Citizens Bancshares 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

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

For the quarterly period ended March 31, 2010

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 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 and 90,000 shares of Non-Voting Common Stock, $1.00 par value were outstanding on May 13, 2010.

PART 1.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2010 AND DECEMBER 31, 2009

(In thousands, except share data)

	2010			2009
	(Unaudited)
ASSETS
Cash and due from banks	$	5,050		$	6,461
Interest-bearing deposits with banks	46,625			20,609
Certificates of deposit	150			150
Investment securities available for sale, at fair value	115,796			112,644
Investment securities held to maturity, at cost	3,870			3,909
Other investments	2,257			2,257
Loans receivable, net	198,195			200,219
Premises and equipment, net	7,796			7,825
Cash surrender value of life insurance	10,544			10,465
Foreclosed real estate	11,657			10,837
Other assets	11,824			12,163
Total assets	$	413,764		$	387,539
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	67,670		$	58,401
Interest-bearing deposits	284,564			267,611
Total deposits	352,234			326,012
Accrued expenses and other liabilities	4,371			4,794
Advances from Federal Home Loan Bank	14,491			14,495
Total liabilities	371,096			345,301
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock - No par value; 10,000,000 shares authorized; Series A , 7,462 shares issued and outstanding	7,462			7,462
Common stock - $1 par value; 20,000,000 shares authorized; 2,230,065 shares issued and outstanding	2,230			2,230
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding	90			90
Nonvested restricted common stock	(51		)	(52		)
Additional paid-in capital	7,722			7,707
Retained earnings	26,366			25,834
Treasury stock at cost, 217,531 shares at March 31, 2010 and December 31, 2009	(1,805		)	(1,805		)
Accumulated other comprehensive income, net of income taxes	654			772
Total stockholders’ equity	42,668			42,238
	$	413,764		$	387,539

See notes to consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited  - In thousands, except per share data)

	Three MonthsEnded March 31,
	2010		2009
Interest income:
Loans, including fees	$	3,348	$	3,523
Investment securities:
Taxable	681		850
Tax-exempt	455		254
Interest-bearing deposits	21		5
Total interest income	4,505		4,632
Interest expense:
Deposits	688		941
Other borrowings	14		40
Total interest expense	702		981
Net interest income	3,803		3,651
Provision for loan losses	630		438
Net interest income after provision for loan losses	3,173		3,213
Noninterest income:
Service charges on deposits	906		957
Gain on sales of securities	333		23
Gain (loss) on sales of assets	4		(2		)
Other operating income	513		327
Total noninterest income	1,756		1,305
Noninterest expense:
Salaries and employee benefits	1,962		1,836
Net occupancy and equipment	624		595
Amortization of core deposit intangible	131		13
FDIC insurance	182		111
Other real estate owned	131		37
Other operating expenses	1,215		1,630
Total noninterest expense	4,245		4,222
Income before income taxes	684		296
Income tax expense	59		12
Net income	$	625	$	284
Preferred dividends accrued	93		27
Net income available to common shareholders	$	532	$	257
Net income per common share - basic and diluted	$	0.25	$	0.12
Weighted average common outstanding shares - basic	2,103		2,101
Weighted average common outstanding shares - diluted	2,113		2,101
Dividends per common share	$	—	$	0.19

See notes to consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

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

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited  - In thousands, except parenthetical footnotes)

																							Accumulated
							Nonvoting						Additional										Other
	Preferred Stock			Common Stock			Common Stock			Restricted			Paid-in		Retained			Treasury Stock					Comprehensive
	Shares	Amount		Shares	Amount		Shares	Amount		Stock			Capital		Earnings			Shares		Amount			Income (Loss)			Total
Balance—December 31, 2008	—	$	—	2,230	$	2,230	90	$	90	$	—		$	7,611	$	25,465		(220	)	$	(1,813	)	$	75		$	33,658
Net income	—	—		—	—		—	—		—			—		284			—		—			—			284
Unrealized holding gains on investment securities available for sale—net of taxes of $230,183	—	—		—	—		—	—		—			—		—			—		—			773			773
Less reclassification adjustment for holding losses included in net income—net of taxes of $7,967	—	—		—	—		—	—		—			—		—			—		—			(342		)	(342		)
Comprehensive loss																										715
Issuance of preferred stock	7	7,462		—	—		—	—		—			—		—			—		—			—			7,462
Stock based compensation expense	—	—		—	—		—	—		—			15		—			—		—			—			15
Sale of Treasury stock	—	—		—	—		—	—		—			—		—			2		4			—			4
Dividends declared - common	—	—		—	—		—	—		—			—		(399		)	—		—			—			(399		)
Balance—March 31, 2009	7	$	7,462	2,230	$	2,230	90	$	90	$	—		$	7,626	$	25,350		(218	)	$	(1,809	)	$	506		$	41,455
Balance—December 31, 2009	7	$	7,462	2,230	$	2,230	90	$	90	$	(52	)	$	7,707	$	25,834		(218	)	$	(1,805	)	$	772		$	42,238
Net income	—	—		—	—		—	—		—			—		625			—		—			—			625
Unrealized holding gains on investment securities available for sale—net of taxes of $52,765	—	—		—	—		—	—		—			—		—			—		—			102			102
Less reclassification adjustment for holding gains included in net income—net of taxes of $113,323	—	—		—	—		—	—		—			—		—			—		—			(220		)	(220		)
Comprehensive income (loss)																										507
Stock based compensation expense	—	—		—	—		—	—		—			15		—			—		—			—			15
Nonvested restricted stock	—	—		—	—		—	—		1			—		—			—		—			—			1
Sale of treasury stock	—	—		—	—		—	—		—			—		—			—		—			—			—
Dividends declared - preferred	—	—		—	—		—	—		—			—		(93		)	—		—			—			(93		)
Balance—March 31, 2010	7	$	7,462	2,230	$	2,230	90	$	90	$	(51	)	$	7,722	$	26,366		(218	)	$	(1,805	)	$	654		$	42,668

See notes to consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(In thousands)

	2010			2009
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	625		$	284
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses	630			438
Depreciation	176			190
Amortization and accretion, net	271			76
Provision for deferred income taxes (benefit)	35			(248		)
Gains on sale of assets and investments	(337		)	(21		)
Stock based compensation expense	15			15
Restricted stock based compensation plan	1			—
Change in other assets	182			(4,859		)
Change in accrued expenses and other liabilities	(425		)	685
Net cash provided by (used in) operating activities	1,173			(3,440		)
INVESTING ACTIVITIES:
Net cash and cash equivalents acquired from branch purchase	—			45,431
Net change in certificates of deposit	—			(51		)
Proceeds from calls and maturities of investment securities held to maturity	39			50
Proceeds from sales and maturities of investment securities available for sale	16,637			3,276
Purchases of investment securities available for sale	(19,761		)	(6,735		)
Net change in other investments	—			5
Net change in loans receivable	456			(245		)
Net proceeds from the sale of foreclosed properties	83			731
Purchases of premises and equipment, net	(147		)	(907		)
Net cash provided by (used in) investing activities	(2,693		)	41,555
FINANCING ACTIVITIES:
Net change in deposits	26,222			3,689
Net change in advances from Federal Home Loan Bank	(4		)	(1,605		)
Proceeds from issuance of preferred stock	—			7,462
Sale (purchase) of treasury stock activity	—			4
Dividends paid - preferred	(93		)	—
Dividends paid - common	—			(399		)
Net cash provided by financing activities	26,125			9,151
Net change in cash and cash equivalents	24,605			47,266
Cash and cash equivalents, beginning of period	27,070			16,146
Cash and cash equivalents at end of period	$	51,675		$	63,412
Supplemental disclosures of cash paid during the period for:
Interest	$	700		$	994
Income taxes	$	15		$	415
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure	$	929		1,462
Change in unrealized gain on investment securities available for sale, net of taxes	$	(118	)	$	431

See notes to consolidated financial statements.

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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, 2009.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2010 fiscal year.

The consolidated financial statements of the Company for the three month period ended March 31, 2010 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 month period 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, 2009.  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.

The Preferred Shares qualify 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

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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 January 2010, fair value guidance was amended to require disclosures for significant amounts transferred in and out of Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and settlements be provided in the Level 3 reconciliation.  The new disclosures are effective for the Company for the current quarter and have been reflected in the Fair Value footnote.

Guidance related to subsequent events was amended in February 2010 to remove the requirement for an SEC filer to disclose the date through which subsequent events were evaluated.  The amendments were effective upon issuance and had no significant impact on the Company’s 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 March 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government-sponsored enterprises securities	$	1,499	$	—	$	—	$	1,499
State, county, and municipal securities	43,672		597		316		43,953
Mortgage-backed securities	69,634		1,350		640		70,344
Totals	$	114,805	$	1,947	$	956	$	115,796

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

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

At March 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	3,584	$	92	$	13	$	3,663
Mortgage-backed securities	286		2		—		288
Totals	$	3,870	$	94	$	13	$	3,951

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

The amortized costs and fair values of investment securities at March 31, 2010, 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 (in thousands).

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	858	$	863	$	261	$	262
Due after one year through five years	3,074		3,141		225		234
Due after five years through ten years	20,008		20,353		3,384		3,455
Due after ten years	90,865		91,439		—		—
	$	114,805	$	115,796	$	3,870	$	3,951

Securities with carrying values of $85,687,000 and $86,127,000 at March 31, 2010 and December 31, 2009 were pledged to secure public deposits, FHLB advances and a $22.3 million line of credit at the Federal Reserve Bank discount window and for other purposes as required by law.

Gross realized gains on securities were $333,000 and $23,000 at March 31, 2010 and 2009, respectively.  There were no gross realized losses on securities at March 31, 2010 and 2009.

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The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations, 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.

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 March 31, 2010 and December 31, 2009. 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 (in thousands).

At March 31, 2010

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	$	23,290	$	(245	)	$	4,390	$	(395	)	$	27,680	$	(640	)
Municipal securities	13,102		(204		)	1,096		(112		)	14,198		(316		)
Total	$	36,392	$	(449	)	$	5,486	$	(507	)	$	41,878	$	(956	)

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	$	—	$	—	$	267	$	(13	)	$	267	$	(13	)
Total	$	—	$	—	$	267	$	(13	)	$	267	$	(13	)

At December 31, 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	$	14,781	$	(128	)	$	4,832	$	(438	)	$	19,613	$	(566	)
Municipal securities	13,863		(353		)	284		(26		)	14,147		(379		)
Total	$	28,644	$	(481	)	$	5,116	$	(464	)	$	33,760	$	(945	)

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	$	—	$	—	$	267	$	(13	)	$	267	$	(13	)
Total	$	—	$	—	$	267	$	(13	)	$	267	$	(13	)

At March 31, 2010 and December 31, 2009, the Company had 8 available-for-sale securities that were in an unrealized loss position for longer than 12 months.  Of the 8 investment securities that were in an unrealized loss position for more than 12 months, 5 were private label collateralized mortgage obligation (CMO) securities.  The Company reviews these securities for other-than-temporary impairment on a quarterly basis by monitoring their credit support and coverage, constant payment of the contractual principal and interest, loan to value and delinquencies ratios.  

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

The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell those securities before recovery of its amortized cost. The Company believes, based on industry analyst reports and credit ratings, that it will continue to receive scheduled interest payments as well as the entire principal balance, and 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.

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3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures or monitors certain of its assets and liabilities on a fair value basis.  Fair value is used on a recurring basis for assets and liabilities that are elected to be accounted for under ASC guidance as well as certain assets and liabilities in which fair value is the primary basis of accounting.  Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value, which are in accordance with the guidance for determining the fair value of a financial asset when the market for that asset is not active.

In accordance with ASC guidance, 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 that 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, and highly structured or long-term derivative contracts.

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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 (in thousands).

	Fair Value Measurements at March 31, 2010
			Quoted Prices
			In Active
			Markets for		Significant
	Assets/Liabilities		Identical		Other		Significant
	Measured at		Assets/		Observable		Unobservable
	Fair Value		Liabilities		Inputs		Inputs
	March 31, 2010		(Level 1)		(Level 2)		(Level 3)
Recurring Basis:
Assets
Securities available for sale:
Government-sponsored enterprises	$	1,499	$	—	$	1,499	$	—
State, county, and municipal securities	43,953		—		43,953		—
Mortgage-backed securities	70,344		—		70,344		—
Liabilities
FHLB Advances	14,491		—		14,491		—
Nonrecurring Basis:
Assets
Impaired loans	$	47,600	$	—	$	47,600	$	—
Other real estate owned	11,657		—		11,657		—
Goodwill	362		—		—		362
Core deposit intangibles	2,836		—		—		2,836
	Fair Value Measurements at December 31, 2009
			Quoted Prices
			In Active
			Markets for		Significant
	Assets/Liabilities		Identical		Other		Significant
	Measured at		Assets/		Observable		Unobservable
	Fair Value		Liabilities		Inputs		Inputs
	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
Recurring Basis:
Assets
Securities available for sale:
Government-sponsored enterprises	$	3,000	$	—	$	3,000	$	—
State, county, and municipal securities	43,467		—		43,467		—
Mortgage-backed securities	58,384		—		58,384		—
Corporate securities	7,793		—		7,793		—
Liabilities
FHLB Advances	14,495		—		14,495		—
Nonrecurring Basis:
Assets
Impaired loans	$	47,535	$	—	$	47,535	$	—
Other real estate owned	10,837		—		10,837		—
Goodwill	362		—		—		362
Core deposit intangibles	2,967		—		—		2,967

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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.

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

	2010				2009
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(in thousands)				(in thousands)
Financial assets:
Cash and due from banks	$	5,050	$	5,050	$	6,461	$	6,461
Interest-bearing deposits with banks	46,625		46,625		20,609		20,609
Cetificates of deposit	150		150		150		150
Investment securities	119,666		119,747		116,553		116,639
Other investments	2,257		2,257		2,257		2,257
Loans—net	198,195		199,574		200,219		201,840
Cash surrender value of life insurance	10,544		10,544		10,465		10,465
Financial liabilities:
Deposits	352,234		374,261		326,012		316,301
Advances from Federal Home Loan Bank	14,491		14,491		14,495		14,495
	Notional		Estimated		Notional		Estimated
	amount		fair value		amount		fair value
Off-balance-sheet financial instruments:
Commitments to extend credit	$	22,936	—		$	24,111	—
Commercial letters of credit	2,481		—		3,106		—

4.  OTHER REAL ESTATE OWNED

Other real estate owned is reported at the lower of cost or fair value less estimated disposal costs, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. Any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is treated as a charge-off against the allowance for loan losses. Any subsequent declines in value are charged to earnings.  Transactions in other real estate owned are summarized below (in thousands):

	March 31,			December 31,
	2010			2009
Balance—beginning of year	$	10,837		$	3,874
Additions	929			8,263
Sales	(83		)	(1,042		)
Write downs	(26		)	(258		)
Balance—end of year	$	11,657		$	10,837

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5.  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):

	March 31, 2010				December 31, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Unamortized intangible asset:
Goodwill	$	362	$	—	$	362	$	—
Amortized intangible assets:
Core deposit intangibles	$	3,676	$	840	$	3,676	$	709

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

	Three months ended March 31, 2010		Three months ended March 31, 2009
Aggregate amortization expense of core deposit intangibles:	$	131	$	13
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2010	$	490
2011	$	472
2012	$	472
2013	$	472
2014 and thereafter	$	1,062

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6.  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 March 31,
	2010			2009
Net Income	$	625		$	284
Other comprehensive income (loss)	(118		)	431
Comprehensive income	$	507		$	715

7.  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 month period ended March 31, 2010 and 2009 (in thousands, except per share data):

	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
Three Months ended March 31, 2010
Basic earnings per share available to common stockholders	$	532	2,103	$	0.25
Nonvested restricted stock grant	—		10	—
Effect of dilutive securities: options to purchase common shares	—		—	—
Diluted earnings per share	$	532	2,113	$	0.25
Three Months ended March 31, 2009
Basic earnings per share available to common stockholders	$	257	2,101	$	0.12
Effect of dilutive securities: options to purchase common shares	—		—	—
Diluted earnings per share	$	257	2,101	$	0.12

8.  SUBSEQUENT EVENTS

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.

9.  RECLASSIFICATIONS

Certain 2009 amounts have been reclassified to conform to the 2010 presentation.

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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 March 31, 2010 and December 31, 2009, and the changes in the financial condition and results of operations for the three month period ended March 31, 2010 and 2009.

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 2010 or 2009.

Premiums and discounts on available for sale and held to maturity securities are amortized or

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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, 2009.  The Company has followed those policies in preparing this report.

FINANCIAL CONDITION

Total assets at March 31, 2010 increased by 7% or $26,225,000 to $413,764,000 compared to $387,539,000 at December 31, 2009.  This increase is primarily due to the Company’s continued success in the growth of its deposit base in the first quarter of 2010.  Total deposits grew by $26 million or 8% to $352 million.  At quarter end, the majority of these funds were temporarily invested in interest-bearing deposits with other banks.  The investment securities portfolio increased by $3 million, partially offsetting the decline in net loans receivable.  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 $2,024,000 or 1% to $198,195,000 at March 31, 2010 compared to December 31, 2009.  In the previous quarter ended December 31, 2009, loan receivables declined by $5,095,000.  While the decline in loan volume has slowed, the Company continues to find new loan demand to be relatively weak due to the continuing recessionary economic conditions.

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.

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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, increased FDIC assessments and credit reserve.  At March 31, 2010 and December 31, 2009, the Company’s investment securities portfolio represented approximately 29% and 31%, 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):

		March 31		December 31,
		2010		2009
Commercial, financial, and agricultural		$	14,232	$	14,282
Installment		8,664		9,240
Real estate - mortgage		166,454		161,229
Real estate - construction		12,993		19,132
Other		337		594
	Loans receivable	202,680		204,477
Less:	Net deferred loan fees	158		164
	Allowance for loan losses	4,327		4,094
	Loans receivable, net	$	198,195	$	200,219

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

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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 financial and credit markets continued to experience difficulty in the first three months of 2010.  Although the economic outlook appears to be stabilizing the local markets continue to be impacted by recessionary conditions which continue to influence the levels of our nonperforming assets.  For the first quarter of 2010, nonperforming assets was relatively flat compared to December 31, 2009, decreasing by a nominal $55,000 to $17,748,000. The Company charged-off $437,000 in nonperforming loans and wrote down foreclosed assets by $26,000 to their estimated fair value during the period.  While real estate acquired through foreclosure (OREO) increased by $820,000 to $11,657,000, it was offset by a decline of $$875,000 in nonaccrual loans.  Nonaccrual loans were $6,091,000 at March 31, 2010 compared to $6,966,000 at December 31, 2009.  At March 31, 2010, nonperforming assets represents 4.29% of total assets compared to 4.59% at December 31, 2009 which represents a 30 basis point improvement.  There were no loans greater than 90 days past due and still accruing interest at the end of the first quarter of 2010 or at December 31, 2009.

The table below presents a summary of the Company’s nonperforming assets at March 31, 2010 and December 31, 2009.

	March 31, 2010			December 31, 2009
	(in thousands, except financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans	$	6,091		$	6,966
Past-due loans of 90 days or more	—			—
Nonperforming loans	6,091			6,966
Real estate acquired through foreclosure	11,657			10,837
Total nonperforming assets	$	17,748		$	17,803
Ratios:
Nonperforming loans to loans, net of unearned income	3.01		%	3.41		%
Nonperforming assets to loans, net of unearned income, and real estate acquired through foreclosure	8.29		%	8.27		%
Nonperforming assets to total assets	4.29		%	4.59		%
Allowance for loan losses to nonperforming loans	71.04		%	58.77		%
Allowance for loan losses to nonperforming assets	24.38		%	23.00		%

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

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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 three months of 2010, based on the Company’s evaluation, a provision for loan losses of $630,000 was charged against operating earnings compared to $438,000 for the same period last year.  The increase in the provision for loan losses in 2010 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 March 31, 2010 was approximately $4,327,000, representing 2.14% of total loans, net of unearned income compared to approximately $4,930,000 for the same period last year, which represented 2.31% of total loans, net of unearned income.  Approximately $2,590,000 of the allowance for loan losses was allocated to loans management considered impaired at March 31, 2010.

At March 31, 2010, 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.

Also, a substantial portion of the Company’s loan portfolio is collateralized by real estate in metropolitan Atlanta and Birmingham markets. Accordingly, the ultimate collectibility of a substantial portion of the Company’s loan portfolio is susceptible to changes in market conditions in the metropolitan Atlanta and Birmingham areas.

·The Company’s loans to area churches were approximately $42.3 million and $45.5 million at March 31, 2010 and December 31, 2009, respectively, which are generally secured by real estate.

·The Company’s loans to area convenience stores were approximately $11.9 million at March 31, 2010 and December 31, 2009, respectively.  Loans to convenience stores are generally secured by real estate.

·The Company’s loans to area hotels were approximately $18.3 million and $18.4 million at March 31, 2010 and December 31, 2009, respectively, which are generally secured by real estate.

Also, 1—4 family residential mortgage loans secured by first liens were approximately $38 million at March 31, 2010 and December 31, 2009, respectively. The Company has no subprime mortgages in its loan portfolio.

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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 three month periods ended March 31, 2010 and 2009 (amount in thousands, except financial ratios):

	2010			2009
Loans, net of unearned income	$	202,522		$	213,556
Average loans, net of unearned income and the allowance for loan losses	$	199,072		$	209,365
Allowance for loan losses at the beginning of period	$	4,094		$	4,659
Loans charged-off:
Commercial, financial, and agricultural	50			—
Real estate - loans	309			46
Installment loans to individuals	78			149
Total loans charged-off	437			195
Recoveries of loans previously charged off:
Commercial, financial, and agricultural	1			2
Real estate - loans	10			4
Installment loans to individuals	29			22
Total loans recovered	40			28
Net loans charged-off	397			167
Additions to allowance for loan losses charged to operating expense	630			438
Allowance for loan losses at period end	$	4,327		$	4,930
Ratio of net loans charged-off to average loans, net of unearned income and the allowance for loan losses	0.20		%	0.08		%
Ratio of allowance for loan losses to loans, net of unearned income	2.14		%	2.31		%

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DEPOSITS

Deposits are the Company’s primary source of funding loan growth.  Total deposits at March 31, 2010 increased 8% or $26 million to $352,234,000.  This increase in deposits relates to the continued growth in our deposit base as customers seek banks with a strong capital position and who are financially sound.  The Company meets both of these criteria.   Noninterest-bearing deposits increased by 16% or $9 million and interest-bearing deposits increased by 6% or $17 million when compared to December 31, 2009.

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 regardless of dollar amount.  On April 13, 2010, the FDIC extended the TLGP through December 31, 2010 and the Company has elected to stay in the TLGP for the extended period.  In addition, the Company participates in the Certificate of Deposit Account Registry Services (CDARS”), a program that allows each of our customers access to multi-million-dollar FDIC insurance coverage on CD investments.  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.

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

	March 31,		December 31,
	2010		2009
NOW and money market accounts	$	89,798	$	84,432
Savings accounts	33,435		33,039
Time deposits of $100,000 or more	106,565		94,553
Other time deposits	54,766		55,587
	$	284,564	$	267,611

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 Bank had outstanding advances from the FHLB of $14,491,000 at March 31, 2010 and $14,495,000 at December 31, 2009. These advances are collateralized by FHLB stock, a blanket lien on 1-4 family and multifamily mortgage loans, certain commercial real estate loans and investment securities.  As of March 31, 2010 and December 31, 2009, total loans pledged as collateral was $47,494,000, respectively.

Maturity	Callable	Type	March 31, 2010				December 31, 2009
			(in thousands)
July 2010	Daily	Variable	0.36	%	$	14,150	0.36	%	$	14,150
August 2026		(1)	—		341		—		345
Total Principal Outstanding					$	14,491			$	14,495
Weighted Average Rate at Period End			0.35	%			0.35	%

(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.

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At March 31, 2010, the Company had a $77 million line of credit facility at the FHLB of which $34.5 million was outstanding consisting of an advance of $14.5 million and a letter of credit to secure public deposits in the amount of $20 million.  The Company also had $22.3 million of borrowing capacity at the Federal Reserve Bank discount window.

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.

For the three-month period ending March 31, 2010, net interest income increased by $152,000 or 4% to $3,803,000 compared to $3,651,000 reported for the same period last year.  Total interest income declined by $127,000 compared to the same three month period in 2009 due to a $175,000 decrease in interest income on loans.  The Company continues to experience lower loan volume as well as lower loan yields and higher nonaccruing loans during the period due to the recessionary conditions.  The decrease in interest on loans was partially offset by a $48,000 increase in investment income.    Total interest expense for the period decreased by $279,000 or 28% compared to the same three month period in 2009.  Interest expense on interest-bearing deposits decreased by $253,000 or 27%, as the Company increased its mix of noninterest-bearing deposits and lowered its funding cost of interest-bearing deposits.  Also, interest expense on other borrowings decreased by $26,000 or 65% due to lower balances outstanding and lower interest rates paid on the Company’s advances from the FHLB.  At March 31, 2010, the Company had a net interest margin of 4.12% compared to 4.65% for the same period last year.

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 three months of 2010, the Company recognized a provision for loan losses of $630,000, a $192,000 or 44% increase, compared to $438,000 for the same period in 2009.  This increase was primarily driven by charge-offs, foreclosures and collateral value impairment.  The allowance for loan losses was $4,327,000 at March 31, 2010 compared to $4,930,000 at December 31, 2009.  At March 31, 2010, the allowance for loan losses was 71% of nonperforming loans compared to 59% at December 31, 2009.  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 March 31, 2010, 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.

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Noninterest income totaled $1,756,000 for the three month period ended March 31, 2010, an increase of $451,000 or 35% compared to the same period ended March 31, 2009.  This increase is primarily attributed to a $333,000 gain on the sale of securities which was $310,000 higher than the same period last year.  The Company reduced some of the market risk in its investment portfolio and improved its capital position by selling its corporate bond portfolio and swapped several mortgage-backed securities to position itself for rising interest rates as part of its asset/liability strategy.  For the same period last year, gain realized on the sale of securities totaled $23,000.

Also significant, other operating income increased by $186,000 or 57% to $513,000 compared to the same three month period last year.  This increase is attributed to a $259,000 award the Company received for its participation in the U.S. Department of Treasury Bank Enterprise Award (BEA) which provides financial incentives for lending and investment activities within economically distressed communities.  The Company did not receive the BEA for the same period last year.

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.

Non-interest expense in the first quarter of 2010 was relatively flat compared to the same quarter last year, increasing by a nominal $23,000.  For the three month period ended March 31, 2010, salaries and employee benefits increased by $126,000.  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, related to the branch purchase, amortization of core deposits intangible increased by $118,000 compared to the same period last year.  FDIC insurance increased by $71,000 compared to the same period last year due to increased insurance rates and the expiration of a one-time assessment credit that expired during the first quarter of 2009.  Expenses on other real estate owned increased by $94,000 due to real estate taxes, repair cost and upkeep of the various real estate properties and writedowns.

Partially offsetting these higher operating costs was a decline in the Company’s other operating expenses of $415,000.  This decease is partially due to savings initiative implemented by the Company and several one time expenses incurred in the first quarter of 2009 related to legal and advisory services for the Company’s participation in TARP and the acquisition of the Lithonia, Georgia branch.  The Company also incurred additional marketing, data processing and training cost related to the acquisition.  For the same period in 2009 other operating expenses also included a judgment in the amount of $64,000 which was levied against the Company for lender liability in the first quarter of 2009.

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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 March 31, 2010.  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 March 31, 2010.

	Cumulative amounts as of March 31, 2010 Maturing and repricing within
	3			3 to 12			1 to 5			Over
	Months			Months			Years			5 Years			Total
	(amounts in thousands, except ratios)
Interest-sensitive assets:
Interest-bearing deposits with other banks	$	46,625		$	—		$	—		$	—		$	46,625
Certificates of deposit	—			150			—			—			150
Investments	—			1,124			3,366			115,176			119,666
Loans	54,950			24,578			86,089			36,905			202,522
Total interest-sensitive assets	$	101,575		$	25,852		$	89,455		$	152,081		$	368,963
Interest-sensitive liabilities:
Deposits (a)	$	168,630		$	102,358		$	13,576		$	—		$	284,564
Other borrowings	14,150			—			—			341			14,491
Total interest-sensitive liabilities	$	182,780		$	102,358		$	13,576		$	341		$	299,055
Interest-sensitivity gap	$	(81,205	)	$	(76,506	)	$	75,879		$	151,740		$	69,908
Cumulative interest-sensitivity gap to total interest-sensitive assets	(22.01		)%	(42.74		)%	(22.18		)%	18.95		%	18.95		%

(a) Savings, Now, and money market deposits totaling $123,233 are included in the maturing in 3 months classification.

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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 $430,000 for the three month period ended March 31, 2010.  This increase is primarily due to a $532,000 increase in retained earnings, representing an increase in net income of $625,000, partially offset by a $93,000 preferred dividend accrued to the Treasury under the CPP.  Partially offsetting the increase to retained earnings, the Company’s accumulated other comprehensive income, net of taxes decreased by $118,000 to $654,000.  This decrease 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.

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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 17%, 16% and 10% at March 31, 2010 compared to 16%, 15% and 10% at December 31, 2009, respectively.  At March 31, 2010, 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 March 31, 2010 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 March 31, 2010, 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.

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PART II.	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS
	The Company and the Bank are involved in various claims and legal actions arising in the ordinary course of business.  In the opinion of management, based in part on the advice of counsel, the ultimate disposition of these matters will not have a material adverse impact on the Company’s consolidated financial position.
ITEM 1A.	RISK FACTORS
	We believe there have been no material changes from the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.  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.

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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:  May 14, 2010	By:	/s/ James E. Young
	James E. Young
	President and Chief Executive Officer
Date:  May 14, 2010	By:	/s/ Cynthia N. Day
	Cynthia N. Day
	Senior Executive Vice President and
	Chief Operating Officer
Date:  May 14, 2010	By:	/s/ Samuel J. Cox
	Samuel J. Cox
	Executive Vice President and
	Chief Financial Officer

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