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 wholly 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 September 30, 2009 was 38.79% and at December 31, 2008 was 36.17%. Management believes it maintains adequate liquidity for the Corporation's current needs.

The Corporation's primary source of liquidity is customer deposits, which were $560,570,067 at September 30, 2009 and $545,927,422 at December 31, 2008. 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 $297,407,670 invested in investment securities at September 30, 2009 and $258,023,206 at December 31, 2008. This increase is mainly due to the increase in the amount of securities sold under agreement to repurchase during the first nine months of 2009. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $41,500,000 at September 30, 2009 and $19,500,000 at December 31, 2008. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At September 30, 2009, the Corporation had unused and available $113,890,325 of its line of credit with the FHLB and at December 31, 2008, the Corporation had unused and available $127,285,491 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 2008 to September 30, 2009 resulted from the Corporation's qualifying collateral decreasing.

At September 30, 2009 and December 31, 2008, the Corporation had no federal funds sold. The Corporation invests its excess liquidity in federal funds sold on an as-needed basis.

When the Corporation has more funds than it needs for its reserve requirements or short-term liquidity needs, the Corporation increases its investment portfolio 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 $77,000,090 at September 30, 2009 as compared to $71,399,638 at December 31, 2008. The main reason for the increase in equity capital was the positive impact of the FASB ASC Section 320-10-65 adjustment due to an increase in the market value of the Corporation's investment portfolio and excess earnings over dividends paid. This market value increase was due to general market conditions, which caused an increase in the market price of the investment portfolio.

Certain employees and directors exercised stock options for 19,238 shares of stock in 2008. These option exercises increased the number of shares outstanding to 4,849,296 at December 31, 2008. In the first nine months of 2009, 5 directors and 11 employees exercised stock options for 37,150 shares of stock, which resulted in 4,870,187 shares outstanding at September 30, 2009. Commencing March 1, 2007, the Corporation implemented a stock repurchase program under which the Corporation may repurchase up to 250,000 shares of its stock on the open market. At the end of the program, February 29, 2008, the Corporation had purchased 160,186 shares at an average price of $21.66.

Commencing May 1, 2008, the Corporation implemented a stock repurchase program under which the Corporation could repurchase up to 250,000 shares of the Company's common stock on the open market. The Plan was effective as of May 1, 2008 and terminated April 30, 2009. At the end of the program, the Corporation had purchased 44,284 shares at an average price of $21.03.

Effective 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 will terminate no later than April 30, 2010. At September 30, 2009, the Corporation has purchased 3,900 shares at an average price of $23.34, which reduced the number of shares outstanding to 4,870,187.

Cash dividends in the amount of $2,914,986, or $0.60 per share, have been paid in 2009 as of the end of the third 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 September 30, 2009 the Corporation meets all capital adequacy requirements to which it is subject.

                                                                                             To Be Well
                                                                                          Capitalized Under
                                                                  For Capital             Prompt Corrective
                                           Actual              Adequacy Purposes         Actions Provisions
                                       Amount      Ratio         Amount      Ratio         Amount      Ratio
As of September 30, 2009
Total Capital
(to Risk-Weighted Assets)           $ 77,392,730   15.45 %    $ 40,061,944   >8.00 %    $ 50,077,430   >10.00 %

Tier 1 Capital
(to Risk-Weighted Assets)           $ 71,865,399   14.35 %    $ 20,030,972   >4.00 %    $ 30,046,458    >6.00 %

Tier 1 Capital
(to Average Assets)                 $ 71,865,399    8.78 %    $ 32,738,437   >4.00 %    $ 40,923,046    >5.00 %

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        For the Nine Months Ended
                                                September 30,                     September 30,
                                             2009             2008             2009             2008
Interest Income, including fees         $    10,475,065    $ 9,908,721    $   30,729,180    $ 29,352,869
Interest Expense                              2,650,756      3,033,780         8,762,732      10,458,181

Net Interest Income                           7,824,309      6,874,941        21,966,448      18,894,688
Provision for Loan Losses                     1,123,297        372,105         2,263,642       1,028,914

Net Interest Income after Provision
for Loan Losses                               6,701,012      6,502,836        19,702,806      17,865,774
Other Income                                  2,080,827      1,783,426         5,521,968       6,312,169
Other Expense                                 6,609,912      5,480,229        18,331,529      16,300,399

Income before Provision For Income
Taxes                                         2,171,927      2,806,033         6,893,245       7,877,544
Provision for Income Taxes                      434,506        701,680         1,457,133       1,658,069

Net Income                              $     1,737,421    $ 2,104,353    $    5,436,112    $  6,219,475

Net Income Per share - Basic            $          0.36    $      0.43    $         1.12    $       1.28

Net Income Per Share - Diluted          $          0.35    $      0.43    $         1.11    $       1.27

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 9.34% for the three months ended September 30, 2009 and 12.04% for the corresponding period in 2008. For the nine months ended September 30, 2009, ROE was 9.86% compared to 11.84% for the nine months ended September 30, 2008. In both instances, the decrease in ROE was caused by the decrease in net income for the first nine months of 2009 while the average equity increased.

The book value per share increased to $15.81 at September 30, 2009 compared to $14.72 at December 31, 2008. The increase in book value per share reflects the increase in equity due to the amount of earnings in excess of dividends, the increase as a result of the FASB ASC Section 320-10-65 adjustment and the effect of stock options exercised as well as shares repurchased. Average assets for the nine months ended September 30, 2009 were $799,026,437 compared to $702,189,790 for the year ended December 31, 2008.

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 4.34% for the third quarter of 2009 compared to 4.61% for the corresponding period of 2008. For the nine months ended September 30, 2009 annualized net interest margin was 4.20% as compared to 4.46% for the nine months ended September 30, 2008. The decrease in net interest margin from 2008 to 2009 is the result of a larger decrease in yields on earnings assets compared to the decrease in rates paid on deposits and borrowed funds, as detailed below. Earning assets averaged $748,856,303 for the three months ended September 30, 2009. This represents an increase of $135,950,128, or 22.2%, over average earning assets of $612,906,175 for the three month period ended September 30, 2008. Earnings assets averaged $726,015,074 for the nine months ended September 30, 2009. This represents an increase of $99,304,406, or 15.8% over average earning assets of $626,710,668 for the nine months ended September 30, 2008. The increase in earning assets for the three and nine months ended September 30, 2009 is the result of the normal growth pattern of the Corporation and not due to any special investments or acquisitions.

Interest bearing deposits averaged $478,826,308 for the three months ended September 30, 2009. This represents an increase of $68,466,631, or 16.7%, over the average of interest bearing deposits of $410,359,677 for the three month period ended September 30, 2008. This was due to an increase in each category of deposits outstanding. Other borrowed funds averaged $177,597,693 for the three months ended September 30, 2009. This represents an increase of $57,629,676, or 48.0%, over the other borrowed funds of $119,968,017 for the three month period ended September 30, 2008. This increase was due mainly to an increase in the Commercial Repo Liability. Interest bearing deposits averaged 477,150,317 for the nine months ended September 30, 2009. This represents an increase of $68,433,225, or 16.7%, over the average of interest bearing deposits of $408,717,092 for the nine month period ended September 30, 2008. This was due to an increase in each category of deposits outstanding. Other borrowed funds averaged $158,214,440 for the nine months ended September 30, 2009. This represents an increase of $28,878,370, or 22.3%, over the other borrowed funds of $129,336,070 for the nine month period ended September 30, 2008. The increase in other borrowed funds was primarily due to a $54,743,459 increase in the Commercial Repo Liability offset by a $23,570,182 decrease in the Sweep Account Liability, a $577,436 decrease in Federal Funds Purchased, a decrease in the ABE loan liability of $212,932 and a decrease in the Federal Home Loan Bank advances of $1,504,539 for the nine month period ended September 30, 2009 when compared to the nine month period ended September 30, 2008.

Net interest income was $7,824,309 for the three month period ended September 30, 2009, an increase of $949,368 from the $6,874,941 for the three month period ended September 30, 2008, primarily due to change in volume, which was partially offset by the decrease in rate, as detailed below. 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 September 30, 2009, the rates paid on deposits and borrowed funds decreased less than the yield on earning assets as compared to the changes in rates and yields in the same period in 2008. The yield on all interest bearing assets decreased 89 basis points to 5.75% in the third quarter of 2009 from 6.64% for the same period in 2008. At the same time, the rate paid on all interest bearing liabilities for the third quarter of 2009 decreased 66 basis points to 1.62% from 2.28% in the same period of 2008. Net interest income was $21,966,448 for the nine months ended September 30, 2009, an increase of $3,071,760 from the $18,894,688 for the nine month period ended September 30, 2008, primarily due to change in volume, which was partially offset by the decrease in rate, as discussed below. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As to changes in rate, in the nine month period ended September 30, 2009, the rates paid on deposits and borrowed funds decreased less than the yield on earning assets as compared to the changes in rates and yields in the same period in 2008. The yield on all interest bearing assets decreased 87 basis points to 5.80% in the first nine months of 2009 from 6.67% for the same period in 2008. At the same time, the rate paid on all interest bearing liabilities for the first nine months of 2009 decreased 75 basis points to 1.84% from 2.59% in the same period of 2008.

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

                        For the Three Months Ended            For the Nine Months Ended
                              September 30,                         September 30,
                         2009               2008               2009               2008
 Interest and Fees   $   7,368,838      $   7,382,418      $  22,007,962      $  21,899,227
 Average Loans         442,035,406        401,647,346        439,619,343        391,112,280
 Annualized Yield             6.67 %             7.35 %             6.67 %             7.47 %

The decrease in interest rates in the three and nine month period ended September 30, 2009 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 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 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, 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. 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:

                                      Year to Date        Year to Date         Amount of      Percent of
                                     September 30,        December 31,          Increase       Increase
                                          2009                2008             (Decrease)     (Decrease)
BALANCES:
Gross Loans                          $  447,189,882       $ 428,705,256       $ 18,484,626          4.31 %
Allowance for Loan Losses                 5,527,331           4,479,585          1,047,746         23.39 %
Nonaccrual Loans                          9,870,313           1,396,885          8,473,428        606.59 %
Ratios:
Allowance for loan losses to
gross loans                                    1.24 %              1.04 %
Net loans charged off to
allowance for loan losses                     21.97 %             15.90 %

The provision for loan losses for the three months ended September 30, 2009 was $1,123,297, an increase of $751,192 over the $372,105 provision for the same period in 2008. The provision for loan losses was $2,263,642 for the nine months ended September 30, 2009 compared to a provision of $1,028,914 for the nine months ended September 30, 2008. The provision in the three month period ended September 30, 2009 reflects an increase in the amount of loans outstanding and the effect of loans charged-off in the third quarter of 2009.

For the three months ended September 30, 2009, net loan losses charged to the allowance for loan losses totaled $473,131, an increase of $246,531 over the $226,600 charged off in the same period in 2008. For the nine months ended September 30, 2009, net loan losses charged to the allowance for loan losses totaled $1,214,528, an increase of $603,434 over the $611,094 charged off in the same period in 2008.

Management of the Corporation 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 nine months of 2009 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 September 30, 2009 was $2,080,827, an increase of $297,401, or 16.7%, compared to $1,783,426 for the same period in 2008. Service charges on deposit accounts increased $18,273, or 1.7%, to $1,081,059 in the three months ended September 30, 2009 compared to $1,062,786 for the same period in 2008. Other service charges and fees increased $69,674, or 21.4%, in the three months ended September 30, 2009 compared to the same period in 2008. The difference in fee income was the result of increase in volume and not a direct result of fee changes.

Non-interest income for the nine months ended September 30, 2009 was $5,521,968, a decrease of $790,201, or 12.5%, compared to $6,312,169 for the same period in 2008. Service charges on deposit accounts decreased $7,752, or 0.3%, to $3,009,826 in the nine months ended September 30, 2009 compared to $3,017,578 for the same period in 2008. Other service charges and fees increased $175,321, or 19.7%, in the nine months ended September 30, 2009 compared to the same period in 2008. The difference in fee income was the result of an increase in volume and not a direct result of fee changes.

During the second quarter of 2008, the Bank received proceeds from bank owned life insurance that insured the life of one of its officers. These net proceeds resulted in an additional $772,771 in other income for the 2008 second quarter and the 2008 year to date.

The following is a detail of the other major income classifications that are included in Other Income under Non-Interest Income on the income statement.

                                        Three months ended         Nine months ended
                                          September 30,              September 30,
   Other Income                          2009        2008         2009          2008
   BOLI Insurance                     $  123,998   $ 180,773   $   486,816   $   539,526
   Mortgage Loan Origination Income      100,679      87,890       236,523       214,942
   Shay Investments Income                    -           -             -        441,588
   Other Income                          379,721     126,281       724,248     1,209,301

   Total Other Income                 $  604,398   $ 394,944   $ 1,447,587   $ 2,405,357

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 September 30, 2009 and 2008 were $6,609,912 and $5,480,229, respectively, an increase of $1,129,683, or 20.6%, from 2008 to 2009. Salaries and benefits increased to $3,281,090 for the three months ended September 30, 2009 from $3,019,748 for the same period in 2008. This represents an increase of $261,342, or 8.7%. Occupancy expense increased $186,962, or 20.5%, to $1,099,080 in the three months ended September 30, 2009 when compared to the same period of 2008. Occupancy expense increased due to increases in depreciation, equipment rental, service contracts and utilities.

Total non-interest expenses for the nine month period ended September 30, 2009 and 2008 were $18,331,529 and $16,300,399, respectively, an increase of $2,031,130, or 12.5%, from 2008 to 2009. Salaries and benefits increased to $9,646,435 for the nine months ended September 30, 2009 from $8,974,575 for the same period in 2008. This represents an increase of $671,860, or 7.5%. Occupancy expense increased $356,787, or 13.2%, to $3,061,057 in the nine months ended September 30, 2009 when compared to the same period of 2008. Occupancy expense increased due to increases in depreciation, equipment rental, service contracts and utilities.

During the second quarter of 2008, benefits were paid out to the beneficiary of an officer of the bank under the Bank's Supplemental Executive Retirement Plan in the amount of $259,945. This amount is reflected in the increase of the 2008 nine months' other non-interest expense.

During the second quarter of 2009, the Corporation expensed the special FDIC assessment that all banks were required to pay on September 30, 2009. The amount of the special FDIC assessment expensed during the quarter was $373,125 and is reflected in other operating expense.

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           Nine months ended
                                         September 30,               September 30,
   Other Operating Expense            2009          2008          2009          2008
   Intangible amortization         $    46,173   $   119,462   $   138,518   $   388,213
   Advertising                         171,491       197,418       493,030       573,526
   Office supplies                     134,133       130,018       404,206       446,040
   Legal and audit fees                 92,213        95,155       333,853       286,669
   Telephone expense                   229,159       151,967       521,271       367,885
   Postage and freight                 118,241        78,589       269,172       250,899
   Loan collection expense              93,750        55,619       209,336       114,287
   Other losses                        389,783       148,510       541,776       228,323
   FDIC & State assessment             213,985        40,131       799,278       104,676
   Other expenses                      740,814       531,494     1,913,597     1,861,036

   Total Other Operating Expense   $ 2,229,742   $ 1,548,363   $ 5,624,037   $ 4,621,554

The Corporation's efficiency ratio for the three months ended September 30, 2009 was 64.61% compared to the 61.33% for the same period in 2008. For the nine months ended September 30, 2009 and 2008, the Corporation's efficiency ratio was 64.55% and 62.62%, 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.