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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended September 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 mark 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 November 10, 2004.

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CITIZENS HOLDING COMPANY

THIRD 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)

See notes to consolidated financial statements.

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to consolidated financial statements.

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CITIZENS HOLDING COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the three and nine months ended September 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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treasury stock method. Stock options have a dilutive effect when the current market price exceeds the option exercise price and have an anti-dilutive effect when the exercise price exceeds the current market price. Net income per share was 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 was 60.51% at September 30, 2004, 56.99% at December 31, 2003 and 62.28% at September 30, 2003. 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. Deposits are the chief source of the Corporation’s liquidity. In addition, 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 September 30, 2004. At September 30, 2004, the Corporation had unused and available $35,000,000 of its federal funds line of credit and $111,372,433 of its line of credit with the Federal Home Loan Bank.

CAPITAL RESOURCES

The Corporation’s equity capital was $59,379,929 at September 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.

The Corporation does not anticipate any capital expenditures on expansion, new services, equipment or personnel in the near future other than what that may be necessary to accommodate normal growth of the Corporation.

In 2003, certain employees and directors exercised stock options for 5,050 shares. In 2004, officer and directors exercised options for an aggregate of 8,200 shares of stock in the first quarter, 7,950 shares in the second quarter and 4,500 shares in the third quarter.

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These option exercises brought the number of shares outstanding to 5,000,278 at September 30, 2004. Cash dividends in the amount of $2,246,840, or $0.45 per share, have been paid in 2004 as of the end of the third quarter.

Quantitative measures established by Federal Deposit Insurance Corporation 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 September 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 September 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, as described in Note 4 to the financial statements.

Annualized return on average equity (ROE) was 13.33% and 12.40% for the three and nine months ended September 30, 2004, compared to 13.37% and 12.37% for the three and nine months ended September 30, 2003.

The book value per share increased to $11.88 at September 30, 2004 compared to $11.35 at December 31, 2003 and to $11.08 at September 30, 2003. The increase in book value at September 30, 2004 as compared to December 31, 2003 and September 30, 2003 is due to earnings exceeding dividends paid during these periods, offset in part by the decline in the market value of the security portfolio due to the rise in interest rates. Average assets for the nine months ended September 30, 2004, were $562,440,841 compared to $549,519,773 for the year ended December 31, 2003 and $547,435,590 at September 30, 2003. Average equity increased to $58,186,523 for the nine months ended September 30, 2004, from $56,121,211 for the year ended December 31, 2003 and $56,100,776 at September 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 $5,592,937 and $16,561,571 for the three and nine month periods ended September 30, 2004, an increase of $109,592 and $582,532, respectively, over the same periods in 2003. Increases in loan volume accounted for a large part of the net interest income increase while the yield on the loan portfolio declined slightly as did the rates paid on deposits.

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The annualized net interest margin was 4.53% and 4.56% for the three and nine month periods ended September 30, 2004, compared to an annualized net interest margin of 4.42% and 4.44% for the three and nine months ended September 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 $504,058,412 for the nine months ended September 30, 2004. This represented an increase of $4,350,533, or .9%, over average earning assets of $499,707,879 for the nine months ended September 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 nine month periods ended September 30, 2004 as compared to the same periods in prior periods 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

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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.

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 September 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. The balance of this credit at September 30, 2004 totaled $3,612,219, and there is a related specific reserve of $1,163,666. Management believes that adequate allowances have been made to offset the loss, if any, associated with this particular credit.

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The provision for loan losses for the three months ended September 30, 2004 was $121,691, a decrease of $595,709, or 83.0%, over the $717,400 for the same period in 2003. The provision for the nine months ended September 30, 2004, was $1,021,691, a decrease of $445,709 or 30.4% over the $1,467,400 for the nine months ended September 30, 2003. The decrease 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. The Corporation used an in-depth analysis of the Corporation’s current loan portfolio, using a loan grading system and the assignment of specific reserves to certain loans, to determine what would represent a reasonable and adequate allowance for loan loss.

For the three months ended September 30, 2004, net loan losses charged to the allowance for loan losses totaled $94,027, a decrease of $273,407 over the net loan losses charged to the allowance in the same period in 2003. For the nine months ended September 30, 2003, net loan losses charged to the allowance for loan losses totaled $353,445, a decrease of $467,999 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 such as income received from the sale of investment securities.

Other operating income for the three months ended September 30, 2004 decreased $309,176, or 18.5%, to $1,365,223 over the same period in 2003 and for the nine months ended September 30, 2004, increased $24,228, or ..6%, to $4,156,766 over the same period in 2003. The decrease in 2004 for the three month period was due mainly to a reduction in the income received from the sale of investment securities and the recognition of the proceeds of a bank owned life insurance policy on a director in the third quarter of 2003.

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OTHER EXPENSE

Other expense includes salaries and employee benefits, occupancy and equipment, and other operating expenses such as legal and accounting, office supplies, postage and other expenses necessary for the operation of a business. Other expense for the three and nine months ended September 30, 2004 were $4,190,082 and $12,311,739 compared to $3,821,859 and $11,207,172 for the three and nine months ended September 30, 2003, an increase of $368,223, or 9.6%, and $1,104,567, or 9.9%, respectively. Salaries and benefits increased to $2,275,272 and $6,628,989 for the three and nine months of 2004 from $2,016,484 and $5,907,636 for the same period in 2003, an increase of $258,788, or 12.8%, and $721,353, or 12.2%, 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 are primarily responsible for the overall increase in other expense. The remainder of this increase is due to increased expenses related to normal growth and inflation. The Corporation’s efficiency ratio (the ratio of operating expenses to net interest income and other operating income) for the three and nine month periods ended September 30, 2004 was 58.07% and 57.44%, compared to 51.88% and 54.26% for the same periods in 2003.

The Corporation anticipates the expenditures it will make in the fourth quarter in order to comply with Section 404 of the Sarbanes-Oxley Act of 2002 will have a material effect on the Company’s earnings, but the Corporation is unable to quantify the amount of these anticipated expenditures.

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 as of the end of the third quarter of 2004 increased $4,076,425 compared to $15,199,846 as of December 31, 2003 due to normal fluctuations in cash letters sent for collection on the last day of the quarter.

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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 $3,073,225, or 2.2%, 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 in the first nine months of 2004. Net loans increased by $11,248,892, or 3.2%, during the nine month period ended September 30, 2004 as compared to $351,937,005 at December 31, 2003. Commercial, financial and agricultural loans increased $14,317,978, or 7.7%, consumer loans increased $1,919,155, or 3.2%, real estate mortgage loans increased $500,699, or .5% while real estate construction loans decreased $5,090,659, or 33.0%. No special loan programs were initiated during this period.

DEPOSITS

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

The increase in total deposits 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. Certificates of deposit declined due to competitive pressure from financial institutions in our market area.

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OFF-BALANCE SHEET ARRANGEMENTS

The Corporation has no off-balance sheet arrangements except as set forth in Note 3 in the notes to the consolidated financial statements included in this report, which provides 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 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 September 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, the Corporation’s 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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. In the third quarter of 2004, there were no stock repurchases of Corporation stock. There have been no sales of unregistered securities during 2004.

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 September 30, 2004 the maximum amount available for transfer from the Bank to the Corporation in the form of cash dividends was $50,942,000.

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FRB regulations limit the amount the Bank may loan to the Corporation unless those loans are collateralized by specific obligations. At September 30, 2004, the maximum amount available for transfer from the Bank in the form of loans was $57,455,804. The maximum amount available for transfer from the Bank in the form of both cash dividends and loans was $108,397,804 (which represents 19% of the Bank’s consolidated net assets).

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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.

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EXHIBIT INDEX

EXHIBITS