CITIZENS HOLDING CO /MS/ - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - CITIZENS HOLDING CO /MS/	Financial_Report.xls
EX-32.(B) - SECTION 906 CERTIFICATION OF CFO - CITIZENS HOLDING CO /MS/	dex32b.htm
EX-31.(A) - SECTION 302 CERTIFICATION OF CEO - CITIZENS HOLDING CO /MS/	dex31a.htm
EX-32.(A) - SECTION 906 CERTIFICATION OF CEO - CITIZENS HOLDING CO /MS/	dex32a.htm
EX-31.(B) - SECTION 302 CERTIFICATION OF CFO - CITIZENS HOLDING CO /MS/	dex31b.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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

For the transition period from to

Commission File Number: 001-15375

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)


MISSISSIPPI		64-0666512
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

521 Main Street, Philadelphia, MS		39350
(Address of principal executive offices)		(Zip Code)

601-656-4692

(Registrant’s telephone number, including area code)

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 ¨ 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 such shorter period that the registrant was required to submit and post such files). x Yes ¨ 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Number of shares outstanding of each of the issuer’s classes of common stock, as of August 5, 2011:


Title		Outstanding
Common Stock, $0.20 par value		4,843,911

CITIZENS HOLDING COMPANY

INTERIM FINANCIAL STATEMENTS FOR QUARTER ENDED JUNE 30, 2011

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	1

Item 1.	Consolidated Financial Statements (Unaudited).	1

	Consolidated Statements of Condition June 30, 2011 and December 31, 2010	1

	Consolidated Statements of Income Three and six months ended June 30, 2011 and 2010	2

	Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2011 and 2010	3

	Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2011 and 2010	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	36

Item 4.	Controls and Procedures.	39

PART II.	OTHER INFORMATION	40

Item 1.	Legal Proceedings.*

Item 1A.	Risk Factors.	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.*

Item 3.	Defaults Upon Senior Securities*

Item 4.	[Removed and Reserved.]

Item 5.	Other Information.*

Item 6.	Exhibits.	41

* None or Not Applicable

SIGNATURES		42

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited).

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CONDITION(Unaudited)


	June 30, 2011		December 31, 2010
ASSETS
Cash and due from banks	$	22,299,125	$	16,963,393
Interest bearing deposits with other banks		11,622,122		1,155,588
Investment securities available for sale, at fair value		347,936,349		324,730,301
Loans, net of allowance for loan losses of $6,359,602 in 2011 and $6,379,070 in 2010		406,072,546		415,496,720
Premises and equipment, net		21,186,494		20,751,478
Other real estate owned, net		3,147,809		3,068,209
Accrued interest receivable		4,830,929		4,823,227
Cash value of life insurance		19,875,021		19,535,300
Intangible assets, net		3,318,957		3,411,303
Other assets		4,963,329		8,297,213


TOTAL ASSETS	$	845,252,681	$	818,232,732


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Noninterest-bearing demand	$	95,971,966	$	95,324,759
Interest-bearing NOW and money market accounts		177,732,499		164,325,092
Savings deposits		41,130,446		37,778,537
Certificates of deposit		232,314,862		240,001,335

Total deposits		547,149,773		537,429,723

Federal Funds Purchased		—		2,500,000
Securities sold under agreement to repurchase		114,055,801		110,483,437
Federal Home Loan Bank advances		94,400,000		84,400,000
Accrued interest payable		383,603		538,881
Deferred compensation payable		4,618,585		4,330,069
Other liabilities		1,301,677		2,255,526


Total liabilities		761,909,439		741,937,636

STOCKHOLDERS’ EQUITY
Common stock; $.20 par value, 22,500,000 shares authorized, 4,843,911 shares outstanding at June 30, 2011 and 4,838,411 shares outstanding at December 31, 2010		968,782		967,682
Additional paid-in capital		3,185,357		3,061,221
Retained earnings		76,142,950		74,464,123
Accumulated other comprehensive income (loss), net of tax expense of ($1,812,145) in 2011 and tax benefit of $1,307,540 in 2010		3,046,153		(2,197,930	)


Total stockholders’ equity		83,343,242		76,295,096


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	845,252,681	$	818,232,732

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
INTEREST INCOME
Loan income, including fees	$	6,398,678	$	7,011,615	$	12,947,609	$	14,264,924
Investment securities		3,038,701		2,417,028		5,823,247		5,028,166
Other interest		6,472		23,192		18,267		33,962


Total interest income		9,443,851		9,451,835		18,789,123		19,327,052

INTEREST EXPENSE
Deposits		802,618		1,361,998		1,689,617		2,786,730
Other borrowed funds		879,750		878,569		1,759,704		1,763,749


Total interest expense		1,682,368		2,240,567		3,449,321		4,550,479


NET INTEREST INCOME		7,761,483		7,211,268		15,339,802		14,776,573

PROVISION FOR LOAN LOSSES		682,773		695,255		926,834		1,320,211


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,078,710		6,516,013		14,412,968		13,456,362

OTHER INCOME
Service charges on deposit accounts		855,986		1,020,995		1,730,383		1,985,773
Other service charges and fees		415,174		372,571		829,133		746,397
Other income		245,306		315,653		541,345		1,061,745


Total other income		1,516,466		1,709,219		3,100,861		3,793,915


OTHER EXPENSES
Salaries and employee benefits		3,524,103		3,448,339		7,043,712		6,848,700
Occupancy expense		1,018,542		992,962		2,107,489		1,938,350
Other operating expense		1,703,394		1,671,456		3,495,119		3,810,403


Total other expenses		6,246,039		6,112,757		12,646,320		12,597,453


INCOME BEFORE PROVISION FOR INCOME TAXES		2,349,137		2,112,475		4,867,509		4,652,824

PROVISION FOR INCOME TAXES		494,865		416,371		1,058,351		981,163


NET INCOME	$	1,854,272	$	1,696,104	$	3,809,158	$	3,671,661


NET INCOME PER SHARE
-Basic	$	0.38	$	0.35	$	0.79	$	0.76


-Diluted	$	0.38	$	0.35	$	0.79	$	0.75


DIVIDENDS PAID PER SHARE	$	0.22	$	0.21	$	0.44	$	0.42

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2011		2010			2011		2010

Net income	$	1,854,272	$	1,696,104		$	3,809,158	$	3,671,661

Other comprehensive income, net of tax

Unrealized holding gains (losses)		3,648,868		(154,452	)		5,238,294		1,905,330

Reclassification adjustment for gains included in net income		5,357		618,013			5,789		618,013


Total other comprehensive income (loss)		3,654,225		463,561			5,244,083		2,523,343


Comprehensive income	$	5,508,497	$	2,159,665		$	9,053,241	$	6,195,004

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

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended June 30,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities	$	5,419,819		$	7,772,004

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale		73,203,384			96,061,186
Proceeds from sales of securities available for sale		—			30,072,201
Purchases of investment securities available for sale		(88,813,259	)		(105,237,061	)
Net change in securities sold under agreement to repurchase		3,572,364			(10,415,211	)
Purchases of bank premises and equipment		(1,035,486	)		(1,197,496	)
Increase in interest bearing deposits with other banks		(10,466,534	)		(15,092,748	)
Purchase of Federal Home Loan Bank Stock		(108,000	)		—
Proceeds from sale of other real estate acquired by foreclosure		338,080			819,200
Net decrease in loans		8,072,260			10,889,386


Net cash (used by) provided by investing activities		(15,237,191	)		5,899,457

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		9,720,050			(20,208,749	)
Proceeds from exercising stock options		63,385			189,161
Increase in Federal Home Loan Bank advances		10,000,000			12,000,000
Repurchase of stock		—			(366,381	)
Decrease in federal funds purchased		(2,500,000	)		—
Payment of dividends		(2,130,331	)		(2,030,274	)


Net cash provided by (used by) financing activities		15,153,104			(10,416,243	)


Net increase in cash and due from banks		5,335,732			3,255,218

Cash and due from banks, beginning of period		16,963,393			15,365,612


Cash and due from banks, end of period	$	22,299,125		$	18,620,830

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

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three and six months ended June 30, 2011

(Unaudited)

Note 1. Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). However, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended June 30, 2011, are not necessarily indicative of the results that may be expected for any other interim periods or for the year as a whole.

The interim consolidated financial statements of Citizens Holding Company include the accounts of its wholly-owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with Citizens Holding Company, the “Corporation”). All significant intercompany transactions have been eliminated in consolidation.

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 15, 2011.

Note 2. Commitments and Contingent Liabilities

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of June 30, 2011, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $28,835,248 compared to an aggregate unused balance of $36,011,792 at December 31, 2010. There were $3,120,825 of letters of credit outstanding at June 30, 2011, and $3,141,959 at December 31, 2010. The fair value of such contracts is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the level of draws under its credit-related commitments into its asset and liability management program.

The Corporation is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provisions are made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the present time, management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not have a material impact on the Corporation’s consolidated financial condition or results of operations.

Note 3. Net Income per Share

Net income per share - basic has been computed based on the weighted average number of shares outstanding during each period. Net income per share - diluted has been computed based on the weighted average number of shares outstanding during each period plus the dilutive effect of outstanding stock options using the treasury stock method. Earnings per share was computed as follows:


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010

Basic weighted average shares outstanding		4,841,438		4,833,609		4,840,770		4,832,749
Dilutive effect of granted options		12,799		22,588		9,056		32,882


Diluted weighted average shares outstanding		4,854,237		4,856,197		4,849,826		4,865,631


Net income	$	1,854,272	$	1,696,104	$	3,809,158	$	3,671,661
Net income per share-basic	$	0.38	$	0.35	$	0.79	$	0.76
Net income per share-diluted	$	0.38	$	0.35	$	0.79	$	0.75

Note 4. Stock Option Plan

At June 30, 2011, the Corporation had one stock-based compensation plan, which is the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”). Prior to its expiration, the Corporation also had the 1999 Employees’ Long-Term Incentive Plan, or the “Employees’ Plan”. The Corporation accounts for these plans under the stock compensation topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). This topic provides guidance related to share-based payment transactions, including valuation methods (including assumptions such as expected volatility and expected term), the classification of compensation expense, non-GAAP financial measures, first-time adoption in an interim period and disclosure in Management’s Discussion and Analysis subsequent to adoption.

On April 27, 2011, the members of the Board of Directors were granted a total of 13,500 options as specified in the Directors’ Plan. These options were granted at an exercise price of $20.02 per option, which was the closing price of Citizens Holding Company stock on that day. These options are first exercisable on October 28, 2011, and must be exercised no later than April 27, 2021.

The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The following assumptions were used in estimating the fair value of the options granted to the directors in the second quarter of 2011.


Assumption	Directors

Dividend Yield		4.90	%
Risk-Free Interest Rate		2.24	%
Expected Life		8.1 years
Expected Volatility		74.47	%
Calculated Value per Option	$	9.16
Forfeitures		0.00	%

Using the Black-Scholes option-pricing model with the foregoing assumptions, it was determined that the cost of options granted under the Directors’ Plan in April 2011 was $123,702 and should be recognized as an expense of $20,617 per month over the six-month requisite service period, beginning in April 2011. This was recorded as salary expense with a credit to paid-in capital. A deferred tax on these options was recorded in the aggregate amount of $46,140, or $7,690 per month, over the six-month requisite service period, beginning in April 2011.

The following table below is a summary of the stock option activity for the three months ended June 30, 2011.


	Directors’ Plan					Employees’ Plan
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price

Outstanding at December 31, 2010		93,000		$	20.65		136,500		$	19.92
Granted		13,500			20.02		—			—
Exercised		(4,500	)		10.83		(1,000	)		14.65
Expired		—			—		—			—


Outstanding at June 30, 2011		102,000		$	21.00		135,500		$	19.96

The intrinsic value of options granted under the Directors’ Plan at June 30, 2011, was $61,440 and the intrinsic value of options granted under the Employees’ Plan at June 30, 2011, was $188,800 for a total intrinsic value at June 30, 2011, of $250,240.

Note 5. Income Taxes

The income tax topic of the ASC defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This topic also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of June 30, 2011, the Corporation had no unrecognized tax benefits related to federal and state income tax matters. Therefore, the Corporation does not anticipate any material increase or decrease in the effective tax rate during 2011 relative to any tax positions taken. It is the Corporation’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.

The Corporation and its subsidiaries file a consolidated United States federal income tax return. The Corporation is currently open to audit under the statute of limitations by the Internal Revenue Service for all tax years after 2007. The Corporation and its subsidiaries’ state income tax returns are also open to audit under the statute of limitations for the same period.

Note 6. Loans

The composition of net loans at June 30, 2011 and December 31, 2010 is as follows:


	June 30, 2011			December 31, 2010
	(In Thousands)

Real Estate:
Land Development and Construction	$	11,464		$	21,838
Farmland		37,642			44,734
1-4 Family Mortgages		142,582			143,627
Commercial Real Estate		138,289			139,760

Total Real Estate Loans		329,977			349,959


Business Loans:
Commercial and Industrial Loans		39,449			28,429
Farm Production and other Farm Loans		2,035			2,429

Total Business Loans		41,484			30,858


Consumer Loans:
Credit Cards		990			990
Other Consumer Loans		40,228			40,292

Total Consumer Loans		41,218			41,282


Total Gross Loans		412,679			422,099


Unearned income		(246	)		(223	)
Allowance for loan losses		(6,360	)		(6,379	)


Loans, net	$	406,073		$	415,497

Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status, when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accruals are discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Period-end non-accrual loans, segregated by class of loans, were as follows:


	June 30, 2011		December 31, 2010
	(in thousands)
Real Estate:
Land Development and Construction	$	731	$	553
Farmland		394		581
1-4 Family Mortgages		1,802		1,741
Commercial Real Estate		6,717		6,590

Total Real Estate Loans		9,644		9,465


Business Loans:
Commercial and Industrial Loans		358		1,250
Farm Production and other Farm Loans		8		8

Total Business Loans		366		1,258


Consumer Loans:
Credit Cards		—		—
Other Consumer Loans		291		209

Total Consumer Loans		291		209


Total Non-Accrual Loans	$	10,301	$	10,932

An age analysis of past due loans, segregated by class of loans, as of June 30, 2011, was as follows (in thousands):


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	212	$	63	$	275	$	11,189	$	11,464	$	—
Farmland		865		136		1,001		36,641		37,642		—
1-4 Family Mortgages		5,476		448		5,924		136,658		142,582		134
Commercial Real Estate		639		4,437		5,076		133,213		138,289		—

Total Real Estate Loans		7,192		5,084		12,276		317,701		329,977		134


Business Loans:
Commercial and Industrial Loans		408		190		598		38,851		39,449		—
Farm Production and other Farm Loans		69		7		76		1,959		2,035		—

Total Business Loans		477		197		674		40,810		41,484		—


Consumer Loans:
Credit Cards		16		61		77		913		990		61
Other Consumer Loans		1,694		120		1,774		38,454		40,228		13

Total Consumer Loans		1,710		141		1,851		39,367		41,218		74


Total Loans	$	9,379	$	5,422	$	14,801	$	397,878	$	412,679	$	208

An age analysis of past due loans, segregated by class of loans, as of December 31, 2010 was as follows (in thousands):


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	312	$	808	$	1,120	$	20,718	$	21,838	$	447
Farmland		1,675		417		2,092		42,642		44,734		115

1-4 Family Mortgages		5,231		808		6,039		137,588		143,627		63

Commercial Real Estate		1,564		95		1,659		138,101		139,760		—

Total Real Estate Loans		8,782		2,128		10,910		339,049		349,959		625


Business Loans:
Commercial and Industrial Loans		1,763		502		2,265		26,164		28,429		300

Farm Production and other Farm Loans		39		5		44		2,385		2,429		5


Total Business Loans		1,802		507		2,309		28,549		30,858		305


Consumer Loans:

Credit Cards		21		70		91		899		990		70
Other Consumer Loans		2,268		139		2,407		37,885		40,292		23

Total Consumer Loans		2,289		209		2,498		38,784		41,282		93


Total Loans	$	12,873	$	2,844	$	15,717	$	406,382	$	422,099	$	1,023

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all the amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at past due loans, bankruptcy filing and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original contract terms. If a loan is determined to be impaired and the collateral is deemed to be insufficient to fully repay the loan, a specific reserve will be established. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

Impaired loans as of June 30, 2011 and December 31, 2010, by class of loans, are as follows (in thousands):


June 30, 2011	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	731	$	579	$	152	$	731	$	156	$	739
Farmland		394		364		30		394		9		392
1-4 Family Mortgages		1,900		973		927		1,900		236		2,523
Commercial Real Estate		7,106		4,710		2,396		7,106		832		7,105

Total Real Estate Loans		10,131		6,626		3,505		10,131		1,233		10,759


Business Loans:
Commercial and Industrial Loans		448		248		200		448		116		573
Farm Production and other Farm Loans		7		7		—		7		—		3

Total Business Loans		455		255		200		455		116		576


Consumer Loans:
Credit Cards		—		—		—		—		—		—
Other Consumer Loans		292		292		—		292		—		263

Total Consumer Loans		292		292		—		292		—		263


Total Loans	$	10,878	$	7,173	$	3,705	$	10,878	$	1,349	$	11,598


December 31, 2010	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	553	$	391	$	162	$	553	$	156	$	630
Farmland		581		394		187		581		79		534
1-4 Family Mortgages		1,840		967		873		1,840		196		1,801
Commercial Real Estate		6,981		4,443		2,538		6,981		832		6,975

Total Real Estate Loans		9,955		6,195		3,760		9,955		1,263		9,940


Business Loans:
Commercial and Industrial Loans		1,342		1,017		325		1,342		194		1,436
Farm Production and other Farm Loans		7		7		—		7		—		17

Total Business Loans		1,349		1,024		325		1,349		194		1,453


Consumer Loans:
Credit Cards		—		—		—		—		—		—
Other Consumer Loans		209		135		74		209		21		206

Total Consumer Loans		209		135		74		209		21		206


Total Loans	$	11,513	$	7,354	$	4,159	$	11,513	$	1,478	$	11,599

The Corporation utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows.

Grade 1. MINIMAL RISK - Those loans without loss exposure to the Corporation. This classification is reserved for only the best, well secured loans to borrowers with significant capital strength, low leverage, stable earnings and growth and other readily available financing alternatives. This type of loan would also include loans secured by a program of the government.

Grade 2. MODEST RISK - These loans include borrowers with solid credit quality and moderate risk of loss. These loans may be fully secured by certificates of deposit with another reputable financial institution, or secured by readily marketable securities with acceptable margins.

Grade 3. AVERAGE RISK - This is the rating assigned to most of the loans held by the Corporation. This includes loans with average loss exposure and average overall quality. These loans should liquidate through possessing adequate collateral and adequate earnings of the borrower. In addition, these loans are properly documented and are in accordance with all aspects of the current loan policy.

Grade 4. ACCEPTABLE RISK - Borrower generates sufficient cash flow to fund debt service but most working asset and capital expansion needs are provided from external sources. Profitability and key balance sheet ratios are usually close to peers but one or more may be higher than peers.

Grade 5. MANAGEMENT ATTENTION - Borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the borrower has taken a negative turn and may be temporarily strained. Cash flow is weak but cash reserves remain adequate to meet debt service. Management weakness is evident.

Grade 6. OTHER LOANS ESPECIALLY MENTIONED (OLEM) - Loans in this category are fundamentally sound but possess some weaknesses. OLEM loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.

Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.

Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment.

Grade 9. LOSS - Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets.

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at June 30, 2011.

The following table details the amount of gross loans by loan grade and class as of June 30, 2011 (in thousands):


Grades	Satisfactory 1, 2, 3, 4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:

Land Development and Construction	$	9,812	$	107	$	1,545	$	—	$	—	$	11,464

Farmland		33,055		2,888		1,699		—		—		37,642
1-4 Family Mortgages		125,381		2,833		14,313		55		—		142,582
Commercial Real Estate		118,898		8,312		11,079		—		—		138,289

Total Real Estate Loans		287,146		14,140		28,636		55		—		329,977


Business Loans:
Commercial and Industrial Loans		36,900		1,348		1,163		38		—		39,449
Farm Production and other Farm Loans		1,938		20		77		—		—		2,035

Total Business Loans		38,838		1,368		1,240		38		—		41,484


Consumer Loans:
Credit Cards		929		—		61		—		—		990
Other Consumer Loans		38,548		211		1,443		19		7		40,228

Total Consumer Loans		39,538		211		1,504		19		7		41,218


Total Loans	$	365,522	$	15,719	$	31,380	$	112	$	7	$	412,679

The following table details the amount of gross loans by loan grade and class as of December 31, 2010:


Grades	Satisfactory 1, 2, 3,4		Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:

Land Development and Construction	$	20,165	$	65	$	1,608	$	—	$	—	$	21,838

Farmland		40,462		2,210		2,062		—		—		44,734
1-4 Family Mortgages		128,505		1,966		13,130		26		—		143,627
Commercial Real Estate		127,851		542		11,367		—		—		139,760

Total Real Estate Loans		316,983		4,783		28,167		26		—		349,959


Business Loans:
Commercial and Industrial Loans		26,062		608		1,739		16		4		28,429
Farm Production and other Farm Loans		2,363		14		52		—		—		2,429

Total Business Loans		28,425		622		1,791		16		4		30,858


Consumer Loans:
Credit Cards		920		—		70		—		—		990
Other Consumer Loans		38,674		34		1,571		10		3		40,292

Total Consumer Loans		39,594		34		1,641		10		3		41,282


Total Loans	$	385,002	$	5,439	$	31,599	$	52	$	7	$	422,099

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that will occur within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.

The allowance on the majority of the loan portfolio is calculated using a historical chargeoff percentage applied to the current loan balances by loan segment. This historical period is the average of the previous 5 years with the most current years weighted to show the effect of the most recent chargeoff activity. This percentage is also adjusted for economic factors such as local unemployment and general business conditions, both local and nationwide.

The group of loans that are considered to be impaired are individually evaluated for possible loss and a specific reserve is established to cover any loss contingency. Loans that are determined to be a loss with no benefit of remaining in the portfolio are charged off to the allowance. These specific reserves are reviewed periodically for continued impairment and adequacy of the specific reserve and adjusted when necessary.

The following table details activity in the allowance for possible loan losses by portfolio segment for the six months ended June 30, 2011:


June 30, 2011	Real Estate		Business Loans		Consumer			Total

Beginning Balance, January 1, 2011	$	4,306,691	$	1,104,706	$	967,673		$	6,379,070

Provision for possible loan losses		1,001,230		51,813		(126,209	)		926,834

Chargeoffs		840,784		66,360		109,955			1,017,099

Recoveries		13,049		6,031		51,717			70,797


Net Chargeoffs		827,735		60,329		58,238			946,302


Ending Balance	$	4,480,186	$	1,096,190	$	783,226		$	6,359,602


Period end allowance allocated to:

Loans individually evaluated for impairment		1,232,349		116,930		62			1,349,341

Loans collectively evaluated for impairment		3,247,837		979,260		783,164			5,010,261


Ending Balance, June 30, 2011	$	4,480,186	$	1,096,190	$	783,226		$	6,359,602

Activity in the allowance for possible loan losses for the six months ended June 30, 2010 was as follows:


	June 30, 2010

Balance, beginning of period	$	5,525,927
Provision for loan losses		1,320,211
Loans charged off		(964,881	)
Recoveries of loans previously charged off		133,091


Balance, end of period	$	6,014,348

The Corporation’s recorded investment in loans as of June 30, 2011 and December 31, 2010 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):


June 30, 2011	Real Estate		Business Loans		Consumer		Total

Loans individually evaluated for impairment	$	10,131	$	455	$	292	$	10,878

Loans collectively evaluated for impairment		319,846		41,029		40,926		401,801


	$	329,977	$	41,484	$	41,218	$	412,679


December 31, 2010	Real Estate		Business Loans		Consumer		Total

Loans individually evaluated for impairment	$	9,955	$	1,349	$	209	$	11,513

Loans collectively evaluated for impairment		340,004		29,509		41,073		410,586


	$	349,959	$	30,858	$	41,282	$	422,099

Note 7. Recent Accounting Pronouncements

In January 2010, the FASB issued an update to ASC Topic 820, which requires the addition of new disclosures and clarifies existing disclosure requirements already included in the guidance for fair value measurements. The new disclosures related to significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, as well as the clarifications of existing disclosures are effective for interim or annual reporting periods beginning after December 15, 2009. The new disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for interim or annual reporting periods beginning after December 15, 2010. The adoption has not had a material effect on the Corporation’s financial position, results of operations or stockholders’ equity.

In July 2010, the FASB issued an update to ASC Topic 310, that requires additional disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. The update makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the

aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. The disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The update has not had a material effect on our consolidated financial statements other than the new required disclosures.

Note 8. Fair Value of Financial Instruments

The fair value topic of the ASC establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:


Level 1		Quoted prices in active markets for identical assets or liabilities;

Level 2		Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or

Level 3		Unobservable inputs, such as discounted cash flow models or valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U. S. Government Agencies	$	—	$	201,195,462	$	—	$	201,195,462
Mortgage-backed Securities		—		38,770,987		—		38,770,987
Other investments		—		105,748,324		2,221,576		107,969,900


Total	$	—	$	345,714,773	$	2,221,576	$	347,936,349

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2010:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U. S. Government Agencies	$	—	$	186,157,928	$	—	$	186,157,928
Mortgage-backed Securities		—		37,759,943		—		37,759,943
Other investments		—		98,927,753		1,884,677		100,812,430


Total	$	—	$	322,845,624	$	1,884,677	$	324,730,301

The following table reports the activity for 2011 in assets measured at fair value on a recurring basis using significant unobservable inputs.


	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
	Structured Financial Product

Balance at January 1, 2011	$	1,884,677

Unrealized gains included in other comprehensive income		336,899


Balance at June 30, 2011	$	2,221,576

As of June 30, 2011, management determined, based on the current credit ratings, known defaults and deferrals by the underlying banks and the degree to which future defaults and deferrals would be required to occur before the cash flow for the Corporation’s tranche is negatively impacted, that no other-than-temporary impairment exists.

The Corporation recorded no gains or losses in earnings for the period that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

For assets measured at fair value on a nonrecurring basis during 2011 that were still held in the balance sheet at June 30, 2011, the following table provides the hierarchy level and the fair value of the related assets:


	2011
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals

Impaired loans	$	—	$	—	$	2,362,000	$	2,362,000
Other real estate owned		—		—		329,000		329,000


Total	$		$		$	2,691,000	$	2,691,000

For assets measured at fair value on a nonrecurring basis during 2010 that were still held in the balance sheet at December 31, 2010, the following table provides the hierarchy level and the fair value of the related assets:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals

Impaired loans	$	—	$	—	$	2,680,775	$	2,680,775
Other real estate owned		—		—		2,172,198		2,172,198


Total	$	—	$	—	$	4,852,973	$	4,852,973

Impaired loans with a carrying value of $3,711,341 and $4,159,181 had an allocated allowance for loan losses of $1,349,341 and $1,478,406 at June 30, 2011 and December 31, 2010, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

Other real estate owned (“OREO”) acquired during the six-month period ended June 30, 2011, and recorded at fair value, less costs to sell, was $329,000. There were no writedowns during the period on OREO previously acquired. OREO acquired during 2010 and recorded at fair value, less costs to sell, was $973,758. Additional writedowns during 2010 on OREO previously acquired was $112,060 on five properties valued at $1,198,440.

The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation and may not be indicative of amounts that might ultimately be realized upon disposition or settlement of those assets and liabilities.

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at June 30, 2011, and December 31, 2010:


	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and due from banks	$	22,299,125	$	22,299,125	$	16,963,393	$	16,963,393
Interest bearing deposits with banks		11,622,122		11,622,122		1,155,588		1,155,588
Securities available-for-sale		347,936,349		347,936,349		324,730,301		324,730,301
Net loans		406,072,546		405,819,343		415,496,720		415,605,513

Financial liabilities
Deposits	$	547,149,773	$	546,961,250	$	537,429,723	$	537,751,275
Federal Home Loan Bank advances		94,400,000		98,003,838		84,400,000		88,038,797
Federal funds purchased		—		—		2,500,000		2,500,000
Securities Sold under agreement to repurchase		114,055,801		114,055,801		110,483,437		110,483,437

The fair value estimates, methods and assumptions used by the Corporation in estimating its fair value disclosures for financial statements were as follows:

Cash and Due from Banks and Interest Bearing Deposits with Banks

The carrying amounts reported in the balance sheet for these instruments approximate fair value because of their immediate and shorter-term maturities, which are considered to be three months or less when purchased.

Securities Available-for-Sale

Fair values for investment securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of

comparable instruments. When neither quoted prices nor comparable instruments are available, unobservable inputs are needed to form an expected future cash flow analysis to establish fair values. Level 2 securities include debt securities such as obligations of United States government agencies and corporations, mortgage-backed securities and state, county and municipal bonds. Level 3 securities consist of a pooled trust preferred security.

Net Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (i.e., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans, and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest receivable approximates its fair value.

Impaired Loans

Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’ financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

Other real estate owned

OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at fair value of the real estate, less costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for decline in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. As such, values for OREO are classified as Level 3.

Deposits

The fair values for demand deposits, NOW and money market accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and time deposits approximate their fair values at the reporting date. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank (FHLB) Borrowings

The fair value of FHLB advances is based on discounted cash flow analysis.

Federal Funds Sold and Purchased and Commercial Repurchase Agreements

Due to the short term nature of these instruments, which is considered to be three months or less, the carrying amount is equal to the fair value.

Off-Balance Sheet Instruments

The fair value of commitments to extend credit and letters of credit are estimated using fees currently charged to enter into similar agreements. The fees associated with these financial instruments are not material.

CITIZENS HOLDING COMPANY

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD LOOKING STATEMENTS

In addition to historical information, this report contains statements which constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this report, including, but not limited to, statements found in Item 1, “Notes to Consolidated Financial Statements” and in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Corporation notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Corporation’s business include, but are not limited to, the following: (a) the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Corporation operates; (b) changes in the legislative and regulatory environment that negatively impact the Corporation through increased operating expenses; (c) increased competition from other financial institutions; (d) the impact of technological advances; (e) expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions; (f) changes in asset quality and loan demand; (g) expectations about overall economic strength and the performance of the economies in the Corporation’s market area; and (h) other risks detailed from time to time in the Corporation’s filings with the Securities and Exchange Commission. The Corporation does not undertake any obligation to update or revise any forward-looking statements subsequent to the date on which they are made.

Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of Citizens Holding Company and its wholly owned subsidiary, The Citizens Bank of Philadelphia (the “Bank,” and collectively with Citizens Holding Company, the “Corporation”). The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this report.

LIQUIDITY

The Corporation has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Corporation at June 30, 2011, was 24.18% and at December 31, 2010, was 19.98%. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $547,149,773 at June 30, 2011, and $537,429,723 at December 31, 2010. Other sources of liquidity include investment securities, the Corporation’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Corporation had $347,936,349 invested in investment securities at June 30, 2011, and $324,730,301 at December 31, 2010. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $37,500,000 at June 30, 2011 and $46,400,000 at December 31, 2010. The Corporation lowered its available federal funds lines with correspondent banks after an assessment of prior use and the need for this line in the future. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At June 30, 2011, the Corporation had unused and available $104,581,156 of its line of credit with the FHLB and at December 31, 2010, the Corporation had unused and available $119,501,966 of its line of credit with the FHLB. The decrease in the amount available under the Corporation’s line of credit with the FHLB from the end of 2010 to June 30, 2011, was the result of a decrease in collateral available, as calculated quarterly by the FHLB.

At June 30, 2011 the Corporation had no federal funds purchased and at December 31, 2010, had federal funds purchased in the amounts of $2,500,000. The Corporation usually purchases funds from correspondent banks on a temporary basis to meet short term funding needs.

When the Corporation has more funds than it needs for its reserve requirements or short-term liquidity needs, the Corporation increases its investment portfolio, increases the balances in interest bearing due from accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to insure rate flexibility and to meet loan funding and liquidity needs. When deposits decline or do not grow sufficiently to fund loan demand, management will seek funding either through federal funds purchased or advances from the FHLB.

CAPITAL RESOURCES

The Corporation’s equity capital was $83,343,242 at June 30, 2011, as compared to $76,295,096 at December 31, 2010. One of the reasons for the increase in equity capital was net earnings in excess of dividends paid. Equity capital was also positively impacted by the investment securities market value adjustment due to an increase in the market value of the Corporation’s investment portfolio. This market value increase was due to general market conditions, specifically the decrease in short term interest rates, which caused an increase in the market price of the investment portfolio.

Commencing May 1, 2009, the Corporation renewed its stock repurchase program whereby the Corporation may purchase up to 250,000 shares of the Corporation’s common stock on the open market. This plan terminated April 30, 2010, and the Corporation had purchased 49,326 shares at an average price of $22.75. This reduced the number of shares outstanding at December 31, 2010, to 4,838,411.

Cash dividends in the amount of $2,130,331, or $0.44 per share, have been paid in 2011 as of the end of the second quarter.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of June 30, 2011, the Corporation meets all capital adequacy requirements to which it is subject.


						For Capital					To Be Well Capitalized Under Prompt Corrective
	Actual					Adequacy Purposes					Actions Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of June 30, 2011
Total Capital	$	83,147,439		16.85	%	$	39,475,472		>8.00	%	$	49,344,340		>10.00	%
(to Risk-Weighted Assets)

Tier 1 Capital		76,977,031		15.60	%		19,737,736		>4.00	%		29,606,604		>6.00	%
(to Risk-Weighted Assets)

Tier 1 Capital		76,977,031		9.35	%		32,936,716		>4.00	%		41,170,895		>5.00	%
( to Average Assets)

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Corporation and the related changes between those periods:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010

Interest Income, including fees	$	9,443,851	$	9,451,835	$	18,789,123	$	19,327,052
Interest Expense		1,682,368		2,240,567		3,449,321		4,550,479


Net Interest Income		7,761,483		7,211,268		15,339,802		14,776,573
Provision for Loan Losses		682,773		695,255		926,834		1,320,211

Net Interest Income after
Provision for Loan Losses		7,078,710		6,516,013		14,412,968		13,456,362
Other Income		1,516,466		1,709,219		3,100,861		3,793,915
Other Expense		6,246,039		6,112,757		12,646,320		12,597,453


Income before Provision For
Income Taxes		2,349,137		2,112,475		4,867,509		4,652,824
Provision for Income Taxes		494,865		416,371		1,058,351		981,163


Net Income	$	1,854,272	$	1,696,104	$	3,809,158	$	3,671,661


Net Income Per share - Basic	$	0.38	$	0.38	$	0.79	$	0.76


Net Income Per Share-Diluted	$	0.38	$	0.37	$	0.79	$	0.75

See Note 3 to the Corporation’s Consolidated Financial Statements for an explanation regarding the Corporation’s calculation of Net Income Per Share - basic and - diluted.

Annualized return on average equity (“ROE”) was 9.19% for the three months ended June 30, 2011, and 8.67% for the corresponding period in 2010. For the six months ended June 30, 2011, ROE was 9.60% compared to 9.50% for the six months ended June 30, 2010. In both instances, the increase in ROE was caused by a slight increase in average equity along with an increase in net income for the three and six months of 2011.

The book value per share increased to $17.21 at June 30, 2011, compared to $15.77 at December 31, 2010. The increase in book value per share reflects the increase in equity due to the amount of earnings in excess of dividends and the increase in other comprehensive income due to the increase in market value of the Corporation’s investment securities. Average assets for the six months ended June 30, 2011, were $826,736,862 compared to $839,212,189 for the year ended December 31, 2010.

NET INTEREST INCOME / NET INTEREST MARGIN

One component of the Corporation’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds. The net interest margin is net interest income expressed as a percentage of average earning assets.

The annualized net interest margin was 4.29% for the second quarter of 2011 compared to 3.97% for the corresponding period of 2010. For the six months ended June 30, 2011, annualized net interest margin was 4.28% compared to 4.08% for the six months ended June 30, 2010. The increase in net interest margin from 2010 to 2011 is the result of an increase in yields on earning assets compared to the decrease in rates paid on deposits and borrowed funds, along with a decrease in average earning assets, as detailed below. Earning assets averaged $751,504,674 for the three months ended June 30, 2011. This represents a decrease of $6,969,436, or 0.9%, over average earning assets of $758,474,110 for the three month period ended June 30, 2010. Earning assets averaged $748,443,331 for the six months ended June 30, 2011. This represents a decrease of $12,803,821, or 1.7% over average earning assets of $761,247,152 for the six months ended June 30, 2010. The decrease in earning assets for the three and six months ended June 30, 2011, is the result of the declining loan demand and decline in deposits due to current local and national economic conditions.

Interest bearing deposits averaged $438,381,788 for the three months ended June 30, 2011. This represents a decrease of $29,749,173, or 6.4%, from the average of interest bearing deposits of $468,130,961 for the three-month period ended June 30, 2010. This was due, in large part, to a decrease in certificates of deposit.

Other borrowed funds averaged $206,074,800 for the three months ended June 30, 2011. This represents an increase of $14,264,027, or 7.4%, over the other borrowed funds of $191,810,773 for the three-month period ended June 30, 2010. This increase in other borrowed funds was due to a $10,630,854 increase in the Commercial Repo Liability, a $200,463 decrease in the ABE Loan Liability, a $4,422,320 increase in Federal Funds Purchased and a decrease in the FHLB advances of $588,684 for the three-month period ended June 30, 2011, when compared to the three-month period ended June 30, 2010.

Interest bearing deposits averaged $438,784,184 for the six-month period ended June 30, 2011. This represents a decrease of $31,635,673, or 6.7% from the average of interest bearing deposits of $470,419,857 for the six-month period ended June 30, 2010. This was due, in large part, to a decrease in certificates of deposit and interest bearing transaction accounts.

Other borrowed funds averaged $205,638,743 for the six months ended June 30, 2011. This represents an increase of $11,668,078, or 6.0% over the other borrowed funds of $193,970,665 for the six-month period ended June 30, 2010. This increase in other borrowed funds was due to a $10,760,036 increase in the Commercial Repo Liability, a $207,427 decrease in the ABE Loan Liability, a $927,624 increase in Federal Funds Purchased and an increase in the Federal Home Loan Bank advances of $187,845 for the six-month period ended June 30, 2011, when compared to the six-month period ended June 30, 2010.

Net interest income was $7,761,483 for the three-month period ended June 30, 2011, an increase of $550,215 from $7,211,268 for the three-month period ended June 30, 2010, primarily due to changes in rate. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As to changes in rate in the three-month period ended June 30, 2011, the yield on earning assets increased while the rates paid on deposits and borrowed funds decreased from the same period in 2010. The yield on all interest bearing assets increased 3 basis points to 5.18% in the second quarter of 2011 from 5.15% for the same period in 2010. At the same time, the rate paid on all interest bearing liabilities for the second quarter of 2011 decreased by 33 basis points to 1.05% from 1.38% in the same period of 2010. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both decrease.

Net interest income was $15,339,802 for the six months ended June 30, 2011, an increase of $563,229 from the $14,776,573 for the six-months ended June 30, 2010, primarily due to changes in both rate and volume. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As to changes in rate, in the six-month period ended June 30, 2011, the rates paid on deposits and borrowed funds decreased more than the yield on earning assets as compared to the changes in rates and yields in the same period of 2010. The yield on all interest bearing assets decreased 8 basis points to 5.20% in the first six months of 2011 from 5.28% for the same period in 2010. At the same time, the rate paid on all interest bearing liabilities for the first six months of 2011 decreased 31 basis points to 1.07% from 1.38% in the same period in 2010. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both decrease.

The following table shows the interest and fees and corresponding yields for loans only.


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Interest and Fees	$	6,398,678		$	7,011,615		$	12,947,609		$	14,264,924
Average Gross Loans		412,887,296			439,958,474			415,451,123			445,861,441
Annualized Yield		6.20	%		6.37	%		6.23	%		6.40	%

The decrease in interest rates in the three-month period ended June 30, 2011, reflects the decrease in all loan interest rates for both new and refinanced loans in the period.

CREDIT LOSS EXPERIENCE

As a natural corollary to the Corporation’s lending activities, some loan losses are to be expected. The risk of loss varies with the type of loan being made and the overall creditworthiness of the

borrower over the term of the loan. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and for various types of loans. The Corporation attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures.

The Corporation maintains a program of systematic review of its existing loans. Loans are graded for their overall quality. Those loans, which the Corporation’s management determines require further monitoring and supervision, are segregated and reviewed on a regular basis. Significant problem loans are reviewed on a monthly basis by the Corporation’s Board of Directors.

The Corporation charges off that portion of any loan that management has determined to be a loss. A loan is generally considered by management to represent a loss in whole or in part when exposure beyond the collateral value is apparent, servicing of the unsecured portion has been discontinued or collection is not anticipated based on the borrower’s financial condition. The general economic conditions in the borrower’s industry influence this determination. The principal amount of any loan that is declared a loss is charged against the Corporation’s allowance for loan losses.

The Corporation’s allowance for loan losses is designed to provide for loan losses that can be reasonably anticipated. The allowance for loan losses is established through charges to operating expenses in the form of provisions for loan losses. Actual loan losses or recoveries are charged or credited to the allowance for loan losses. Management of the Corporation determines the amount of the allowance. Among the factors considered in determining the allowance for loan losses are the current financial condition of the Corporation’s borrowers and the value of security, if any, for their loans. Estimates of future economic conditions and their impact on various industries and individual borrowers are also taken into consideration, as are the Corporation’s historical loan loss experience and reports of banking regulatory authorities. As these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether the Corporation will sustain loan losses in excess or below its allowance or that subsequent evaluation of the loan portfolio may not require material increases or decreases in such allowance.

The following table summarizes the Corporation’s allowance for loan losses for the dates indicated:


	Quarter Ended June 30, 2011			Year Ended December 31, 2010			Amount of Increase (Decrease)			Percent of Increase (Decrease)

BALANCES:
Gross Loans	$	412,678,381		$	422,098,362		$	(9,419,981	)		-2.23	%
Allowance for Loan Losses		6,359,602			6,379,070			(19,468	)		-0.31	%
Nonaccrual Loans		10,301,427			10,931,670			(630,243	)		-5.77	%
Ratios:
Allowance for loan losses to gross loans		1.54	%		1.51	%
Net loans charged off to allowance for loan losses		14.88	%		25.12	%

The provision for loan losses for the three months ended June 30, 2011, was $682,773, a decrease of $12,482 from the $695,255 provision for the same period in 2010. The provision for loan losses was $926,834 for the six month period ended June 30, 2011, compared to a provision of $1,320,211 for the six months ended June 30, 2010. The decrease in our loan loss provisions for the three and six-month periods is a result of a decrease in outstanding loans, an increase in loan losses recorded for the respective periods and management’s assessment of inherent loss in the loan portfolio, including the impact caused by current local and national economic conditions. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to the improvement of loans classified as non-accrual due to payments received on these loans in excess of new loans added to the list.

For the three months ended June 30, 2011, net loan losses charged to the allowance for loan losses totaled $847,389, an increase of $439,689 from the $407,700 charged off in the same period in 2010. For the six months ended June 30, 2011, net loan losses charged to the allowance for loan losses totaled $946,302, an increase of $114,261 from the $832,041 charged off in the same period in 2010. This increase was due to an overall increase in the number of charge offs in 2011 when compared to the same period in 2010 and not the result of any one loan segment.

Management reviews with the Board of Directors the adequacy of the allowance for loan losses on a quarterly basis. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the first six months of 2011 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, in light of overall economic conditions in the Corporation’s geographic area and the nation as a whole, it is possible that additional provisions for loan loss may be required.

NON-INTEREST INCOME

Non-interest income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Non-interest income for the three months ended June 30, 2011, was $1,516,466, a decrease of $249,225, or 14.1%, from the same period in 2010. The decrease in non-interest income is the result of investment security gains realized in 2010 that did not repeat in 2011. Service charges on deposit accounts decreased by $165,009, or 16.2%, to $855,986 in the three months ended June 30, 2011, compared to $1,020,995 for the same period in 2010. Other service charges and fees increased by $42,603, or 11.4%, in the three months ended June 30, 2011, compared to the same period in 2010. The difference in fee income was the result of fluctuations in volume and not a direct result of fee changes.

Non-interest income for the six months ended June 30, 2011, was $3,100,861, a decrease of $693,054, or 18.3%, compared to $3,793,915 for the same period in 2010. The decrease in non-interest income is the result of investment security gains realized in 2010 that did not repeat in 2011. Service charges on deposit accounts decreased $255,390, or 12.9%, to $1,730,383 in the six months ended June 30, 2011, as compared to the same period in 2010. Other service charges and fees increased $82,736, or 11.1%, in the six months ended June 30, 2011, as compared to the same period in 2010. The difference in fee income was the result of fluctuations in volume and not a direct result of fee changes.

The following is a detail of the other major income classifications that are included in Other Income on the income statement:


	Three months ended June 30,				Six months ended June 30,
Other Income	2011		2010		2011		2010

BOLI Insurance	$	121,924	$	115,315	$	237,309	$	220,315
Mortgage Loan Origination Income		69,993		76,817		168,493		103,612
Income from Security Sales, net		5,357		59,331		5,789		618,013
Other Income		48,032		64,190		129,754		119,805


Total Other Income	$	245,306	$	315,653	$	541,345	$	1,061,745

NON-INTEREST EXPENSE

Non-interest expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three-month period ended June 30, 2011 and 2010 were $6,246,039 and $6,112,757, respectively, an increase of $76,810, or 1.3%, from 2010 to 2011. Salaries and benefits increased to $3,524,103 for the three months ended June 30, 2011, from $3,448,339 for the same period in 2010. This represents an increase

of $75,764, or 2.2%. This increase was the result of normal yearly salaries increases. Occupancy expense increased by $25,580, or 2.6%, to $1,018,542 for the three months ended June 30, 2011, when compared to the same period of 2010. This increase is due in part to the expenses related to the new branch located in Hattiesburg, Mississippi.

Total non-interest expenses for the six-month period ended June 30, 2011 and 2010 were $12,646,320 and $12,597,453, respectively, an increase of $48,867, or 0.4%, from 2010 to 2011. Salaries and benefits increased to $7,043,712 for the six months ended June 30, 2011, from $6,848,700 for the same period in 2010. This represents an increase of $195,012, or 2.8%. This increase was the result of normal yearly salaries increases. Occupancy expense increased $169,139, or 8.7%, to $2,107,489 in the six months ended June 2011 when compared to the same period in 2010. This increase is due in part to the expenses related to the new branch located in Hattiesburg, Mississippi.

The following is a detail of the major expense classifications that make up the other operating expense line item in the income statement:


	Three months ended June 30,						Six months ended June 30,
Other Operating Expense	2011			2010			2011		2010

Intangible Amortization	$	46,172		$	46,172		$	92,345	$	92,345
Advertising		180,900			159,395			351,662		289,348
Office Supplies		123,474			114,442			303,250		226,109
Legal and Audit Fees		116,254			119,424			237,160		237,776
Telephone expense		117,770			137,041			214,152		277,350
Postage and Freight		100,224			111,118			192,874		187,729
Loan Collection Expense		(31,323	)		95,786			42,051		241,819
Other Losses		(1,818	)		(57,246	)		11,502		421,465
FDIC and State Assessment		267,801			251,893			532,870		508,040
Debit Card/ATM expense		203,983			144,348			385,361		275,856
Travel and Convention		75,578			64,046			138,779		138,320
Other expenses		504,379			485,037			993,113		914,246


Total Other Expense	$	1,703,394		$	1,671,456		$	3,495,119	$	3,810,403

The Corporation’s efficiency ratio for the three months ended June 30, 2011, was 65.11% compared to the 66.35% for the same period in 2010. For the six months ended June 30, 2011 and 2010, the Corporation’s efficiency ratio was 66.31% and 64.78%, respectively. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.

BALANCE SHEET ANALYSIS


	June 30, 2011		December 31, 2010		Amount of Increase (Decrease)			Percent of Increase (Decrease)

Cash and Due From Banks	$	22,299,125	$	16,963,393	$	5,335,732			31.45	%
Interest Bearing deposits with Other Banks		11,622,122		1,155,588		10,466,534			905.73	%
Investment Securities		347,936,349		324,730,301		23,206,048			7.15	%
Loans, net		406,072,546		415,496,720		(9,424,174	)		-2.27	%
Total Assets		845,252,681		818,232,732		27,019,949			3.30	%

Total Deposits		547,149,773		537,429,723		9,720,050			1.81	%

Total Stockholders’ Equity		83,343,242		76,295,096		7,048,146			9.24	%

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash, balances at correspondent banks and items in process of collection. The balance at June 30, 2011, was $22,299,125, an increase of $5,335,732 from the balance of $16,963,393 at December 31, 2010, due to an increase in the availability of cash letters sent for collection on the last day of the period.

PREMISES AND EQUIPMENT

During the six-month period ended June 30, 2011, premises and equipment increased by $435,016, or 2.1%, to $21,186,494 when compared to $20,751,478 at December 31, 2010. The increase was due to the addition of property and equipment exceeding the amount of depreciation in the normal course of business. During this time, additions were made for interim construction costs on a new branch building in Hattiesburg.

INVESTMENT SECURITIES

The investment securities portfolio consists of United States agency debentures, mortgage-backed securities, obligations of states, counties and municipal governments and FHLB stock. Investments at June 30, 2011, increased $23,206,048, or 7.1%, to $347,936,349 from the balance at December 31, 2010. This increase is due to the Corporation’s strategy of investing funds not needed for the declining loan demand in the highest yielding asset.

LOANS

The loan balance decreased by $9,424,174 during the three months ended June 30, 2011, to $406,072,546 from $415,496,720 at December 31, 2010. Loan demand, especially in the commercial and industrial loan and consumer categories, was weak during the first six months of 2011. No material changes were made to the loan products offered by the Corporation during this period.

DEPOSITS

The following table shows the balance and percentage change in the various deposits:


	June 30, 2011		December 31, 2010		Amount of Increase (Decrease)			Percent of Increase (Decrease)

Noninterest-Bearing Deposits	$	95,971,966	$	95,324,759	$	647,207			0.68	%
Interest-Bearing Deposits		177,732,499		164,325,092		13,407,407			8.16	%
Savings Deposits		41,130,446		37,778,537		3,351,909			8.87	%
Certificates of Deposit		232,314,862		240,001,335		(7,686,473	)		-3.20	%


Total Deposits	$	547,149,773	$	537,429,723	$	9,720,050			1.81	%

Interest-bearing deposits, noninterest-bearing deposits and savings increased while certificates of deposit decreased during the six months ended June 30, 2011. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management. These rate adjustments impact deposit balances.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to Note 2 to the consolidated financial statements included in this report for a discussion of the nature and extent of the Corporation’s off-balance sheet arrangements, which consist of commitments to fund loans and letters of credit.

CONTRACTUAL OBLIGATIONS

There have been no material changes outside of the ordinary course of the Corporation’s business to the contractual obligations set forth in Note 12 to the Corporation’s financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The following discussion outlines specific risks that could affect the Corporation’s ability to compete, change the Corporation’s risk profile or eventually impact the Corporation’s financial results. The risks the Corporation faces generally are similar to those experienced, to varying degrees, by all financial services companies.

The Corporation’s strategies and its management’s ability to react to changing competitive and

economic environments have historically enabled the Corporation to compete effectively and manage risks to acceptable levels. The Corporation has outlined potential risk factors below that it presently believe could be important; however, other risks may prove to be important in the future. New risks may emerge at any time and the Corporation cannot predict with certainty all potential developments which could affect the Corporation’s financial performance. The following discussion highlights potential risks, which could intensify over time or shift dynamically in a way that might change the Corporation’s risk profile.

Competition Risks

The market in which the Corporation competes is saturated with community banks seeking to provide a service oriented banking experience to individuals and businesses compared with what the Corporation believes is the more rigid and less friendly environment found in large banks. This requires the Corporation to offer most, if not all, of the products and conveniences that are offered by the larger banks with a service differentiation. In doing so, it is imperative that the Corporation identify the lines of business that the Corporation can excel in, prudently utilize the Corporation’s available capital to acquire the people and platforms required thereof and execute on the strategy.

Credit Risks

Like all lenders, the Corporation faces the risk that the Corporation’s customers may not repay their loans and that the realizable value of collateral may be insufficient to avoid a loss of principal. In the Corporation’s business, some level of credit loss is unavoidable and overall levels of credit loss can vary over time. Our ability to manage credit risks depends primarily upon the Corporation’s ability to assess the creditworthiness of customers and the value of collateral, including real estate. The Corporation controls credit risk by diversifying the Corporation’s loan portfolio and managing its composition, and by recording and managing an allowance for expected loan losses in accordance with applicable accounting rules. At the end of June 30, 2011, the Corporation had $6.360 million of available reserves to cover such losses. The models and approaches the Corporation uses to originate and manage loans are regularly updated to take into account changes in the competitive environment, in real estate prices and other collateral values, and in the economy, among other things based on the Corporation’s experience originating loans and servicing loan portfolios.

Financing, Funding and Liquidity Risks

One of the most important aspects of management’s efforts to sustain long-term profitability for the Corporation is the management of interest rate risk. Management’s goal is to maximize net interest income within acceptable levels of interest-rate risk and liquidity.

The Corporation’s assets and liabilities are principally financial in nature and the resulting earnings thereon are subject to significant variability due to the timing and extent to which the Corporation can reprice the yields on interest-earning assets and the costs of interest bearing liabilities as a result of changes in market interest rates. Interest rates in the financial markets affect the Corporation’s decisions on pricing its assets and liabilities which impacts net interest

income, an important cash flow stream for the Corporation. As a result, a substantial part of the Corporation’s risk-management activities are devoted to managing interest-rate risk. Currently, the Corporation does not have any significant risks related to foreign exchange, commodities or equity risk exposures.

Interest Rate and Yield Curve Risks

A significant portion of the Corporation’s business involves borrowing and lending money. Accordingly, changes in interest rates directly impact the Corporation’s revenues and expenses, and potentially could compress the Corporation’s net interest margin. The Corporation actively manages its balance sheet to control the risks of a reduction in net interest margin brought about by ordinary fluctuations in rates.

Like all financial services companies, the Corporation faces the risks of abnormalities in the yield curve. The yield curve simply shows the interest rates applicable to short and long term debt. The curve is steep when short-term rates are much lower than long-term rates: it is flat when short-term rates are equal, or nearly equal, to long-term rates: and it is inverted when short-term rates exceed long-term rates. Historically, the yield curve is positively sloped. A flat or inverted yield curve tends to decrease net interest margin, as funding costs increase relative to the yield on assets. Currently, the yield curve is positively sloped.

Regulatory and Legal Risks

The Corporation operates in a heavily regulated industry and therefore is subject to many banking, deposit, and consumer lending regulations in addition to the rules applicable to all companies publicly traded in the U.S. securities markets. Failure to comply with applicable regulations could result in financial, structural, and operational penalties. In addition, efforts to comply with applicable regulations may increase the Corporation’s costs and, or limit the Corporation’s ability to pursue certain business opportunities. Federal and state regulations significantly limit the types of activities in which the Corporation, as a financial institution, may engage. In addition, the Corporation is subject to a wide array of other regulations that govern other aspects of how the Corporation conducts business, such as in the areas of employment and intellectual property. Federal and state legislative and regulatory authorities occasionally consider changing these regulations or adopting new ones. Such actions could limit the amount of interest or fees the Corporation can charge, could restrict the Corporation’s ability to collect loans or realize on collateral or could materially affect us in other ways. Additional federal and state consumer protection regulations also could expand the privacy protections afforded to customers of financial institutions, restricting the Corporation’s ability to share or receive customer information and increasing the Corporation’s costs. In addition, changes in accounting rules can significantly affect how the Corporation records and reports assets, liabilities, revenues, expenses and earnings.

The Corporation also faces litigation risks from customers (singly or in class actions) and from federal or state regulators. Litigation is an unavoidable part of doing business, and the Corporation manages those risks through internal controls, personnel training, insurance, litigation management, the Corporation’s compliance and ethics processes and other means. However, the commencement, outcome and magnitude of litigation cannot be predicted or controlled with certainty.

Accounting Estimate Risks

The preparation of the Corporation’s consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make significant estimates that affect the financial statements. The Corporation’s most critical estimate is the level of the allowance for credit losses. However, other estimates occasionally become highly significant, especially in volatile situations such as litigation and other loss contingency matters. Estimates are made at specific points in time; as actual events unfold, estimates are adjusted accordingly. Due to the inherent nature of these estimates, it is possible that, at some time in the future, the Corporation may significantly increase the allowance for credit losses or sustain credit losses that are significantly higher than the provided allowance, or the Corporation may make some other adjustment that will differ materially from the estimates that the Corporation make today.

Expense Control

Expenses and other costs directly affect the Corporation’s earnings. The Corporation’s ability to successfully manage expenses is important to its long-term profitability. Many factors can influence the amount of the Corporation’s expenses, as well as how quickly they grow. As the Corporation’s businesses change or expand, additional expenses can arise from asset purchases, structural reorganization evolving business strategies, and changing regulations, among other things. The Corporation manages expense growth and risk through a variety of means, including actual versus budget management, imposition of expense authorization, and procurement coordination and processes.

ITEM 4.

CONTROLS AND PROCEDURES.

The management of the Corporation, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Corporation’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of June 30, 2011 (the end of the period covered by this Quarterly Report on Form 10-Q).

There were no changes to the Corporation’s internal control over financial reporting that occurred in the three months ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A.

RISK FACTORS.

Information regarding risk factors appears in Part I, Item 1A, “Risk Factors,” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material changes in the risk factors previously disclosed in such Annual Report on Form 10-K.

Changes in interest rates could make it difficult to maintain our current interest income spread and could result in reduced earnings.

Our earnings are largely derived from net interest income, which is interest income and fees earned on loans and investments, less interest paid on deposits and other borrowings. Interest rates are highly sensitive to many factors that are beyond the control of our management, such as general economic conditions and the policies of various governmental and regulatory authorities. An unanticipated rapid decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore on the level of net interest income. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth than previously experienced. Due to concerns regarding the federal debt ceiling, the credit rating agencies may downgrade the credit rating of the federal government, which could result in increased interest rates generally. For the reasons set forth above, an increase in interest rates generally as a result of such a credit rating downgrade could adversely affect our net interest income levels, thereby resulting in reduced earnings, and reduce loan demand.

ITEM 6.

EXHIBITS.

Exhibits


31(a)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

31(b)		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

32(a)		Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.

32(b)		Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.

101		The following financial information from Citizens Holding Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, filed with the SEC on August 8, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of June 30, 2011 (Unaudited) and December 31, 2010; (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2011 (Unaudited) and 2010 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2011 (Unaudited) and 2010 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2011 (Unaudited) and 2010 (Unaudited); and (v) Notes to Consolidated Financial Statements, tagged as blocks of text (Unaudited).*

Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CITIZENS HOLDING COMPANY


BY:		/s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer

BY:		/s/ Robert T. Smith
Robert T. Smith
Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

DATE: August 5, 2011

EXHIBIT INDEX


Exhibit Number		Description of Exhibit

31(a)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)

31(b)		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)

32(a)		Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350.

32(b)		Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350.

101		The following financial information from Citizens Holding Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, filed with the SEC on August 8, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of June 30, 2011 (Unaudited) and December 31, 2010; (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2011 (Unaudited) and 2010 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2011 (Unaudited) and 2010 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2011 (Unaudited) and 2010 (Unaudited); and (v) Notes to Consolidated Financial Statements, tagged as blocks of text (Unaudited).*

CITIZENS HOLDING CO /MS/ - FORM 10-Q - August 8, 2011

Attached files

CITIZENS HOLDING CO /MS/ Reports

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