to spot deterioration and intervene timely to curtail significant losses.

Total liabilities at the end of the third quarter 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 was partially offset by an $8,213,000 decrease in Advances from Federal Home Loan Bank of Atlanta to $20,500,000.

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

INVESTMENT SECURITIES

The composition of the Company’s investment securities portfolio reflects the Company’s investment strategy of maximizing portfolio yields commensurate with risk and liquidity considerations. The primary objective of the Company’s investment strategy is to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company’s interest rate sensitivity position, while at the same time producing adequate levels of interest income.

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

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

LOANS

Loans outstanding, by classification, are summarized as 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 consists of home equity loans, mortgages on 1—4 family residential, multifamily residential, and nonfarm nonresidential properties such as churches, hotels, and convenience stores.

NONPERFORMING ASSETS

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

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

The challenging financial and credit markets continued to experience difficulty in the first nine months of 2009. As the economic outlook appears to be stabilizing the local markets continue to experience declines in real estate values, increases in job loss and delinquency levels which continue to impact the levels of our nonperforming assets. Nonperforming assets decreased by $2,317,000 to $17,735,000 at September 30, 2009 from $20,052,000 at December 31, 2008. Year to date, the Company has charged-off $2,399,000 of nonperforming loans and wrote down foreclosed assets by $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 is a 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 greater than 90 days past due and still accruing interest at the end of the third quarter of 2009 or at December 31, 2008.

The table below presents a summary of the Company’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 primarily available to absorb losses inherent in the loan portfolio. Credit exposures deemed uncollectible are charged against the allowance for loan losses.

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

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

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

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

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

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

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

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

The following table summarizes loans, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expense as of and for the nine month periods ended September 30, 2009 and 2008 (amount in thousands, except financial 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		%

DEPOSITS

Deposits are the Company’s primary source of funding loan growth. Total deposits at September 30, 2009 increased 11% or $31 million to $312,739,000. This increase is primarily due to the acquisition 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 million when compared to December 31, 2008.

The Company is participating in the Temporary Liquidity Guarantee Program’s (“TLGP”) full coverage of noninterest-bearing deposit transaction accounts and certain interest-bearing checking accounts (for which the rate paid will not exceed 50 basis points) regardless of dollar amount through December 31, 2009. On August 26, 2009, the FDIC extended the TLGP through June 30, 2010 and the Company has elected to stay in the TLGP for the extended period. In addition, the Company participates in Certificate of Deposit Account Registry Services (CDARS”), a program that allows its customers the ability to benefit from full FDIC insurance on CD investments of up to $250 million. The Company has deposits in both of these programs from Corporate and Governmental customers who make sizeable deposits and withdrawals based on their budgetary needs which can result in large fluctuations of deposits balances.

The following is a summary of interest-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 funding earning asset growth through core deposits; however, the Company has relied on other borrowings as a supplemental funding source. Other borrowings consist of Federal funds purchased, 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 the FHLB 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 mortgage loans, multifamily mortgage loans, commercial real estate loans and investment securities.

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

RESULTS OF OPERATIONS

Net Interest Income:

Net interest income is the principal component of a financial institution’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.

In summary, the Company’s net income for the first nine month of 2009 was negatively impacted by slow loan growth, credit quality that required high loan loss provisions and write-downs of the collateral value securing impaired loans and OREO due to market value declines. Also impacting net income, were higher FDIC assessment fees due to a revised pricing structure and a special one-time assessment which resulted in an 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 or 13% to $11,236,000 compared to $9,983,000 for the same period in 2008. Total interest income for this period decreased by $939,000 or 6% compared to the same nine month period in 2008 and was primarily due to a $1,511,000 or 12% decrease in interest income on loans. The decrease in interest income on loans is due to lower yields and volume and higher nonaccrued loans compared to the same period in 2008, and was partially offset by a $658,000 increase in investment income. Total interest expense for the nine month period decreased by $2,192,000 or 42% compared to the same nine month period in 2008. Interest expense on interest-bearing deposits decreased by $2,047,000 or 41%, as the Company was able to lower rates on its deposit products and increase its mix of noninterest-bearing deposits. At September 30, 2009, the Company had a net interest margin of 4.45%.

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

The Company has an asset/liability management program, which monitors the Company’s interest rate sensitivity and ensures the Company is competitive in the loan and deposit market. The Company continues to monitor its asset/liability mix and will make changes as appropriate to ensure it is properly positioned to react to changing interest rates and inflationary trends.

Provision for loan losses

For the first nine months of 2009, the Company recognized a provision for 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 period last year. This increase was primarily driven by foreclosures and collateral value impairment resulting in increased provision for loan losses. Nonaccrual loans decreased by $7,349,000 for the year due to charge-offs, increased collection efforts and the transfer of several loans to OREO. At September 30, 2009, nonperforming assets to loans, net of unearned income and OREO decreased by 1.06% compared to December 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

September 30, 2009, the allowance for loan losses was 53% of nonperforming loans compared to 29% at December 31, 2008. The provision for loan losses and the resulting allowance for loan losses are based on changes in the size and character of the Company’s loan portfolio, changes in nonperforming and past due loans, the existing risk of individual loans, concentrations of loans to specific 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 of financial services and activities, including fee-based services and commissions earned through insurance sales. In addition, gains and losses realized from the sale of investment portfolio securities 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 primarily attributed to a $291,000 gain on the sale of securities during the period as the Company fine-tuned its investment portfolio to improve its capital ratios and swapped the tail-end of several mortgage-backed securities for asset/liability purposes. For the same period 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 also attributed to gains on the sale of securities which totaled $454,000 for the nine month period. For the same period last 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 quarter of 2009 compared to the same periods last year. For the three month period ended September 30, 2009, salaries and employee benefits increased by $49,000. This increase is due to the addition of employees the Company obtained in 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 the same period last year. FDIC insurance increased by $159,000 due to increased insurance rates and the expiration of a one-time assessment credit. Expenses on other real estate owned increased by $184,000 due to additional writedown of property value and maintenance cost.

For the nine month period ended September 30, 2009, noninterest expense increased by $1,660,000 or 15%. Salaries and employee benefits increased by $192,000 and amortization of core deposits intangible increased by $236,000 compared to the same period last year. These increases are associated with the branch purchased at the end of March 2009. On a year-to-date basis, FDIC insurance increased by $441,000 due to increased insurance rates, the expiration of a one-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 noninterest expense is due in part to the expenses the Company incurred in legal and advisory services costs related to the Company participation in the TARP and the acquisition of its Lithonia, Georgia branch. The Company also incurred additional marketing, data processing and training cost related to the acquisition. Benefit expenses associated with participants remaining in the old indexed retirement plan increased by $257,000 due to a change in the index rate. Other operating expenses also include a judgment in the amount of $64,000 which was levied against the Company for lender liability in the first quarter of 2009 and other losses of $222,000.

INTEREST RATE SENSITIVITY MANAGEMENT

Interest rate sensitivity management involves managing the potential impact of interest rate movements on net interest income within acceptable levels of risk. The Company seeks to accomplish this by structuring the balance sheet so that repricing opportunities exist for both assets and liabilities in equivalent amounts and time intervals. Imbalances in these repricing opportunities at any point in time constitute a financial institution’s interest rate risk. The Company’s ability to reprice assets and liabilities in the same dollar amounts and at the same time minimizes interest rate risk.

One method of measuring the impact of interest rate sensitivity is the cumulative gap analysis. The difference between interest rate sensitive assets and interest rate sensitive liabilities at various time intervals is referred to as the gap. The Company is liability sensitive on a short-term basis as reflected in the following table. Generally, a net liability sensitive position indicates that there would be a negative impact on net interest income in an increasing rate environment. However, interest rate sensitivity gap does not necessarily indicate the impact of general interest rate movements on the net interest margin, since all interest rates and yields do not adjust at the same velocity and the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company’s customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. The following table shows the contractual maturities of all interest rate sensitive assets and liabilities at September 30, 2009. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Taking a conservative approach, the Company has included demand deposits such as NOW, money market, and savings accounts in the three month category. However, the actual repricing of these accounts may extend beyond twelve months. The interest rate sensitivity gap is only a general indicator of potential effects of interest rate changes on net interest income.

The following table sets forth the distribution of the repricing of the Company’s interest rate sensitive assets and 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		%

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

LIQUIDITY

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. Additionally, the Company requires cash for various operating needs including: dividends to shareholders; business combinations; capital injections to its subsidiary; the servicing of debt; and the payment of general corporate expenses. The Company has access to various capital markets and on March 6, 2009, the Company issued 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 Capital Purchase Program (the “CPP”) for an investment of $7,462,000. However, the primary source of liquidity for the Company is dividends from its bank subsidiary. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company as well as the Company’s payment of dividends to its stockholders. The Georgia Department of Banking and Finance regulates the Bank’s dividend payments and must approve dividend payments that exceed 50 percent of the Bank’s prior year net income. The payment of dividends may also be affected or limited by other factors, such as the requirement by federal agencies to maintain adequate capital above regulatory guidelines and that bank holding companies and insured banks pay dividends out of current earnings. Currently, the Bank must receive approval from the Georgia Department of Banking and Finance and the Company must receive approval from the Federal Reserve Bank of Atlanta prior to the payment of dividends.

Asset and liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Company’s customers, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can earn a return that meets the investment requirements of its shareholders. Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable cash position that meets both requirements.

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

The liability portion of the balance sheet provides liquidity through various customers’ interest bearing and noninterest bearing deposit accounts. Federal funds purchased 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 in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. The Company does not anticipate any liquidity requirements in the near future that it will not be able to meet.

CAPITAL RESOURCES

Stockholders’ equity increased by $9,482,000 for the nine month period ended September 30, 2009. This increase is primarily due to a $7,462,000 investment on March 6, 2009 by the U.S. Department of the Treasury (“Treasury”) under the TARP Capital Purchase Program (the “CPP”). In exchange for this investment, the Company issued 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 rapid movements in the Treasury markets, wild swings in volatility and credit spreads, and their impact on the Company’s available for sale securities portfolio. Retained earnings increased by $77,000 representing an increase in net income of $641,000, partially offset by a dividend of $0.19

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets. The Company’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 16%, 15% and 10% at September 30, 2009 compared to 15%, 13% and 10% at December 31, 2008, respectively. At September 30, 2009, the Company met all capital adequacy requirements to which it is subject and is considered to be ‘well capitalized” under regulatory standards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4T. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted, under the supervision of and with the participation of our management, including the Company’s Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’s Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2009 in accumulating and communicating information to management, including the Chief Executive Officer, the Chief Operating Officer, and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports filed or submitted by the Company under the Securities Exchange Act is recorded, processed, summarized and reported within the specified time periods. During the quarter ended September 30, 2009, there have been no changes in the Company’s internal controls over financial reporting or, to the Company’s knowledge, in other factors that could significantly change those internal controls subsequent to the date the Company carried out its evaluation that 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 in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will 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 in various claims and legal actions arising in the ordinary course of business. In the opinion of management, based in part on the advice of counsel, the ultimate disposition of these matters will not have a material adverse impact on the Company’s consolidated financial position.

ITEM 1A. RISK FACTORS

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

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

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibit 31

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

Exhibit 32

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

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the 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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Bad

Citizens Bancshares Inactive 10-Q2009 Q3 Quarterly report

Content analysis

The amortized costs and fair values of investment securities at September 30, 2009, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with and without call or prepayment penalties.

LOANS