Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

(Mark One)

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

		For the quarterly period ended September 30, 2016

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

		For the transition period from ____________ to _____________

Commission File No: 0 - 14535

CITIZENS BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

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

230 Peachtree Street, N.W. Suite 2700, 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: 2,079,997 shares of Common Stock, $1.00 par value and 90,000 shares of Non-Voting Common Stock, $1.00 par value were outstanding on November 10, 2016.

PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2016 AND DECEMBER 31, 2015
(In thousands, except share data)

ASSETS	2016			2015
	(Unaudited)
Cash and due from banks	$	2,651		$	2,577
Federal funds sold		16,556			16,500
Interest-bearing deposits with banks		34,984			29,820
Certificates of deposit		900			900
Investment securities available for sale, at fair value		123,598			123,258
Other investments		958			965
Loans receivable, net		197,458			184,836
Premises and equipment, net		6,521			6,136
Cash surrender value of life insurance		10,290			10,090
Other real estate owned		2,853			4,463
Other assets		9,985			9,075

Total assets	$	406,754		$	388,620

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Noninterest-bearing deposits	$	89,918		$	88,543
Interest-bearing deposits		253,770			240,319

Total deposits		343,688			328,862

Accrued expenses and other liabilities		5,006			4,147
Advances from Federal Home Loan Bank		5,220			5,235

Total liabilities		353,914			338,244

STOCKHOLDERS’ EQUITY:
Preferred stock - No par value; 10,000,000 shares authorized;
Series B, 7,462 shares issued and outstanding		7,462			7,462
Series C, 4,379 shares issued and outstanding		4,379			4,379
Common stock - $1 par value; 20,000,000 shares authorized; 2,330,028 and 2,308,228 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		2,330			2,308
Nonvoting common stock - $1 par value; 5,000,000 shares authorized; 90,000 issued and outstanding		90			90
Nonvested restricted common stock		(162	)		(147	)
Additional paid-in capital		8,471			8,344
Retained earnings		31,244			29,941
Treasury stock at cost, 250,030 and 241,454 shares at September 30, 2016 and December 31, 2015, respectively		(1,991	)		(1,930	)
Accumulated other comprehensive income (loss), net of income taxes		1,017			(71	)

Total stockholders’ equity		52,840			50,376

	$	406,754		$	388,620

See notes to condensed consolidated financial statements.

Page 1 of 44

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited - In thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
Interest income:
Loans, including fees	$	2,445	$	2,644	$	7,148		$	7,486
Investment securities:
Taxable		444		467		1,395			1,424
Tax-exempt		191		214		599			667
Federal funds sold		29		—		85			—
Interest-bearing deposits		77		42		217			128
Total interest income		3,186		3,367		9,444			9,705

Interest expense:
Deposits		169		172		494			535
Other borrowings		4		—		13			—
Total interest expense		173		172		507			535

Net interest income		3,013		3,195		8,937			9,170

Provision for (recovery of) loan losses		37		75		(63	)		200
Net interest income after provision for loan losses		2,976		3,120		9,000			8,970

Noninterest income:
Service charges on deposits		743		711		2,046			2,044
Gain on sales of securities		201		109		201			421
Gain on sales of assets		2		—		2			—
Other operating income		271		249		1,074			827
Total noninterest income		1,217		1,069		3,323			3,292

Noninterest expense:
Salaries and employee benefits		1,703		1,711		5,122			5,076
Net occupancy and equipment		534		526		1,515			1,551
Amortization of core deposit intangible		—		118		118			354
FDIC insurance		25		85		172			253
Other real estate owned, net		80		153		(56	)		264
Other operating expenses		1,128		1,069		3,261			3,302
Total noninterest expense		3,470		3,662		10,132			10,800

Income before income taxes		723		527		2,191			1,462
Income tax expense		176		107		536			266

Net income	$	547	$	420	$	1,655		$	1,196
Preferred dividends		59		59		178			178
Net income available to common shareholders	$	488	$	361	$	1,477		$	1,018
Net income per common share - basic	$	0.22	$	0.16	$	0.67		$	0.47
Net income per common share - diluted	$	0.22	$	0.16	$	0.66		$	0.46
Weighted average common outstanding shares - basic		2,212		2,190		2,207			2,183
Weighted average common outstanding shares - diluted		2,236		2,215		2,232			2,209

See notes to condensed consolidated financial statements.

Page 2 of 44

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - In thousands)

	Three Months Ended
	September 30,
	2016			2015
Net Income	$	547		$	420
Other Comprehensive Income:
Unrealized holding gain (loss) on investment securities available for sale, net of tax of ($218) for 2016 and ($315) for 2015		(424	)		604
Reclassification adjustment for realized gains (loss) included in net income, net of tax of $68 for 2016 and ($37) for 2015		(133	)		(72	)
Other Comprehensive Income (loss)	$	(557	)	$	532
Total Comprehensive Income (loss)	$	(10	)	$	952

	Nine Months Ended
	September 30,
	2016			2015
Net Income	$	1,655		$	1,196
Other Comprehensive Income:
Unrealized holding gain (loss) on investment securities available for sale, net of tax of $629 for 2016 and ($188) for 2015		1,221			371
Reclassification adjustment for holding gains (loss) included in net income, net of tax of $68 and $37 for 2016 and 2015, respectively		(133	)		(278	)
Other Comprehensive Income (loss)	$	1,088		$	93
Total Comprehensive Income	$	2,743		$	1,289

See notes to condensed consolidated financial statements

Page 3 of 44

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited - In thousands)


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


Balance—December 31, 2014		12	$	11,841		2,303	$	2,303		90	$	90	$	(107	)	$	8,119		$	28,532			(236	)	$	(1,882	)	$	670		$	49,566

Net income		—		—		—		—		—		—		—			—			1,196			—			—			—			1,196
Other comprehensive loss		—		—		—		—		—		—		—			—			—			—			—			93			93
Issuance of common stock		—		—		5		5		—		—		—			38			—			(5	)		(48	)		—			(5	)
Nonvested restricted stock		—		—		—		—		—		—		(100	)		187			—			—			—			—			87
Dividends declared - preferred		—		—		—		—		—		—		—			—			(178	)		—			—			—			(178	)
Dividends declared - common		—		—		—		—		—		—		—			—			(173	)		—			—			—			(173	)
Balance—September 30, 2015		12	$	11,841		2,308	$	2,308		90	$	90	$	(207	)	$	8,344		$	29,377			(241	)	$	(1,930	)	$	763		$	50,586

Balance—December 31, 2015		12	$	11,841		2,308	$	2,308		90	$	90	$	(147	)	$	8,344		$	29,941			(241	)	$	(1,930	)	$	(71	)	$	50,376

Net income		—		—		—		—		—		—		—			—			1,655			—			—			—			1,655
Other comprehensive income		—		—		—		—		—		—		—			—			—			—			—			1,088			1,088
Issuance of common stock		—		—		22		22		—		—		—			(157	)		—			(9	)		(61	)		—			(196	)
Nonvested restricted stock		—		—		—		—		—		—		(15	)		284			—			—			—			—			269
Dividends declared - preferred		—		—		—		—		—		—		—			—			(178	)		—			—			—			(178	)
Dividends declared - common		—		—		—		—		—		—		—			—			(174	)		—			—			—			(174	)
Balance—September 30, 2016		12	$	11,841		2,330	$	2,330		90	$	90	$	(162	)	$	8,471		$	31,244			(250	)	$	(1,991	)	$	1,017		$	52,840

See notes to condensed consolidated financial statements.

Page 4 of 44

CITIZENS BANCSHARES CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(In thousands)

	2016			2015
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	1,655		$	1,196
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for loan losses		(63	)		200
Depreciation		463			412
Amortization and accretion, net		435			706
Provision for deferred income tax		704			345
Gains on sale of securities		(201	)		(421	)
Gains on sale of premises and equipment, net		(2	)		—
Restricted stock based compensation plan		135			87
Decrease in carrying value of other real estate owned		140			153
Net gain on sale of other real estate owned		(269	)		(23	)
Bank owned life insurance income		(200	)		(171	)
Change in other assets		(2,291	)		(125	)
Change in accrued expenses and other liabilities		859			(167	)

Net cash provided by operating activities		1,365			2,192

INVESTING ACTIVITIES:
Proceeds from calls of investment securities held to maturity		—			240
Proceeds from sales, maturities, and paydowns of investment securities available for sale		20,301			36,479
Purchases of investment securities available for sale		(19,257	)		(27,178	)
Net change in other investments		7			(7	)
Net change in loans receivable		(12,813	)		3,980
Proceeds from the sale of other real estate owned		2,140			789
Redemption of bank owned life insurance		—			2,232
Purchase of bank owned life insurance		—			(2,000	)
Purchases of premises and equipment, net		(849	)		(259	)
Proceeds from the sale of premises and equipment, net		2			—

Net cash provided by (used in) investing activities		(10,469	)		14,276

FINANCING ACTIVITIES:
Net change in deposits		14,826			(15,468	)
Net change in advances from Federal Home Loan Bank		(15	)		(14	)
Restricted stock remitted by employees for taxes		(61	)		(5	)
Dividends paid - preferred		(178	)		(178	)
Dividends paid - common		(174	)		(173	)
Net cash provided by (used in) financing activities		14,398			(15,838	)

Net change in cash and cash equivalents		5,294			630

Cash and cash equivalents, beginning of period		48,897			48,411

Cash and cash equivalents at end of period	$	54,191		$	49,041

Supplemental disclosures of cash paid during the period for:
Interest	$	689		$	536
Income taxes	$	148		$	20

Supplemental disclosures of noncash transactions:
Real estate acquired through foreclosure	$	401		$	143

Change in unrealized gain on investment securities available for sale, net of taxes	$	1,088		$	93

See notes to condensed consolidated financial statements.

Page 5 of 44

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, 2015. The results of operations for the interim periods reported herein are not necessarily representative of the results expected for the full 2016 fiscal year.

The consolidated financial statements of the Company for the three and nine month periods ended September 30, 2016 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, 2015. 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”) issued pursuant to the TARP Community Development Capital Initiative, 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”).

Page 6 of 44

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

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

Recently Issued Accounting Standards

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendment was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. These amendments did not have a material effect on its financial statements.

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers . As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

Page 7 of 44

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

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

Page 8 of 44

2. INVESTMENTS

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

At September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

State, county, and municipal securities	$	25,139	$	1,017	$	14	$	26,142
Mortgage-backed securities		94,431		813		282		94,962
Corporate securities		2,488		6		—		2,494
Totals	$	122,058	$	1,836	$	296	$	123,598

At December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

State, county, and municipal securities	$	28,248	$	1,223	$	14	$	29,457
Mortgage-backed securities		93,118		65		1,383		91,800
Corporate securities		2,000		1		—		2,001
Totals	$	123,366	$	1,289	$	1,397	$	123,258

At September 30, 2016 and December 31, 2015, there were no investment securities held to maturity.

The amortized costs and fair values of investment securities at September 30, 2016, 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
	Amortized		Fair
	Cost		Value

Due in one year or less	$	855	$	857
Due after one year through five years		3,522		3,553
Due after five years through ten years		31,854		33,058
Due after ten years		85,827		86,130

	$	122,058	$	123,598

Securities with carrying values of $85,930,000 and $93,161,000 as of September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, FHLB advances and a $27,858,000 line of credit at the Federal Reserve Bank discount window and for other purposes as required by law.

For the three month period ended September 30, 2016, proceeds from the sale of securities were $3,368,000 and gross realized gains on sales of securities were $201,000. For the three month period ended September 30, 2015, proceeds from the sale of securities were $6,907,000 and gross realized gains on sales of securities were $109,000. There were no gross realized losses on sales of securities for the same period during 2016 and 2015.

Page 9 of 44

For the nine month period ended September 30, 2016, proceeds from the sale of securities were $3,368,000 and gross realized gains on sales of securities were $201,000. For the nine month period ended September 30, 2015, proceeds from the sale of securities were $19,292,000 and gross realized gains on sales of securities were $421,000. There there were no gross realized losses on sales of securities for the same period during 2016 and 2015.

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

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2016 and December 31, 2015. Except as explicitly identified below, all unrealized losses on investment securities are considered by management to be temporarily impaired given the credit ratings on these investment securities and the short duration of the unrealized loss (in thousands):

At September 30, 2016
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	$	19,616	$	(113	)	$	15,569	$	(169	)	$	35,185	$	(282	)

Municipal securities		1,974		(14	)		—		—			1,974		(14	)

Total	$	21,590	$	(127	)	$	15,569	$	(169	)	$	37,159	$	(296	)

At December 31, 2015
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	$	63,533	$	(722	)	$	21,333	$	(661	)	$	84,866	$	(1,383	)

Municipal securities		2,587		(14	)		—		—			2,587		(14	)

Total	$	66,120	$	(736	)	$	21,333	$	(661	)	$	87,453	$	(1,397	)

The Company’s available for sale portfolio had twelve (12) investment securities at September 30, 2016 that were in an unrealized loss position for longer than twelve months. At December 31, 2015, the Company had fifteen (15) investment securities 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.

Page 10 of 44

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.

3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

	September 30,		December 31,
	2016		2015

Commercial, financial, and agricultural	$	46,866	$	42,748
Commercial Real Estate		106,179		104,092
Single-Family Residential		30,554		31,096
Construction and Development		8,387		2,220
Consumer		7,355		6,804
		199,341		186,960
Allowance for loan losses		1,883		2,124

	$	197,458	$	184,836

Page 11 of 44

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

	For the Three Month Period Ended September 30, 2016
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total

Beginning balance	$	428		$	925		$	483		$	9		$	213		$	2,058
Provision for loan losses		10			(110	)		91			2			44			37
Loans charged-off		—			(10	)		(219	)		—			(28	)		(257	)
Recoveries on loans charged-off		19			14			—			—			12			45
Ending Balance	$	457		$	819		$	355		$	11		$	241		$	1,883

	For the Nine Month Period Ended September 30, 2016
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total

Beginning balance	$	342		$	1,170		$	435		$	3		$	174		$	2,124
Provision for loan losses		115			(496	)		161			8			149			(63	)
Loans charged-off		(30	)		(189	)		(320	)		—			(125	)		(664	)
Recoveries on loans charged-off		30			334			79			—			43			486
Ending Balance	$	457		$	819		$	355		$	11		$	241		$	1,883

	For the Three Month Period Ended September 30, 2015
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total

Beginning balance	$	640		$	1,191		$	290		$	9		$	191		$	2,321
Provision for loan losses		60			(120	)		89			(5	)		51			75
Loans charged-off		—			(55	)		(60	)		—			(54	)		(169	)
Recoveries on loans charged-off		4			6			1			—			10			21
Ending Balance	$	704		$	1,022		$	320		$	4		$	198		$	2,248

	For the Nine Month Period Ended September 30, 2015
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total

Beginning balance	$	415		$	1,366		$	254		$	72		$	192		$	2,299
Provision for loan losses		275			(388	)		271			(74	)		116			200
Loans charged-off		—			(138	)		(230	)		—			(165	)		(533	)
Recoveries on loans charged-off		14			182			25			6			55			282
Ending Balance	$	704		$	1,022		$	320		$	4		$	198		$	2,248

Page 12 of 44

In determining our allowance for loan losses, we regularly review loans for specific reserves based on the appropriate impairment assessment methodology. Consumer residential loans are evaluated as a homogeneous population and therefore loans are not evaluated individually for impairment. General reserves are determined using historical loss trends measured over a rolling four quarter average for consumer loans, and a three year average loss factor for commercial loans which is applied to risk rated loans grouped by Federal Financial Examination Council (“FFIEC”) call code. For commercial loans, the general reserves are calculated by applying the appropriate historical loss factor to the loan pool. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our total allowance for loan losses.

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

	At September 30, 2016
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	75	$	416	$	124	$	—	$	—	$	615
Total specific reserves		75		416		124		—		—		615
General reserves		382		403		231		11		241		1,268
Total	$	457	$	819	$	355	$	11	$	241	$	1,883

Loans individually evaluated for impairment	$	149	$	9,219	$	339	$	—	$	—	$	9,707
Loans collectively evaluated for impairment		46,717		96,960		30,215		8,387		7,355		189,634
Total	$	46,866	$	106,179	$	30,554	$	8,387	$	7,355	$	199,341

	At December 31, 2015
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	550	$	100	$	—	$	—	$	650
Total specific reserves		—		550		100		—		—		650
General reserves		342		620		335		3		174		1,474
Total	$	342	$	1,170	$	435	$	3	$	174	$	2,124

Loans individually evaluated for impairment	$	—	$	9,392	$	417	$	—	$	—	$	9,809
Loans collectively evaluated for impairment		42,748		94,700		30,679		2,220		6,804		177,151
Total	$	42,748	$	104,092	$	31,096	$	2,220	$	6,804	$	186,960

Page 13 of 44

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

	At September 30, 2016
	Impaired Loans - With Allowance						Impaired Loans - With no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment
Residential:
First mortgages	$	—	$	—	$	—	$	—	$	—
HELOC’s and equity		224		204		124		135		135
Commercial
Secured		75		75		75		150		74
Unsecured		—		—		—		—		—
Commercial Real Estate:
Owner occupied		406		406		416		8,418		7,846
Non-owner occupied		—		—		—		1,066		967
Multi-family		—		—		—		—		—
Construction and Development:
Construction		—		—		—		—		—
Improved Land		—		—		—		—		—
Unimproved Land		—		—		—		—		—
Consumer and Other		—		—		—		—		—
Total	$	705	$	685	$	615	$	9,769	$	9,022

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

	Nine Months Ended				Nine Months Ended
	September 30, 2016				September 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	—
HELOC’s and equity		345		9		212		34
Commercial:
Secured		225		—		—		—
Unsecured		—		—		—		—
Commercial Real Estate:
Owner occupied		8,447		202		8,802		296
Non-owner occupied		1,001		23		2,294		179
Multi-family		—		—		—		—
Construction and Development:
Construction		—		—		—		—
Improved Land		—		—		—		—
Unimproved Land		—		—		—		—
Consumer and Other		—		—		—		—
Total	$	10,018	$	234	$	11,308	$	509

Page 14 of 44

	At December 31, 2015
	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	$	—	$	—	$	—	$	—	$	—	$	—	$	—
HELOC’s and equity		134		134		100		304		283		209		43
Commercial
Secured		—		—		—		—		—		—		—
Unsecured		—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		4,115		4,115		356		4,456		3,972		8,666		391
Non-owner occupied		691		691		194		667		614		1,679		193
Multi-family		—		—		—		—		—		—		—
Construction and Development:
Construction		—		—		—		—		—		—		—
Improved Land		—		—		—		—		—		—		—
Consumer and Other		—		—				—		—		—		—
Total	$	4,940	$	4,940	$	650	$	5,427	$	4,869	$	10,554	$	627

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


	At September 30, 2016
													Recorded
													Investment
	30- 59		60- 89		Over 90						Total		> 90 Days
	Days Past		Days Past		Days Past		Total				Loans		and
	Due		Due		Due		Past Due		Current		Receivable		Accruing		Nonaccrual
Residential:
First mortgages	$	—	$	440	$	534	$	974	$	18,822	$	19,796	$	—	$	1,027
HELOC’s and equity		88		9		57		154		10,604		10,758		—		125
Commercial:
Secured		5		174		150		329		39,097		39,426		—		150
Unsecured		—		—		—		—		7,440		7,440		—		—
Commercial Real Estate:
Owner occupied		868		355		149		1,372		49,628		51,000		—		238
Non-owner occupied		75		308		—		383		49,136		49,519		—		698
Multi-family		—		—		—		—		5,660		5,660		—		—
Construction and
Development		—		—		—		—		8,387		8,387		—		—
Consumer and Other		18		2		29		49		7,306		7,355		—		29
Total	$	1,054	$	1,288	$	919	$	3,261	$	196,080	$	199,341	$	—	$	2,267

Page 15 of 44

	At December 31, 2015
													Recorded
													Investment
	30- 59		60- 89		Over 90						Total		> 90 Days
	Days Past		Days Past		Days Past		Total				Loans		and
	Due		Due		Due		Past Due		Current		Receivable		Accruing		Nonaccrual
Residential:
First mortgages	$	1,581	$	824	$	745	$	3,150	$	19,253	$	22,403	$	—	$	1,246
HELOC’s and equity		224		59		173		456		8,237		8,693		—		250
Commercial:
Secured		49		—		30		79		36,144		36,223		—		30
Unsecured		—		—		—		—		6,525		6,525		—		—
Commercial Real Estate:
Owner occupied		931		336		—		1,267		51,180		52,447		—		933
Non-owner occupied		441		691		—		1,132		45,684		46,816		—		551
Multi-family		—		—		—		—		4,829		4,829		—		—
Construction and
Development		—		—		—		—		2,220		2,220		—		—
Consumer and Other		29		41		6		76		6,728		6,804		—		6
Total	$	3,255	$	1,951	$	954	$	6,160	$	180,800	$	186,960	$	—	$	3,016

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 is not exhaustive, it provides a description of the risks that management has determined are the most significant.

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

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

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

Page 16 of 44

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.

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.

Page 17 of 44

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


	At September 30, 2016

					Special
	Total		Pass Credits		Mention		Substandard		Doubtful
Single-Family Residential:
First mortgages	$	19,796	$	18,822	$	—	$	974	$	—
HELOC’s and equity		10,758		10,286		9		395		68
Commercial, financial, and agricultural:
Secured		39,426		39,275		—		76		75
Unsecured		7,440		7,440		—		—		—
Commercial Real Estate:
Owner occupied		51,000		44,963		248		5,789		—
Non-owner occupied		49,519		48,527		—		992		—
Multi-family		5,660		5,660		—		—		—
Construction and Development		8,387		8,387		—		—		—
Consumer		7,355		7,324		—		4		27
Total	$	199,341	$	190,684	$	257	$	8,230	$	170

	At December 31, 2015

					Special
	Total		Pass Credits		Mention		Substandard		Doubtful
Single-Family Residential:
First mortgages	$	22,403	$	20,729	$	—	$	1,651	$	23
HELOC’s and equity		8,693		8,004		66		547		76
Commercial, financial, and agricultural:
Secured		36,223		36,193		—		—		30
Unsecured		6,525		6,525		—		—		—
Commercial Real Estate:
Owner occupied		52,447		45,274		1,604		5,569		—
Non-owner occupied		46,816		45,458		107		1,251		—
Multi-family		4,829		4,524		305		—		—
Construction and Development		2,220		2,220		—		—		—
Consumer		6,804		6,749		—		16		39
Total	$	186,960	$	175,676	$	2,082	$	9,034	$	168

During the three and nine months ended September 30, 2016, the Company did not modify any loan that was considered to be a troubled debt restructuring. During the three and nine months ended September 30, 2015, the Company modified one (1) and five (5) loans, respectively, that were considered to be troubled debt restructurings. We extended the terms and decreased the interest rate on these loans (dollars in thousands).

Page 18 of 44

Extended Terms and Decreased Interest Rate
	Three Months Ended September 30, 2015
	Number of		Pre-Modification		Post-Modification
	Loans		Recorded Investment		Recorded Investment
Troubled Debt Restructurings

Residential mortgages		1	$	325	$	325
Total		1	$	325	$	325

Decreased Interest Rate Only
	Nine Months Ended September 30, 2015
	Number of		Pre-Modification		Post-Modification
	Loans		Recorded Investment		Recorded Investment
Residential mortgages		5	$	445	$	445
Total		5	$	445	$	445

There were no loans restructured during the last twelve months that experienced payment default subsequent to restructuring during the three and nine month periods ended September 30, 2016. During the three and nine month periods ended September 30, 2015, there was one (1) loan restructured during the last twelve months that experienced payment default subsequent to restructuring.

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.

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.

Page 19 of 44

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

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

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

Loans—The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired, and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, 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 September 30, 2016 and December 31, 2015, 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.

Page 20 of 44

The following tables present financial assets measured at fair value on a recurring and nonrecurring basis and the change in fair value for those specific financial instruments in which fair value has been elected. (there were no financial liabilities measured at fair value for the periods being reported) (in thousands):

	Fair Value Measurements at September 30, 2016
			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	$	26,142	$	—	$	26,142	$	—
Mortgage-backed securities		94,962		—		94,962		—
Corporate securities		2,494		—		2,494		—
		123,598		—		123,598		—

Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate	$	8,803	$	—	$	—	$	8,803
Single-family Residential		215		—		—		215
Commercial		74		—		—		74
Other real estate owned		2,853		—		—		2,853
		11,945		—		—		11,945

	Fair Value Measurements at December 31, 2015
			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	$	29,457	$	—	$	29,457	$	—
Mortgage-backed securities		91,800		—		91,800		—
Corporate securities		2,001		—		2,001		—
		123,258		—		123,258		—

Nonrecurring Basis:
Assets
Impaired loans:
Commercial Real Estate	$	8,842	$	—	$	—	$	8,842
Single-family Residential		317		—		—		317
Other real estate owned		4,463		—		—		4,463
		13,622		—		—		13,622

Page 21 of 44

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows (dollars in thousands):

Fair Value at

Valuation

Unobservable

(Dollars in thousands)

September 30, 2016

Technique

Inputs

Range

Impaired Loans:

Negative adjustment for

Commercial Real Estate

8,803

Appraised

selling costs and changes in

5% - 20%

Value

market conditions since

appraisal

Negative adjustment for

Single-family Residential

215

Appraised

selling costs and changes in

5% - 20%

Value

market conditions since

appraisal

Negative adjustment for

Commercial

Appraised

selling costs and changes in

5% - 20%

Value

market conditions since

appraisal

Negative adjustment for

OREO

2,853

Appraised

selling costs and changes in

5% - 20%

Value

market conditions since

appraisal

As of December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows (dollars in thousands):

Fair Value at

Valuation

Unobservable

(Dollars in thousands)

December 31, 2015

Technique

Inputs

Range

Impaired Loans:

Negative adjustment for

Commercial Real Estate

8,842

Appraised

selling costs and changes in

5% - 20%

Value

market conditions since

appraisal

Negative adjustment for

Single-family Residential

317

Appraised

selling costs and changes in

5% - 20%

Value

market conditions since

appraisal

Negative adjustment for

OREO

4,463

Appraised

selling costs and changes in

5% - 20%

Value

market conditions since

appraisal

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.

Page 22 of 44

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 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.

Page 23 of 44

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2016 (in thousands):

	September 30, 2016
	Fair Value Measurements
	Carrying
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	2,651	$	2,651	$	2,651	$	—	$	—
Interest-bearing deposits with banks		34,984		34,984		34,984		—		—
Federal funds sold		16,556		16,556		16,556		—		—
Certificates of deposit		900		900		900		—		—
Investment securities		123,598		123,598		—		123,598		—
Other investments		958		958		958		—		—
Loans-net		197,458		197,188		—		—		197,188
Cash surrender value of life insurance		10,290		10,290		10,290		—		—

Financial liabilities:
Deposits		343,688		344,199		228,511		115,688		—
Advances from Federal Home Loan Bank		5,220		5,220		—		5,220		—

	Notional		Estimated
	Amount		Fair Value
Off-balance-sheet financial instruments:
Commitments to extend credit	$	28,857	$	—
Commercial letters of credit		1,889		—

The carrying values and estimated fair values of the Company’s financial instruments at December 31, 2015 are as follows (in thousands) :

	December 31, 2015
	Fair Value Measurements
	Carrying
	Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	2,577	$	2,577	$	2,577	$	—	$	—
Interest-bearing deposits with banks		29,820		29,820		29,820		—		—
Federal funds sold		16,500		16,500		16,500		—		—
Certificates of deposit		900		900		900		—		—
Investment securities		123,258		123,258		—		123,258		—
Other investments		965		965		965		—		—
Loans-net		184,836		183,929		—		—		183,929
Cash surrender value of life insurance		10,090		10,090		10,090		—		—

Financial liabilities:
Deposits		328,862		329,211		212,820		116,391		—
Advances from Federal Home Loan Bank		5,235		5,235		—		5,235		—

	Notional		Estimated
	Amount		Fair Value
Off-balance-sheet financial instruments:
Commitments to extend credit	$	35,843	$	—
Commercial letters of credit		1,889		—

Page 24 of 44

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):

	September 30,			December 31,
	2016			2015

Balance—beginning of period	$	4,463		$	4,668
Additions		401			976
Sales		(1,871	)		(964	)
Write downs		(140	)		(217	)

Balance—end of period	$	2,853		$	4,463

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. During the first quarter of 2016, the deposit premium became fully amortized.

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):

	September 30, 2016				December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Unamortized intangible asset:
Goodwill	$	362	$	—	$	362	$	—

Amortized intangible assets:
Core deposit intangibles	$	3,303	$	3,303	$	3,303	$	3,185

Page 25 of 44

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

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Aggregate amortization expense of core deposit intangibles:	$	—	$	118	$	118	$	354

Estimated aggregate amortization expense of core deposit intangibles for the years ending December 31:

2016	$	118
2017 and thereafter	$	—

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.

Options with exercise prices greater than the average market price of the Company’s stock during the periods are excluded from computation of diluted earnings per share. Options with exercise prices lower than the average market price of the Company’s stock during the periods are considered dilutive and are therefore included in the computation of diluted earnings per share.

The following table presents the number of options that are considered antidilutive and dilutive in the computation of diluted earnings per share:

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Options excluded from calculation of diluted earnings per share		32,500		24,877		32,500		24,877

Dilutive options included in calculation of diluted earnings per share		—		16,500		—		16,500

Total number of options outstanding		32,500		41,377		32,500		41,377

Page 26 of 44

The following schedule reconciles the numerator and denominator of the basic and diluted net income per share available to common and potential common stockholders for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per share data):

	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount

Three Months ended September 30, 2016

Basic earnings per share available to common stockholders	$	488		2,212	$	0.22
Nonvested restricted stock grant		—		24		—
Effect of dilutive securities: options to purchase common shares		—		—		—

Diluted earnings per share	$	488		2,236	$	0.22

Nine Months ended September 30, 2016

Basic earnings per share available to common stockholders	$	1,477		2,207	$	0.67
Nonvested restricted stock grant		—		25		(0.01	)
Effect of dilutive securities: options to purchase common shares		—		—		—

Diluted earnings per share	$	1,477		2,232	$	0.66

Three Months ended September 30, 2015

Basic earnings per share available to common stockholders	$	361		2,190	$	0.16
Nonvested restricted stock grant		—		8		—
Effect of dilutive securities: options to purchase common shares		—		17		—

Diluted earnings per share	$	361		2,215	$	0.16

Nine Months ended September 30, 2015

Basic earnings per share available to common stockholders	$	1,018		2,183	$	0.47
Nonvested restricted stock grant		—		9		(0.01	)
Effect of dilutive securities: options to purchase common shares		—		17		—

Diluted earnings per share	$	1,018		2,209	$	0.46

8. SUBSEQUENT EVENTS

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

9. RECLASSIFICATIONS

Certain amounts in the 2015 consolidated financial statements were reclassified to conform to the 2016 presentation. These reclassifications had no effect on shareholders’ equity or the results of operations as previously presented.

Page 27 of 44

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 September 30, 2016 and December 31, 2015, and the changes in the financial condition and results of operations for the three and nine month periods ended September 30, 2016 and 2015.

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 2016 or 2015.

Page 28 of 44

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

Page 29 of 44

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, 2015. The Company has followed those policies in preparing this report.

FINANCIAL CONDITION

At September 30, 2016, the Company had total assets of $406,754,000 compared to $388,620,000 at December 31, 2015. The $18,134,000 increase is primarily related to an increase in interest-bearing deposits with banks of $5,164,000 and net loans of $12,622,000 and other aggregate assets of $348,000. Other real estate owned (OREO) decreased by $1,610,000. 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. At September 30, 2016, total assets consisted primarily of $123,598,000 in investment securities and $197,458,000 in net loans representing 30% and 49% of total assets, respectively. Investment securities and net loans represented 32% and 48% of total assets at December 31, 2015.

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. We saw meaningful growth in our net loans receivable at September 30, 2016 reflecting the additional resources that we added to our lending area. The increases were principally in construction and development of $6,167,000, commercial, financial and agriculture of $4,118,000, commercial real estate of $2,087,000, and consumer loans of $551,000 coupled with a net decrease in allowance for loan losses of $241,000; offset by a decline in single-family residential loans of $542,000. The Company continues to pursue opportunities to enhance its lending as well as investing in the resources needed to strengthen these efforts.

At September 30, 2016, OREO decreased by $1,610,000 to $2,853,000 compared to $4,463,000 reported at the year-end of 2015. This decrease is primarily related to the sale of OREO properties totaling $1,871,000 and $140,000 in write-downs, partially offset by $401,000 in additions to the OREO balance during the nine months period ended September 30, 2016.

Cash value of life insurance, a comprehensive compensation program for directors and certain senior managers of the Company, increased by $200,000 to $10,290,000 at September 30, 2016. The increase is primarily due to the earnings on the premiums paid over the life of the insurance contract during the nine months period ended September 30, 2016.

The Company’s liabilities at September 30, 2016 totaled $353,914,000 and consisted primarily of $343,688,000 in deposits, which increased by $14,826,000 compared to total deposits of $328,862,000 at December 31, 2015. Accrued expenses and other liabilities were $5,006,000, representing an increase of $859,000 compared to $4,147,000 at December 31, 2015 primarily in deferred income taxes and accrued other expenses. FHLB advances totaled $5,220,000 at September 30, 2016 compared to $5,235,000 at December 31, 2015.

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 and minimize its interest rate risk.

Page 30 of 44

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 September 30, 2016, and December 31, 2015, the investment securities portfolio represented approximately 30% and 32%, respectively, of the Company’s total assets.

LOANS

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

	September 30,		December 31,
	2016		2015

Commercial, Financial, and Agricultural	$	46,866	$	42,748
Commercial Real Estate		106,179		104,092
Single-Family Residential		30,554		31,096
Construction and Development		8,387		2,220
Consumer		7,355		6,804
		199,341		186,960
Allowance for loan losses		1,883		2,124

	$	197,458	$	184,836

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 September 30, 2016 and December 31, 2015, real estate loans, which represent commercial and industrial real estate and other loans secured by single-family properties, totaled $136.7 million and $135.2 million, respectively, and represented 68.6% and 72.3% 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.

The Company’s loans to area churches, which are generally secured by real estate, were approximately $47.3 million and $42.0 million at September 30, 2016 and December 31, 2015, respectively.

The Company’s loans to area convenience stores were approximately $4.9 million and $6.1 million at September 30, 2016 and December 31, 2015, 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 $12.1 million and $15.6 million at September 30, 2016 and December 31, 2015, respectively.

Page 31 of 44

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 or 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.

During the nine months period ended September 30, 2016, nonperforming assets decreased by $2,359,000, or 31.5%, to $5,120,000 when compared to December 31, 2015. The year-to-date decrease is primarily attributed to declines in other real estate owned (OREO) and nonperforming loans of $1,610,000 and $749,000, respectively. The Company charged-off $664,000 in nonperforming loans during the nine months period which is an increase of $131,000 compared to $533,000 charged-off for the same period last year. Charge-offs, net of recoveries, for the same period decreased by $73,000. At September 30, 2016, nonperforming assets represented 1.26% of total assets compared to 1.92% at December 31, 2015. There were no loans greater than 90 days past due and still accruing interest at September 30, 2016 and December 31, 2015.

Page 32 of 44

The table below presents a summary of the Company’s nonperforming assets at September 30, 2016 and December 31, 2015.

	September 30,			December 31,
	2016			2015
	(in thousands, except
	financial ratios)
Nonperforming assets:
Nonperforming loans:
Restructured nonperforming loans (TDRs)	$	1,518		$	2,497
Other nonaccrual loans		749			519
Past-due loans of 90 days or more and still accruing		—			—
Nonperforming loans		2,267			3,016

Real estate acquired through foreclosure		2,853			4,463
Total nonperforming assets	$	5,120		$	7,479

Ratios:
Nonperforming loans to loans, net of unearned income		1.14	%		1.61	%

Nonperforming assets to loans, net of unearned income, and real estate acquired through foreclosure		2.54	%		3.91	%

Nonperforming assets to total assets		1.26	%		1.92	%

Allowance for loan losses to nonperforming loans		83.06	%		70.42	%

Allowance for loan losses to nonperforming assets		36.78	%		28.40	%

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 concessionary 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.

Page 33 of 44

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).

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

	September 30,		December 31,
	2016		2015
Troubled Debt Restructured Loans:
Restructured loans still accruing	$	5,046	$	5,285
Restructured loans nonaccruing		1,518		2,497
Total restructured and modified loans	$	6,564	$	7,782

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 an 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 nine months ended September 30, 2016, the Company was able to recapture previous provision for loan losses of $63,000 primarily due to the receipt of two large recoveries in the second quarter of 2016. For the nine months ended September 30, 2015, provision for loan losses of $200,000 was charged against operating earnings based on growth of the loan portfolio and the Company’s evaluation of the loan portfolio. Approximately $615,000 of the allowance for loan losses was allocated to loans management considered impaired at September 30, 2016 compared to $650,000 at December 31, 2015.

At September 30, 2016, 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.

Page 34 of 44

The following table summarizes loans, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expense as of and for the nine months ended September 30, 2016 and 2015 (amount in thousands, except financial ratios):

	2016			2015

Loans, net of unearned income	$	199,341		$	186,696

Average loans, net of unearned income and the allowance for loan losses	$	191,094		$	189,072

Allowance for loan losses at the beginning of period	$	2,124		$	2,299

Loans charged-off:
Commercial, financial, and agricultural		30			—
Real estate - loans		509			368
Installment loans to individuals		125			165
Total loans charged-off		664			533

Recoveries of loans previously charged off:
Commercial, financial, and agricultural		30			14
Real estate - loans		413			213
Installment loans to individuals		43			55
Total loans recovered		486			282

Net loans charged-off		178			251

(Recoveries of) provision for loan losses		(63	)		200

Allowance for loan losses at period end	$	1,883		$	2,248

Ratio of net loans charged-off (recovered) to average loans, net of unearned income and the allowance for loan losses		0.09	%		0.13	%

Ratio of allowance for loan losses to loans, net of unearned income		0.94	%		1.20	%

Page 35 of 44

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

	September 30, 2016					December 31, 2015
			Percent of					Percent of
	Amount		Total Loans			Amount		Total Loans

Commercial, financial, and agricultural	$	457		24	%	$	342		23	%
Commercial Real Estate		819		53	%		1,170		56	%
Single-family Residential		355		15	%		435		17	%
Construction and Development		11		4	%		3		1	%
Consumer		241		4	%		174		3	%

Total allowance for loan losses	$	1,883		100	%	$	2,124		100	%

DEPOSITS

Deposits are the Company’s primary source of funding loan growth. Total deposits at September 30, 2016 increased by 4.5% or $14,826,000 to $343,688,000 compared to December 31, 2015. The bank has a stable core deposit base with a high percentage of non-interest bearing deposits. Noninterest-bearing deposits increased by $1,375,000, or approximately 1.6% to $89,918,000 and interest-bearing deposits increased by $13,451,000, or 5.6%, to $253,770,000 for the nine months period ending September 30, 2016. On an average basis, noninterest-bearing deposits increased by $4,612,000 to $97,185,000 during the nine months ended September 30, 2016 compared to $92,573,000 for the year ended December 31, 2015. Average interest-bearing deposits increased by $281,000 to $251,775,000 at September 30, 2016 compared to $251,494,000 for the year ended December 31, 2015. At September 30, 2016, the Company’s cost of funds was approximately 0.18% compared to 0.20% 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 the FDIC insurance coverage on their time deposits over the $250,000 limit. At September 30, 2016 and December 31, 2015, the Company had $21,328,000 and $21,020,000, respectively, in CDARS deposits. Participation in this program has enhanced the Company’s ability to retain customers with time deposits higher than the FDIC $250,000 insurance coverage limit.

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 were $35,551,000 and $35,020,000 at September 30, 2016 and December 31, 2015, respectively.

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

	September 30,		December 31,
	2016		2015

NOW and money market accounts	$	98,153	$	89,470
Savings accounts		40,282		34,807
Time deposits of $100,000 or more		87,102		86,914
Other time deposits		28,233		29,128
	$	253,770	$	240,319

Page 36 of 44

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.

These advances are collateralized by FHLB stock, a blanket lien on 1-4 family and multifamily mortgage loans, certain commercial real estate loans and investment securities. As of September 30, 2016 and December 31, 2015, total loans pledged as collateral were $29,602,000 and $27,033,000, respectively.

Maturity	Callable	Type	September 30, 2016		December 31, 2015
			(in thousands)

October 2016 ⁽¹⁾			$	5,000	$	5,000

August 2026 ⁽²⁾				220		235

Total Principal Outstanding			$	5,220	$	5,235

(1)

This FHLB advance had a fixed rate of 0.35% as of September 30, 2016.

(2)

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 September 30, 2016 the Company had approximately a $103.3 million line of credit facility at the FHLB of which $25.2 million was committed consisting of advances of $5,220,000 and a letter of credit to secure public deposits in the amount of $20.0 million. The Company also had approximately $27.9 million of borrowing capacity at the Federal Reserve Bank discount window and an unsecured $4.0 million fed funds line of credit.

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 September 30, 2016, net interest income decreased by $182,000 or 5.7% to $3,013,000 compared to $3,195,000 reported for the same period last year. Total interest income decreased by $181,000, or 5.4%, to $3,186,000 compared to $3,367,000 for the same three months period in 2015. Interest income on loans decreased by $199,000 due to a 71 bps decrease in yields earned on loans while the average loan balances increased by $10,241,000 compared to the same period last year. Interest income on investment securities decreased by $46,000 primarily due to a 10 bps decrease in investment yields and lower average balances compared to third quarter of 2015. This decline was offset by an increase in interest earned on federal funds sold and interest-bearing deposits of $64,000 compared to the same period last year. Total interest expense for the period increased by $1,000 compared to the same three months period in 2015 as the Company continues to manage the funding cost and deposit mix. At September 30, 2016, the Company’s cost of funds was approximately 0.18% compared to 0.20% for the same period last year.

Page 37 of 44

On a year-to-date basis, net interest income decreased by $233,000 or 2.5% to $8,937,000 compared to $9,170,000 reported for the same period last year. Total interest income decreased by $261,000 or 2.7% to $9,444,000 compared to the same nine months period in 2015. Interest income on loans decreased by $338,000 while interest income on federal funds sold and interest bearing deposits increased by $174,000 compared to the same period in 2015. Interest income on investment securities decreased by $91,000 primarily due to a 5 bps decrease in investment yields and the investment portfolio having a lower average investment balance compared to the same period in 2015. Total interest expense for the nine months period ended September 30, 2016, decreased by $28,000 or 5.2% compared to the same period in 2015 as the Company lowered its funding cost and improved its deposit mix.

For the nine months ended September 30, 2016, the Company maintained an annualized net interest margin on a fully tax equivalent basis of 3.29% compared to 3.47% reported at September 30, 2015. The decrease in the net interest margin on a fully tax equivalent basis compared to the same period last year is primarily due to the paydown of higher rate legacy loans that are being replaced by lower yielding loans. Similarly, interest income on investment securities declined due to lower investment yields caused by higher yielding bonds being paid down, maturing or being called and being replaced with lower yielding securities. The Company is mindful of the interest rate risk of investing in a low rate environment which would negatively impact its liquidity and capital position in a rising rate environment.

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

Provision for loan losses

For the three months ended September 30, 2016 and 2015, the Company charged against operating earnings a provision for loan losses of $37,000 and $75,000, respectively. The lower provision during the quarter was due to continued improvement of the loan quality in the portfolio.

For the nine months ended September 30, 2016, the Company was able to recapture previous provision for loan losses of $63,000 primarily due to the receipt of two large recoveries in the second quarter of 2016. For the nine months ended September 30, 2015, the Company charged against operating earnings a provision for loan losses of $200,000.

The allowance for loan losses was $1,883,000, $2,124,000, and $2,248,000 at September 30, 2016, December 31, 2015, and September 30, 2015, respectively. The allowance for loan losses was 83.06%, 70.42%, and 51.81% of nonperforming loans at September 30, 2016, December 31, 2015, and September 30, 2015, respectively. The provision for loan losses and the resulting allowance for loan losses are based on changes in the size and character of the Company’s loan portfolio, changes in nonperforming and past due loans, the existing risk of individual loans, concentrations of loans to specific borrowers or industries, and economic conditions. At September 30, 2016, 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.

Page 38 of 44

Noninterest income totaled $1,217,000 for the three months period ended September 30, 2016, an increase of $148,000, or 13.8% compared with the same period last year. This increase is primarily in gains on the sale of investment securities of $92,000. There were no gains on sale of investment securities for the same period in 2015. The service charges on deposits income increased by $32,000 and other operating income increased by $22,000 compared to the same period last year.

For the year-to-date, noninterest income increased by $31,000 to $3,323,000 compared to the same period last year. This increase was primarily in other operating income which increased by $247,000; offset by a decrease in gains on the sale of investments of $220,000. Gain on sale of securities was $201,000 compared to $421,000 in 2015. Service charges on deposits increased by $2,000. The increase in other operating income was primarily due to a $186,000 legal judgment that the Company collected and a $78,000 recovery in the second quarter of 2016.

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 third quarter of 2016 decreased by $192,000 to $3,470,000 compared to $3,662,000 for the same quarter last year primarily due to a decrease of $118,000 in the amortization of core deposit intangible which was fully amortized in the first quarter of 2016. Salaries and employee benefits expense decreased by $8,000. Net occupancy and equipment expense increased by $8,000 compared to the same period of last year. OREO related expenses decreased by $73,000 compared to the same period last year primarily due to a gain on sale of OREO. FDIC insurance expenses decreased by $60,000 compared to the same period in the prior year. Other operating expenses increased by $59,000 compared to the same period in the prior year.

For the nine months period ended September 30, 2016, non-interest expense decreased by $668,000 to $10,132,000 compared to $10,800,000 for the same period last year. Salaries and employee benefits expense increased by $46,000 due to the hiring of additional lending officers to enhance loan production, and the filling of one officer level position that was vacant in early 2015. Net occupancy and equipment expense decreased by $36,000 primarily due to lower rent expense, building maintenance expense and insurance costs compared to the same period of last year. OREO related expenses declined by $320,000 due to the gain on sale of OREO of $269,000 during 2016 and lower OREO taxes of $56,000 compared to the same period in 2015. Amortization of core deposit intangible decreased by $236,000 which was fully amortized in the first quarter of 2016. FDIC insurance expenses decreased by $81,000 compared to the same period in the prior year. Other operating expenses decreased by $41,000 compared to the same period in the prior year. The decline in other operating expenses is in multiple expense categories as the Company continues to manage its expenses in line with the decline in interest income caused by the prolonged low interest rate environment.

INTEREST RATE SENSITIVITY MANAGEMENT

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

Page 39 of 44

One method of measuring the impact of interest rate sensitivity is the cumulative gap analysis. The difference between interest rate sensitive assets and interest rate sensitive liabilities at various time intervals is referred to as the gap. The Company is liability sensitive on a short-term basis as reflected in the following table. Generally, a net liability sensitive position indicates that there would be a negative impact on net interest income in an increasing rate environment. However, interest rate sensitivity gap does not necessarily indicate the impact of general interest rate movements on the net interest margin, since all interest rates and yields do not adjust at the same velocity and the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Company’s customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. The following table shows the contractual maturities of all interest rate sensitive assets and liabilities at September 30, 2016. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Taking a conservative approach, the Company has included demand deposits such as NOW, money market, and savings accounts in the three month category. However, the actual repricing of these accounts may extend beyond twelve months. The interest rate sensitivity gap is only a general indicator of potential effects of interest rate changes on net interest income.

The following table sets forth the distribution of the repricing of the Company’s interest rate sensitive assets and interest rate sensitive liabilities as of September 30, 2016 (in thousands):

	Cumulative amounts as of September 30, 2016
	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	$	34,984		$	—		$	—		$	—		$	34,984
Federal funds sold		16,556			—			—			—			16,556
Certificates of deposit		—			900			—			—			900
Investments		—			857			3,553			119,188			123,598
Loans		67,412			19,416			85,990			26,523			199,341
Total interest-sensitive assets	$	118,952		$	21,173		$	89,543		$	145,711		$	375,379

Interest-sensitive liabilities:
Interest bearing deposits ^(a)	$	161,246		$	69,429		$	23,095		$	—		$	253,770
Other borrowings		—			5,000			—			220			5,220
Total interest-sensitive liabilities	$	161,246		$	74,429		$	23,095		$	220		$	258,990

Interest-sensitivity gap	$	(42,294	)	$	(53,256	)	$	66,448		$	145,491		$	116,389

Cumulative interest-sensitivity gap		(42,294	)		(95,550	)		(29,102	)		116,389			116,389

Cumulative interest-sensitivity gap to total interest-sensitive assets		(11.27	)%		(25.45	)%		(7.75	)%		31.01	%		31.01	%

(a) Savings, NOW, and money market deposits totaling $138,436 are included in the maturing in 3 months classification.

Page 40 of 44

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.

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 September 30, 2016 the Company had approximately a $103.3 million line of credit facility at the FHLB of which $25.2 million was committed consisting of advances of $5,220,000 and a letter of credit to secure public deposits in the amount of $20.0 million. The Company also had approximately $27.9 million of borrowing capacity at the Federal Reserve Bank discount window and an unsecured $4.0 million fed funds line of credit. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. The Company does not anticipate any liquidity requirements in the near future that it will not be able to meet.

CAPITAL RESOURCES

Stockholders’ equity increased by $2,464,000 during the nine months period ended September 30, 2016 due to multiple factors. Accumulated other comprehensive income, net of income taxes, increased by $1,088,000. This increase is attributed to the volatility in interest rates and swings in credit spreads, and their impact on the fair value of the Company’s available for sale securities portfolio. Retained earnings increased by $1,303,000 primarily due to a net income of $1,655,000; offset by $178,000 of preferred dividends paid to the U.S. Treasury and $174,000 in cash dividends paid to common stockholders. Additional paid-in-capital increased by $127,000 due to the increase in nonvested restricted stock; offset by the issuance of common stock associated with restricted stock.

Page 41 of 44

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amount and ratios of total and Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets. Effective January 1, 2015, the regulation now also requires the Company to maintain a minimum amount and ratio of common equity Tier 1 capital to risk weighted assets. Furthermore, effective January 1, 2016, in addition to the minimum risk-based capital and leverage ratios, banking organizations must maintain a “capital conservation buffer” consisting of CET1 in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. At September 30, 2016, the Company and the Bank met all capital adequacy requirements to which they are subject and are considered to be ’‘well capitalized” under regulatory standards.

The following table presents regulatory capital adequancy ratios for the Company and the Bank as at September 30, 2016 and December 31, 2015:

	September 30,						December 31,
	2016						2015
	The Company			The Bank			The Company			The Bank

Tier 1 Capital (to average assets)		12	%		12	%		12	%		13	%
Tier 1 Capital (to risk weighted assets)		19	%		19	%		20	%		20	%
Tier 1 Common Equity (to risk weighted assets)		N/A			19	%		N/A			20	%
Total Capital (to risk weighted assets)		20	%		20	%		20	%		21	%

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 September 30, 2016 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 September 30, 2016, 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.

Page 42 of 44

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

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

ITEM 1A.	RISK FACTORS

	We believe there have been no material changes from the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. You should carefully consider the factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

	None

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

	None

ITEM 4.	MINE SAFETY DISCLOSURES

	Not Applicable

ITEM 5.	OTHER INFORMATION

	None

ITEM 6.	EXHIBITS

	Exhibit 31

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

	Exhibit 32

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

	Exhibit 101

	Interactive data files providing financial information from the Registrant’s Report on Form 10-Q as of and for the three and nine months ended September 30, 2016 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.

Page 43 of 44

SIGNATURES

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

CITIZENS BANCSHARES CORPORATION


Date: November 14, 2016	By:	/s/ Cynthia N. Day
	Cynthia N. Day
	President and Chief Executive Officer

Date: November 14, 2016	By:	/s/ Samuel J. Cox
	Samuel J. Cox
	Executive Vice President and
	Chief Financial Officer