Citizens Bancshares 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

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

For the quarterly period ended March 31, 2012

OR

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

For the transition period from               to              

Commission File No:  0 - 14535

CITIZENS BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  x  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: 2,025,530 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value were outstanding on May 11, 2012.

PART 1.                FINANCIAL INFORMATION

ITEM 1.  Financial Statements

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2012 AND DECEMBER 31, 2011

(In thousands, except share data)

	2012			2011
	(Unaudited)
ASSETS
Cash and due from banks	$	6,140		$	5,683
Interest-bearing deposits with banks	30,467			27,769
Certificates of deposit	100			100
Investment securities available for sale, at fair value	135,937			124,242
Investment securities held to maturity, at cost	3,293			3,294
Other investments	1,312			1,312
Loans receivable, net	190,412			195,431
Premises and equipment, net	7,109			7,228
Cash surrender value of life insurance	11,286			11,217
Foreclosed real estate	10,033			10,076
Other assets	10,865			10,808
Total assets	$	406,954		$	397,160
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	67,987		$	59,582
Interest-bearing deposits	285,126			283,449
Total deposits	353,113			343,031
Accrued expenses and other liabilities	5,038			5,286
Advances from Federal Home Loan Bank	305			310
Total liabilities	358,456			348,627
STOCKHOLDERS’ EQUITY:
Preferred stock - No par value; 10,000,000 shares authorized; Series B, 7,462 shares issued and outstanding	7,462			7,462
Preferred stock - No par value; 10,000,000 shares authorized; Series C, 4,379 shares issued and outstanding	4,379			4,379
Common stock - $1 par value; 20,000,000 shares authorized; 2,245,364 and 2,237,357 shares issued at March 31, 2012 and December 31, 2011, respectively	2,245			2,237
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding	90			90
Nonvested restricted common stock	(118		)	(86		)
Additional paid-in capital	7,847			7,809
Retained earnings	25,902			25,828
Treasury stock at cost, 219,834 and 219,072 shares at March 31, 2012 and December 31, 2011, respectively	(1,813		)	(1,810		)
Accumulated other comprehensive income, net of income taxes	2,504			2,624
Total stockholders’ equity	48,498			48,533
	$	406,954		$	397,160

See notes to condensed consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - In thousands, except per share data)

	Three MonthsEnded March 31,
	2012			2011
Interest income:
Loans, including fees	$	3,006		$	2,928
Investment securities:
Taxable	504			615
Tax-exempt	409			454
Interest-bearing deposits	16			14
Total interest income	3,935			4,011
Interest expense:
Deposits	297			438
Total interest expense	297			438
Net interest income	3,638			3,573
Provision for loan losses	750			475
Net interest income after provision for loan losses	2,888			3,098
Noninterest income:
Service charges on deposits	780			863
Gain on sales of securities	322			63
Gain on sales of assets	—			6
Other operating income	370			309
Total noninterest income	1,472			1,241
Noninterest expense:
Salaries and employee benefits	1,650			1,825
Net occupancy and equipment	644			584
Amortization of core deposit intangible	118			118
FDIC insurance	146			198
Other real estate owned, net	767			330
Other operating expenses	1,051			1,197
Total noninterest expense	4,376			4,252
Income (loss) before income taxes	(16		)	87
Income tax benefit	(149		)	(130		)
Net income	$	133		$	217
Preferred dividends	59			59
Net income available to common shareholders	$	74		$	158
Net income per common share - basic	$	0.03		$	0.08
Net income per common share - diluted	$	0.03		$	0.07
Weighted average common outstanding shares - basic	2,134			2,105
Weighted average common outstanding shares - diluted	2,148			2,120

See notes to condensed consolidated financial statements.

2

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - In thousands)

	Three Months Ended March 31,
	2012			2011
Net Income	$	133		$	217
Other Comprehensive Income
Unrealized holding gain on investment securities available for sale, net of tax of $48 for 2012 and $352 for 2011	93			683
Reclassification adjustment for holding gains included in net income, net of tax of $109 for 2012 and $21 for 2011	(213		)	(42		)
Total Comprehensive Income	$	13		$	858

	Three Months Ended March 31,
	2012			2011
Disclosure of reclassification amount, net of tax for the periods ended:
Net unrealized gain arising during the year	141			1,035
Reclassification adjustment for holding gains included in net income	(322		)	(63		)
	(181		)	972
Tax effect	(61		)	331
Net unrealized (loss) gain on securities available for sale	$	(120	)	$	641

The accompanying notes are an integral part of these consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited - In thousands)

																								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, 2010	12	$	11,841	2,233	$	2,233	90	$	90	$	(107	)	$	7,813		$	25,965		(218	)	$	(1,805	)	$	(213	)	$	45,817
Net income	—	—		—	—		—	—		—			—			217			—		—			—			217
Unrealized holding gains on investment securities available for sale—net of taxes of $352	—	—		—	—		—	—		—			—			—			—		—			683			683
Less reclassification adjustment for holding gains included in net income—net of taxes of $21	—	—		—	—		—	—		—			—			—			—		—			(42		)	(42		)
Issuance of preferred stock	—	—		—	—		—	—		—			—			—			—		—			—
Issuance of common stock	—	—		4	4		—	—		—			12			—			—		—			—			16
Stock based compensation expense	—	—		—	—		—	—		—			—			—			—		—			—			—
Nonvested restricted stock	—	—		—	—		—	—		11			(32		)	—			—		—			—			(21		)
Purchase of treasury stock	—	—		—	—		—	—		—			—			—			(1	)	(5		)	—			(5		)
Dividends declared - preferred	—	—		—	—		—	—		—			—			(59		)	—		—			—			(59		)
Dividends declared - common	—	—		—	—		—	—		—			—			—			—		—			—			—
Balance—March 31, 2011	12	$	11,841	2,237	$	2,237	90	$	90	$	(96	)	$	7,793		$	26,123		(219	)	$	(1,810	)	$	428		$	46,606
Balance—December 31, 2011	12	$	11,841	2,237	$	2,237	90	$	90	$	(86	)	$	7,809		$	25,828		(219	)	$	(1,810	)	$	2,624		$	48,533
Net income	—	—		—	—		—	—		—			—			133			—		—			—			133
Unrealized holding gains on investment securities available for sale—net of taxes of $48	—	—		—	—		—	—		—			—			—			—		—			93			93
Less reclassification adjustment for holding gains included in net income—net of taxes of $109	—	—		—	—		—	—		—			—			—			—		—			(213		)	(213		)
Issuance of common stock	—	—		8	8		—	—		—			23			—			—		—			—			31
Issuance of restricted stock	—	—		—	—		—	—		(32		)	15			—			—		—			—			(17		)
Nonvested restricted stock	—	—		—	—		—	—		—			—			—			—		—			—			—
Purchase of treasury stock	—	—		—	—		—	—		—			—			—			(1	)	(3		)	—			(3		)
Dividends declared - preferred	—	—		—	—		—	—		—			—			(59		)	—		—			—			(59		)
Balance—March 31, 2012	12	$	11,841	2,245	$	2,245	90	$	90	$	(118	)	$	7,847		$	25,902		(220	)	$	(1,813	)	$	2,504		$	48,498

See notes to condensed consolidated financial statements.

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CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(In thousands)

	2012			2011
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	133		$	217
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	750			475
Depreciation	170			170
Amortization and accretion, net	248			288
Provision for deferred income tax benefit	177			(99		)
Gains on sale of assets and investments, net	(322		)	(63		)
Net loss on sale of other real estate owned	43			14
Restricted stock based compensation plan	(16		)	21
Decrease in carrying value of other real estate owned	651			284
Change in other assets	(364		)	202
Change in accrued expenses and other liabilities	(249		)	(45		)
Net cash provided by operating activities	1,221			1,464
INVESTING ACTIVITIES:
Net change in certificates of deposit	—			50
Proceeds from calls and maturities of investment securities held to maturity	1			2
Proceeds from sales and maturities of investment securities available for sale	10,953			7,661
Purchases of investment securities available for sale	(22,720		)	(2,000		)
Net change in loans receivable	3,462			(256		)
Proceeds from the sale of premises and equipment	—			6
Proceeds from the sale of other real estate owned	243			117
Purchases of premises and equipment, net	(51		)	(27		)
Net cash provided by (used in) investing activities	(8,112		)	5,553
FINANCING ACTIVITIES:
Net change in deposits	10,082			4,649
Net change in advances from Federal Home Loan Bank	(5		)	(4		)
Proceeds from issuance of common stock	31			16
Purchase of treasury stock	(3		)	(5		)
Dividends paid - preferred	(59		)	(59		)
Net cash provided by financing activities	10,046			4,597
Net change in cash and cash equivalents	3,155			11,614
Cash and cash equivalents, beginning of period	33,452			23,797
Cash and cash equivalents at end of period	$	36,607		$	35,411
Supplemental disclosures of cash paid during the period for:
Interest	$	307		$	502
Income taxes	$	28		$	8
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure	$	895		3,471
Change in unrealized gain on investment securities available for sale, net of taxes	$	(120	)	$	641

See notes to condensed consolidated financial statements.

5

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

Notes to the Condensed 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, 2011.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2012 fiscal year.

The consolidated financial statements of the Company for the three month period ended March 31, 2012 are unaudited.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the three month period have been included.  All adjustments are of a normal recurring nature.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which often require the judgment of management in the selection and application of certain accounting principles and methods.  Reference is made to the accounting policies of the Company described in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  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”).

6

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 issued 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 September 2011, the Intangibles topic was amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  These amendments were effective for the Company on January 1, 2012.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements.  The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements.

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

7

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

2. INVESTMENTS

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

At March 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	39,382	$	2,816	$	1	$	42,197
Mortgage-backed securities	83,056		1,345		66		84,335
Corporate securities	9,700		58		353		9,405
Totals	$	132,138	$	4,219	$	420	$	135,937

At December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	42,640	$	3,269	$	1	$	45,908
Mortgage-backed securities	67,941		1,405		117		69,229
Corporate securities	9,685		—		580		9,105
Totals	$	120,266	$	4,674	$	698	$	124,242

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

At March 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	3,292	$	66	$	—	$	3,358
Mortgage-backed securities	1		—		—		1
Totals	$	3,293	$	66	$	—	$	3,359

At December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	3,293	$	84	$	—	$	3,377
Mortgage-backed securities	1		—		—		1
Totals	$	3,294	$	84	$	—	$	3,378

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The amortized costs and fair values of investment securities at March 31, 2012, 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).

	Held to Maturity				Available for Sale
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1	$	1	$	250	$	251
Due after one year through five years	1,747		1,770		6,244		5,974
Due after five years through ten years	1,545		1,588		29,234		30,541
Due after ten years	—		—		96,410		99,171
	$	3,293	$	3,359	$	132,138	$	135,937

Securities with carrying values of $82,734,000 and $85,776,000 at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, FHLB advances and a $20.2 million line of credit at the Federal Reserve Bank discount window and for other purposes as required by law.

Proceeds from the sale of securities were $3,356,000 and $2,339,000 for the three months ended March 31, 2012 and March 31, 2011, respectively. Gross realized gains on securities were $322,000  and $68,000 for the three months ended March 31, 2012 and 2011, respectively. For the three month periods ended March 31, 2012 and 2011, gross realized losses on securities were zero and $5,000, respectively.

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 March 31, 2012 and December 31, 2011. 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).

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At March 31, 2012

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	$	13,262	$	(47	)	$	1,747	$	(19	)	$	15,009	$	(66	)
Municipal securities	189		(1		)	—		—			189		(1		)
Corporate	3,127		(261		)	3,908		(92		)	7,035		(353		)
Total	$	16,578	$	(309	)	$	5,655	$	(111	)	$	22,233	$	(420	)

Securities Held to Maturity

There were no securities classified as held to maturity in an unrealized loss position at March 31, 2012.

At December 31, 2011

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	$	16,456	$	(86	)	$	2,180	$	(31	)	$	18,636	$	(117	)
Municipal securities	—		—			189		(1		)	189		(1		)
Corporate	5,227		(458		)	3,878		(122		)	9,105		(580		)
Total	$	21,683	$	(544	)	$	6,247	$	(154	)	$	27,930	$	(698	)

Securities Held to Maturity

There were no securities classified as held to maturity in an unrealized loss position at December 31, 2011.

The Company’s available for sale portfolio had four investment securities at March 31, 2012 and five investment securities at December 31, 2011 that were in an unrealized loss position for longer than twelve months. 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.

As of the date of its evaluation, the Company did not intend to sell and has the ability to hold 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 or the security matures. 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 not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

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3. LOANS

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

	March 31,		December 31,
	2012		2011
Commercial, financial, and agricultural	$	21,686	$	22,706
Commercial Real Estate	122,205		126,675
Single-Family Residential	36,701		37,539
Construction and Development	6,776		5,377
Consumer	6,971		7,090
	194,339		199,387
Allowance for loan losses	3,927		3,956
	$	190,412	$	195,431

Activity in the allowance for loan losses is summarized as follows (in thousands):

	March 31, 2012			December 31, 2011			March 31, 2011
Balance at beginning of year	$	3,956		$	4,188		$	4,188
Provision for loan losses	750			3,883			475
Loans charged-off	(823		)	(4,302		)	(858		)
Recoveries on loans previously charged-off	44			187			36
Balance at end of year	$	3,927		$	3,956		$	3,841

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Activity in the allowance for loan losses by portfolio segment is summarized as follows (in thousands):

	For the Three Month Period Ended March 31, 2012
	Commercial			Commercial Real Estate			Single-family Residential			Construction & Development			Consumer			Total
Beginning balance	$	394		$	2,206		$	696		$	449		$	211		$	3,956
Provision for loan losses	(10		)	414			204			148			(6		)	750
Loans charged-off	(7		)	(631		)	(134		)	(29		)	(22		)	(823		)
Recoveries on loans charged-off	8			7			4			—			25			44
Ending Balance	$	385		$	1,996		$	770		$	568		$	208		$	3,927

	For the Year Ended December, 2011
	Commercial			Commercial Real Estate			Single-family Residential			Construction & Development			Consumer			Total
Beginning balance	$	365		$	2,616		$	376		$	290		$	541		$	4,188
Provision for loan losses	262			1,852			1,049			932			(212		)	3,883
Loans charged-off	(262		)	(2,302		)	(749		)	(773		)	(216		)	(4,302		)
Recoveries on loans charged-off	29			40			20			—			98			187
Ending Balance	$	394		$	2,206		$	696		$	449		$	211		$	3,956

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments.  However, the entire allowance for loan losses is available for any loan that, in the judgment of management, should be charged-off.

In determining our allowance for loan losses, we regularly review loans for specific reserves based on the appropriate impairment assessment methodology.  General reserves are determined using historical loss trends measured over a rolling four quarter average for consumer loans, and a three year average loss factor for commercial loans which is applied to risk rated loans grouped by Federal Financial Examination Council (“FFIEC”) call code.  For commercial loans, the general reserves are calculated by applying the appropriate historical loss factor to the loan pool. Impaired loans greater than a minimum threshold established by management are excluded from this analysis.   The sum of all such amounts determines our total allowance for loan losses.

The allocation of the allowance for loan losses by portfolio segment was as follows (in thousands):

	At March 31, 2012
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	601	$	17	$	48	$	—	$	666
Total specific reserves	—		601		17		48		—		666
General reserves	385		1,395		753		520		208		3,261
Total	$	385	$	1,996	$	770	$	568	$	208	$	3,927
Loans individually evaluated for impairment	$	—	$	12,451	$	637	$	576	$	—	$	13,664
Loans collectively evaluated for impairment	21,686		109,754		36,064		6,200		6,971		180,675
Total	$	21,686	$	122,205	$	36,701	$	6,776	$	6,971	$	194,339

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	At December 31, 2011
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	732	$	—	$	20	$	—	$	752
Total specific reserves	—		732		—		20		—		752
General reserves	394		1,474		696		429		211		3,204
Total	$	394	$	2,206	$	696	$	449	$	211	$	3,956
Loans individually evaluated for impairment	$	—	$	15,506	$	—	$	634	$	—	$	16,140
Loans collectively evaluated for impairment	22,706		111,169		37,539		4,743		7,090		183,247
Total	$	22,706	$	126,675	$	37,539	$	5,377	$	7,090	$	199,387

The following table presents impaired loans by class of loan (in thousands):

	At March 31, 2012
							Impaired Loans - With
	Impaired Loans - With Allowance						no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Average Recorded Investment		Interest Income Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	—	$	—	$	—	$	—
HELOC’s and equity	479		479		17		253		158		711		5
Commercial
Secured	—		—		—		—		—		—		—
Unsecured	—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied	1,773		1,773		49		3,138		3,023		4,828		64
Non-owner occupied	4,350		4,295		499		3,640		2,957		7,696		262
Multi-family	403		403		53		—		—		406		8
Construction and Development:
Construction	—		—		—		489		301		343		18
Improved Land	556		275		48		—		—		620		3
Unimproved Land	—		—		—		—		—		—		—
Consumer and Other	—		—		—		—		—		—		—
Total	$	7,561	$	7,225	$	666	$	7,520	$	6,439	$	14,604	$	360

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	At December 31, 2011
							Impaired Loans - With
	Impaired Loans - With Allowance						no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Average Recorded Investment		Interest Income Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	—	$	—	$	—	$	—
HELOC’s and equity	—		—		—		—		—		—		—
Commercial
Secured	—		—		—		—		—		—		—
Unsecured	—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied	1,712		1,712		161		2,810		2,810		4,596		52
Non-owner occupied	6,398		6,398		522		5,075		4,184		11,107		873
Multi-family	402		402		49		412		—		407		40
Construction and Development
Construction	—		—		—		479		291		327		35
Improved Land	557		276		20		151		67		384		15
Unimproved Land	—		—		—		—		—		—		—
Consumer and Other	—		—				—		—		—		—
Total	$	9,069	$	8,788	$	752	$	8,927	$	7,352	$	16,821	$	1,015

Included in the tables above, there were 38 and 36 loans restructured totaling $11,682,000 and $9,095,000 with a valuation allowance of $522,000 and $39,000 at March 31, 2012 and December 31, 2011, respectively.  Total impaired loans decreased by $2,476,000 to $13,664,000 at March 31, 2012, compared to $16,140,000 at December 31, 2011.  This decline was due to the pay-off a large hotel loan.  The remaining decrease was due to foreclosures, write-downs, and principal paydowns.

The following table is an aging analysis of our loan portfolio (in thousands):

	At March 31, 2012
	30- 59 Days Past Due		60- 89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing		Nonaccrual
Residential:
First mortgages	$	2,665	$	—	$	2,753	$	5,418	$	21,759	$	27,177	$	—	$	3,811
HELOC’s and equity	226		14		865		1,105		8,419		9,524		—		905
Commercial:
Secured	61		—		3		64		15,896		15,960		—		3
Unsecured	25		—		—		25		5,701		5,726		—		—
Commercial Real Estate:
Owner occupied	2,190		244		60		2,494		55,790		58,284		—		2,771
Non-owner occupied	383		3,247		2,597		6,227		48,860		55,087		—		4,005
Multi-family	101		—		—		101		8,733		8,834		—		—
Construction and Development:
Construction	—		—		—		—		5,619		5,619		—		—
Improved Land	301		—		180		481		115		596		—		180
Unimproved Land	—		—		123		123		438		561		—		123
Consumer	33		1		134		168		6,803		6,971		—		134
Total	$	5,985	$	3,506	$	6,715	$	16,206	$	178,133	$	194,339	$	—	$	11,932

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	At December 31, 2011
	30- 59 Days Past Due		60- 89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing		Nonaccrual
Residential:
First mortgages	$	1,691	$	800	$	3,550	$	6,041	$	22,121	$	28,162	$	—	$	4,546
HELOC’s and equity	261		—		931		1,192		8,185		9,377		—		932
Commercial:
Secured	13		—		6		19		17,653		17,672		—		6
Unsecured	—		—		—		—		5,034		5,034		—		—
Commercial Real Estate:
Owner occupied	1,095		546		1,904		3,545		55,834		59,379		—		2,087
Non-owner occupied	6,330		1,788		1,957		10,075		48,343		58,418		—		4,793
Multi-family	—		—		—		—		8,878		8,878		—		—
Construction and Development:
Construction	291		—		—		291		3,107		3,398		—		—
Improved Land	—		—		247		247		1,278		1,525		—		247
Unimproved Land	—		—		207		207		247		454		—		206
Consumer and Other	55		1		126		182		6,908		7,090		—		135
Total	$	9,736	$	3,135	$	8,928	$	21,799	$	177,588	$	199,387	$	—	$	12,952

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan and lease portfolio.  Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list in not exhaustive, it provides a description of the risks that management has determined are the most significant.

Commercial, financial and agricultural loans—We centrally underwrite each of our commercial loans based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We endeavor to gain a complete understanding of our borrower’s businesses including the experience and background of the principals. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, we gain an understanding of the likely value of the collateral and what level of strength the collateral brings to the loan transaction. To the extent that the principals or other parties provide personal guarantees, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of our collateral. Due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

Consumer—The installment loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

Commercial Real Estate—Real estate commercial loans consist of loans secured by multifamily housing, commercial non-owner and owner occupied and other commercial real estate loans.  The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates.  Commercial owner-occupied and other

15

commercial real estate loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk.  These loans are primarily secured by real property and can include other collateral such as personal guarantees, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.  Also, due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

Single-family Residential— Real estate residential loans are to individuals and are secured by 1-4 family residential property.  Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Such a decline in values has led to unprecedented levels of foreclosures and losses during 2008-2012 within the banking industry.

Construction and Development—Real estate construction loans are highly dependent on the supply and demand for residential and commercial real estate in the markets we serve as well as the demand for newly constructed commercial space and residential homes and lots that our customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers. Real estate construction loans can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.

Risk categories—The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if appropriately classified and impaired, if any. All other loan relationships greater than $750,000 are reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will evaluate the loan grade.

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

Special Mention Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in

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full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table presents our loan portfolio by risk rating (in thousands):

	At March 31, 2012
	Total		Pass Credits		Special Mention		Substandard		Doubtful
Residential:
First mortgages	$	27,177	$	23,179	$	1,244	$	2,754	$	—
HELOC’s and equity	9,524		8,379		144		941		60
Commercial:
Secured	15,960		13,876		2,006		78		—
Unsecured	5,726		5,678		—		48		—
Commercial Real Estate:
Owner occupied	58,284		52,729		1,177		4,378		—
Non-owner occupied	55,087		41,748		6,068		5,209		2,062
Multi-family	8,834		7,841		993		—		—
Construction and Development:
Construction	5,619		5,318		—		301		—
Improved Land	596		320		—		228		48
Unimproved Land	561		181		—		380		—
Consumer and Other	6,971		6,793		21		146		11
Total	$	194,339	$	166,042	$	11,653	$	14,463	$	2,181

	At December 31, 2011
	Total		Pass Credits		Special Mention		Substandard		Doubtful
Residential:
First mortgages	$	28,162	$	23,747	$	—	$	4,350	$	65
HELOC’s and equity	9,377		8,173		112		1,092		—
Commercial:
Secured	17,672		17,503		13		156		—
Unsecured	5,034		5,034		—		—		—
Commercial Real Estate:
Owner occupied	59,380		53,749		36		5,595		—
Non-owner occupied	58,417		42,185		6,120		8,872		1,240
Multi-family	8,878		8,475		403		—		—
Construction and Development:
Construction	3,398		3,107		—		291		—
Improved Land	1,525		1,182		—		343		—
Unimproved Land	454		247		—		207		—
Consumer and Other	7,090		6,934		19		129		8
Total	$	199,387	$	170,336	$	6,703	$	21,035	$	1,313

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The following table details troubled debt restructurings identified during the three month period ended March 31, 2012 (in thousands):

	For Three Month Period Ended March 31, 2012
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Residential:
HELOC’s and equity	—	$	—	$	—
Commercial Real Estate:
Owner occupied	2	1,633		1,716
Non-owner occupied	2	947		953
Total	4	$	2,580	$	2,669

The following table provides the types of troubled debt restructurings made for the quarter ended March 31, 2012, as well as the loans restructured during the last twelve months that have experienced payment default subsequent to restructuring during the three month period ended March 31, 2012 (in thousands):

	For Three Month Period Ended March 31, 2012
	All restructurings			Restructurings with subsequent payment default
	Number of loans	Recorded investment at period end		Number of loans	Recorded investment at period end
Decreased the interest rate and loan term extension
Commercial, financial, and agricultural	2	$	1,716	—	—
Commercial Real Estate	2	953		—	—
Single-family Residential	—	—		—	—
Construction and Development	—	—		—	—
Consumer	—	—		—	—
Total decreased the interest rate and loan term extension	4	$	2,669	—	—
Total restructurings	4	$	2,669	—	$	—

There were no loans restructured in the last twelve months for which a subsequent payment default occurred during the three months ended March 31, 2012. The Company considers a default as failure to comply with the restructured loan agreement. This would include the restructured loan being past due greater than 90 days, failure to comply with financial covenants, or failure to maintain current insurance coverage or real estate taxes after the loan restructured date.

4. 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

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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- Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. The fair value of other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company may further adjust an appraised amount given its knowledge of a specific property or market.

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,

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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, and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2012 and December 31, 2011, 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. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company may further adjust an appraised amount given its knowledge of a specific property or market. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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The following tables present financial assets 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.  There were no financial liabilities measured at fair value for the periods being reported (in thousands).

	Fair Value Measurements at March 31, 2012
			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Assets		Identical		Observable		Unobservable
	Measured at		Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Recurring Basis:
Assets
Securities available for sale:
State, county, and municipal securities	$	42,197	$	—	$	42,197	$	—
Mortgage-backed securities	84,335		—		84,335		—
Corporate securities	9,405		—		9,405		—
	$	135,937			$	135,937
Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate	$	11,850	$	—	$	—	$	11,850
Single-family Residential	620		—		—		620
Construction and Development	528		—		—		528
Other real estate owned	10,033		—		—		10,033

	Fair Value Measurements at December 31, 2011
			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
	Assets		Identical		Observable		Unobservable
	Measured at		Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Recurring Basis:
Assets
Securities available for sale:
State, county, and municipal securities	$	45,908	$	—	$	45,908	$	—
Mortgage-backed securities	69,229		—		69,229		—
Corporate securities	9,105		—		9,105		—
	$	124,242			124,242
Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate	$	14,774	$	—	$	—	$	14,774
Construction and Development	614		—		—		614
Other real estate owned	10,076		—		—		10,076

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For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows (dollars in thousands):

	Fair Value at		Valuation	Unobservable
(dollars in thousands)	March 31, 2012		Technique	Inputs	Range
Impaired Loans:
Commercial Real Estate	$	11,850	Appraised Value	Negative adjustment for selling costs and changes in market conditions since appraisal	5% - 20%
Single-family Residential	$	620	Appraised Value	Negative adjustment for selling costs and changes in market conditions since appraisal	5% - 20%
Construction & Development	$	528	Appraised Value	Negative adjustment for selling costs and changes in market conditions since appraisal	5% - 20%
OREO	$	10,033	Appraised Value	Negative adjustment for selling costs and changes in market conditions since appraisal	5% - 20%

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 an estimate 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—Fair value equals the carrying value of such assets due to their nature and is classified as Level 1.

Investment Securities—Fair value of investment securities are based on quoted market prices and is classified as Level 2.

Other Investments—The carrying amount of other investments approximates its fair value and is classified as Level 1.

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 resulting in a Level 3 classification. For variable rate loans, the carrying amount is a reasonable estimate of fair value. The methods utilized to estimate the fair values of loans do not necessarily represent an exit price. The carrying amount of related accrued interest receivable, due to its short-term nature, approximates its fair value, is not significant and is not disclosed.

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 and is classified as Level 1.

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

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deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities and is classified as Level 2.

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 and is classified as Level 2.

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

Limitations—Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments; for example, premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2012 (in thousands):

	March 31, 2012
	Carrying	Fair Value Measurements
	Amount	Total	Level 1	Level 2	Level 3
Financial assets:
Cash and due from banks	6,140	6,140	6,140	—	—
Interest-bearing deposits with banks	30,467	30,467	30,467	—	—
Cetificates of deposit	100	100	100	—	—
Investment securities	139,230	139,296	—	139,296	—
Other investments	1,312	1,312	1,312	—	—
Loans—net	190,412	191,333	—	—	191,333
Cash surrender value of life insurance	11,286	11,286	11,286	—	—
Financial liabilities:
Deposits	353,113	344,282	—	344,282	—
Advances from Federal Home Loan Bank	305	305	—	305	—

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The carrying values and estimated fair values of the Company’s financial instruments at December 31, 2011 are as follows:

	2011
	Carrying		Estimated
	Value		Fair Value
	(in thousands)
Financial assets:
Cash and due from banks	$	5,683	$	5,683
Interest-bearing deposits with banks	27,769		27,769
Cetificates of deposit	100		100
Investment securities	127,536		127,620
Other investments	1,312		1,312
Loans—net	195,432		195,815
Cash surrender value of life insurance	11,217		11,217
Financial liabilities:
Deposits	343,031		335,890
Advances from Federal Home Loan Bank	310		310

	Notional amount		Estimated fair value
Off-balance-sheet financial instruments:
Commitments to extend credit	$	18,035	$	—
Commercial letters of credit	2,367		—

5.  OTHER REAL ESTATE OWNED

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

	March 31,			December 31,
	2012			2011
Balance—beginning of period	$	10,076		$	9,110
Additions	895			5,748
Sales	(287		)	(3,523		)
Write downs	(651		)	(1,259		)
Balance—end of period	$	10,033		$	10,076

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6.  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 (in thousands):

	March 31, 2012				December 31, 2011
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Unamortized intangible asset:
Goodwill	$	362	$	—	$	362	$	—
Amortized intangible assets:
Core deposit intangibles	$	3,676	$	1,788	$	3,676	$	1,670

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

	Three months ended March 31,
	2012		2011
Aggregate amortization expense of core deposit intangibles:	$	118	$	118
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2012	$	472
2013	$	472
2014	$	472
2015	$	472
2016 and thereafter	$	118

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7.  NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

Basic and diluted net income per share available to common and potential common stockholders has been calculated based on the weighted average number of shares outstanding.  The following schedule reconciles the numerator and denominator of the basic and diluted net income per share available to common and potential common stockholders for the three month period ended March 31, 2012 and 2011 (in thousands, except per share data):

	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
Three Months ended March 31, 2012
Basic earnings per share available to common stockholders	$	74	2,134	$	0.03
Nonvested restricted stock grant	—		14	—
Effect of dilutive securities: options to purchase common shares	—		—	—
Diluted earnings per share	$	74	2,148	$	0.03
Three Months ended March 31, 2011
Basic earnings per share available to common stockholders	$	158	2,105	$	0.08
Nonvested restricted stock grant	—		15	(0.01		)
Effect of dilutive securities: options to purchase common shares	—		—	—
Diluted earnings per share	$	158	2,120	$	0.07

8.  SUBSEQUENT EVENTS

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

9.  RECLASSIFICATIONS

Certain amounts in the 2011 consolidated financial statements were reclassified to conform to the 2012 presentation. These reclassifications had no effect on stockholders’ equity or the results of operations as previously presented.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION

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

Forward Looking Statements

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

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

The following discussion is of the Company’s financial condition as of March 31, 2012 and December 31, 2011, and the changes in the financial condition and results of operations for the three month periods ended March 31, 2012 and 2011.

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 2012 or 2011.

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

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accreted using a method which approximates a level yield.

Gains and losses on sales of investment securities are recognized upon disposition, based on the adjusted cost of the specific security.  A decline in market value of any security below cost that is deemed other than temporary is charged to earnings or other comprehensive income 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 financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain

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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, 2011.  The Company has followed those policies in preparing this report.

FINANCIAL CONDITION

At March 31, 2012, the Company had total assets of $406,954,000 compared to $397,160,000 at December 31, 2011.  Total assets consisted primarily of $140,542,000 in investments securities and $190,412,000 in net loans representing 35% and 47% of total assets, respectively.  Investment securities and net loans represented 32% and 49% of total assets, respectively, at December 31, 2011.

Interest-bearing deposits with banks increased by $2,698,000 to $30,467,000 for the three month period ended March 31, 2012 compared to December 31, 2011.  Interest-bearing deposits with banks primarily represent funds maintained on deposit at the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB).  These funds fluctuate daily and are used to manage the Company’s liquidity position.  The Company monitors its short-term liquidity position daily and closely manages its overnight cash positions in light of the current economic environment.

Loans typically provide higher interest yields than other types of interest-earning assets and, therefore, continue to be the largest component of the Company’s assets.  Net loans receivable decreased by $5,020,000 for the year. This decrease was primarily driven by the sale of a commercial real-estate loan with a carrying value of $2.5 million and normal principal paydowns which exceeded loan growth for the quarter.  As part of the Company’s strategy for 2012 to cleanse the balance sheet of nonperforming assets, the Company took an opportunity to liquidate a classified loan which had the potential for further deterioration in collateral value as well as performance of the loan. The Company continues to participate in a leasing arrangement with a Fortune 500 company and a cooperative of small and mid-sized banks to improve loan volume.

At March 31, 2012, other real estate owned decreased by a nominal amount to $10,033,000 compared to the year-end of 2011. The decrease is primarily due to the addition of properties totaling $895,000 during the three month period, offset by sales of $287,000 and write-downs totaling $651,000.

Cash value of life insurance, a comprehensive compensation program for directors and certain senior managers of the Company, increased $69,000 to $11,286,000 at March 31, 2012.  The increase primarily represents the earnings on the premiums paid over the life of the insurance contract.

The Company’s liabilities at March 31, 2012 totaled $358,456,000 and consisted primarily of $353,113,000 in deposits, representing an increase of $10,082,000 compared to total deposits of $343,031,000 at December 31, 2011.  FHLB advances totaled $305,000 at March 31, 2012 compared to $310,000 at December 31, 2011.

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

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INVESTMENT SECURITIES

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

At March 31, 2012 and December 31, 2011, the investment securities portfolio represented approximately 35% and 32%, respectively, 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.

LOANS

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

	March 31,		December 31,
	2012		2011
Commercial, financial, and agricultural	$	21,686	$	22,706
Commercial Real Estate	122,205		126,675
Single-Family Residential	36,701		37,539
Construction and Development	6,776		5,377
Consumer	6,971		7,090
Loans receivable	194,339		199,387
Allowance for loan losses	3,927		3,956
Loans receivable, net	$	190,412	$	195,431

The Company does not have any concentrations of loans exceeding 10% of total loans of which management is aware and which are not otherwise disclosed as a category of loans in the table above or in other sections of this Quarterly Report on Form 10-Q.  A substantial portion of the Company’s loan portfolio is secured by real estate in metropolitan Atlanta and Birmingham.

The largest component of loans in the Company’s loan portfolio is commercial real estate loans.  At March 31, 2012 and December 31, 2011, commercial real estate loans, which represent commercial and industrial real estate and other loans secured by multi-family properties, totaled $122 million and $127 million, respectively, and represented 63% of loans, net of unearned income for the periods reported.

As stated above, a substantial portion of the Company’s loan portfolio is collateralized by real estate in

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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, which are generally secured by real estate, were approximately $44.4 million at March 31, 2012 and $44.5 million at December 31, 2011.

·The Company’s loans to area convenience stores were approximately $10.4 million at March 31, 2012 and $10.6 million at December 31, 2011.  Loans to convenience stores are generally secured by real estate.

·The Company’s loans to area hotels, which are generally secured by real estate, were approximately $25.9 million at March 31, 2012 and $29.0 million at December 31, 2011.

NONPERFORMING ASSETS

Nonperforming assets include nonperforming loans, real estate acquired through foreclosure, and repossessed assets.  Nonperforming loans generally include loans and leases whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties that are past due with respect to principal or interest more than 90 days and have been placed on nonaccrual status.

Accrued interest income is reversed when a loan is placed on nonaccrual status.  Interest collections on nonaccruing loans and leases for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received.  Nonperforming loans may be restored to accrual status when all principal and interest is current and the full repayment of the remaining contractual principal and interest is expected, or when the loan becomes well-secured and is in the process of collection.

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 conditions in our local markets continue to experience difficulty during 2012. The unemployment rate in Metro Atlanta, our largest market, is projected to be 8.7% for March 2012.

For the period, nonperforming assets decreased $1,063,000 to $21,965,000 at March 31, 2012, compared to $23,028,000 at December 31, 2011.  The Company charged-off $823,000 in nonperforming loans during the first three months of 2012 compared to $858,000 for the same period last year.  OREO decreased by a nominal amount to $10,033,000 for the period.  At March 31, 2012, nonperforming assets represent 5.40% of total assets compared to 5.80% at December 31, 2011.  There were no loans greater than 90 days past due and still accruing interest at the end of the first quarter of 2012 or at December 31, 2011.

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The table below presents a summary of the Company’s nonperforming assets at March 31, 2012 and December 31, 2011.

	March 31,			December 31,
	2012			2011
	(in thousands, except
	financial ratios)
Nonperforming assets:
Nonperforming loans:
Restructured nonperforming loans (TDRs)	$	6,256		$	4,044
Other nonaccrual loans	5,676			8,908
Past-due loans of 90 days or more and still accruing	—			—
Nonperforming loans	11,932			12,952
Real estate acquired through foreclosure	10,033			10,076
Total nonperforming assets	$	21,965		$	23,028
Ratios:
Nonperforming loans to loans, net of unearned income	6.14		%	6.50		%
Nonperforming assets to loans, net of unearned income, and real estate acquired through foreclosure	10.75		%	10.99		%
Nonperforming assets to total assets	5.40		%	5.80		%
Allowance for loan losses to nonperforming loans	32.91		%	30.54		%
Allowance for loan losses to nonperforming assets	17.88		%	17.18		%

TROUBLED DEBT RESTRUCTURINGS

Loans to be restructured are identified based on an assessment of the borrower’s credit status, which involves, but is not limited to, a review of financial statements, payment delinquency, non-accrual status, and risk rating.  Determining the borrower’s credit status is a continual process that is performed by the Company’s staff with periodic participation from an independent external loan review group.

Troubled debt restructurings (“TDR”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company seeks to assist these borrowers by working with them to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan while ensuring compliance with the Federal Financial Institutions Examination Council (FFIEC) guidelines. To facilitate this process, a formal concessionary modification that would not otherwise be considered may be granted resulting in classification of the loan as a TDR.  All modifications are considered troubled debt restructurings.

The modification may include a change in the interest rate or the payment amount or a combination of both.  Substantially all modifications completed under a formal restructuring agreement are considered TDRs.  Modifications can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. These restructurings rarely result in the forgiveness of principal or interest.

With respect to commercial TDRs, an analysis of the credit evaluation, in conjunction with an evaluation of the borrower’s performance prior to the restructuring, are considered when evaluating

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the borrower’s ability to meet the restructured terms of the loan agreement.  Nonperforming commercial TDRs may be returned to accrual status based on a current, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment under the modified terms.  This evaluation must include consideration of the borrower’s sustained historical repayment performance for a reasonable period (generally a minimum of six months) prior to the date on which the loan is returned to accrual status.

In connection with consumer loan TDRs, a nonperforming loan will be returned to accruing status when current as to principal and interest and upon a sustained historical repayment performance (generally a minimum of six months).  At March 31, 2012 and December 31, 2011 all restructurings were classified as TDRs.

The following table summarizes the Company’s TDRs and loans modifications (in thousands):

	March 31, 2012		December 31, 2011
Troubled Debt Restructured Loans:
Restructured loans still accruing	$	5,426	$	5,051
Restructured loans nonaccruing	6,256		4,044
Other Loan Modifications	—		—
Total restructured and modified loans	$	11,682	$	9,095

Troubled debt restructured loans that have performed in accordance with the restructured terms of the agreement for one year and for which an interest rate concession was not granted are removed from the TDR classification.

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.

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments.  However, the entire allowance for loan losses is available for any loan that, in the judgment of management, should be charged-off. For the first quarter of 2012, based on the Company’s evaluation, the provision for loan losses charged against operating earnings increased by $275,000 to $750,000 compared to $475,000 for the same three month period last year. Approximately $666,000 of the allowance for loan losses was allocated to loans management considered impaired at March 31, 2012, compared to $752,000 at December 31, 2011.

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At March 31, 2012, 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.

The following table summarizes loans, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expense as of and for the three month periods ended March 31, 2012 and 2011 (amount in thousands, except financial ratios):

	2012			2011
Loans, net of unearned income	$	194,339		$	192,129
Average loans, net of unearned income and the allowance for loan losses	$	192,546		$	190,828
Allowance for loan losses at the beginning of period	$	3,956		$	4,188
Loans charged-off:
Commercial, financial, and agricultural	7			—
Real estate - loans	794			809
Installment loans to individuals	22			49
Total loans charged-off	823			858
Recoveries of loans previously charged off:
Commercial, financial, and agricultural	8			1
Real estate - loans	11			3
Installment loans to individuals	25			32
Total loans recovered	44			36
Net loans charged-off	779			822
Additions to allowance for loan losses charged to operating expense	750			475
Allowance for loan losses at period end	$	3,927		$	3,841
Ratio of net loans charged-off to average loans, net of unearned income and the allowance for loan losses	0.40		%	0.43		%
Ratio of allowance for loan losses to loans, net of unearned income	2.02		%	2.00		%

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The following table presents the allocation of the allowance for loan losses.  The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses, and other factors that may affect future loan losses in the categories of loans shown (amount in thousands):

	March 31, 2012				December 31, 2011
			Percent of				Percent of
	Amount		Total Loans		Amount		Total Loans
Commercial, financial, and agricultural	$	385	11	%	$	394	11	%
Commercial Real Estate	1,996		63	%	2,206		63	%
Single-family Residential	770		19	%	696		19	%
Construction and Development	568		3	%	449		3	%
Consumer	208		4	%	211		4	%
Total allowance for loan losses	$	3,927	100	%	$	3,956	100	%

DEPOSITS

Deposits are the Company’s primary source of funding loan growth.  Total deposits at March 31, 2012 increased by 2.9% or $10,082,000 to $353,113,000 compared to December 31, 2011.  The bank has a stable core deposit base with a high percentage of non-interest bearing deposits.  Noninterest-bearing deposits increased by $8,405,000, or 14.1%, to $67,987,000 due to additional funds received from municipal customers and interest-bearing deposits increased by $1,677,000, to $285,126,000 for the three month period ending March 31, 2012.  On an average basis, noninterest-bearing deposits increased for the first three months of the year to $63,938,000 compared to $61,064,000 at December 31, 2011.  Average interest-bearing deposits increased by $7,071,000 to $284,144,000 at March 31, 2012 compared to $277,073,000 at December 31, 2011.  As a result of the high level of low cost core deposits, the Company maintained an annualized net interest margin on a fully tax equivalent basis of 4.31% at March 31, 2012 compared to 4.45% reported for the same period last year.

The Company is participating in the Temporary Liquidity Guarantee Program’s full coverage of noninterest-bearing deposit transaction accounts.  In addition, the Company participates in Certificate of Deposit Account Registry Services (“CDARS”), a program that allows its customers the ability to benefit from full FDIC insurance on CD investments.  At March 31, 2012 and December 31, 2011, the Company had $17,825,000 and $17,819,000, respectively, in CDARS deposits.  Participation in these programs has enhanced the Company’s ability to retain Corporate and Governmental customers that make sizeable deposits and withdrawals based on their budgetary needs.

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

	March 31		December 31,
	2012		2011
NOW and money market accounts	$	96,499	$	94,339
Savings accounts	32,434		31,458
Time deposits of $100,000 or more	119,494		120,236
Other time deposits	36,699		37,416
	$	285,126	$	283,449

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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 $305,000 at March 31, 2012 and $310,000 at December 31, 2011. These advances are collateralized by FHLB stock, a blanket lien on 1-4 family and multifamily mortgage loans, certain commercial real estate loans and investment securities.  As of March 31, 2012 and December 31, 2011, total loans pledged as collateral was $28,964,000, respectively.

Maturity	Callable	Type		March 31, 2012				December 31, 2011
				(in thousands)
August 2026			(1)	—		305		—		310
Total Principal Outstanding						$	305			$	310
Weighted Average Rate at Period End				—	%			—	%

(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.

At March 31, 2012, the Company had a $79.4 million line of credit facility at the FHLB of which $20.3 million was committed consisting of an advance of $305,000 and a letter of credit to secure public deposits in the amount of $20.0 million.  The Company also had $20.2 million of borrowing capacity at the Federal Reserve Bank discount window.

RESULTS OF OPERATIONS

Net Interest Income:

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

For the three-month period ended March 31, 2012, net interest income increased by $65,000 or 1.8% to $3,638,000 compared to $3,573,000 reported for the same period last year.  Total interest income declined by $76,000 to $3,935,000 compared to the same three month period in 2011 primarily due to a $156,000 decrease in interest income on investment securities, which was partially offset by an increase in interest income on loans of $78,000. Interest income on investment securities declined by $156,000 due to lower yields earned on investment securities compared to the first quarter of 2011.  Total interest expense for the period decreased by $141,000 or 32.2% compared to the same three month period in 2011 as the Company lowered its funding cost and improved its deposit mix.  At March 31, 2012, the Company’s annualized cost of funds was approximately 0.33% compared to 0.51%  for the same period last year.

At March 31, 2012, the Company maintained an annualized net interest margin on a fully tax equivalent basis of 4.31% compared to 4.45% reported at March 31, 2011.

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

Provision for loan losses

For the first three months of 2012, the Company recognized a provision for loan losses of $750,000, a $275,000 or 57.9% increase, compared to $475,000 for the same period in 2011 due to a large charge-off during the first quarter of 2012.  The allowance for loan losses was $3,927,000 at March 31, 2012 compared to $3,956,000 at December 31, 2011.  The allowance for loan losses was 32.91% of nonperforming loans at March 31, 2012 and 30.54% at December 31, 2011.  The provision for loan losses and the resulting allowance for loan losses are based on changes in the size and character of the Company’s loan portfolio, changes in nonperforming and past due loans, the existing risk of individual loans, concentrations of loans to specific borrowers or industries, and economic conditions. At March 31, 2012, the Company considered its allowance for loan losses to be adequate.

Noninterest income:

Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services and commissions earned through insurance sales.  In addition, gains and losses realized from the sale of investment portfolio securities and sales of assets are included in noninterest income.

Noninterest income totaled $1,472,000 for the three month period ended March 31, 2012, an increase of $231,000, or 18.6% compared with the same period last year.  The increase in the first quarter of 2012 is primarily attributed to an increase in net gain on sales of securities of $259,000 to $322,000 at March 31, 2012, compared to $63,000 at March 31, 2011, and an increase in other operating income of $61,000 to $370,000, which were partially off-set by a decrease in service charges on deposits of $83,000 to $780,000. The majority of the decrease in service charges on deposits was due to lower NSF fees earned in the current quarter.

Noninterest expense:

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

Non-interest expense in the first quarter of 2012 was relatively consistent at $4,376,000 compared to $4,252,000 for the same quarter last year.  OREO related expenses and write-downs increased by $437,000 to $767,000 from $330,000 reported for the first quarter of 2011, due to several additional write-downs of properties in 2012. For the three month period ended March 31, 2012, salaries and employee benefits decreased by $175,000 due to fewer full-time employees (“FTE”) at March 31, 2012 compared to March 31, 2011.  In its continual effort to manage it core expenses, the Company reduced its staffing level at March 31, 2012 to 207 FTE’s compared to 214 FTE’s at March 31, 2011.  The Company has also made the decision that no merit salary increases will be awarded in 2012.  Other operating expenses decreased by $146,000 due to lower professional fees, lower FDIC insurance premiums, and lower retirement plan accruals.  Net occupancy cost increased by $60,000, compared to the same period last year due to higher rental expense, equipment and software maintenance, and insurance expense.

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INTEREST RATE SENSITIVITY MANAGEMENT

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

One method of measuring the impact of interest rate sensitivity is the cumulative gap analysis.  The difference between interest rate sensitive assets and interest rate sensitive liabilities at various time intervals is referred to as the gap.  The Company is liability sensitive on a short-term basis as reflected in the following table.  Generally, a net liability sensitive position indicates that there would be a negative impact on net interest income in an increasing rate environment.  However, interest rate sensitivity gap does not necessarily indicate the impact of general interest rate movements on the net interest margin, since all interest rates and yields do not adjust at the same velocity and the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company’s customers.  In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. The following table shows the contractual maturities of all interest rate sensitive assets and liabilities at March 31, 2012.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  Taking a conservative approach, the Company has included demand deposits such as NOW, money market, and savings accounts in the three month category.  However, the actual repricing of these accounts may extend beyond twelve months.  The interest rate sensitivity gap is only a general indicator of potential effects of interest rate changes on net interest income.

The following table sets forth the distribution of the repricing of the Company’s interest rate sensitive assets and interest rate sensitive liabilities as of March 31, 2012.

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	Cumulative amounts as of March 31, 2012
	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	$	30,467		$	—		$	—		$	—		$	30,467
Certificates of deposit	—			100			—			—			100
Investments	120			132			7,721			131,257			139,230
Loans	42,662			29,636			86,390			35,651			194,339
Total interest-sensitive assets	$	73,249		$	29,868		$	94,111		$	166,908		$	364,136
Interest-sensitive liabilities:
Deposits (a)	$	192,309		$	73,820		$	18,997		$	—		$	285,126
Other borrowings	—			—			—			305			305
Total interest-sensitive liabilities	$	192,309		$	73,820		$	18,997		$	305		$	285,431
Interest-sensitivity gap	$	(119,060	)	$	(43,952	)	$	75,114		$	166,603		$	78,705
Cumulative interest-sensitivity gap to total interest-sensitive assets	(32.70		)%	(44.77		)%	(24.14		)%	21.61		%	21.61		%

(a) Savings, Now, and money market deposits totaling $128,933 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.  On August 13, 2010, the Company exchanged the outstanding 7,462 shares of Series A Preferred Stock for 7,462 shares of Series B Preferred Stock.  No monetary consideration was given in connection with this exchange.  The Company also issued 4,379 shares of Series C Preferred Stock for $4,379,000 to the Treasury on September 17, 2010.  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 from the Federal Reserve Bank Discount Window and the Federal Home Loan Bank are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity.  At March, 31, 2012, the Company had a $79.4 million line of credit facility at the FHLB of which $20.3 million was committed consisting of an advance of $305,000 and a letter of credit to secure public deposits in the amount of $20.0 million.  The Company also had $20.2 million of borrowing capacity at the Federal Reserve Bank discount window.  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 decreased by $35,000 for the three month period ended March 31, 2012. This decrease is primarily due to a decrease in the unrealized net gains of the investment portfolio as of March 31, 2012 compared to December 31, 2011.

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 18%, 17% and 10% at March 31, 2012 and 18%, 16% and 11% at December 31, 2011, respectively.  The Bank’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 18%, 16% and 10% at March 31, 2012 and 17%, 16% and 10% at December 31, 2011, respectively. At March 31, 2012, the Company and the Bank met all capital adequacy requirements to which it is subject and is considered to be ‘‘well capitalized” under regulatory standards.

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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 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, and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2012 in accumulating and communicating information to management, including the Chief Executive Officer, and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports filed or submitted by the Company under the Securities Exchange Act is recorded, processed, summarized and reported within the specified time periods.  During the quarter ended March 31, 2012, there have been no changes in the Company’s internal controls over financial reporting or, to the Company’s knowledge, in other factors that could significantly change those internal controls subsequent to the date the Company carried out its evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  However, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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PART II.  OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

ITEM 1A.RISK FACTORS

We believe there have been no material changes from the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.  You should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

None

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.MINE SAFETY DISCLOSURES

Not Applicable

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.

Exhibit 101

Interactive data files providing financial information from the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2012 in XBRL.  Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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SIGNATURES

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

CITIZENS BANCSHARES CORPORATION

Date:	May 15, 2012	By:	/s/ Cynthia N. Day
		Cynthia N. Day
		President and Chief Executive Officer
Date:	May 15, 2012	By:	/s/ Samuel J. Cox
		Samuel J. Cox
		Executive Vice President and Chief Financial Officer

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