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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

CITIZENS BANCORP/OR
(Exact name of registrant as specified in its charter)

275 Southwest Third Street
Corvallis, Oregon 97339
(Address of principal executive offices)

(541) 752-5161
(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.

YES [X]     NO [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

4,089,259 shares as of July 31, 2002, no par.

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CITIZENS BANCORP
FORM 10-Q
JUNE 30, 2002
INDEX

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PART I FINANCIAL INFORMATION

ITEM 1

CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)

See accompanying notes

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CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousand, except per share amounts)

See accompanying notes

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CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in Thousands)

See accompanying notes

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CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited), (Dollars in thousands)

See accompanying notes

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CITIZENS BANCORP
Notes to Consolidated Financial Statements (unaudited)

1. BASIS OF PRESENTATION

The interim condensed consolidated financial statements include the accounts of Citizens Bancorp (“Bancorp”), a bank holding company and its wholly owned subsidiary, Citizens Bank (“Bank”) after elimination of intercompany transactions and balances. Substantially all activity of Citizens Bancorp is conducted through its subsidiary bank.

The interim financial statements are unaudited but have been prepared in accordance with accounting principles generally accepted in the United States of America for interim condensed financial information and with instructions to form 10-Q. Accordingly, the condensed interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation for the interim periods included herein have been made.

The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2001 consolidated financial statements, including notes there to, included in Bancorp’s 2001 Annual Report to shareholders.

2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIALS

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. SHAREHOLDERS EQUITY AND NET INCOME PER COMMON SHARE

The Board of Directors declared a $.37 per share dividend to Bancorp shareholders of record on November 14, 2001, payable on January 10, 2002. Through the Dividend Reinvestment Plan (DRIP) 61,589 shares were purchased at a price of $10.47 per share.

Basic earnings per share are based on the average number of common shares outstanding, assuming no dilution. Diluted earnings per common share are computed assuming the exercise of stock options.

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The option price of all outstanding options at June 30, 2001 was in excess of the market price of the stock at that date, making them anti-dilutive.

All per share amounts have been restated to retroactively reflect stock dividends, stock purchased and stock splits previously reported.

4. CONTINGENCIES

Unfunded loan commitments totaled $32.3 million as of June 30, 2002 and $25.9 million as of December 31, 2001.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for all fiscal years beginning after June 15, 2002. In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not anticipate that the adoption of SFAS Nos. 143 and 144 will have a material effect on its financial position or results of operations.

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ITEM 2

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

In addition to historical information, this report contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for the purpose of availing Bancorp the protection of the safe harbor provisions of this Act. The forward looking statements contained in this report are subject to factors, risks and uncertainties that may cause actual results to differ materially from those projected. Factors that might result in such material difference include, but are not limited to economic conditions, the regulatory environment, rapidly changing technology, new legislation, competitive factors, the interest rate environment and the overall condition of the banking industry. Forward looking statements can be identified by such words as “estimate”, “believe”, “expect”, “intend”, “anticipate”, “should”, “may”, “will”, or other similar words or phrases. Although Bancorp believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Readers are therefore cautioned not to place undue reliance on such forward looking statements, which reflect management’s analysis only as of the date of the statement. Bancorp does not intend to update these forward looking statements other than in its periodic filings under applicable security laws.

OVERVIEW

Citizens Bank (“the Bank”) was chartered October 1, 1957 (charter #333) by the State of Oregon as a commercial bank. Since its beginning with a single office in Corvallis, Citizens Bank has expanded to an additional nine locations in the four counties of Benton, Linn, Lane, and Yamhill. Branches are located in the communities of Corvallis, Philomath, Albany, Junction City, Veneta, McMinnville, and Harrisburg.

At the January 2002 Board of Directors meeting, the Board approved a plan to expand our branch network into Dallas, Oregon. Plans are now under way to build a new office there, our eleventh. We are excited about our potential to do business in Dallas. We believe that our market penetration will be strong. The Company has located a site for the branch but is waiting for all inspections to be completed before closing. It is anticipated that the branch may open in a temporary building in October. The construction of a permanent building will also commence at that time.

Citizens Bancorp (“Bancorp”), an Oregon Corporation and financial holding company, was formed in 1996 for the purpose of becoming the holding company of Citizens Bank. Bancorp is headquartered in Corvallis, Oregon. Its principal business activities are conducted through its full-service, commercial bank subsidiary, Citizens Bank.

Bancorp operates through a two-tiered corporate structure. At the holding company level the affairs of Bancorp are overseen by a Board of Directors elected by the shareholders of Bancorp at the annual meeting of shareholders. The business of the Bank is overseen by a Board of Directors elected by Bancorp, the sole owner of the Bank. As of the date of this Form 10-Q the respective members of the Board of Directors of the Bank and the Board of Directors of Bancorp are identical.

Bancorp’s culture focuses on the tenets of collaborative leadership, branch autonomy, assertive business development, a positive working environment, a commitment to the community, outstanding customer service, and relationship banking. Management believes that a healthy culture together with a progressive management style will result in constantly improved shareholder value.

Bancorp’s primary goal is to improve shareholder value through increased earnings while maintaining a high level of safety and soundness. Bancorp is committed to independence and long-term performance strategies.

The long-term benefit to Bancorp of its cultural and management style is consistent growth and development of the Bank over time. Risk levels have been greatly reduced because of expertise in loan, investment, operational, and human resource management.

Bancorp’s primary market focus is to provide commercial bank services to businesses, professionals, and individuals. Bancorp emphasizes the development of meaningful customer relationships and a high level of service. Its employees are well-trained banking professionals who are committed to these objectives.

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The Bank offers deposit accounts, safe-deposit boxes, consumer loans, commercial loans, agricultural loans, and commercial and residential real estate loans. Commercial loans include operating lines of credit, equipment and real estate financing, capital needs, and other traditional financing products.

The Bank has a growing emphasis in financing farm operations, equipment, and property. The Bank has also emphasized loans to professionals with its professional line of credit products. The Bank’s loan portfolio has some concentrations in real estate secured loans, primarily commercial properties. The Bank also operates a small residential mortgage loan origination department that originates loans and sells them into the secondary market.

Deposit products include regular and “package” checking accounts, savings accounts, certificates of deposit, money market accounts, and IRA accounts. The Bank offers debit cards, check guarantee cards, and ATM cards as well as MasterCard and VISA cards as part of its retail banking services.

The Bank offers extended banking hours in selected locations as well as Saturday banking. ATM machines are also available at ten (10) locations offering 24-hour transaction services, including cash withdrawals, deposits, account transfers, and balance inquiries. The Bank also offers its customers a 24-hour automated telephone service that offers account transfers and balance inquiries. The Bank’s on-line banking product offers services to both individuals and business account customers. Business customers have a comprehensive cash management option. All online users have the availability of the “bill payment” feature. The Bank expects to continually enhance its on-line banking product while maintaining its quality “people to people” customer service. Citizens on-line banking can be reached at www.CitizensEBank.com.

Bancorp reported net income of $1,321,000 in the second quarter ending June 30, 2002, or $.32 per common share, an increase of 41.9% from the second quarter net income of $931,000 in 2001 or $.22 per common share. For the first six months of 2002, Bancorp earned $2,443,000, or $.59 per common share, an increase of 30.2% from the six month 2001 earnings of $1,877,000 or $.45 per common share. The net increase is primarily attributed to the decrease in interest expense on deposits.

LOAN PORTFOLIO

The composition of the loan portfolio was as follows (in thousands):

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     Transactions in the allowance for credit losses were as follows for the six months ended June 30, 2002:

It is the policy of the Bank to place loans on nonaccrual after they become 90 days past due unless the loans are well secured and in the process of collection. The Bank may place loans that are not contractually past due or that are deemed fully collateralized on nonaccrual status as a management tool to actively oversee specific loans.

Loans on nonaccrual status as of June 30, 2002 and December 31, 2001 were approximately $98,000 and $703,000 respectively. Loans past due 90 days or more on which the Bank continued to accrue interest were approximately $61,000 at June 30, 2002 and $330,000 at December 31, 2001. There were no loans with modified terms as of June 30, 2002.

INVESTMENT SECURITIES

The amortized cost and estimated book value of the investment securities held by the Bank, including unrealized gains and losses, at June 30, 2002 and December 31, 2001, are as follows (in thousands):

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MATERIAL CHANGES IN FINANCIAL CONDITION

Changes in the balance sheet for the six months ended June 30, 2002 include an increase in total assets, primarily in loans and securities available for sale and an increase in liabilities primarily in repurchase agreements and savings and interest bearing demand deposits.

At June 30, 2002, total assets increased 5.9% or approximately $16.4 million over total assets at December 31, 2001. Major components of the change in assets were:

	•		$1.3 million increase in cash and due from banks
	•		$5.5 million increase in investment securities
	•		$8.5 million increase in net loans

Loans were generally made to customers within the Company’s market area. The increases were funded by an increase in deposits, repurchase agreements and other borrowings.

The Company experienced a growth in deposits, repurchase agreements, and other borrowings which represent treasury tax and loan deposits during the six months ended June 30, 2002, specifically as follows:

	•		Demand deposits increased $.715 million
	•		Savings and interest bearing deposits increased $9.2 million
	•		Time certificates of deposits decreased $4.4 million
	•		Repurchase agreements increased $9.5 million
	•		Other borrowings, consisting of the treasury tax and loan deposits, increased $1.0 million

Management believes the growth in deposits and repurchase agreements is a result of continuing penetration into the market area as a result of its emphasis on customer service, its relationship style of banking and on continuing difficulties in the stock market. The decrease in time certificates of deposits was a result of management’s decision not to pay above-market rates for time deposits in competition with other financial institutions when liquidity was well within its established asset-liability management guidelines. The increase in other borrowings is attributable to an increase in tax deposits.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

The Company reported net income of approximately $2,443,000 or $.59 per common share, for the six months ended June 30, 2002, compared to net income of approximately $1,877,000 or $.45 per common share, for the same period in 2001. This represents an increase in net income of 30.2%. Net income for the quarter ended June 30, 2002, was approximately $1,321,000 or $.32 net income per common share, compared to net income of approximately $931,000, or $.22 per common share, for the same period in 2001. This represents an increase in net income of 41.9%. The increase during this period was primarily attributable to a decrease in interest expense.

Total interest income decreased approximately $761,000 or 8.1% for the six months and $339,000 or 7.1% for the three months ended June 30, 2002 as compared to the same periods in 2001. These decreases for both the six-month and three-month periods were primarily the result of a decrease in interest income on loans and security investments. The decrease is directly related to the overall decrease in market rates from the comparable periods in 2001 which offset the earnings on increased levels of loans and investments.

Total interest expense decreased approximately $1,441,000 or 45.5% for the six months and $700,000 or 45.8% for the three months ended June 30, 2002 as compared to the same periods in 2001. The decrease in interest expense for these periods was the result of lower interest rates paid on deposits resulting from overall market rate decreases compared to the same periods in 2001. The effect of the rate decrease was greater than interest expense related to increased levels of deposits.

Net interest income for the six months and three months ended June 30, 2002 was up $680,000 or 10.9% and $361,000 or 11.2%, respectively, from the comparable periods in 2001, as the average rate differences on interest bearing liabilities exceeded the rate differences on interest earning assets.

Total non-interest income increased approximately $355,000 or 23.8% for the six months and $243,000 or 32.3% for the three months ended June 30, 2002 as compared to the same periods in 2001. The primary increases were due to the gain on sale of a security investment available for sale, earnings on insurance contracts on executive

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officers purchased in late 2001, an increase in merchant bankcard income, ATM fees, and service charges on deposit accounts resulting from increases in volume and customer relationships.

Total non-interest expense increased $264,000 or 5.8% for the six months and $224,000 or 9.8% for the three months ended June 30, 2002, as compared to the same periods in 2001. Non-interest expense increased as a result of routine adjustments in staff salaries, salary expense related to the hiring of a manager and loan officer for the planned Dallas branch, and expenses associated with technology enhancements, products and occupancy.

CREDIT LOSS PROVISION

The Bank maintains an allowance for credit losses on loans that occur from time to time as an incidental part of the business of banking. Loans are charged against this allowance for credit losses which is adjusted periodically to reflect changing loan volumes, risk potential in the portfolio and general economic conditions. Additions to the allowance for credit losses are made through a charge against income.

During the first six months ended June 30, 2002, the Bank funded the allowance for credit losses $147,000 from operations as compared to $246,000 for the same six month period in 2001. For the three month period ending June 30, 2002, the Bank funded the allowance for credit losses $84,000 as compared to $123,000 for the same three month period in 2001. The Bank decreased the provision for credit losses based on its analysis of delinquencies, loan types, loan classifications, and other factors affecting the loan portfolio at June 30, 2002. The Bank experienced $73,000 in credit losses and $9,000 in recoveries for the six months ended June 30, 2002 and $60,000 in net losses for the same period ended June 30, 2001. Historically, the Bank’s loan charge-off levels have been very low compared to its peers. Management believes that the allowance for credit losses at June 30, 2002 of $2,229,000 or 1.22% of total loans is adequate.

The provision for credit losses represents charges made to operating expenses to maintain an appropriate allowance for credit losses. Management considers various factors in establishing an appropriate allowance. These factors include an assessment of the financial condition of the borrower, a determination of the borrower’s ability to service the debt from cash flow, a conservative assessment of the value of the underlying collateral, the condition of the specific industry of the borrower, the economic health of the local community, a comprehensive analysis of the levels and trends of loan types, and a review of past due and classified loans.

It is Bank policy that once each quarter, Bank management makes recommendations to the Board regarding the adequacy of the Bank’s allowance for credit losses and the amount of the provision that should be charged against earnings for the next three months. Management’s recommendations are based on an internal loan review process to determine specific potential loss factors on classified loans, risk factor of loan grades, historical loss factors derived from actual net charge-off experience, trends in non-performing loans and other potential risks in the loan portfolio such as industry concentration, the local economy and the volume of loans.

Management uses a loan grading system wherein loan officers assign a risk grade to each of their loans at inception and at intervals based on receipt of financial information, renewal, or when there is an indication that a credit may have improved or weakened. The risk grades in the loan portfolio are used in determining a factor that is used in analyzing the adequacy of the allowance for credit losses.

The Bank’s policy is to charge off loans when, in management’s opinion, the loan or a portion of the loan is deemed uncollectible following a concerted collection effort. Management continues to pursue collection after a loan is charged-off until all possibilities for collection have been exhausted.

LIQUIDITY AND CAPITAL RESOURCES

Bancorp’s subsidiary, the Bank, has adopted policies to maintain a relatively liquid position to enable it to respond to changes in the Bank’s financial environment. Generally, the Bank’s major sources of liquidity are customer deposits, sales and maturities of securities, the use of borrowing lines with correspondent banks including Federal Home Loan bank borrowings, loan repayments and net cash provided by operating activities.

The analysis of liquidity should also include a review of the changes that appear in the consolidated statement of cash flows for the first six months of 2002. The statement of cash flows includes operating, investing and financing categories. Operating activities include net income which is adjusted for non-cash items and increases or decreases in cash due to certain changes in assets and liabilities. Investing activities consist primarily of both

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proceeds from maturities and purchases of securities, and the net growth in loans. Financing activities present the cash flows associated with the Bank’s deposit accounts.

Management believes that the Bank’s existing sources of liquidity will enable the Bank to fund its requirements in the normal course of business.

As of June 30, 2002, shareholders’ equity totaled $31,893,000 as compared to $29,524,000 at December 31, 2001, an increase of 8.0%. This increase in equity was primarily due to the Company’s net income.

The total number of shares of Bancorp’s common stock that may be issued upon the exercise of all options granted under the Incentive Stock Option Plan may not exceed in the aggregate four percent (4%) of Bancorp’s issued and outstanding shares of common stock. As of July 31, 2002 Bancorp’s issued and outstanding shares totaled 4,089,259, so the maximum number of shares issuable under the Incentive Stock Option Plan was 163,570 on that date. As of July 31, 2002, options for 82,500 shares had been granted, options for 45 shares exercised, and options for 500 shares expired under this Plan.

The total number of shares of Bancorp’s common stock that may be issued under the Stock Bonus Plan may not exceed in the aggregate one percent (1%) of Bancorp’s issued and outstanding shares of common stock. As of July 31, 2001 Bancorp’s issued and outstanding shares totaled 4,089,259, so the maximum number of shares issuable under the Stock Bonus Plan was 40,893 on that date. As of July 31, 2002 no stock had been issued under this Plan.

Capital ratios for the Company were as follows as of the dates indicated: