UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

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

For the quarterly period ended March 31, 2013

OR

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

For the transition period from                    to                

Commission File No:  0 - 14535

CITIZENS BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

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

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: 2,056,790 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 15, 2013.

PART 1.FINANCIAL INFORMATION

ITEM 1.Financial Statements

1

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2013 AND DECEMBER 31, 2012

(In thousands, except share data)

	2013			2012
	(Unaudited)
ASSETS
Cash and due from banks	$	5,102		$	5,384
Interest-bearing deposits with banks	40,030			34,803
Certificates of deposit	100			100
Investment securities available for sale, at fair value	130,698			129,866
Investment securities held to maturity, at cost	926			1,356
Other investments	874			995
Loans receivable, net	180,101			187,489
Premises and equipment, net	6,879			6,956
Cash surrender value of life insurance	9,682			9,620
Foreclosed real estate	9,172			8,195
Other assets	10,679			10,841
Total assets	$	394,243		$	395,605
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	67,366		$	59,342
Interest-bearing deposits	272,029			281,251
Total deposits	339,395			340,593
Accrued expenses and other liabilities	5,398			5,566
Advances from Federal Home Loan Bank	287			292
Total liabilities	345,080			346,451
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; 2,292,728 and 2,250,364 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively	2,293			2,250
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding	90			90
Nonvested restricted common stock	(52		)	(57		)
Additional paid-in capital	7,932			7,942
Retained earnings	26,403			26,190
Treasury stock at cost, 235,938 and 220,525 shares at March 31, 2013 and December 31, 2012, respectively	(1,882		)	(1,820		)
Accumulated other comprehensive income, net of income taxes	2,538			2,718
Total stockholders’ equity	49,163			49,154
	$	394,243		$	395,605

See notes to condensed consolidated financial statements.

2

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - In thousands, except per share data)

	Three Months Ended March 31,
	2013			2012
Interest income:
Loans, including fees	$	2,538		$	3,006
Investment securities:
Taxable	375			504
Tax-exempt	340			409
Interest-bearing deposits	20			16
Total interest income	3,273			3,935
Interest expense:
Deposits	235			297
Total interest expense	235			297
Net interest income	3,038			3,638
Provision for loan losses	225			750
Net interest income after provision for loan losses	2,813			2,888
Noninterest income:
Service charges on deposits	768			780
Gain on sales of securities	141			322
Other operating income	328			370
Total noninterest income	1,237			1,472
Noninterest expense:
Salaries and employee benefits	1,615			1,654
Net occupancy and equipment	510			576
Amortization of core deposit intangible	118			118
FDIC insurance	130			146
Other real estate owned, net	248			781
Other operating expenses	1,192			1,101
Total noninterest expense	3,813			4,376
Income (loss) before income taxes	237			(16		)
Income tax benefit	(35		)	(149		)
Net income	$	272		$	133
Preferred dividends	59			59
Net income available to common shareholders	$	213		$	74
Net income per common share - basic and diluted	$	0.10		$	0.03
Weighted average common outstanding shares - basic	2,146			2,134
Weighted average common outstanding shares - diluted	2,152			2,148

See notes to condensed consolidated financial statements.

3

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - In thousands)

	Three Months Ended March 31,
	2013			2012
Net Income	$	272		$	133
Other Comprehensive Income
Unrealized holding (loss) gain on investment securities available for sale, net of tax of $44 for 2013 and $48 for 2012	(87		)	93
Reclassification adjustment for holding gains included in net income, net of tax of $48 for 2013 and $109 for 2012	(93		)	(213		)
Other Comprehensive Loss	(180		)	(120		)
Total Comprehensive Income	$	92		$	13

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

4

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(Unaudited  — In thousands, except parenthetical footnotes)

																								Accumulated
							Nonvoting			Nonvested			Additional											Other
	Preferred Stock			Common Stock			Common Stock			Restricted			Paid-in			Retained			Treasury Stock					Comprehensive
	Shares	Amount		Shares	Amount		Shares	Amount		Stock			Capital			Earnings			Shares		Amount			Income (Loss)			Total
Balance—December 31, 2011	12	$	11,841	2,237	$	2,237	90	$	90	$	(86	)	$	7,809		$	25,828		(219	)	$	(1,810	)	$	2,624		$	48,533
Net loss	—	—		—	—		—	—		—			—			133			—		—			—			133
Other Comprehensive Loss	—	—		—	—		—	—		—			—			—			—		—			(120		)	(120		)
Issuance of common stock	—	—		8	8		—	—		—			23			—			—		—			—			31
Nonvested restricted stock	—	—		—	—		—	—		(32		)	15			—			—		—			—			(17		)
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
Balance—December 31, 2012	12	$	11,841	2,250	$	2,250	90	$	90	$	(57	)	$	7,942		$	26,190		(221	)	$	(1,820	)	$	2,718		$	49,154
Net income	—	—		—	—		—	—		—			—			272			—		—			—			272
Other Comprehensive Loss	—	—		—	—		—	—		—			—			—			—		—			(180		)	(180		)
Issuance of common stock	—	—		43	43		—	—		—			137			—			—		—			—			180
Nonvested restricted stock	—	—		—	—		—	—		5			(147		)	—			—		—			—			(142		)
Purchase of treasury stock	—	—		—	—		—	—		—			—			—			(15	)	(62		)	—			(62		)
Dividends declared - preferred	—	—		—	—		—	—		—			—			(59		)	—		—			—			(59		)
Balance—March 31, 2013	12	$	11,841	2,293	$	2,293	90	$	90	$	(52	)	$	7,932		$	26,403		(236	)	$	(1,882	)	$	2,538		$	49,163

See notes to condensed consolidated financial statements.

5

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(In thousands)

	2013			2012
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	272		$	133
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	225			750
Depreciation	150			170
Amortization and accretion, net	388			248
Provision for deferred income tax benefit	(4		)	177
Gains on sale of assets and investments, net	(141		)	(322		)
Restricted stock based compensation plan	(142		)	(17		)
Decrease in carrying value of other real estate owned	116			651
Net loss on sale of other real estate owned	2			43
Change in other assets	71			(363		)
Change in accrued expenses and other liabilities	(168		)	(249		)
Net cash provided by operating activities	769			1,221
INVESTING ACTIVITIES:
Proceeds from calls and maturities of investment securities held to maturity	430			1
Proceeds from sales and maturities of investment securities available for sale	9,124			10,953
Purchases of investment securities available for sale	(10,224		)	(22,720		)
Net change in loans receivable	5,904			3,462
Proceeds from the sale of other real estate owned	159			243
Purchases of premises and equipment, net	(73		)	(51		)
Net cash provided by (used in) investing activities	5,320			(8,112		)
FINANCING ACTIVITIES:
Net change in deposits	(1,198		)	10,082
Net change in advances from Federal Home Loan Bank	(5		)	(5		)
Proceeds from issuance of common stock	180			31
Purchase of treasury stock	(62		)	(3		)
Dividends paid - preferred	(59		)	(59		)
Net cash provided by (used in) financing activities	(1,144		)	10,046
Net change in cash and cash equivalents	4,945			3,155
Cash and cash equivalents, beginning of period	40,187			33,452
Cash and cash equivalents at end of period	$	45,132		$	36,607
Supplemental disclosures of cash paid during the period for:
Interest	$	254		$	307
Income taxes	$	26		$	28
Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure	$	1,254		895
Change in unrealized gain on investment securities available for sale, net of taxes	$	(180	)	$	(120	)

See notes to condensed consolidated financial statements.

6

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 seven 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, 2012.  The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2013 fiscal year.

The consolidated financial statements of the Company for the three month period ended March 31, 2013 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, 2012.  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”).

On September 17, 2010, the Company issued 4,379 shares of its Series C Preferred Shares to the

7

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.

Recently Issued Accounting Standards

In July 2012, the Intangibles topic was amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that indefinite-lived intangible assets are impaired. If it is determined to be more likely than not that indefinite-lived intangible assets are impaired, then the entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The amendments did not have a material effect on the Company’s financial statements.

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminated the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and required consecutive presentation of the statement of net income and other comprehensive income.  The amendments were applicable to the Company 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 while the FASB redeliberated the presentation requirements for the reclassification adjustments.  In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations.  Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements.  However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.  The amendments are effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012. Early adoption is permitted.  These amendments did not have a material effect on the Company’s financial statements.

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

8

2. INVESTMENTS

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

At March 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	36,037	$	2,574	$	—	$	38,611
Mortgage-backed securities	81,055		1,238		159		82,134
Corporate securities	9,760		213		20		9,953
Totals	$	126,852	$	4,025	$	179	$	130,698

At December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	36,977	$	2,887	$	—	$	39,864
Mortgage-backed securities	79,025		1,357		134		80,248
Corporate securities	9,746		135		127		9,754
Totals	$	125,748	$	4,379	$	261	$	129,866

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

At March 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	926	$	16	$	—	$	942

At December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State, county, and municipal securities	$	1,356	$	24	$	—	$	1,380

9

The amortized costs and fair values of investment securities at March 31, 2013, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with and without call or prepayment penalties (in thousands).

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	12,267		12,600		926		942
Due after five years through ten years	26,701		28,396		—		—
Due after ten years	87,884		89,702		—		—
	$	126,852	$	130,698	$	926	$	942

Securities with carrying values of $86,861,747 and $82,428,000 for the three months ended March 31, 2013 and December 31, 2012, respectively, were pledged to secure public deposits, FHLB advances and a $16.4 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 $1,082,000 and $3,356,000 at March 31, 2013 and March 31, 2012, respectively. Gross realized gains on sales of securities were $141,000 and $322,000 for the three months ended March 31, 2013 and 2012, respectively. There were no gross realized losses on sales of securities for the three months ended March 31, 2013 and 2012, 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, 2013 and December 31, 2012. 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).

10

At March 31, 2013

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	$	20,757	$	(159	)	$	—	$	—		$	20,757	$	(159	)
Corporate	—		—			1,980		(20		)	1,980		(20		)
Total	$	20,757	$	(159	)	$	1,980	$	(20	)	$	22,737	$	(179	)

Securities Held to Maturity

There were no securities classified as held to maturity in an unrealized loss position at March 31, 2013.

At December 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	$	17,834	$	(134	)	$	—	$	—		$	17,834	$	(134	)
Corporate	1,985		(16		)	3,889		(111		)	5,874		(127		)
Total	$	19,819	$	(150	)	$	3,889	$	(111	)	$	23,708	$	(261	)

Securities Held to Maturity

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

The Company’s available for sale portfolio had one and two investment securities at March 31, 2013 and December 31, 2012, respectively, 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 is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

11

3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

	March 31,		December 31,
	2013		2012
Commercial, financial, and agricultural	$	20,900	$	23,510
Commercial Real Estate	118,586		125,239
Single-Family Residential	35,619		34,523
Construction and Development	2,448		1,813
Consumer	5,963		5,913
	183,516		190,998
Allowance for loan losses	3,415		3,509
	$	180,101	$	187,489

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

	March 31, 2013			December 31, 2012			March 31, 2012
Balance at beginning of period	$	3,509		$	3,956		$	3,956
Provision for loan losses	225			2,400			750
Loans charged-off	(388		)	(3,069		)	(823		)
Recoveries on loans previously charged-off	69			222			44
Balance at end of period	$	3,415		$	3,509		$	3,927

12

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

	For the Three Month Period Ended March 31, 2013
	Commercial			Commercial Real Estate			Single-family Residential			Construction & Development			Consumer			Total
Beginning balance	$	433		$	1,853		$	803		$	177		$	243		$	3,509
Provision for loan losses	(31		)	14			136			39			67			225
Loans charged-off	(5		)	(65		)	(216		)	(30		)	(72		)	(388		)
Recoveries on loans charged-off	11			26			11			—			21			69
Ending Balance	$	408		$	1,828		$	734		$	186		$	259		$	3,415

	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, 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	27			1,761			646			(140		)	106			2,400
Loans charged-off	(21		)	(2,138		)	(625		)	(136		)	(149		)	(3,069		)
Recoveries on loans charged-off	33			24			86			4			75			222
Ending Balance	$	433		$	1,853		$	803		$	177		$	243		$	3,509

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

13

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, 2013
	Commercial		Commercial Real Estate		Single-family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	354	$	—	$	—	$	—	$	354
Total specific reserves	—		354		—		—		—		354
General reserves	408		1,474		734		186		259		3,061
Total	$	408	$	1,828	$	734	$	186	$	259	$	3,415
Loans individually evaluated for impairment	$	—	$	13,298	$	434	$	120	$	—	$	13,852
Loans collectively evaluated for impairment	20,900		105,288		35,185		2,328		5,963		169,664
Total	$	20,900	$	118,586	$	35,619	$	2,448	$	5,963	$	183,516

	At December 31, 2012
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	319	$	1	$	—	$	—	$	320
Total specific reserves	—		319		1		—		—		320
General reserves	433		1,534		802		177		243		3,189
Total	$	433	$	1,853	$	803	$	177	$	243	$	3,509
Loans individually evaluated for impairment	$	—	$	17,248	$	516	$	278	$	—	$	18,042
Loans collectively evaluated for impairment	23,510		107,991		34,007		1,535		5,913		172,956
Total	$	23,510	$	125,239	$	34,523	$	1,813	$	5,913	$	190,998

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

	At March 31, 2013
							Impaired Loans - With
	Impaired Loans - With Allowance						no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment
Residential:
First mortgages	$	—	$	—	$	—	$	231	$	231
HELOC’s and equity	—		—		—		203		203
Commercial
Secured	—		—		—		—		—
Unsecured	—		—		—		—		—
Commercial Real Estate:
Owner occupied	1,039		1,039		281		6,932		6,845
Non-owner occupied	1,057		1,003		73		4,326		4,081
Multi-family	—		—		—		330		330
Construction and Development:
Construction	—		—		—		120		120
Improved Land	—		—		—		—		—
Unimproved Land	—		—		—		—		—
Consumer and Other	—		—		—		—		—
Total	$	2,096	$	2,042	$	354	$	12,142	$	11,810

The following table presents the average recorded investment and interest income recognized on impaired loans by class of loan (in thousands):

	March 31, 2013				March 31, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential:
First mortgages	$	231	$	—	$	—	$	—
HELOC’s and equity	204		9		711		5
Commercial
Secured	—		—		—		—
Unsecured	—		—		—		—
Commercial Real Estate:
Owner occupied	7,898		199		4,828		64
Non-owner occupied	5,404		47		7,696		262
Multi-family	367		29		406		8
Construction and Development:
Construction	122		8		343		18
Improved Land	—		—		620		3
Unimproved Land	—		—		—		—
Consumer and Other	—		—		—		—
Total	$	14,226	$	292	$	14,604	$	360

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	At December 31, 2012
	Impaired Loans - With Allowance						Impaired Loans - With no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Average Recorded Investment		Interest Income Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	234	$	230	$	231	$	—
HELOC’s and equity	77		77		1		261		209		210		44
Commercial
Secured	—		—		—		—		—		—		—
Unsecured	—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied	2,856		2,856		293		7,199		7,199		10,116		480
Non-owner occupied	492		319		24		7,056		5,770		6,420		673
Multi-family	388		388		2		716		716		1,053		103
Construction and Development													.
Construction	—		—		—		120		121		122		55
Improved Land	—		—		—		418		157		169		6
Unimproved Land	—		—		—		—		—		—		—
Consumer and Other	—		—				—		—		—		—
Total	$	3,813	$	3,640	$	320	$	16,004	$	14,402	$	18,321	$	1,361

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

	At March 31, 2013
	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	$	2,592	$	193	$	2,355	$	5,140	$	21,217	$	26,357	$	—	$	2,819
HELOC’s and equity	210		24		358		592		8,670		9,262		—		385
Commercial:
Secured	30		16		—		46		15,337		15,383		—		24
Unsecured	—		—		—		—		5,517		5,517		—		—
Commercial Real Estate:
Owner occupied	693		179		258		1,130		44,088		45,218		—		2,521
Non-owner occupied	897		46		5,385		6,328		54,980		61,308		—		5,956
Multi-family	—		—		—		—		12,060		12,060		—		—
Construction and Development:
Construction	—		—		—		—		1,792		1,792		—		—
Improved Land	48		—		120		168		117		285		—		120
Unimproved Land	28		—		—		28		343		371		—		—
Consumer and Other	69		9		68		146		5,817		5,963		—		68
Total	$	4,567	$	467	$	8,544	$	13,578	$	169,938	$	183,516	$	—	$	11,893

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	At December 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	$	1,550	$	957	$	3,116	$	5,623	$	20,106	$	25,729	$	—	$	3,721
HELOC’s and equity	218		32		291		541		8,253		8,794		—		321
Commercial:
Secured	24		—		5		29		16,827		16,856		—		5
Unsecured	5		—		—		5		6,649		6,654		—		—
Commercial Real Estate:
Owner occupied	1,463		188		394		2,045		55,603		57,648		—		2,029
Non-owner occupied	353		634		3,613		4,600		50,486		55,086		—		4,355
Multi-family	—		—		—		—		12,505		12,505		—		—
Construction and Development:
Construction	767		—		—		767		222		989		—		—
Improved Land	—		—		120		120		331		451		—		120
Unimproved Land	—		—		157		157		216		373		—		157
Consumer and Other	49		43		87		179		5,734		5,913		—		87
Total	$	4,429	$	1,854	$	7,783	$	14,066	$	176,932	$	190,998	$	—	$	10,795

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

17

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 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 impairment, 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.

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

19

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

	At March 31, 2013
	Total		Pass Credits		Special Mention		Substandard		Doubtful
Residential:
First mortgages	$	26,357	$	23,009	$	800	$	2,548	$	—
HELOC’s and equity	9,262		8,754		24		484		—
Commercial:
Secured	15,383		15,334		32		16		1
Unsecured	5,517		5,517		—		—		—
Commercial Real Estate:
Owner occupied	45,218		36,378		3,093		5,715		32
Non-owner occupied	61,308		49,024		8,314		3,961		9
Multi-family	12,060		11,018		648		394		—
Construction and Development:
Construction	1,792		1,672		120		—		—
Improved Land	285		237		—		48		—
Unimproved Land	371		—		—		371		—
Consumer and Other	5,963		5,828		55		80		—
Total	$	183,516	$	156,771	$	13,086	$	13,617	$	42

	At December 31, 2012
	Total		Pass Credits		Special Mention		Substandard		Doubtful
Residential:
First mortgages	$	25,729	$	21,656	$	—	$	4,073	$	—
HELOC’s and equity	8,794		7,745		583		466		—
Commercial:
Secured	16,856		16,788		37		31		—
Unsecured	6,654		5,456		1,185		13		—
Commercial Real Estate:
Owner occupied	57,648		44,252		9,551		3,845		—
Non-owner occupied	55,086		45,127		3,248		6,711		—
Multi-family	12,505		10,636		1,413		456		—
Construction and Development:
Construction	989		869		120		—		—
Improved Land	451		245		—		206		—
Unimproved Land	373		—		—		373		—
Consumer and Other	5,913		5,801		—		87		25
Total	$	190,998	$	158,575	$	16,137	$	16,261	$	25

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As a result of adopting the amendments in ASU 2011-02, the Bank reassessed all restructurings that occurred on or after the beginning of the year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. The Bank identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Bank identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. As of March 31, 2013, the Company did not identify any loans as TDRs under the amended guidance for which the loan was previously measured a general allowance methodology.

During the three months ended March 31, 2013, the Bank modified 2 loans that were considered to be troubled debt restructurings. We extended the terms and decreased the interest rate on 2 loans (dollar in thousands).

	March 31, 2013
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Commercial Real Estate:
Owner occupied	1	$	198	$	198
Non-owner occupied	1	62		62
Total	2	$	260	$	260

During the three months ended March 31, 2012, the Bank modified 4 loans that were considered to be troubled debt restructurings. We extended the terms and decreased the interest rate on 4 loans (dollar in thousands).

	March 31, 2012
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Commercial Real Estate:
Owner occupied	2	1,633		1,716
Non-owner occupied	2	947		953
Total	4	$	2,580	$	2,669

There were no loans restructured during the last twelve months that have experienced payment default subsequent to restructuring during the three months ended March 31, 2013 and 2012, respectively.

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 restructure date.

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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 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.

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Loans—The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, 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, 2013 and December 31, 2012, 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.

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):

23

	Fair Value Measurements at March 31, 2013
			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	$	38,611	$	—	$	38,611	$	—
Mortgage-backed securities	82,134		—		82,134		—
Corporate securities	9,953		—		9,953		—
	130,698				130,698
Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate	$	12,944	$	—	$	—	$	12,944
Single-family Residential	434		—		—		434
Construction and Development	120		—		—		120
Other real estate owned	9,172		—		—		9,172
	22,670						22,670
	Fair Value Measurements at December 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	$	39,864	$	—	$	39,864	$	—
Mortgage-backed securities	80,248		—		80,248		—
Corporate securities	9,754		—		9,754		—
	129,866				129,866
Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate	$	16,929	$	—	$	—	$	16,929
Single-family Residential	515		—		—		515
Construction and Development	278		—		—		278
Other real estate owned	8,195		—		—		8,195
	25,917						25,917

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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, 2013, 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, 2013		Technique	Inputs	Range
Impaired Loans:
Commercial Real Estate	$	12,944	Appraised Value	Negative adjustment for selling costs and changes in market conditions since appraisal	5% - 20%
Single-family Residential	$	434	Appraised Value	Negative adjustment for selling costs and changes in market conditions since appraisal	5% - 20%
Construction & Development	$	120	Appraised Value	Negative adjustment for selling costs and changes in market conditions since appraisal	5% - 20%
OREO	$	9,172	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 is 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

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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 are 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 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 are 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.

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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, 2013 (in thousands):

	March 31, 2013
	Carrying	Fair Value Measurements
	Amount	Total	Level 1	Level 2	Level 3
Financial assets:
Cash and due from banks	5,102	5,102	5,102	—	—
Interest-bearing deposits with banks	40,030	40,030	40,030	—	—
Cetificates of deposit	100	100	100	—	—
Investment securities	131,624	131,640	—	131,640	—
Other investments	874	874	874	—	—
Loans—net	180,101	180,534	—	—	180,534
Cash surrender value of life insurance	9,682	9,682	9,682	—	—
Financial liabilities:
Deposits	339,395	332,761	—	332,761	—
Advances from Federal Home Loan Bank	287	—	—	287	—

	Notional	Estimated
	Amount	Fair Value
Off-balance-sheet financial instruments:
Commitments to extend credit	20,015	—
Commercial letters of credit	2,218	—

The carrying values and estimated fair values of the Company’s financial instruments at December 31, 2012 are as follows:

	December 31, 2012
	Carrying	Fair Value Measurements
	Amount	Total	Level 1	Level 2	Level 3
Financial assets:
Cash and due from banks	5,384	5,384	5,384	—	—
Interest-bearing deposits with banks	34,803	34,803	34,803	—	—
Cetificates of deposit	100	100	100	—	—
Investment securities	131,222	131,246	—	131,246	—
Other investments	995	995	995	—	—
Loans—net	187,489	188,233	—	—	188,233
Cash surrender value of life insurance	9,620	9,620	9,620	—	—
Financial liabilities:
Deposits	340,593	334,105	—	334,105	—
Advances from Federal Home Loan Bank	292	292	—	292	—

	Notional	Estimated
	Amount	Fair Value
Off-balance-sheet financial instruments:
Commitments to extend credit	24,335	—
Commercial letters of credit	2,218	—

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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,
	2013			2012
Balance—beginning of period	$	8,195		$	10,076
Additions	1,254			4,660
Sales	(161		)	(4,074		)
Write downs	(116		)	(2,467		)
Balance—end of period	$	9,172		$	8,195

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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 Condensed 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, 2013				December 31, 2012
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Unamortized intangible asset:
Goodwill	$	362	$	—	$	362	$	—
Amortized intangible assets:
Core deposit intangibles	$	3,676	$	2,260	$	3,676	$	2,142

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

	Three months ended March 31,
	2013		2012
Aggregate amortization expense of core deposit intangibles:	$	118	$	118
Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:
2013	$	472
2014	$	472
2015	$	472
2016	$	118
2017 and thereafter	$	—

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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 months ended March 31, 2013 and 2012 (in thousands, except per share data):

	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
Three Months ended March 31, 2013
Basic earnings per share available to common stockholders	$	213	2,146	$	0.10
Nonvested restricted stock grant	—		6	—
Effect of dilutive securities: options to purchase common shares	—		—	—
Diluted earnings per share	$	213	2,152	$	0.10
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

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8.  SUBSEQUENT EVENTS

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

9.  RECLASSIFICATIONS

Certain amounts in the 2012 consolidated financial statements were reclassified to conform to the 2013 presentation. These reclassifications had no effect on shareholders’ 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 10 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, 2013 and December 31, 2012, and the changes in the financial condition and results of operations for the three months ended March 31, 2013 and 2012.

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 2013 or 2012.

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

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

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

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

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

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

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

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

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

A description of other accounting policies are summarized in Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  The Company has followed those policies in preparing this report.

FINANCIAL CONDITION

At March 31, 2013, the Company had total assets of $394,243,000 compared to $395,605,000 at December 31, 2012.  Total assets consisted primarily of $132,498,000 in investment securities and $180,101,000 in net loans representing 34% and 46% of total assets, respectively.  Investment securities and net loans represented 33% and 47% of total assets at December 31, 2012.

Interest-bearing deposits with banks increased by $5,227,000 to $40,030,000 for the three months ended March 31, 2013 compared to December 31, 2012.  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 $7,388,000 during the quarter. This decrease was primarily driven by a pay-off of a significant commercial real-estate loan. The customer was seeking terms that management felt would put the Bank in a precarious position regarding repayment.

At March 31, 2013, OREO increased by $977,000 to $9,172,000 compared to $8,195,000 reported at year-end of 2012. This increase primarily related to the foreclosure of one property in February 2013.

Cash value of life insurance, a comprehensive compensation program for directors and certain senior managers of the Company, increased $62,000 to $9,682,000 at March 31, 2013.  The increase primarily represents the earnings on the premiums paid over the life of the insurance contract.

The Company’s liabilities at March 31, 2013 totaled $345,080,000 and consisted primarily of $339,395,000 in deposits, representing a decrease of $1,198,000 compared to total deposits of $340,593,000 at December 31, 2012.  FHLB advances totaled $287,000 compared to $292,000 at December 31, 2012.

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, 2013 and December 31, 2012, the investment securities portfolio represented approximately 34% and 33%, 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,
	2013		2012
Commercial, financial, and agricultural	$	20,900	$	23,510
Commercial Real Estate	118,586		125,239
Single-Family Residential	35,619		34,523
Construction and Development	2,448		1,813
Consumer	5,963		5,913
Loans receivable	183,516		190,998
Allowance for loan losses	3,415		3,509
Loans receivable, net	$	180,101	$	187,489

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 real estate loans.  At March 31, 2013 and December 31, 2012, real estate loans, which represent commercial and industrial real estate and other loans secured by single-family properties, totaled $154.2 million and $159.8 million, respectively, and represented 84.0% and 83.6% of loans, respectively, net of unearned income for the period.

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

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·The Company’s loans to area churches, which are generally secured by real estate, were approximately $45.0 million and $49.5 million at March 31, 2013 and December 31, 2012, respectively.

·The Company’s loans to area convenience stores were approximately $9.6 million and $9.3 million at March 31, 2013 and December 31, 2012, respectively.  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 $24.7 and $24.8 million at March 31, 2013 and December 31, 2012, respectively.

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.

For the period, nonperforming assets increased by $2,075,000 to $21,065,000 compared to $18,990,000 at December 31, 2012.  This increase is primarily related to a $977,000 increase in OREO and a $1,098,000 increase in nonaccrual loans.  The Company charged-off $388,000 in nonperforming loans during the first three months of 2013 which is a decrease of $435,000 compared to $823,000 charged-off for the same period last year. At March 31, 2013, nonperforming assets represent 5.34% of total assets compared to 4.80% at December 31, 2012.  There were no loans greater than 90 days past due and still accruing interest at the end of the first quarter of 2013 or at December 31, 2012.

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The table below presents a summary of the Company’s nonperforming assets at March 31, 2013 and December 31, 2012.

	March 31,			December 31,
	2013			2012
	(in thousands, except
	financial ratios)
Nonperforming assets:
Nonperforming loans:
Restructured nonperforming loans (TDRs)	$	4,206		$	3,941
Other nonaccrual loans	7,687			6,854
Past-due loans of 90 days or more and still accruing	—			—
Nonperforming loans	11,893			10,795
Real estate acquired through foreclosure	9,172			8,195
Total nonperforming assets	$	21,065		$	18,990
Ratios:
Nonperforming loans to loans, net of unearned income	6.48		%	5.65		%
Nonperforming assets to loans, net of unearned income, and real estate acquired through foreclosure	10.93		%	9.53		%
Nonperforming assets to total assets	5.34		%	4.80		%
Allowance for loan losses to nonperforming loans	28.71		%	32.51		%
Allowance for loan losses to nonperforming assets	16.21		%	18.48		%

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.

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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 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, 2013 and December 31, 2012 all restructurings were classified as TDRs.

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

	March 31, 2013		December 31, 2012
Troubled Debt Restructured Loans:
Restructured loans still accruing	$	6,238	$	6,258
Restructured loans nonaccruing	4,206		3,941
Total restructured and modified loans	$	10,444	$	10,199

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 2013, based on the Company’s evaluation, the provision for loan losses charged against operating earnings decreased by $525,000 to $225,000 compared to $750,000 for the same three month period last year due to improved credit quality. Approximately $354,000 of the allowance for loan losses was allocated to loans management

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considered impaired at March 31, 2013 compared to $320,000 at December 31, 2012.

At March 31, 2013, 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.

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The following table summarizes loans, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expense as of and for the three months ended March 31, 2013 and 2012 (amount in thousands, except financial ratios):

	2013			2012
Loans, net of unearned income	$	183,516		$	194,339
Average loans, net of unearned income and the allowance for loan losses	$	180,740		$	192,546
Allowance for loan losses at the beginning of period	$	3,509		$	3,956
Loans charged-off:
Commercial, financial, and agricultural	5			7
Real estate - loans	311			794
Installment loans to individuals	72			22
Total loans charged-off	388			823
Recoveries of loans previously charged off:
Commercial, financial, and agricultural	11			8
Real estate - loans	37			11
Installment loans to individuals	21			25
Total loans recovered	69			44
Net loans charged-off	319			779
Additions to allowance for loan losses charged to operating expense	225			750
Allowance for loan losses at period end	$	3,415		$	3,927
Ratio of net loans charged-off to average loans, net of unearned income and the allowance for loan losses	0.18		%	0.40		%
Ratio of allowance for loan losses to loans, net of unearned income	1.86		%	2.02		%

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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 loans 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, 2013				December 31, 2012
			Percent of				Percent of
	Amount		Total Loans		Amount		Total Loans
Commercial, financial, and agricultural	$	408	11	%	$	433	12	%
Commercial Real Estate	1,828		65	%	1,853		66	%
Single-family Residential	734		19	%	803		18	%
Construction and Development	186		2	%	177		1	%
Consumer	259		3	%	243		3	%
Total allowance for loan losses	$	3,415	100	%	$	3,509	100	%

DEPOSITS

Deposits are the Company’s primary source of funding loan growth.  Total deposits at March 31, 2013 decreased by 0.4% or $1,198,000 to $339,395,000 compared to December 31, 2012. The bank has a stable core deposit base with a high percentage of non-interest bearing deposits.  Noninterest-bearing deposits increased by $8,024,000 to $67,366,000 and interest-bearing deposits decreased by $9,222,000, or 3.3%%, to $272,029,000 for the three months ending March 31, 2013.  On an average basis, noninterest-bearing deposits decreased to $60,963,000 for the first three months of the year compared to $63,276,000 for the year ended December 31, 2012. Average interest-bearing deposits decreased by $4,462,000 to $274,236,000 at March 31, 2013 compared to $278,698,000 for the year ended December 31, 2012.  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 3.68% at March 31, 2013 compared to 4.31% reported for the same period last year.

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, 2013 and December 31, 2012, the Company had $19,322,000 and $14,964,000, respectively, in CDARS deposits.  Participation in this program has enhanced the Company’s ability to retain Corporate and Governmental customers’ with CD deposits higher than the FDIC $250,000 insurance coverage limit.

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

	March 31,		December 31,
	2013		2012
NOW and money market accounts	$	84,206	$	92,672
Savings accounts	32,985		32,770
Time deposits of $100,000 or more	119,864		121,223
Other time deposits	34,974		34,586
	$	272,029	$	281,251

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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 $287,000 at March 31, 2013 and $292,000 at December 31, 2012.

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, 2013 and December 31, 2012, total loans pledged as collateral was $26,203,000 and $25,087,000, respectively.

Maturity	Callable	Type		March 31, 2013				December 31, 2012
				(in thousands)
August 2026			(1)	—		287		—		292
Total Principal Outstanding						$	287			$	292
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, 2013 the Company had an $79.1 million line of credit facility at the FHLB of which $20.3 million was committed consisting of advances of $287,000 and a letter of credit to secure public deposits in the amount of $20.0 million.  The Company also had $16.5 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, 2013, net interest income decreased by $600,000 or 16.5% to $3,038,000 compared to $3,638,000 reported for the same period last year.  Total interest income decreased $662,000 or 16.8% compared to $3,935,000 for the same three month period in 2012. Interest income on loans declined $468,000 due to a challenging lending environment, loan payoffs, loans in nonaccrual status, and lower lending rates. Interest income on investment securities declined by $198,000 due to lower yields earned on investment securities compared to the first quarter of 2012.  Total interest expense for the period decreased by $62,000 or 20.9% compared to the same three month period in 2012 as the Company continues to lower its funding cost and improve its deposit mix.  At March 31, 2013 the Company’s cost of funds was approximately 0.27% compared to 0.33% for the same period last year.

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At March 31, 2013, the Company maintained an annualized net interest margin on a fully tax equivalent basis of 3.68%  compared to 3.87% in the previous quarter and 4.31% reported at March 31, 2012.  The Company continues to pursue opportunities to enhance its lending and is investing in the resources and lending associates to strengthen our efforts.

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

Provision for loan losses

In the first quarter of 2013, the Company’s provision for loan losses declined by $525,000, or 70.0%, to $225,000 compared to $750,000 reported in the first quarter of 2012.

The allowance for loan losses was $3,415,000 at March 31, 2013 compared to $3,509,000 at December 31, 2012.  The allowance for loan losses was 28.71% of nonperforming loans at March 31, 2013 and 32.51% at December 31, 2012.  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, 2013 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 $1,237,000 for the three months ended March 31, 2013, a decline of $235,000 or 16.0% compared with the same period last year primarily due to a decrease in gain on sale of investments. Gain on the sale of investments decreased $181,000 to $141,000 for the three months ended March 31, 2013.  Service charges on deposits and other operating income also declined for the period by $12,000 and $42,000, respectively.

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 2013 decreased by $563,000 to $3,813,000 compared to $4,376,000 for the same quarter last year primarily due to a decrease in net OREO expenses of $533,000 due to a decrease in writedowns by $535,000 compared to March 31, 2012. Non-interest expense continues to be closely managed as salaries and employee benefits expense decreased $39,000, net occupancy and equipment expense decreased $66,000, FDIC insurance expense decreased $16,000, which were partially off-set by other operating expenses increasing $91,000 primarily due to a nonrecurring retention payment of $100,000 toward the settlement of a lawsuit.

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

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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, 2013.  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, 2013.

	Cumulative amounts as of March 31, 2013
	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	$	40,030		$	—		$	—		$	—		$	40,030
Certificates of deposit	—			100			—			—			100
Investments	—			—			13,526			118,098			131,624
Loans	57,422			12,348			78,371			35,375			183,516
Total interest-sensitive assets	$	97,452		$	12,448		$	91,897		$	153,473		$	355,270
Interest-sensitive liabilities:
Deposits (a)	$	154,468		$	76,045		$	41,516		$	—		$	272,029
Other borrowings	—			—			—			287			287
Total interest-sensitive liabilities	$	154,468		$	76,045		$	41,516		$	287		$	272,316
Interest-sensitivity gap	$	(57,016	)	$	(63,597	)	$	50,381		$	153,186		$	82,954
Cumulative interest-sensitivity gap	(57,016		)	(120,613		)	(70,232		)	82,954			82,954
Cumulative interest-sensitivity gap to total interest-sensitive assets	(16.05		)%	(33.95		)%	(19.77		)%	23.35		%	23.35		%

(a) Savings, Now, and money market deposits totaling $117,191 are included in the maturing in 3 months classification.

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LIQUIDITY

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.  Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs.  Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. Additionally, the Company requires cash for various operating needs including: dividends to shareholders; business combinations; capital injections to its subsidiary; the servicing of debt; and the payment of general corporate expenses. The Company has access to various capital markets and on March 6, 2009, the Company issued 7,462 shares of a Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Department of the Treasury (“Treasury”) under the TARP 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.

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, 2013 the Company had an $79.1 million line of credit facility at the FHLB of which $20.3 million was committed consisting of advances of $287,000 and a letter of credit to secure public deposits in the amount of $20 million.  The Company also had $16.5 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.

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CAPITAL RESOURCES

Stockholders’ equity increased $9,000 for the three months period ended March 31, 2013 primarily due to first quarter 2013 earnings available to common shareholders of $213,000 which was partially off-set by a decline in other comprehensive income, net of income taxes, of $180,000.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets.  The Company’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 19%, 18% and 11% at March 31, 2013 and 19%, 17% and 11% at December 31, 2012.  The Bank’s total and Tier 1 capital to risk weighted assets and Tier 1 to average assets were 19%, 18% and 11% at March 31, 2013 and 19%, 17% and 11% at December 31, 2012. At March 31, 2013, 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.

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, 2013 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, 2013, there have been no changes in the Company’s internal controls over financial reporting or, to the Company’s knowledge, in other factors that could significantly change those internal controls subsequent to the date the Company carried out its evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  However, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II.OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

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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, 2012.  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.

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Exhibit 101

Interactive data files providing financial information from the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2013 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.

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, 2013	By:	/s/ Cynthia N. Day
	Cynthia N. Day
	President and Chief Executive Officer
Date:   May 15, 2013	By:	/s/ Samuel J. Cox
	Samuel J. Cox
	Executive Vice President and
	Chief Financial Officer

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