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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from              to             

Commission file number: 000-25221

CITIZENS HOLDING COMPANY

(exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 601-656-4692

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 12, 2004.

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CITIZENS HOLDING COMPANY

SECOND QUARTER 2004 INTERIM FINANCIAL STATEMENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

(Unaudited)

See notes to consolidated financial statements.

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See notes to consolidated financial statements.

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the three and six months ended June 30, 2004

The interim consolidated financial statements of Citizens Holding Company include the accounts of its 97.53% owned subsidiary, The Citizens Bank of Philadelphia (collectively referred to as “the Corporation”). All significant intercompany transactions have been eliminated in consolidation.

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outstanding during each period plus the dilutive effect of outstanding granted options. Earnings per share were computed as follows:

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On March 9, 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments”. This bulletin summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The adoption of this bulletin did not impact the Corporation’s consolidated financial statements.

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis is written to provide greater insight into the results of operations and the financial condition of Citizens Holding Company and its 97.53% owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with Citizens Holding Company, the “Corporation”).

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. Liquidity is the ratio of net deposits and short-term liabilities divided by net cash, short-term investments and marketable assets. Liquidity of the Corporation at June 30, 2004 was 60.70%, at December 31, 2003 was 56.99% and at June 30, 2003 was 67.18%. Management believes it maintains adequate liquidity for the Corporation’s current needs.

When the Corporation has more funds than it needs for its reserve requirements or short-term liquidity needs, the Corporation increases its security investments 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. The Corporation has secured and unsecured federal funds lines with correspondent banks in the amount of $35,000,000. In addition, the Corporation has the ability to draw on its line of credit with the Federal Home Loan Bank in excess of $154,250,296 at June 30, 2004. At June 30, 2004, the Corporation had unused and available $35,000,000 of its federal funds line of credit and $111,116,314 of its line of credit with the Federal Home Loan Bank.

CAPITAL RESOURCES

The Corporation’s equity capital was $55,956,865 at June 30, 2004, as compared to $56,502,076 at December 31, 2003. The main source of capital for the Corporation has been the retention of net income.

In 2003 certain employees and directors exercised stock options for 5,050 shares, and in the first quarter of 2004 an officer and a director exercised options for an aggregate of 8,200 shares of stock. These option exercises brought the number of shares outstanding to 4,995,778 at June 30, 2004. Cash dividends in the amount of $1,496,798, or $0.30 per share, have been paid in 2004 as of the end of the second quarter.

Quantitative measures established by Federal Deposit Insurance Corporation regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and

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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, 2004, the Corporation meets all capital adequacy requirements to which it is subject. The Bank was rated as “well capitalized” under FDIC regulations at June 30, 2004.

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:

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Net Income Per Share—Basic is calculated using weighted average number of shares outstanding for the period. Net Income Per Share—Diluted is calculated using the weighted average number of shares outstanding for the period, plus the net dilutive effect of granted stock options determined using the treasury stock method.

Annualized return on average equity (ROE) was 12.36% and 11.94% for the three and six months ended June 30, 2004, and 12.67% and 11.86% for the three and six months ended June 30, 2003.

The book value per share decreased to $11.20 at June 30, 2004 compared to $11.35 at December 31, 2003 and increased compared to $11.19 at June 30, 2003. The decrease in book value at June 30, 2004 as compared to December 31, 2003, was caused by the market adjustment on investment securities that are held Available-for-Sale. The market value of the security portfolio declined due to the rise in interest rates during the first six months of 2004. The increase in book value per share at June 30, 2004 compared to book value per share at June 30, 2003 is due to earnings exceeding dividends paid during this period, offset in part by the decline in the market value of the security portfolio due to the rise in interest rates during the first six months of 2004. Average assets for the six months ended June 30, 2004, were $557,412,480 compared to $549,519,773 for the year ended December 31, 2003 and $537,938,397 at June 30, 2003. Average equity increased to $58,205,647 for the six months ended June 30, 2004, from $56,121,211 for the year ended December 31, 2003 and $55,522,584 at June 30, 2003. Normal growth in both assets and equity were the reason for the increase in average year to date assets and average year to date equity.

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.

Net interest income was $5,571,985 and $10,968,634 for the three and six month periods ended June 30, 2004, an increase of $241,466 and $472,940, respectively, over the same periods in 2003. Increases in loan volume and the continuing decline in interest rates paid on deposits contributed to these increases in net interest income.

The annualized net interest margin was 4.63% and 4.59% for the three and six month periods ended June 30, 2004, compared to an annualized net interest margin of 4.43% and

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4.46% for the three and six months ended June 30, 2003. The increase in net interest margin is the result of continuing loan demand and the continued decline in rates paid on deposits. Earning assets averaged $499,491,026 for the six months ended June 30, 2004. This represented an increase of $8,920,141, or 1.8%, over average earning assets of $490,570,885 for the six months ended June 30, 2003. The increase in earning assets is the result of the normal growth pattern of the Corporation and not due to any special investments or acquisitions.

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

The decrease in rates in both the three and six month periods ended June 30, 2004 reflect the decrease in all loan rates for both new and refinanced loans in the periods.

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 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 periodic 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 which management considers to represent a loss. A loan is generally considered by management to represent a loss in whole or in part when an 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 and general economic conditions in the borrower’s industry. The principal amount of any loan which is declared a loss is charged against the Corporation’s allowance for loan losses.

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The Corporation’s allowance for loan losses is designed to provide for loan losses which 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. The amount of the allowance is determined by management of the Corporation. 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. Because these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether or not 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:

The increase in nonaccrual loans from December 31, 2003 to June 30, 2004 was the result of the deterioration in credit quality for a single borrower and is not an indication of any downward trend in overall credit quality. Management believes that adequate allowances have been made to offset the loss, if any, associated with this particular credit.

The provision for loan losses for the three months ended June 30, 2004 was $450,000, an increase of $75,000, or 20.0%, over the $375,000 for the same period in 2003. The provision for the six months ended June 30, 2004, was $900,000, an increase of $150,000 or 20% over the $750,000 for the six months ended June 30, 2003. The increase in the provision was made to bring the allowance back to a level deemed sufficient by Management (based on the factors discussed above in this section) to cover anticipated loan losses after the net charge-offs for these periods and to cover the increases in the loan portfolio.

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For the three months ended June 30, 2004, net loan losses charged to allowance for loan losses totaled $100,471, a decrease of $157,913 over the net loan losses charged to the allowance in the same period in 2003. For the six months ended June 30, 2003, net loan losses charged to the allowance for loan losses totaled $259,418, a decrease of $194,592 over the same period in 2003.

Management of the Corporation reviews with the Board of Directors the adequacy of the allowance for possible 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 last three months 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 based on an analysis of the portfolio on an individual loan basis with the loans of lesser quality receiving a higher allowance for possible loss. 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.

OTHER OPERATING INCOME

Other operating income includes service charges on deposit accounts, wire transfer fees, safe deposit box rental fees and other revenue not derived from interest on earning assets.

Other operating income for the three months ended June 30, 2004 increased $164,999, or 12.2%, over the same period in 2003 and for the six months ended June 30, 2004, increased $333,404, or 13.6%, over the same period in 2003. The increase was the result of increased overdraft, returned check income and other service charges related to an increase in deposit customers and an increase in income received from bank-owned life insurance that is used to fund employee benefits.

OTHER EXPENSE

Other expense includes salaries and employee benefits, occupancy and equipment, and other operating expenses. Other expense for the three and six months ended June 30, 2004 were $4,144,606 and $8,121,657 compared to the $3,682,494 and $7,385,313 for the three and six months ended June 30, 2003, an increase of $462,112, or 12.5%, and $736,344, or 10.0%, respectively. Salaries and benefits increased to $2,252,111 and $4,353,717 for the first three and six months of 2004 from $1,959,324 and $3,891,152 for the same period in 2003, an increase of $292,787, or 14.9%, and $462,565, or 11.9%, respectively. Normal growth in the Corporation along with annual increases in salaries and increased cost of employee benefits were the main reasons for the increase in salaries and benefits. These increases in salaries and employee benefits caused the increase in other expenses. The Corporation’s efficiency ratio (the ratio of operating expenses to net interest income and other operating income) for the three and six month periods ended June 30, 2004 was 56.57% and 57.12%, compared to 53.69% and 55.57% for the same periods in 2003.

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BALANCE SHEET ANALYSIS

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are made up of cash, balances at correspondent banks and items in process of collection. The balance for the second quarter of 2004 increased $274,330 over $15,101,810 as of December 31, 2003 due to normal fluctuations in cash letters sent for collection on the last day of the quarter.

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio is made up of U. S. Treasury Notes, U. S. Agency debentures, mortgage-backed securities, obligations of states, counties and municipal governments and Federal Home Loan Bank stock. Investments increased $861,277, or .6%, from the balance at December 31, 2003 due to the investment of excess funds that were not used to fund new loans.

LOANS

Loan demand in the Corporation’s service area began to strengthen as net loans increased by $6,311,990, or 1.8%, during the six month period ended June 30, 2004 as compared to $351,937,005 at December 31, 2003. Residential housing loans continue to be in demand along with commercial and industrial loans. No special loan programs were initiated during this period.

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DEPOSITS

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

The increase is the result of normal deposit growth. The Corporation believes that deposit growth was influenced by the decline in the stock market and the need for more conservative investments by our depositors. The Corporation does not have any brokered deposits. There were no special deposit programs or incentives in place during this period.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to Note 4 in the notes 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.

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, 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

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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 economics 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.

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Overview

The definition of market risk is the possibility of loss that could result from adverse changes in market prices and rates. The Corporation has taken steps to assess the amount of risk that is associated with its asset and liability structure. The Corporation measures the potential risk on a regular basis and makes changes to its strategies to manage these risks. The Corporation does not participate in some of the financial instruments that are inherently subject to substantial market risk.

Market/Interest Rate Risk Management

The primary purpose in managing interest rate risk is to effectively invest capital and preserve the value created by the core banking business. The Corporation utilizes an investment portfolio to manage the interest rate risk naturally created through its business activities. The quarterly interest rate risk report is used to evaluate exposure to interest rate risk, project earnings and manage the composition of the balance sheet and its growth.

Static gap analysis is also used in measuring interest rate risk. An analysis of the Corporation’s repricing opportunities indicates a negative gap position over the next three- and twelve–month periods. This indicates that the Corporation would benefit somewhat from a decrease in market interest rates. Although the Federal Reserve Bank raised key interest rates during the quarter ended June 30, 2004, this rate increase has had little affect on the Corporation’s net interest margin. Market rates on NOW accounts, money market deposit accounts and savings deposits have not responded immediately to the Fed’s interest rate increase and the Corporation believes that when local market pressure causes these rates to increase, they will not increase the full amount of the Fed rate increase. Certificates of deposit will not reprice until their respective maturities and therefore any increase in rates paid will occur over the remaining maturity schedule of the certificate of deposit. If the increase in interest rates is carried out over a period of time, the Corporation believes that the effect on its earnings will be minimized. The Corporation believes that a substantial increase in rates over a short period of time would have a negative effect on the net interest income of the Corporation due to its liability sensitive position. The Corporation will continue to monitor the upward movement in interest rates and will adjust our rates accordingly to compete with our market’s interest rate structure.

Although the Fed has begun to increase key interest rates, the Corporation’s market risk has not changed materially since the end of the last fiscal year end of December 31, 2003. Any more Fed interest rate increases in the near future could have the effect of changing the Corporation’s market risk.

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

ITEM 4. CONTROLS AND PROCEDURES

The Corporation carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the fiscal quarter covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. There have been no changes in the Corporation’s internal controls over financial reporting (as defined in Rule 13(a)-15(f) and Rule 15(d)-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II. - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Capital Standards

The FRB, FDIC and other federal banking agencies have established risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a bank’s operations.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.

In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%.

Stock Repurchase Plan

The Corporation does not have a plan in effect to repurchase its shares of common stock.

Restrictions on Dividends and Other Distributions

The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.

The Corporation’s ability to pay dividends depends in large part on the ability of the Bank to pay dividends to the Corporation. The approval of the Mississippi Department of Banking and Consumer Finance is required prior to the Bank paying dividends; dividends are limited to earned surplus in excess of three times the Bank’s capital stock. At June 30, 2004 the maximum amount available for transfer from the Bank in the form of cash dividends was $50,942,000.

FRB regulations limit the amount the Bank may loan to the Corporation unless those loans are collateralized by specific obligations. At June 30, 2004, the maximum amount

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available for transfer from the Bank in the form of loans was $56,772,262. The maximum amount available for transfer from the Bank in the form of both cash dividends and loans was $107,714,262 (which represents 19% of the Bank’s consolidated net assets).

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Corporation held its Annual Meeting of Shareholders on April 27, 2003 at 3:30 p.m. at the Main Office of The Citizens Bank of Philadelphia, 521 Main Street, Philadelphia, Mississippi. At this meeting there were 4,039,371 shares, or 81.0%, of the Corporation’s issued and outstanding shares of common stock represented either in person or by proxy at the Annual Meeting.

The shareholders considered and voted upon a proposal to set the number of directors to serve on the Board of Directors at ten members. The shareholders of the Corporation adopted this proposal by a vote of 3,840,552 for the proposal and 188,894 shares against the proposal, with 9,922 abstentions and broker non-votes.

An election was held to elect three Class II directors to a three-year term expiring in 2007. The votes for each nominee were:

The shareholders considered and voted on Amendment No. 2 to the 1999 Directors’ Stock Compensation Plan that was previously passed by a vote of the board of directors. This amendment increased by 105,000 the number of shares of common stock of the Corporation available for the grant of stock under the plan. This amendment was approved by the shareholders by a vote of 3,223,953 for the amendment and 72,341 votes against, with 743,077 abstentions and broker non-votes.

The shareholders considered and voted upon a proposal to ratify the Horne CPA Group as the Corporation’s independent auditors for the fiscal year ending December 31, 2004. The shareholders of the Corporation adopted this proposal by a vote of 4,023,098 affirmative votes to 4,630 votes against, with 11,640 abstentions and broker non-votes.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

The following reports on form 8-K were filed by the Corporation during the last quarter of the period covered by this Form 10-Q:

On April 27, 2004, the Corporation furnished on Form 8-K under Item 5, Item 7(a), and Item 12 a press release announcing the financial results of the Corporation for the quarter ended March 31, 2004.

On May 27, the Corporation furnished on Form 8-K under Item 7(c) and Item 9 a press release announcing the payment of a $.15 per share dividend of the Corporation for the second quarter of 2004.

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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