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UNITED STATES

FORM 10-Q

	For the quarterly period ended September 30, 2003

	For the transition period from           to

	Commission file number 000-23277

CITIZENS BANCORP/OR

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 whether the Registrant is an accelerated filer as defined by Exchange Act Rule 12b-2. YES (    ) NO ( X )

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

4,554,242 shares as of October 31, 2003, no par value.

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CITIZENS BANCORP
FORM 10-Q
SEPTEMBER 30, 2003
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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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)

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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 accounting principles generally accepted in the United States of America. 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, 2002 consolidated financial statements, including notes there to, included in Bancorp’s 2002 Annual Report to shareholders. The results of operations for the nine months ended September 30, 2003, are not necessarily indicative of the results which may be obtained for the full year ending December 31, 2003.

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 amount 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 ten percent (10%) stock dividend to Bancorp shareholders of record on July 14, 2003, payable on July 28, 2003. All per share amounts in this report have been retroactively restated for the effect of this stock dividend.
			The Board of Directors declared a $.41 per share dividend ($.45 per share before the restatement for the July 2003 stock dividend) to Bancorp shareholders of record on November 19, 2002, payable on January 10, 2003. Through the Dividend Reinvestment Plan (DRIP), 66,065 shares were purchased at a price of $12.18 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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4.

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan. The Company applies the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based compensation cost is reflected in net income as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation to stock based employee compensation.

5.

CONTINGENCIES

Unfunded loan commitments totaled $34.9 million as of September 30, 2003 and $34.2 million as of December 31, 2002.

6.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation requires a variable interest entity to be consolidated by the primary beneficiary of that entity. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003, and apply to existing entities for the first fiscal year or interim period beginning after June 15, 2003. Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. This Statement did not have a material impact on the Company’s financial condition 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 ten locations in the five counties of Benton, Linn, Lane, Polk, and Yamhill. Branches are located in the communities of Corvallis, Philomath, Albany, Junction City, Veneta, McMinnville, Harrisburg, Dallas, and Springfield (which opened on August 18, 2003).

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.

At the July 15, 2003 Board of Directors meeting, the Board declared a 10% stock dividend to shareholders of record on July 14, 2003, payable on July 28, 2003. All per share information in this report has been retroactively restated to reflect the effect of this stock dividend.

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.

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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.

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 credit 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 eleven (11) 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 $1,275,000 in the third quarter ended September 30, 2003, or $.28 per common share, a decrease of 5.3% from the third quarter net income of $1,346,000 in 2002 or $.30 per common share. For the first nine months of 2003, Bancorp earned $3,875,000, or $.85 per common share, an increase of 2.3% from the nine month 2002 earnings of $3,789,000 or $.84 per common share. The net increase is primarily attributed to the decrease in interest expense on deposits.

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LOAN PORTFOLIO

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

Transactions in the allowance for credit losses were as follows for the nine months ended September 30:

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 non-accrual status as of September 30, 2003 and December 31, 2002 were approximately $1,447,000 and $130,000 respectively. Loans past due 90 days or more on which the Bank continued to accrue interest were approximately $1,000 at September 30, 2003 and $0 at December 31, 2002. There were no loans with modified terms as of September 30, 2003. Non-performing assets (defined as loans on non-accrual status and loans past due 90 days or more) are deemed by management to have adequate collateral or have specific reserves set aside to cover potential losses.

Three loans constitute the majority of approximately $1,447,000 in non-accrual status as of September 30, 2003. One loan of approximately $502,000 is a farm loan. The loan is not past due but management is working with the borrower to have the loan refinanced out of the bank or the farm sold or liquidated. Management deemed it prudent that the loan be on non-accrual status during the workout. In management’s estimation the collateral value is sufficient to cover the debt. The second loan of approximately $522,000 is a farm loan that is being restructured into a three-year pay out. Management anticipates the loan will cash flow and will be paid out at the end of the term. In management’s estimation the value of the collateral supports the debt. The third loan in the approximate amount of $372,000 is commercial real estate. Management is beginning foreclosure procedures against the borrower’s property, which the bank holds as collateral. The appraisal value of the real estate supports the outstanding debt.

INVESTMENT SECURITIES

The amortized cost and estimated book value of the investment securities held by the Bank, including unrealized gains and losses, at September 30, 2003 and December 31, 2002, are as follows (in thousands):

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MATERIAL CHANGES IN FINANCIAL CONDITION

Changes in the balance sheet for the nine months ended September 30, 2003 include an increase in total assets, primarily in loans and interest bearing deposits in banks. The increase in liabilities was primarily in non-interest demand deposits and savings and interest bearing demand deposits.

At September 30, 2003, total assets increased 5.0% or approximately $15.6 million over total assets at December 31, 2002. Major components of the change in assets were:

	–		$4.9 million increase in interest bearing deposits in banks
	–		$1.4 million increase in securities available for sale
	–		$7.7 million increase in net loans