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FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Commission File No. 000-23277

CITIZENS BANCORP/OR

275 Southwest Third Street
P. O. Box 30
Corvallis, Oregon 97339
(Address of principal executive offices)

Registrant’s telephone number: (541) 752-5161

Securities registered under Section 12(b) of the Exchange Act: none

Securities registered under Section 12(g) of the Exchange Act: common stock, no
par value

     Indicate by check mark whether registrant has (1) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ].

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [   ] No [X]

     There is no active trading market for the Registrant’s common stock. The Registrant’s common stock is not listed on any exchange or quoted on NASDAQ. The aggregate market value of the voting common equity held by non-affiliates as of June 28, 2002 (the last business day of the most recently completed second quarter) was $38,235,680, based on the last sale of $12.25 per share on June 28, 2002.

As of March 24, 2003 there were 4,150,275 shares of registrant’s common stock issued and outstanding, of which 3,121,280 were held by non-affiliates.

     DOCUMENTS INCORPORATED BY REFERENCE. Part III of this Form 10-K incorporates by reference portions of the definitive 2003 Annual Meeting Proxy Statement sent to the Company’s shareholders in connection with its April 15, 2003 Annual Meeting of Shareholders.

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INDEX

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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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 the Company 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 the Company 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. The Company does not intend to update these forward looking statements other than in its periodic filings under applicable security laws.

PART I

ITEM 1. BUSINESS

General

Citizens Bancorp (“the Company”), an Oregon Corporation and financial bank holding company, was formed in 1996 for the purpose of becoming the holding company of Citizens Bank (“the Bank”). The Company is headquartered in Corvallis, Oregon. Its principal business activities are conducted through its full-service, commercial bank subsidiary, Citizens Bank. The Company has no current plan to engage in any of the financial activities permissible for a financial holding company under Gramm-Leach-Bliley Financial Services Modernization Act.

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

The Company is authorized to issue up to 10,000,000 shares of common stock, no par value. The Company has registered 1,575,000 shares for issuance under its Dividend Reinvestment Plan, of which 214,213 shares had been issued thereunder as of December 31, 2002. As of December 31, 2002 there were a total of 4,084,210 shares of the Company common stock issued and outstanding. Citizens Bank is the registered transfer agent for the Company’s common stock.

Citizens 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 ten locations in the five counties of Benton, Linn, Lane, Yamhill, and Polk. Branches are located in the communities of Corvallis, Philomath, Albany, Junction City, Veneta, McMinnville, Harrisburg, and Dallas.

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The Company’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 corporate culture together with a progressive management style will result in constantly improved shareholder value.

The Company’s primary goal is to improve shareholder value through increased earnings while maintaining a high level of safety and soundness. The Company is committed to independence and long-term performance strategies. As a result of its corporate culture, the Company continues to show good performance as evidenced by the five-year history of growth in the following selected areas:

The long-term benefit to the Company of its cultural and its management style is consistent growth and development of the Bank over time. Management believes the Bank’s risk levels have been reduced because of the Bank’s expertise in loan, investment, operational, human resource, and technology management.

The Company’s primary market focus is to provide commercial bank services to businesses, professionals, and individuals. The Company 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.

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.

Deposit products include regular and “package” checking accounts, savings accounts, certificates of deposit, money market accounts, and IRA accounts. In addition, the Bank actively markets its repurchase agreement product to corporate customers. The Bank offers a check card, check guarantee card, ATM card as well as a MasterCard and VISA card as part of its retail banking services. The Bank operates a small residential mortgage loan origination department that originates loans and sells them into the secondary market. The Bank offers extended banking hours in selected locations as well as Saturday banking. ATM machines are also available at eleven (11) locations offering 24-hour transaction services, including cash withdrawals, deposits, account transfers, and balance inquiries. The

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Bank also offers its customers a 24-hour automated telephone service that offers account transfers and balance inquiries.

The Bank, in a continuing effort to meet its customers’ needs, has successfully implemented an on-line banking product. The 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. The Bank’s on-line banking can be reached at www.CitizensEBank.com.

Employees

At December 31, 2002 the Bank had 129 full-time equivalent employees. The Bank values its employees. They are actively engaged individually and as a team in contributing to the Bank’s realization of its culture and mission. None of the employees of the Bank are subject to a collective bargaining agreement. A number of benefit programs are available to eligible employees including group medical insurance plans, paid time off, group life insurance, and a 401(K) plan.

Competition

At December 31, 2002, Citizens Bank was among the top 10 largest commercial banks headquartered in the State of Oregon as measured by the State of Oregon’s division of Finance and Corporate Securities. The Bank competes with other commercial banks as well as savings and loan associations, credit unions, mortgage companies, insurance companies, investment banks, securities brokerages and other non-bank financial service providers. Banking in the State of Oregon has been substantially dominated by several very large banking institutions whose headquarters are not in Oregon. They include Wells Fargo Bank, US Bank, Key Bank, Washington Mutual Bank, and Bank of America. Together these large organizations hold a majority of the deposit and loan balances held by banks in the State of Oregon. Citizens Bank attempts to offset some of the advantages of these larger competitors through superior relationship building with the customer, better service, quicker response to the customers’ needs, and local decision-making. We rely on the fact that many businesses and individuals within small Oregon communities want to see their money stay within the local economy, rather than see it used to fund loans in distant places.

2002 Activities

The Bank opened its eleventh branch in the community of Dallas, Oregon on October 28, 2002. The Dallas Branch is located at 583 SE Jefferson Street in a temporary facility. Construction of the permanent building commenced in January 2003, with completion anticipated sometime in the third quarter of 2003. The Company anticipates the Branch will have strong market penetration in Dallas by providing outstanding banking services by the experienced branch staff.

Management and the Board of Directors recently approved the closure of the Bank’s University Branch located at 855 NW Kings Blvd., Corvallis, Oregon on January 31, 2003. The leased facility in which the Branch was operating is in disrepair. The Bank was unable to renegotiate the lease terms in order to economically support the extensive and necessary repairs. Alternative sites in the vicinity of the University Branch were pursued to no avail. Total deposits in this branch at January 31, 2003 were $14.2 million. Two other existing branches are located within a 1.6-mile radius of the University

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Branch and can fully service the University Branch customers. All existing University Branch employees will be reassigned within the Bank.

SUPERVISION AND REGULATION

General

The following generally refers to certain statutes and regulations affecting the banking industry. These references provide brief summaries only and are not intended to be complete. These references are qualified in their entirety by the referenced statutes and regulations. In addition, some statutes and regulations which apply to and regulate the operation of the banking industry might exist which are not referenced below. Changes in applicable statutes and regulations may have a material effect on the business of the Company and its subsidiary.

The earnings and growth of the Company and its subsidiary, Citizens Bank, as well as their existing and future business activities, are affected not only by general economic conditions, but also by the fiscal and monetary policies of the Federal government and its agencies, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board implements monetary policies (intended to curb inflation and combat recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by varying the discount rates applicable to borrowings by banks from the Federal Reserve Bank. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans and paid on deposits. As banking is a business which depends largely on interest rate differentials (in general, the difference between the interest rates received by the banks on loans extended to their customers and interest paid on customer deposits), the influence of economic conditions and monetary policies on interest rates will directly affect earnings. The nature and impact of any future changes in monetary policies cannot be predicted.

Despite some recent legislative initiatives to reduce regulatory burdens, banking remains a highly regulated industry. Banking regulations are intended to protect Bank customers, not Company shareholders. Legislation enacted from time to time may increase the cost of doing business, limit or expand permissible activities, or affect the competitive balance between banks and other financial and non-financial institutions. Proposals to change the laws and regulations governing the operations and taxations of banks and other financial institutions are frequently made in Congress, in the Oregon State Legislature, and before various bank regulatory agencies. In addition, there continue to be proposals in Congress to restructure the banking system.

Some of the significant areas of bank regulation, including significant federal legislation affecting state-chartered banks, are generally discussed below.

Federal Bank Holding Company Regulation

As a financial bank holding company, the Company is subject to the Bank Holding Company Act of 1956 (“BHCA”), as amended, which places the Company under the supervision of the Board of Governors of the Federal Reserve System (“FRB”). In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities related to banking. Certain recent legislation commonly referred to as the Gramm-Leach-Bliley Financial Services

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Modernization Act (“GBLA”) was designed to expand opportunities for banks and bank holding companies.

FRB Regulation. The Company must obtain the approval of the FRB: (1) before acquiring direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such a bank; (2) before merging or consolidating with another bank holding company; and (3) before acquiring substantially all of the assets of any additional banks.

The Company is required by the BHCA to file annual and quarterly reports and such other reports as may be required from time to time by the FRB. In addition, the FRB conducts periodic examinations of the Company.

Support of Subsidiaries. Under FRB policy, a bank holding company is expected to act as a source of financial and managerial strength to, and commit resources to support, each of its subsidiaries. Any capital loans the Company makes to its subsidiary are subordinate to deposits and to certain other indebtedness of the subsidiary. The Crime Control Act of 1990 provides that, in the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment the bank holding company has made to a federal bank regulatory agency to maintain the capital of a subsidiary and this obligation will be entitled to a priority of payment.

Tying Arrangements. The Company and the subsidiary are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its subsidiary may condition an extension of credit to a customer on either (1) a requirement that the customer obtain additional services provided by it or (2) an agreement by the customer to refrain from obtaining other services from a competitor. Until recently, the FRB extended its bank-tying restrictions to bank holding companies and their non-bank subsidiaries. However, effective April 21, 1997, the bank anti-tying rules will no longer apply to the non-bank subsidiaries of a bank holding company.

State Law Restrictions. As a corporation chartered under the laws of the State of Oregon, the Company is also subject to certain limitations and restrictions under applicable Oregon corporate law. For example, these include limitations and restrictions relating to: indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.

Securities Registration and Reporting. The Company is subject to the registration and reporting requirements of the Federal Securities Laws. The periodic reports, Proxy Statements, and other information filed by the Company with the Securities and Exchange Commission (“SEC”) can be inspected and copied or obtained from the Washington, D.C., office of the SEC. In addition, the securities issued by the Company are subject to the registration requirements of the Securities Act of 1933 and applicable state securities laws unless exceptions to registrations are available.

Control Transactions. The Change in Bank Control Act of 1978, as amended, prohibits a person or group of persons from acquiring “control” of a bank holding company unless the FRB has been given 60 days prior written notice of the proposed acquisition, and within that time period, the FRB has not issued a notice disapproving the proposed acquisition, or extended for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to the expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the action. Under

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a rebuttal resumption established by the FRB, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute the acquisition of control.

In addition, any “company” would be required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% if the “company” is a bank holding company) or more of the outstanding shares of the Company, or obtain control over the Company.

Federal And State Bank Regulation

Oregon state-chartered banks are subject to primary regulation and examination by the Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities. The Bank is also subject to supervision, examination, and regulation by certain federal banking agencies. The Bank is insured (to applicable limits) by, and therefore is subject to regulation by, the FDIC.

Applicable federal and state statutes and regulations governing a bank’s operations relate, among other matters, to capital requirements, required reserves against deposits, investments, loans, legal lending limits, certain interest rates payable, mergers and consolidations, borrowings, issuance of securities, payment of dividends (see below), establishment of branches, and dealings with affiliated persons. The FDIC has authority to prohibit banks under their supervision from engaging in what they consider to be an unsafe and unsound practice in conducting their business. Depository institutions, such as the Bank, are affected significantly by the actions of the FRB as it attempts to control the money supply and credit availability in order to influence the economy.

Dividends paid by the Bank to the Company are a material source of all of the Company’s cash flow. Various federal and state statutory provisions limit the amount of dividends the Bank is permitted to pay to the Company without regulatory approval. FRB policy further limits the circumstances under which the bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.

If, in the opinion of the applicable federal banking agency, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the institution could include the payment of dividends), the agency may require, after notice and hearing, that such institution cease and desist from such practice. In addition, the FRB and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings.

Under Oregon law, the Oregon regulatory authorities have the authority to suspend payment of any dividend of an Oregon institution if it is determined that the payment would result in the stockholders’ equity in the institution, after payment of the dividend, to be inadequate for the safe and sound operation of the institution.

Federal law: (1) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (2) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (3) prohibits management personnel of a bank from serving as a director or in other management positions of another financial

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institution whose assets exceed a specified amount or which has an office within a specified geographic area.

No person may acquire “control” of a bank unless the appropriate federal agency has been given 60 days prior written notice and within that time the agency has not disapproved the acquisition. Substantial monetary penalties may be imposed for violation of the change in control or other provisions of banking laws.

FDICIA

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) was enacted into law in late 1991. As required by FDICIA, numerous regulations have been adopted by federal bank regulatory agencies, including the following: (1) federal bank regulatory authorities have established five different capital levels for banks and, as a general matter, enable banks with higher capital levels to engage in a broader rage of activities; (2) the FRB has issued regulations requiring standardized disclosures with respect to interest paid on deposits; (3) the FDIC has imposed restrictions on the acceptance of brokered deposits by weaker banks; (4) the FDIC has implemented risk-based insurance premiums; and (5) the FDIC has issued regulations requiring state-chartered banks to comply with certain restrictions with respect to equity investments and activities in which the banks act as a principal.

FDICIA recapitalized the Bank Insurance Fund (“BIF”) and required the FDIC to maintain the BIF and Savings Association Insurance Fund (“SAIF”) at 1.25% of insured deposits by increasing deposit insurance premiums as necessary to maintain such ratio. FDICIA also required federal bank regulatory authorities to prescribe, by December 1, 1998, (1) non-capital standards of safety and soundness; (2) operational and managerial standards for banks; (3) asset and earnings standards for banks and bank holding companies addressing such areas as classified assets, capital, and stock price, and (4) standards for compensation of executive officers and directors of banks. However, this provision was modified by recent legislation to allow federal regulatory agencies to implement these standards through either guidelines or regulations.

FIRREA

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) became effective on August 9, 1989. Among other things, this far-reaching legislation (1) phased in significant increases in the FDIC insurance premiums paid by commercial banks; (2) created two deposit insurance pools within the FDIC, one to insure commercial banks and savings bank deposits and the other to insure savings association deposits; (3) for the first time, permitted bank holding companies to acquire healthy savings associations; (4) permitted commercial banks that meet certain housing-related asset requirements to secure advances and other federal services from their local Federal Home Loan Banks; and (5) greatly enhanced the regulators’ enforcement powers by removing procedural barriers and sharply increasing the civil and criminal penalties for violating statutes and regulations.

Interstate Banking And Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Individual states had the authority to “opt out” of certain of these provisions. The Interstate Act allowed states to enact “opting-in” legislation that (i) permitted interstate mergers within their own

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borders before June 1, 1997, and (ii) permitted out-of-state banks to establish de novo branches within the state. As of September 29, 1996, bank holding companies could purchase banks in any state, and states may not prohibit such purchases. Additionally, beginning June 1, 1997, banks were permitted to merge with banks in other states as long as the home state of neither merging bank has opted out. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

Oregon, effective February 27, 1995, enacted “opting in” legislation generally permitting interstate mergers, subject to certain restrictions. Given that Oregon permitted interstate banking for a number of years, this legislation was not expected to have profound impact on banking in Oregon or on the Company or the Bank’s operations in particular.

CRA

The Community Reinvestment Act (the “CRA”) requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the records of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. Those factors are also considered in evaluating mergers, acquisitions, and applications to open a branch of facility.

Gramm-Leach-Bliley Financial Services Modernization Act

The Gramm-Leach-Bliley Financial Services Modernization Act (“GLBA”) was signed into law on November 12, 1999, and became effective March 11, 2000. The GLBA establishes the legal ability and regulatory framework to banking organizations to provide broad-based financial services to meet its expanding customer needs. The GLBA establishes three types of financial activities that are permissible for banking organizations: those that are financial in nature; those that are incidental to financial activity; and those that are complimentary to financial activity.

The GLBA sets forth a list of activities deemed financial in nature. Such activities include lending, exchanging, transferring, investing for others, or safeguarding money or securities; insurance underwriting and sales (brokerage) activities; investment or economic advisory services; securitizations; securities underwriting and dealing activities; all “closely related to banking” activities previously approved for bank holding companies by the Federal Reserve Board; certain products offered overseas, such as travel agency services; and merchant banking/equity investment activities.

In general, these expanded powers are reserved to bank holding companies, to be known as financial holding companies (“FHC”) and banks, where all depository institutions affiliated with them are well capitalized, well managed based on applicable banking regulations, and meet specified Community Reinvestment Act ratings. GLBA authorizes the Federal Reserve Bank and the United States Treasury, in cooperation with one another, to determine what additional activities are permissible as financial in nature. Such activities will require FHCs and banks to continue to satisfy applicable well capitalized and well managed requirements. Bank holding companies which do not qualify for FHC status are limited to non-banking activities deemed closely related to banking prior to GLBA.

To become a FHC, a declaration of intent to engage in activities permissible for a FHC must be filed with the Federal Reserve Bank certifying that all requirements for eligibility have been met. The Company filed such a letter of intent with the Federal Reserve Board on February 15, 2000. At this

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time, the Company has no plans to expand into any of the activities approved under the GLBA, but may wish to do so in the future.

In addition to the creation of FHCs, GLBA establishes a primacy of oversight regulation of financial service businesses by the regulators routinely responsible for such activities and entities. This applies both in allocating responsibility for supervising different companies within a FHC and in supervising different activities within the same company. GLBA clarifies the regulation by the States of insurance products sold by depository institutions, and repeals some of the exemptions for banks under federal securities laws in relation to securities offered by banks and the licensing of broker-dealers and investments.

The GLBA also changed the membership requirements to join the Federal Home Loan Bank (“FHLB”) for banks with $500 million or less in assets. The GLBA defines a “community financial institution” as a depository institution insured by the Federal Deposit Insurance Corporation (“FDIC”) with less than $500 million in average total assets during the three years immediately proceeding the date of the membership application. These community financial institutions will not be required to hold at least 10 percent of their assets in residential mortgages in order to join the FHLB system. The section of the GLBA will not affect the Company’s subsidiary, Citizens Bank, as it already holds membership in the FHLB.

The GLBA also adopts restrictions on financial institutions regarding the sharing of customer non-public personal information with non-affiliated third parties unless the customer has had an opportunity to opt out of the disclosure. The GLBA also imposes periodic disclosure requirements concerning financial institution policies and practices regarding data sharing with affiliated and non-affiliated parties.

The Company provided the Federal Reserve Board of San Francisco its declaration to elect to become a financial holding company, pursuant to the GLBA of 1999, on February 15, 2000. The Company received notice of approval from the Board of Governors of the Federal Reserve System on March 13, 2000. The Company has no current plan to engage in any of the financial activities permissible for a financial holding company under GLBA. The Company made its declaration only to be prepared to take advantage of any future business opportunities.

USA Patriot Act

On October 26, 2001, in the wake of the September 11, 2001 terrorist attacks, President George W. Bush signed into law the “United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“the Act”). The Act includes provisions designed to discover and terminate international money laundering efforts and advance the United States government’s war against terrorism. Title III of the Act, the “International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001”, made significant changes to the Money Laundering Control Act of 1970 that directly affects all financial institutions in the United States. Financial institutions are defined broadly to include banks, brokers and dealers of securities, credit unions, thrifts, insurance companies, investment firms, those involved in real estate settlements and closings, currency exchanges and money transmitters, and other industry sectors not generally considered to be “traditional” financial institutions.

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Section 352 of the Act requires a financial institution to establish anti-money laundering programs to include at a minimum:

	•		Development of internal anti-money laundering procedures, policies, and controls designed to detect and prevent money laundering. This should include a “Know Your Customer” program designed to identify prospective customers.
	•		Designation of an internal compliance officer.
	•		Ongoing employee training programs which cover applicable legal requirements, policies and procedures for monitoring customer relationships, acceptable record-keeping measures, and the identification of suspicious transactions or money laundering activities.
	•		Implementation of an independent audit function to test and review the company’s due diligence programs.

Section 312 of the Act requires financial institutions that establish, maintain, administer or manage private banking or correspondent accounts in the United States for non-United States persons or their representatives, including foreign individuals visiting the United States, to establish appropriate specific policies, procedures, and controls designed to detect and report money laundering.

Section 326 of the Act authorizes the Department of the Treasury in conjunction with other bank regulators to issue regulations that provide for minimum standards with respect to customer identification at the time when new accounts are opened.

As of December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering, or managing correspondent accounts for foreign banks that do not have a physical presence in any country (shell banks), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks.

Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on the Federal Reserve Act and Bank Merger Act applications.

While we believe that the USA Patriot Act may, to some degree, affect our recordkeeping and reporting expenses, we do not believe that the Act will have a material effect on our business and operations.

Sarbanes-Oxley Act

In the face of increasing concern and heightened awareness of corporate governance, conflicts of interest, and financial reporting transparency, the U.S. Senate and the U.S. House of Representatives passed the Sarbanes-Oxley Act (the “Act”). President Bush signed the Act into law on July 30, 2002.

The Act generally applies to any company, including non-U.S. companies that have securities registered or is required to file reports under the Securities and Exchange Act of 1934. The provisions of the Act will affect the operation of public companies in several dimensions, including corporate governance, financial disclosure, officer and director activities and responsibilities, and auditor independence. The Act also created and regulates the Public Company Accounting Oversight Board to oversee public company audits and establishes conflict of interest rules for securities analysts.

A summary of the key components of the Act are outlined below.

•

New obligations and restrictions on directors and senior executives. Perhaps more significantly, the Act requires CEOs and CFOs to make extensive certifications relative to

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			each quarterly and annual report filed with the Securities & Exchange Commission (the “SEC”);
	•		Creates greater accountability of outside auditors to audit committees. The Act requires audit committee members to be independent and grants audit committees the authority to engage independent counsel and advisors. Audit committees are required to provide procedures to protect “whistle blowers”;
	•		CEOs and CFOs are required to certify as to the effectiveness of internal controls on a quarterly basis;
	•		Expedited filing requirements for Form 4 with the SEC;
	•		Code of ethics for senior financial officers;
	•		Prohibition of insider trading by directors and executive officers during a black out period under a public company’s 401(K) and other individual retirement accounts;
	•		Increased criminal penalties for violations of securities laws;
	•		Forfeitures by CEOs and CFOs of incentive pay and securities trading profits when there are accounting restatements based on misconduct;
	•		Disclosure of off-balance sheet transactions;
	•		Requires a “financial expert” as a member of the audit committee;
	•		Disclosure in plain English and on rapid and current basis such information concerning material changes in financial condition or operations as the SEC may require.

The full effect and/or impact of the Act on the Company and its subsidiary are unknown at this time.

Capital Adequacy Requirements

Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.

Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments, and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.

Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.

Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage

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ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at least 1% to 2%.

Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions.

FDIC Insurance

The Bank’s deposits are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund administered by the FDIC. The Bank is required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

The FDIC is also empowered to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary.

Effects of Government Monetary Policy

The earnings and growth of the Company are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession, by its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on the Company cannot be predicted with certainty.

Changes In Banking Laws And Regulations

The laws and regulations that affect banks and bank holding companies frequently undergo significant changes at the federal and state levels. Bills are introduced from time to time in the United States Congress that contain proposals to alter the structure, regulation, and competitive relationships of the nation’s financial institutions. Any changes in laws and regulations could have the effect of increasing or decreasing the cost of doing business, limiting or expanding permissible activities (including activities in the insurance and securities fields), or affecting the competitive balance among banks, savings associations, and other financial institutions. Such changes could also reduce the extent of federal deposit insurance, broaden the powers or the geographical range of operations of bank holding companies, alter the extent to which banks could engage in securities activities, alter the taxation of banks, bank holding companies and other financial services organizations, and change the structure and jurisdiction of various financial institution regulatory agencies. Such ongoing changes in laws and regulations, and the extent to which the business of the Company might be affected thereby, cannot be predicted with certainty.

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ITEM 2. PROPERTIES

The principal properties of the Company and its subsidiary, Citizens Bank, are comprised of banking facilities owned by the subsidiary.

The main office of Citizens Bank is located in the heart of the business and retail center in Corvallis, Oregon. The building was constructed in 1977 and has approximately 30,000 square feet of space on two levels above ground and a full basement. The second floor is occupied by the administrative support team, which includes the President/Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Chief Marketing Officer, the Chief Lending Officer, Administrative Assistants and the Loan Service Center.

The first floor serves as the main banking office for the Bank. It is occupied by a manager, a lending staff, an operations staff, tellers, marketing officer, new accounts staff, training officer and mortgage department staff.

The basement is occupied by the Accounts Service Center. It includes a manager, two operations officers, proof and data processing staff, inventory, wire transfer, telephone, and courier staff. All of the Bank’s centralized functions, i.e., management, proof and data information, loan documentation, loan administration, cash services, mail services, accounting and human resources, occur in this building. The Bank owns this building.

The Bank operates eleven (11) branches, of which six (6) are owned and five (5) are leased. These buildings range in size from 2,500 square feet to approximately 30,000 square feet. Their primary function and use is to provide banking service to the Bank’s customers. The Bank has a lease on the land on which the West Albany branch is located. The aggregate monthly rental of leased buildings and land is $13,321. The following sets forth certain information regarding the Bank’s branch facilities.

(1)		Premises leased under an original lease agreement dated May 1, 1970 and a supplemental lease agreement dated August 16, 1994. The lease expires January 1, 2020.
(2)		Premises leased under a lease agreement dated August 1, 1998. The lease expires July 31, 2003. Scheduled to be closed on January 31, 2003.

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	(3)		Premises leased under a supplemental lease agreement dated October 30, 1998. The lease expires on December 31, 2003, with the right to renew for two additional periods of five years each.
	(4)		Ground lease under ground lease agreement dated May 29, 1998. The lease expires in year 2048.
	(5)		Premises leased under a lease agreement dated May 4, 2001. The lease expires May 4, 2006, with the right to renew for two additional periods of five years each.

On October 28, 2002, the Bank opened its eleventh full service branch in Dallas, Oregon. The branch is located in a temporary facility on property purchased by the Bank. The Company anticipates the branch will support the borrowing and deposit needs of the Community in the areas of small to medium sized businesses, agriculture, and professionals. The Company will operate out of the temporary facility while a permanent building is being constructed.

Management and the Board of Directors recently approved the closure of the Bank’s University Branch located at 855 NW Kings Blvd., Corvallis, Oregon on January 31, 2003. The leased facility in which the Branch was operating is in disrepair. The Bank was unable to renegotiate the lease terms in order to economically support the extensive and necessary repairs. Alternative sites in the vicinity of the University Branch were pursued to no avail. Total deposits in this branch at January 31, 2003 were $14.2 million. Two other existing branches are located within a 1.6-mile radius of the University Branch and can fully service the University Branch customers. All existing University Branch employees will be reassigned within the Bank. Costs related to this branch closure were not significant.

ITEM 3. LEGAL PROCEEDINGS

As of the date of filing this Form 10K neither the Company nor its subsidiary were a party to any material legal proceedings. Further, management is not aware of any threatened or pending lawsuits or other proceedings against the Company or its subsidiary which, if determined adversely, would have a material effect on the business or financial position of either of them. The Company or the Bank may from time to time become a party to litigation in the ordinary course of business, such as debt collection litigation or through an appearance as a creditor in a bankruptcy case.

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

During the fourth quarter of the year ended December 31, 2002, no matters were submitted to the Company’s security holders through the solicitation of proxies or otherwise.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no established market for the Company’s common stock, and the stock is not listed on and does not trade on or through any exchange or quotation system. There is no expectation that an established market will develop for the Company’s common stock. As the transfer agent for the Company’s common stock, Citizens Bank keeps an informal record of persons expressing an interest in buying or selling the Company’s common stock and introduces prospective buyers and sellers. Citizens Bank also keeps some informal records of prices paid and received for the Company’s common stock by certain persons. Neither the Company nor Citizens Bank does or will recommend prices for the Company’s common stock.

The following table sets forth certain transaction prices per share for shares of the Company’s common stock for the periods shown. This information is based solely on prices and information reported to Citizens Bank by those persons whose transactions have come to its attention. The reported prices do not represent all transactions in the Company and Citizens Bank can give no assurances as to the accuracy of the reported prices or the completeness of this information.

Per share information for the current and prior periods reflect the effect of the stock dividends and stock splits.

The following table sets forth certain transaction prices per share for shares of the Company’s common stock for the quarterly periods shown. This information is subject to the qualifications set forth above.

Citizens Bank/Bancorp, Common Equity Holding. As of December 31, 2002, there were 4,084,210 shares outstanding, held by 1,013 shareholders of record. As of March 3, 2003, there were 1,021 holders of Citizens Bancorp and 4,150,275 shares outstanding. Since December 31, 2002, 66,993 shares were issued under the Dividend Reinvestment Plan.

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Holders are determined on the basis of ownership. Each entity that owns one or more shares is determined to be a holder. Holders can be individuals, partnerships, corporations, trusts, or any entity that can legally hold assets in the State of Oregon. Two or more individuals together can also be a holder, such as a husband and wife or a parent and child.

The Company has no formal dividend policy. The amount of any dividend is determined by the Bancorp Board of Directors and depends on the amount of profits generated and the growth objectives of the Company and the Bank, together with other factors considered by the Board in its discretion. Under Oregon law certain restrictions on the payment of dividends apply. Under these restrictions, a bank or holding company may not declare or pay any dividend in an amount greater than its retained earnings.

The following sets forth, for the calendar years shown, the cash and stock dividends per share of common stock declared by Citizens Bancorp.

Per share information for prior periods reflect the effects of the stock split and stock dividends.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the Company’s consolidated financial statements and accompanying notes presented herein.

(1)		Per share amounts and the average number of shares outstanding have been restated for a stock dividend of 5% in 1999 and a 2-for-1 stock split in 1998.
(2)		Includes tax equivalent adjustments related to income on securities that is exempt from federal taxes. The federal statutory rate used was 34%.

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Selected Quarterly Financial Data

The following table sets forth the Company’s unaudited data regarding operations for each Quarter for 2002 and 2001. This information, in the opinion of management, includes all normal recurring adjustments necessary to state fairly the information set forth herein.

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(1)

Adjusted to reflect stock repurchases in 2002 and 2001 and dividends reinvested.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

Our financial statements are based on the selection and application of significant accounting policies which require management to make significant estimates and assumptions (see Note 1 to the consolidated financial statements). We believe that the following is one of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

Allowance for Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to operations. The allowance for credit losses is a significant estimate and management and the Board of Directors regularly evaluate its adequacy by considering a number of factors, including, among other things, current loan grades and delinquency trends, historical loss rates, changes in the composition of the loan portfolio, overall portfolio quality, industry concentrations, and current economic factors and the effect of those factors on a borrower’s repayment ability. The use of different estimates or assumptions could produce different provisions for credit losses. In addition, the allowance for credit losses is also subject to regulatory supervision and examination.

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Results of Operations for Years Ended December 31, 2002, 2001, and 2000.

Net Income. For the three years ended December 31, 2002, the Company’s net income was $4.858 million, $4.028 million, and $3.612 million, respectively. 2002 net income increased $.830 million or 20.6% as compared to 2001, which increased $.416 million or 11.5% over 2000. The Company’s increased net income in 2002 is primarily due to a decrease in interest expense and an increase in non-interest income. The decrease in interest expense was directly related to the reduction in interest rates by the Federal Reserve Bank over the last year. The increase in non-interest income in 2002 was the result of an increase in service charges on deposit accounts associated with the growth in the number of customer relationships, increased earnings from bank-owned life insurance policies, increased income from Bankcard as a result of increased product usage and customer relationships and fee income from increased production by the Bank’s mortgage department. The decrease in interest income was primarily a result of lower interest rates in both the loan and investment portfolio due to the lower rate environment as compared to 2001.

The average rate on loans for 2002, 2001, and 2000 was 8.1%, 9.0%, and 9.6%, respectively. The net decrease in the average loan yield was due to the continuing reduction of market rates in 2002. Management believes that the customer relationships developed by its experienced loan officers contributed to the increase in loan volumes in 2002.

The decrease in the investment portfolio income was due to the reinvestment of maturing securities in lower yielding securities as a result of the lower rate environment.

Increases in loan and security volumes were the primary reasons for the increase in average earning assets in 2002. Average yields on earning assets for 2002, 2001, and 2000 were 6.6%, 7.9%, and 8.5%, respectively.

Interest Income. Interest income totaled $17.6 million for the year ended December 31, 2002, a 6.3% decrease over the $18.8 million for 2001, which was an 1.7% increase over the $18.4 million for 2000. The 2002 decrease was primarily due to decreased rates on loans and investment securities due to the impact of rate decreases during the year which negated any increases in earnings from growth in volumes. The increase in 2001 was primarily due to increased loan volumes.

Interest Expense. Interest expense for the year ended December 31, 2002 was $3.3 million, a 41.5% decrease over the $5.7 million expense for 2001, which was a 9.1% decrease over the $6.2 million expense for 2000. The decrease in 2002 was due to deposit rate decreases and a decrease in time deposit balances, while in 2001 decreases were due to deposit rate decreases which offset the increase resulting from higher levels of deposits.

Net Interest Income. Net interest income for the years 2002, 2001, and 2000 was $14.3 million, $13.1 million, and $12.2 million, respectively. Additionally, for the same periods beginning with 2002, net interest margins, on a tax equivalent basis, were 5.3%, 5.5%, and 5.6%, respectively. Despite an increase in volumes, the decrease in the net interest margin from 2000 to 2001 and from 2001 to 2002 was primarily due to the reduced average rates earned on loans and investment securities, which had a greater impact than the reduced cost of deposits.

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The following table sets forth, for the periods indicated, interest income and interest expense with the resulting average yield or rate by category of average earning assets and average interest bearing liabilities.

[Additional columns below]

[Continued from above table, first column(s) repeated]

Year Ended December 31,								2000
												Avg. Rate
				Average				Int. Income				Earned/
(In thousands)				Balance				(Expense)				Paid
ASSETS
Loans (2)				$	151,164			$	14,470				9.57	%
Investment securities:
		Taxable			57,490				3,333				5.80	%
		Tax-exempt (1)			8,418				571				6.78	%
		Total Investment Securities			65,908				3,904				5.92	%
Interest bearing deposits in banks and federal funds sold					3,393				256				7.54	%
Total earning assets					220,465				18,630				8.45	%
Cash and due from banks					6,608
Premises and equipment - net					5,197
Other assets					7,185
Allowance for credit losses					(1,302	)
Total				$	238,153
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
	Savings, MMDA, NOW			$	102,738				(2,163	)			2.11	%
	Time				62,103				(3,401	)			5.48	%
		Total interest- Bearing deposits			168,841				(5,564	)			3.30	%
Repurchase agreements					14,163				(527	)			3.72	%
Other borrowings					2,244				(150	)			6.73	%
Total interest-bearing liabilities					181,248				(6,241	)			3.44	%
Demand deposits					29,264
Other liabilities					1,377
Shareholders’ equity					26,264
Total				$	238,153
Net interest income (1)								$	12,389
Interest income as a % of avg. earning assets													8.45	%
Interest expense as a % of avg. earning assets													2.83	%
Net interest margin													5.62	%