Citizens Bancshares 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

oTRANSITION 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: 2,015,085 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value were outstanding on November 12, 2010.

PART 1.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

(In thousands, except share data)

	2010			2009
	(Unaudited)
ASSETS
Cash and due from banks	$	5,800		$	6,461
Interest-bearing deposits with banks	26,338			20,609
Certificates of deposit	150			150
Investment securities available for sale, at fair value	123,432			112,644
Investment securities held to maturity, at cost	3,314			3,909
Other investments	2,123			2,257
Loans receivable, net	193,923			200,219
Premises and equipment, net	7,647			7,825
Cash surrender value of life insurance	10,767			10,465
Foreclosed real estate	10,128			10,837
Other assets	12,911			12,163
Total assets	$	396,533		$	387,539
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	60,294		$	58,401
Interest-bearing deposits	282,542			267,611
Total deposits	342,836			326,012
Accrued expenses and other liabilities	5,571			4,794
Advances from Federal Home Loan Bank	332			14,495
Total liabilities	348,739			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
Preferred stock - No par value; 10,000,000 shares authorized; Series B, 7,462 shares issued and outstanding	7,462			—
Preferred stock - No par value; 10,000,000 shares authorized; Series C, 4,379 shares issued and outstanding	4,379			—
Common stock - $1 par value; 20,000,000 shares authorized; 2,232,616 shares issued and outstanding	2,233			2,230
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding	90			90
Nonvested restricted common stock	(107		)	(52		)
Additional paid-in capital	7,799			7,707
Retained earnings	25,494			25,834
Treasury stock at cost, 217,531 shares at September 30, 2010 and December 31, 2009	(1,805		)	(1,805		)
Accumulated other comprehensive income, net of income taxes	2,249			772
Total stockholders’ equity	47,794			42,238
	$	396,533		$	387,539

See notes to consolidated financial statements.

1

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited  — In thousands, except per share data)

	Three MonthsEnded September 30,					Nine MonthsEnded September 30,
	2010			2009		2010			2009
Interest income:
Loans, including fees	$	3,490		$	3,623	$	10,001		$	10,655
Investment securities:
Taxable	616			874		1,942			2,622
Tax-exempt	451			375		1,361			945
Interest-bearing deposits	25			13		67			44
Total interest income	4,582			4,885		13,371			14,266
Interest expense:
Deposits	601			894		1,956			2,937
Other borrowings	—			24		16			93
Total interest expense	601			918		1,972			3,030
Net interest income	3,981			3,967		11,399			11,236
Provision for loan losses	450			771		1,940			2,147
Net interest income after provision for loan losses	3,531			3,196		9,459			9,089
Noninterest income:
Service charges on deposits	974			1,108		2,820			3,078
Gain on sales of securities	211			291		546			454
Gain (loss) on sales of assets	(9		)	—		(5		)	2
Other operating income	294			281		1,083			942
Total noninterest income	1,470			1,680		4,444			4,476
Noninterest expense:
Salaries and employee benefits	1,928			1,862		5,877			5,543
Net occupancy and equipment	680			646		1,952			1,830
Amortization of core deposit intangible	118			131		372			276
FDIC insurance	200			178		590			476
Other real estate owned	163			230		2,010			447
Other operating expenses	1,289			1,393		3,735			4,523
Total noninterest expense	4,378			4,440		14,536			13,095
Income (loss) before income taxes	623			436		(633		)	470
Income tax expense (benefit)	38			14		(739		)	(171		)
Net income	$	585		$	422	$	106		$	641
Preferred dividends accrued	67			95		254			217
Net income (loss) available to common shareholders	$	518		$	327	$	(148	)	$	424
Net income (loss) per common share - basic	$	0.25		$	0.16	$	(0.07	)	$	0.20
Net income (loss) per common share - diluted	$	0.24		$	0.16	$	(0.07	)	$	0.20
Weighted average common outstanding shares - basic	2,105			2,103		2,103			2,102
Weighted average common outstanding shares - diluted	2,126			2,103		2,103			2,102
Dividends per common share	$	—		$	—	$	0.08		$	0.19

See notes to consolidated financial statements.

2

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Unaudited  — In thousands, except parenthetical footnotes)

																							Accumulated
							Nonvoting			Nonvested			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	—	—		—	—		—	—		—			—		641			—		—			—			641
Unrealized holding gains on investment securities available for sale—net of taxes of $1,133,411	—	—		—	—		—	—		—			—		—			—		—			2,200			2,200
Less reclassification adjustment for holding gains included in net income—net of taxes of $154,095	—	—		—	—		—	—		—			—		—			—		—			(300		)	(300		)
Comprehensive income																										2,541
Issuance of preferred stock	7	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	$	7,462	2,230	$	2,230	90	$	90	$	—		$	7,645	$	25,542		(218	)	$	(1,805	)	$	1,975		$	43,139
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	—	—		—	—		—	—		—			—		106			—		—			—			106
Unrealized holding gains on investment securities available for sale—net of taxes of $946,932	—	—		—	—		—	—		—			—		—			—		—			1,837			1,837
Less reclassification adjustment for holding gains included in net income—net of taxes of $185,552	—	—		—	—		—	—		—			—		—			—		—			(360		)	(360		)
Comprehensive income																										1,583
Issuance of preferred stock, net	4	4,379		—	—		—	—		—			—		—			—		—			—			4,379
Issuance of common stock	—	—		3	3		—	—		—			—		—			—		—			—			3
Stock based compensation expense	—	—		—	—		—	—		—			27		—			—		—			—			27
Nonvested restricted stock	—	—		—	—		—	—		(55		)	65		—			—		—			—			10
Dividends declared - preferred	—	—		—	—		—	—		—			—		(279		)	—		—			—			(279		)
Dividends declared - common	—	—		—	—		—	—		—			—		(167		)	—		—			—			(167		)
Balance—September 30, 2010	11	$	11,841	2,233	$	2,233	90	$	90	$	(107	)	$	7,799	$	25,494		(218	)	$	(1,805	)	$	2,249		$	47,794

See notes to consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands)

	2010			2009
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	106		$	641
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses	1,940			2,147
Depreciation	556			597
Amortization and accretion, net	751			504
Provision for deferred income benefit	(839		)	(2,456		)
Gains on sale of assets and investments, net	(541		)	(456		)
Stock based compensation expense	27			34
Restricted stock based compensation plan	13			—
Change in other assets	423			(3,766		)
Change in accrued expenses and other liabilities	777			1,407
Net cash provided by (used in) operating activities	3,213			(1,348		)
INVESTING ACTIVITIES:
Net cash and cash equivalents acquired from branch purchase	—			45,431
Net change in certificates of deposit	—			195
Proceeds from calls and maturities of investment securities held to maturity	928			201
Proceeds from sales and maturities of investment securities available for sale	39,532			36,744
Purchases of investment securities available for sale	(48,159		)	(50,207		)
Net change in other investments	—			30
Net change in loans receivable	1,382			(2,494		)
Proceeds from the sale of other real estate owned	1,956			245
Purchases of premises and equipment, net	(378		)	(1,038		)
Net cash provided by (used in) investing activities	(4,739		)	29,107
FINANCING ACTIVITIES:
Net change in deposits	16,824			(14,605		)
Principal payments on debt	—			(240		)
Net change in advances from Federal Home Loan Bank	(14,163		)	(8,213		)
Proceeds from issuance of preferred stock	4,379			7,462
Sale of treasury stock activity	—			8
Dividends paid - preferred	(279		)	(165		)
Dividends paid - common	(167		)	(399		)
Net cash provided by (used in) financing activities	6,594			(16,152		)
Net change in cash and cash equivalents	5,068			11,607
Cash and cash equivalents, beginning of period	27,070			16,146
Cash and cash equivalents at end of period	$	32,138		$	27,753
Supplemental disclosures of cash paid during the period for:
Interest	$	2,025		$	3,711
Income taxes	$	60		$	713
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure	$	3,019		5,274
Change in unrealized gain on investment securities available for sale, net of taxes	$	1,478		$	1,901
Exchange of Preferred Stock, Series A for Preferred Stock Series B with the U. S. Treasury	$	7,462		$	—

See notes to consolidated financial statements.

4

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 and nine month periods ended September 30, 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 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, 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 August 13, 2010, as part of the U.S. Department of the Treasury (the “Treasury”) Troubled Asset Relief Program (“TARP”) Community Development Capital Initiative, the Company entered into a Letter Agreement, and an Exchange Agreement—Standard Terms (“Exchange Agreement”), with the Treasury, pursuant to which the Company agreed to exchange 7,462 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Shares”), issued on March 6, 2009, pursuant to the Company’s participation in the TARP Capital Purchase Program, for 7,462 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Shares”), both of which have a liquidation preference of $1,000 (the “Exchange Transaction”).  No new monetary consideration was exchanged in connection with the Exchange Transaction.  The Exchange Transaction closed on August 13, 2010 (the “Closing Date”).

5

On September 17, 2010, the Company issued 4,379 shares of its Series C Preferred Shares to the Treasury as part of its TARP Community Development Capital Initiative for a total of 11,841 shares of Series B and C Preferred Shares issues to Treasury.  The issuance of the Series B and Series C Preferred Shares was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

The Series B and Series C Preferred Shares qualify as Tier 1 capital and will pay cumulative dividends at a rate of 2% per annum for the first eight years after the Closing Date and 9% per annum thereafter.  The Company may, subject to consultation with the Federal Reserve Bank of Atlanta, redeem the Series B and Series C Preferred Shares at any time for its aggregate liquidation amount plus any accrued and unpaid dividends.

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 July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis.  The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future.  Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks.  Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments.  Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112.  The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests”.  The updates were effective upon issuance but had no impact on the Company’s financial statements.

6

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, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government-sponsored enterprises securities	$	2,000	$	1	$	—	$	2,001
State, county, and municipal securities	47,183		2,010		56		49,137
Mortgage-backed securities	66,590		1,778		324		68,044
Corporate securities	4,251		—		1		4,250
Totals	$	120,024	$	3,789	$	381	$	123,432

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 September 30, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	3,295	$	139	$	—	$	3,434
Mortgage-backed securities	19		1		—		20
Totals	$	3,314	$	140	$	—	$	3,454

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

7

The amortized costs and fair values of investment securities at September 30, 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	$	855	$	857	$	—	$	—
Due after one year through five years	5,040		5,134		911		939
Due after five years through ten years	24,157		24,894		2,403		2,515
Due after ten years	89,972		92,547		—		—
	$	120,024	$	123,432	$	3,314	$	3,454

Securities with carrying values of $72,110,000 and $86,127,000 at September 30, 2010 and December 31, 2009 were pledged to secure public deposits, FHLB advances and a $22 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 $546,000 and $464,000 at September 30, 2010 and 2009, respectively.  Gross realized losses on securities were $10,000 at September 30, 2009.  There were no gross realized losses on securities at September 30, 2010.

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations, general obligation and revenue municipals and corporate 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 September 30, 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).

8

At September 30, 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	$	7,405	$	(103	)	$	3,405	$	(221	)	$	10,810	$	(324	)
Municipal securities	4,429		(44		)	444		(12		)	4,873		(56		)
Corporate	4,250		(1		)	—		—			4,250		(1		)
Total	$	16,084	$	(148	)	$	3,849	$	(233	)	$	19,933	$	(381	)

Securities Held to Maturity

There were no securities classified as held to maturity in an unrealized loss position greater than 12 months at September 30, 2010.

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 September 30, 2010 the Company had 7 available for sale securities that were in an unrealized loss position for longer than 12 months.  At December 31, 2009, 8 available for sale and held to maturity securities were in an unrealized loss position for longer than 12 months.  The investment securities in an unrealized loss position for more than 12 months at September 30, 2010 and December 31, 2009 consisted of 4 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.

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

Other Real Estate Owned—Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company recorded the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines

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the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

Loans—The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represents loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At September 30, 2010 and December 31, 2009, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Goodwill and Other Intangible Assets—Goodwill and other intangible assets are measured for impairment on an annual basis or more frequently if there is a change in circumstances. If the goodwill or other intangibles exceed the fair value, an impairment charge is recorded in an amount equal to the excess. Impairment is tested utilizing accepted valuation techniques utilizing discounted cash flows of the business unit, and implied fair value based on a multiple of earnings and tangible book value for merger transactions. The measurement of these fair values is considered a Level 3 measurement.

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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 September 30, 2010
			Quoted Prices
			In Active
			Markets for		Significant
			Identical		Other		Significant
	Assets/Liabilities		Assets/		Observable		Unobservable
	Measured at		Liabilities		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Recurring Basis:
Assets
Securities available for sale:
Government-sponsored enterprises	$	2,001	$	—	$	2,001	$	—
State, county, and municipal securities	49,137		—		49,137		—
Mortgage-backed securities	68,044		—		68,044		—
Corporate securities	4,250		—		4,250		—
Nonrecurring Basis:
Assets
Impaired loans	$	27,056	$	—	$	27,056	$	—
Other real estate owned	10,128		—		10,128		—
Goodwill	362		—		—		362
Core deposit intangibles	2,595		—		—		2,595

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

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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.

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 September 30, 2010 and December 31, 2009 are as follows:

	2010				2009
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(in thousands)				(in thousands)
Financial assets:
Cash and due from banks	$	5,800	$	5,800	$	6,461	$	6,461
Interest-bearing deposits with banks	26,338		26,338		20,609		20,609
Cetificates of deposit	150		150		150		150
Investment securities	126,746		126,886		116,553		116,639
Other investments	2,123		2,123		2,257		2,257
Loans—net	193,923		194,671		200,219		201,840
Cash surrender value of life insurance	10,767		10,767		10,465		10,465
Financial liabilities:
Deposits	342,836		337,745		326,012		316,301
Advances from Federal Home Loan Bank	332		332		14,495		14,495
	Notional amount		Estimated fair value		Notional amount		Estimated fair value
Off-balance-sheet financial instruments:
Commitments to extend credit	$	24,048	—		$	24,111	—
Commercial letters of credit	2,484		—		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):

	September 30,			December 31,
	2010			2009
Balance—beginning of period	$	10,837		$	3,874
Additions	3,019			8,263
Sales	(1,956		)	(1,042		)
Write downs	(1,772		)	(258		)
Balance—end of period	$	10,128		$	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):

	September 30, 2010				December 31, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Unamortized intangible asset: Goodwill	$	362	$	—	$	362	$	—
Amortized intangible assets: Core deposit intangibles	$	3,676	$	1,081	$	3,676	$	709

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

	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Aggregate amortization expense of core deposit intangibles:	$	118	$	131	$	372	$	276
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  September 30,				Nine Months Ended  September 30,
	2010		2009		2010		2009
Net Income	$	585	$	422	$	106	$	641
Other comprehensive income	743		1,563		1,477		1,901
Comprehensive income	$	1,328	$	1,985	$	1,583	$	2,542

7.  NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE

Basic and diluted net income (loss) 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 (loss) per share available to common and potential common stockholders for the three and nine month periods ended September 30, 2010 and 2009 (in thousands, except per share data):

	Net Income			Shares	Per Share
	(Numerator)			(Denominator)	Amount
Three Months ended September 30, 2010
Basic earnings per share available to common stockholders	$	518		2,105	$	0.25
Nonvested restricted stock grant	—			21	(0.01		)
Effect of dilutive securities: options to purchase common shares	—			—	—
Diluted earnings per share	$	518		2,126	$	0.24
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
Nine Months ended September 30, 2010
Basic loss per share available to common stockholders	$	(148	)	2,103	$	(0.07	)
Nonvested restricted stock grant	—			—	—
Effect of dilutive securities: options to purchase common shares	—			—	—
Diluted loss per share	$	(148	)	2,103	$	(0.07	)
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

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8.  SUBSEQUENT EVENTS

The Company evaluated subsequent events through the date its financial statements were issued.

9.  RECLASSIFICATIONS

Certain 2009 amounts have been reclassified to conform to the 2010 presentation. The reclassifications did not impact net income or stockholder’s equity.

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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 September 30, 2010 and December 31, 2009, and the changes in the financial condition and results of operations for the three and nine month periods ended September 30, 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.

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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.  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.

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.

Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for the portion of a deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s

19

financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.

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 September 30, 2010 increased by 2% or $8,994,000 to $396,533,000 compared to $387,539,000 at December 31, 2009.  This increase is primarily due to the Company’s success in the growth of its deposit base.  Total deposits grew by $16,824,000 or 5% to $343 million for the first nine months of the year.

To manage the Company’s net interest margin and liquidity, the majority of our deposit growth was used to pay off $14 million in FHLB advances.  Also, loan balances continued to contract from pay offs and paydowns generating additional liquidity that must be reinvested.  As a result, the Company’s investment securities portfolio increased by $10 million and interest-bearing deposits with other banks increased by $6 million for the first nine months of the year.  These increases were partially offsetting a $6 million 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, net, the Company’s largest earning asset, decreased by $6,296,000 or 3% to $193,923,000 at September 30, 2010 compared to December 31, 2009.  While the decline in loan volume has slowed, the Company continues to find 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.

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 the decrease in loan activity and increased FDIC assessments and credit reserve.  At September 30, 2010 and December 31, 2009, the investment securities portfolio represented approximately 33% and 31% of the Company’s 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.

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LOANS

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

		September 30		December 31,
		2010		2009
Commercial, financial, and agricultural		$	17,525	$	14,282
Installment		8,863		9,240
Real estate - mortgage		154,855		161,229
Real estate - construction		17,383		19,132
Other		323		594
	Loans receivable	198,949		204,477
Less:	Net deferred loan fees	191		164
	Allowance for loan losses	4,835		4,094
	Loans receivable, net	$	193,923	$	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 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 during the first nine months of 2010.  Although there appears to be some positive signs of recovery and the economic outlook appears to be stabilizing, our local markets continue to be impacted by recessionary conditions which continue to influence the levels of our nonperforming assets.  For the year, nonperforming assets increased by $1,212,000 to $19,015,000. During the first nine months of 2010, the Company charged-off $1,315,000 in nonperforming loans, an improvement over the $2,399,000 charged-off for the same period last year. OREO decreased by a nominal $709,000 to $10,128,000 due to the sales of foreclosed properties totaling $1,956,000 and write-downs of $1,772,000, partially offset by additions to OREO of $3,019,000.  The $1,921,000 increase in nonaccrual loans to $8,887,000 was driven by two commercial real estate properties that were placed on nonaccrual status during the second quarter of 2010.  At September 30, 2010, nonperforming assets represent 4.80% of total assets compared to 4.59% at December 31, 2009.  There were no loans greater than 90 days past due and still accruing interest at the end of the third quarter of 2010 or at December 31, 2009.  In addition, there were 22 and 33 loans restructured or otherwise impaired totaling $9,329,000 and $15,380,000 at

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September 30, 2010 and December 31, 2009, respectively.  At September 30, 2010, eight restructured loans totaling $869,000 and two restructured loans totaling $863,000 at December 31, 2009 are included in nonaccrual loans in the table below.

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

	September 30,			December 31,
	2010			2009
	(in thousands, except
	financial ratios)
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans	$	8,887		$	6,966
Past-due loans of 90 days or more and still accruing	—			—
Nonperforming loans	8,887			6,966
Real estate acquired through foreclosure	10,128			10,837
Total nonperforming assets	$	19,015		$	17,803
Ratios:
Nonperforming loans to loans, net of unearned income	4.47		%	3.41		%
Nonperforming assets to loans, net of unearned income, and real estate acquired through foreclosure	9.10		%	8.27		%
Nonperforming assets to total assets	4.80		%	4.59		%
Allowance for loan losses to nonperforming loans	54.41		%	58.77		%
Allowance for loan losses to nonperforming assets	25.43		%	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 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 2010, a provision for loan losses of $1,940,000 was charged against operating earnings compared to $2,147,000 for the same period last year. The decrease in the provision for loan losses in

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2010 relates to provisioning improvement experienced in the third quarter of 2010.  For the third quarter of 2010, based on the Company’s evaluation, the provision for loan losses charged against operating earnings decreased $321,000 to $450,000 compared to $771,000 for the same three month period last year.

The allowance for loan losses at September 30, 2010 was approximately $4,835,000, representing 2.43% of total loans, net of unearned income compared to approximately $4,638,000 for the same period last year, which represented 2.21% of total loans, net of unearned income.  Approximately $3,348,000 of the allowance for loan losses was allocated to loans management considered impaired at September 30, 2010.

At September 30, 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 $44 million and $46 million at September 30, 2010 and December 31, 2009, respectively, which are generally secured by real estate.

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

·The Company’s loans to area hotels were approximately $20 Million and $18 million at September 30, 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 $36 million at September 30, 2010 and December 31, 2009. 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 nine month periods ended September 30, 2010 and 2009 (amount in thousands, except financial ratios):

	2010			2009
Loans, net of unearned income	$	198,758		$	209,952
Average loans, net of unearned income and the allowance for loan losses	$	196,143		$	207,489
Allowance for loan losses at the beginning of period	$	4,094		$	4,659
Loans charged-off:
Commercial, financial, and agricultural	100			68
Real estate - loans	932			1,798
Installment loans to individuals	283			533
Total loans charged-off	1,315			2,399
Recoveries of loans previously charged off:
Commercial, financial, and agricultural	4			6
Real estate - loans	23			153
Installment loans to individuals	89			72
Total loans recovered	116			231
Net loans charged-off	1,199			2,168
Additions to allowance for loan losses charged to operating expense	1,940			2,147
Allowance for loan losses at period end	$	4,835		$	4,638
Ratio of net loans charged-off to average loans, net of unearned income and the allowance for loan losses	0.61		%	1.04		%
Ratio of allowance for loan losses to loans, net of unearned income	2.43			2.21		%

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DEPOSITS

Deposits are the Company’s primary source of funding loan growth.  Total deposits at September 30, 2010 increased 5% or $17 million to $342,836,000 compared to December 31, 2009.  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 3% or $2 million due to seasonal fluctuations and interest-bearing deposits increased by 6% or $15 million 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):

	September		December 31,
	2010		2009
NOW and money market accounts	$	95,869	$	84,432
Savings accounts	32,495		33,039
Time deposits of $100,000 or more	102,083		94,553
Other time deposits	52,095		55,587
	$	282,542	$	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 $332,000 at September 30, 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 September 30, 2010 and December 31, 2009, total loans pledged as collateral was $43,477,000 and $47,494,000, respectively.

Maturity	Callable	Type	September 30, 2010				December 31, 2009
			(in thousands)
July 2011	Daily	Variable	—	%	$	—	0.36	%	$	14,150
August 2026		(1)	—		332		—		345
Total Principal Outstanding					$	332			$	14,495
Weighted Average Rate at Period End			—	%			0.35	%

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

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At September 30, 2010, the Company had a $79 million line of credit facility at the FHLB of which $20.3 million was committed consisting of an advance of $332,000 and a letter of credit to secure public deposits in the amount of $20 million.  The Company also had $22 million of borrowing capacity at the Federal Reserve Bank discount window.

RESULTS OF OPERATIONS

In summary, the Company’s earnings for the first nine months of 2010 were negatively impacted by a significant decline in the appraised value of two OREO properties resulting in a $1.7 million write-down of their invested value in the second quarter of 2010.  The Company was very conservative in its write downs of the two properties and hopefully will recover some of the value when the properties are sold.  For the three and nine month periods ending September 30, 2010, the Company had net income of $585,000 and $106,000, respectively, compared to a net income of $422,000 and $641,000 for the same periods last year before preferred dividends.

We have positioned ourselves to not only withstand the current economic cycle but prospectively benefit from opportunities created during this economic cycle. Our core operations remain strong as the Company’s emphasis on core funding and a diversified revenue stream has created an enviable funding mix and complementary fee income sources, which support the Company’s resumption of sustained, longer-term profitability.  Without further declines in market valuations which are beyond our control, we are optimistic for maintaining positive earnings for the year with a strong capital position and solid core 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.

Net interest income was essentially flat for the third quarter of 2010, increasing by a nominal $14,000 to $3,981,000 compared to $3,967,000 reported for the same period last year.  Total interest income declined by $303,000 for the three month period ended September 30, 2010 compared to the same period in 2009.  Interest income on loans decreased by $133,000 primarily due to weak loan demand and lower loan yields. Similarly, Interest income on investment securities declined by $182,000 compared to the third quarter of 2009.  While the Company experienced growth in its investment portfolio, this increase has been in lower yielding investment securities.  Total interest expense for the period decreased by $317,000 or 35% compared to the same three month period in 2009.  Interest expense on interest-bearing deposits decreased by $293,000 or 33% as the Company lowered its funding cost of interest-bearing deposits and improved its deposit mix.  Also, interest expense on other borrowings decreased by $24,000 or 100% as the Company had no outstanding interest bearing advances from the FHLB during the third quarter of 2010.

On a year-to-date basis, net interest income increased by $163,000 or 1% to $11,399,000 compared to $11,236,000 for the same period in 2009.  Total interest income for this period decreased by $895,000 or 6% compared to the same nine month period in 2009 and the decrease was primarily due to a $654,000 or 6% decline in interest income on loans.  Similarly, Interest income on investment securities declined by $264,000 or 7% compared to the same nine month period in 2009.  The same factors in the quarterly year-over-year comparison also contributed to the nine month decrease in total interest income.  Total interest expense for the nine month period decreased by $1,058,000 or 35%

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compared to the same nine month period in 2009.  Interest expense on interest-bearing deposits decreased by $981,000 or 33% due to lower rates paid on deposit products and an improved deposit mix.  At September 30, 2010, the Company had a net interest margin of 4.29% compared to 4.45% 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

In the third quarter, the Company’s provision for loan losses decreased by $410,000 to $450,000 compared to the second quarter of 2010.  The increase in the second quarter of 2010 provision for loan losses was driven by two commercial real estate properties that were placed on nonaccrual status during the period.  Compared to the same three month period last year, the third quarter of 2010 provision for loan losses represents a decrease of $321,000.  For the first nine months of 2010, the Company recognized a provision for loan losses of $1,940,000, a $207,000 or 10% decline, compared to $2,147,000 for the same period in 2009.  The allowance for loan losses was $4,835,000 at September 30, 2010 compared to $4,638,000 at December 31, 2009.  At September 30, 2010, the allowance for loan losses was 54% 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 September 30, 2010, the Company considered its allowance for loan losses to be adequate.  Please also see discussion of Allowance For Loan Losses.

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 $1,470,000 for the three month period ended September 30, 2010, a decrease of $210,000 or 13% compared with the same period last year.  This is an improvement over the second quarter 2010 results of a $272,000 or 18% decrease compared with the same period last year.  The decline in the third quarter of 2010 is primarily attributed to services charges on deposits decreasing by $134,000 to $974,000 compared to $1,108,000 for the same period last year.  Also, the Company realized gains on the sale of securities totaling $211,000 versus $291,000 for the same three month period last year, representing a year- over-year decline of $80,000.

Year-to-date, noninterest income was essentially flat, decreasing by a nominal $32,000 to $4,444,000 compared to $4,476,000 reported for the same period last year.  Service charges on deposits for the nine month period decreased by $258,000, or 8%, to $2,820,000 compared to $3,078,000 last year.  Partially offsetting the decrease in service charges on deposits was a $92,000 increase in gains on the sale of securities and a $141,000 increase in other operating income compared to last year.  The increase in other operating income 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.

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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 decreased by $62,000 for the third quarter of 2010 compared to the same period last year.  The Company’s other operating expenses declined by $104,000 partially due to the savings initiative implemented by the Company.  OREO write downs and related expenses also decreased during the three month period, declining by $67,000 compared to the same period last year.  Offsetting these declines were a $66,000 increase in salaries and employee benefits cost due to higher medical costs and a $34,000 increase in net occupancy and equipment cost due to higher real estate taxes, maintenance and insurance costs.

For the nine month period ended September 30, 2010, noninterest expense increased by $1,441,000 or 11% as compared to the same period last year. Total OREO expenses increased by $1,563,000 or 350% due to the significant declines and subsequent write down of the appraised value of two OREO properties in the second quarter of 2010.  Salaries and employee benefits also increased by $334,000 for the year primarily due to higher medical costs and the addition of employees obtained from the Company’s acquisition of a Lithonia, Georgia branch.  Partially offsetting these increases was a decline in other operating expenses of $788,000 or 17% to $3,735,000 on a year-to-date basis. This decrease is partially due to the savings initiative implemented by the Company and several onetime expenses incurred during the first quarter of 2009 related to the legal and advisory services required for the Company’s participation in TARP and the acquisition of its Lithonia, Georgia branch.

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, 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.

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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, 2010.

	Cumulative amounts as of September 30, 2010
	Maturing and repricing within
	3			3 to 12			1 to 5			Over
	Months			Months			Years			5 Years			Total
	(amounts in thousands, except ratios)
Interest-sensitive assets:
Interest-bearing deposits with other banks	$	26,338		$	—		$	—		$	—		$	26,338
Certificates of deposit	—			150			—			—			150
Investments	355			502			6,045			119,844			126,746
Loans	43,434			27,940			91,198			36,377			198,949
Total interest-sensitive assets	$	70,127		$	28,592		$	97,243		$	156,221		$	352,183
Interest-sensitive liabilities:
Deposits (a)	$	186,676		$	79,126		$	16,740		$	—		$	282,542
Other borrowings	—			—			—			332			332
Total interest-sensitive liabilities	$	186,676		$	79,126		$	16,740		$	332		$	282,874
Interest-sensitivity gap	$	(116,549	)	$	(50,534	)	$	80,503		$	155,889		$	69,309
Cumulative interest-sensitivity gap to total interest-sensitive assets	(33.09		)%	(47.44		)%	(24.58		)%	19.68		%	19.68		%

(a) Savings, Now, and money market deposits totaling $128,364 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 Program for an investment of $7,462,000.  During the third quarter of 2010, the Company exchanged the outstanding 7,462 shares of Series A Preferred Stock for 7,462 shares of Series B Preferred Stock.  The Company also issued 4,379 shares of Series C Preferred Stock to the Treasury for an investment of $4,379,000.  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.

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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 $5,556,000 for the nine month period ended September 30, 2010. This increase is primarily due to an additional $4,379,000 investment by the Treasury on September 17, 2010 under the TARP Program. In exchange for this investment, the Company issued 4,379 shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series C, with a $1,000 per share liquidation value. Also, accumulated other comprehensive income, net of taxes positively impacted the Company’s capital, increasing by $1,477,000 to $2,249,000. 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 decreased by $340,000 due to a $279,000 preferred dividend paid to the Treasury and a $167,000 dividend paid to common stockholders, offset by net income of $106,000.

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 19%, 17% and 11% at September 30, 2010 compared to 16%, 15% and 10% at December 31, 2009, respectively.  At September 30, 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 4.  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, 2010 in accumulating and communicating information to management, including the Chief Executive Officer, the Chief Operating

30

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, 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.

PART II.  OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

The Company and the Bank are involved in various claims and legal actions arising in the ordinary course of business.  In the opinion of management, based in part on the advice of counsel, the ultimate disposition of these matters will not have a material adverse impact on the Company’s consolidated financial position.

ITEM 1A.   RISK FACTORS

We believe there have been no material changes from the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, except for the additional risk factor regarding the recently enacted Dodd-Frank Reform Act which is set forth below.  You should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Compliance with the recently enacted Dodd-Frank Reform Act may adversely impact our earnings.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Reform Act”) into law.  The Dodd-Frank Reform Act represents a significant overhaul of many aspects of the regulation of the financial-services industry.  Major elements in the Dodd-Frank Reform Act include the following:

·The establishment of the Financial Stability Oversight Counsel, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices.

·Enhanced supervision of large bank holding companies (i.e., those with over $50 billion in total consolidated assets), with more stringent supervisory standards to be applied to them.

·The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund.

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·The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants.

·Enhanced supervision of credit-rating agencies through the Office of Credit Ratings within the SEC.

·Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities.

·The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body.

·Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.

The majority of the provisions in the Dodd-Frank Reform Act are aimed at financial institutions that are significantly larger than the Company or the Bank.  Nonetheless, there are provisions with which we will have to comply now that the Dodd-Frank Reform Bill is signed into law.  As rules and regulations are promulgated by the federal agencies responsible for implementing and enforcing the provisions in the Dodd-Frank Reform Act, we will have to work to apply resources to ensure that we are in compliance with all applicable provisions, which may adversely impact our earnings.

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

None

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.     REMOVED AND RESERVED

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:  November 15, 2010	By:	/s/ James E. Young
	James E. Young
	President and Chief Executive Officer
Date:   November 15, 2010	By:	/s/ Cynthia N. Day
	Cynthia N. Day
	Senior Executive Vice President and
	Chief Operating Officer
Date:   November 15, 2010	By:	/s/ Samuel J. Cox
	Samuel J. Cox
	Executive Vice President and
	Chief Financial Officer

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