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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
x
  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2004

     
o
  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                     to                    

Commission file number 000-23277

CITIZENS BANCORP/OR

(Exact name of registrant as specified in its charter)
     
Oregon
(State of Incorporation)
  91-1841688
(I.R.S. Employer Identification Number)

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  o

Indicate whether the Registrant is an accelerated filer as defined by Exchange Act Rule 12b-2.  YES  o  NO  x

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

4,619,590 shares as of October 31, 2004, no par value.

 


Table of Contents

CITIZENS BANCORP
FORM 10-Q
SEPTEMBER 30, 2004
INDEX

         
    Page
    Reference
       
       
    1  
    2  
    3  
    4  
    5 – 7  
    7 – 12  
    12  
    12  
       
    13  
    13  
    13  
    13  
    13  
    13  
    14  
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

 


Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1
CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
                 
    September 30, 2004   December 31, 2003
Assets
               
Cash and due from banks
  $ 12,288     $ 30,799  
Interest bearing deposits in banks
    4,203       2,181  
Securities available for sale
    86,065       80,154  
Securities held to maturity
    11,211       11,931  
Federal Home Loan Bank stock
    409       396  
Loans held for sale
    107       0  
Loans, net
    196,113       185,053  
Premises and equipment
    7,741       7,508  
Foreclosed real estate
    0       476  
Accrued interest receivable
    2,413       1,884  
Cash surrender value of life insurance
    4,062       3,937  
Other assets
    2,158       1,950  
 
   
 
     
 
 
Total assets
  $ 326,770     $ 326,269  
 
   
 
     
 
 
Liabilities and Shareholders’ Equity
               
Liabilities
               
Deposits:
               
Demand, non-interest bearing
  $ 49,065     $ 47,308  
Savings and interest bearing demand
    144,688       139,486  
Time
    41,836       48,965  
 
   
 
     
 
 
Total deposits
    235,589       235,759  
Repurchase agreements
    48,967       50,907  
Other borrowings
    1,241       808  
Accrued interest payable
    31       43  
Other liabilities
    1,146       3,135  
 
   
 
     
 
 
Total liabilities
    286,974       290,652  
Shareholders’ Equity
               
Common stock (no par value); authorized 10,000,000 shares; Issued and outstanding: 2004 - 4,619,433 shares; 2003 - 4,554,242 shares;
    28,152       27,155  
Retained earnings
    11,815       8,385  
Accumulated other comprehensive income (loss)
    (171 )     77  
 
   
 
     
 
 
Total shareholders’ equity
    39,796       35,617  
Total liabilities and shareholders’ equity
  $ 326,770     $ 326,269  
 
   
 
     
 
 

See accompanying notes

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)

                                 
    Nine Months Ended   Three Months Ended
    September 30,   September 30,
    2004   2003   2004   2003
Interest Income:
                               
Loans
  $ 9,775     $ 10,604     $ 3,333     $ 3,537  
Interest bearing deposits
    99       106       47       33  
Securities available for sale
    1,224       1,304       429       387  
Securities held to maturity
    314       345       104       126  
Other interest income
    42       50       4       16  
 
   
 
     
 
     
 
     
 
 
Total interest income
    11,454       12,409       3,917       4,099  
Interest Expense:
                               
Deposits
    718       1,107       238       306  
Borrowed funds
    6       6       3       2  
Repurchase agreements
    449       551       164       149  
 
   
 
     
 
     
 
     
 
 
Total interest expense
    1,173       1,664       405       457  
Net Interest Income
    10,281       10,745       3,512       3,642  
Provision for credit losses
    (109 )     (221 )     (32 )     (50 )
Net interest income after provision for credit losses
    10,172       10,524       3,480       3,592  
Non-interest Income:
                               
Service charges on deposit accounts
    1,312       1,275       434       451  
Gain on sales of investments available for sale
    24       163       8       0  
Net gain on sale of branch
    291       0       291       0  
Merchant bankcard
    1,095       937       387       321  
Other
    739       735       239       243  
 
   
 
     
 
     
 
     
 
 
Total non-interest income
    3,461       3,110       1,359       1,015  
Non-interest Expense:
                               
Salaries and employee benefits
    4,765       4,285       1,563       1,505  
Occupancy and equipment
    975       957       317       320  
Merchant bankcard
    931       777       339       274  
Loss on sale of other real estate owned
    50       0       50       0  
Other
    1,554       1,525       520       518  
 
   
 
     
 
     
 
     
 
 
Total non-interest expense
    8,275       7,544       2,789       2,617  
Income before income taxes
    5,358       6,090       2,050       1,990  
 
   
 
     
 
     
 
     
 
 
Income taxes
    (1,928 )     (2,215 )     (738 )     (715 )
Net income
  $ 3,430     $ 3,875     $ 1,312     $ 1,275  
 
   
 
     
 
     
 
     
 
 
Comprehensive income
  $ 3,182     $ 3,625     $ 1,491     $ 1,179  
Per share data:
                               
Basic and diluted earnings per share
  $ 0.74     $ 0.85     $ 0.28     $ 0.28  
Weighted average number of common Shares outstanding:
                               
Basic
    4,615,819       4,557,359       4,619,411       4,553,078  
Diluted
    4,653,187       4,581,072       4,654,234       4,592,104  
Return on Average Assets
    1.38 %     1.62 %     1.55 %     1.60 %

See accompanying notes

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CITIZENS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in Thousands)
                                         
    Nine Months Ended September 30, 2004 and 2003
    Number of                    
    Common   Common           Accumulated    
    Shares   Stock   Retained   Other Comprehensive    
    Outstanding   Amount   Earnings   Income (Loss)   Total
Balance, at December 31, 2002
    4,084,210     $ 19,459     $ 12,498     $ 373     $ 32,330  
COMPREHENSIVE INCOME:
                                       
Net Income
                3,875             3,875  
Other comprehensive income, net of tax:
                                       
Unrealized loss on securities
                      (250 )     (250 )
Comprehensive Income
                            3,625  
Issuance of common stock
    66,065       804                   804  
Repurchase of common stock
    (12,536 )     (173 )                 (173 )
Stock options exercised
    2,290       27                   27  
Stock Dividend
    413,522       7,030       (7,030 )            
 
   
 
     
 
     
 
     
 
     
 
 
Balance, at September 30, 2003
    4,553,551     $ 27,147     $ 9,343     $ 123     $ 36,613  
Balance, at December 31, 2003
    4,554,242     $ 27,155     $ 8,385     $ 77     $ 35,617  
COMPREHENSIVE INCOME:
                                       
Net Income
                3,430             3,430  
Other comprehensive income, net of tax:
                                       
Unrealized loss on securities
                      (248 )     (248 )
Comprehensive Income
                            3,182  
Issuance of common stock
    61,727       958                   958  
Stock Grants
    135       2                   2  
Stock options exercised
    3,329       37                   37  
 
   
 
     
 
     
 
     
 
     
 
 
Balance, at September 30, 2004
    4,619,433     $ 28,152     $ 11,815       ($171 )   $ 39,796  

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CITIZENS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited), (Dollars in thousands)
                 
    Nine Months Ended
    September 30,
    2004   2003
Cash Flows from Operating Activities
               
Net income
  $ 3,430     $ 3,875  
Adjustments to reconcile net income to net Cash provided by operating activities:
               
Provision for credit losses
    109       221  
Depreciation and amortization
    410       428  
Loss on sale of other real estate owned
    50       0  
Net gain on sale of branch
    (291 )     0  
Gains on sales of securities available for sale
    (24 )     (163 )
Stock dividends received
    (13 )     (18 )
(Increase) decrease in accrued interest receivable
    (529 )     174  
(Decrease) in accrued interest payable
    (12 )     (49 )
Other
    369       (325 )
 
   
 
     
 
 
Net cash provided by operating activities
    3,499       4,143  
Cash Flows from Investing Activities
               
Net increase in interest bearing deposits in banks
    (2,022 )     (4,870 )
Proceeds from maturities of available for sale securities
    27,200       69,300  
Proceeds from sales of available for sale securities
    30,847       7,179  
Proceeds from maturities of securities held to maturity
    935       440  
Purchases of securities available for sale
    (64,738 )     (78,560 )
Purchases of securities held to maturity
    (222 )     (1,467 )
Increase in loans made to customers, net of principal collections
    (11,271 )     (6,954 )
Proceeds from sale of other real estate owned
    394       0  
Purchases of premises and equipment and other
    (666 )     (1,426 )
 
   
 
     
 
 
Net cash used in investing activities
    (19,543 )     (16,358 )
Cash Flows from Financing Activities
               
Net increase (decrease) in deposits
    (138 )     17,144  
Net decrease in repurchase agreements and other borrowings
    (1,507 )     (3,704 )
Payment of dividends, net of dividends reinvested
    (1,135 )     (1,034 )
Repurchase of common stock
    0       (173 )
Exercised stock options
    37       27  
 
   
 
     
 
 
Net cash (used in) provided by financing activities
    (2,467 )     12,260  
Net (decrease) increase in cash and due from banks
  $ (18,511 )   $ 45  
Cash and Due from Banks
               
Beginning of period
    30,799       17,722  
End of period
  $ 12,288     $ 17,767  
 
   
 
     
 
 
Supplemental Disclosure of Cash Flow Information
               
Interest paid
  $ 1,185     $ 1,713  
Income taxes paid
    1,885       2,238  
Supplemental Schedule of Non-cash Investing and Financing Activities
               
Fair value adjustment of securities available for sale, net of tax
    (248 )     (250 )
Issuance of common stock through dividend reinvestment plan
    958       804  

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, 2003 consolidated financial statements, including notes there to, included in Bancorp’s 2003 Annual Report to shareholders. The results of operations for the nine months ended September 30, 2004, are not necessarily indicative of the results which may be obtained for the full year ending December 31, 2004.

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 $.46 per share dividend to Bancorp shareholders of record on December 16, 2003, payable on January 12, 2004. Through the Dividend Reinvestment Plan (DRIP), 61,727 shares were purchased at a price of $15.52 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.

                         
Dollars in thousands, except for   Net Income   Shares   Per Share
per share amounts   (Numerator)   (Denominator)   Amount
Nine months ended September 30, 2004
                       
Basic earnings per share:
                       
Net Income
  $ 3,430       4,615,819     $ 0.74  
Effect of dilutive securities:
                       
Options
          37,368       -0-  
Diluted earnings per share:
                       
Net Income
  $ 3,430       4,653,817     $ 0.74  
Nine months ended September 30, 2003
                       
Basic earnings per share:
                       
Net Income
  $ 3,875       4,557,359     $ 0.85  
Effect of dilutive securities:
                       
Options
          23,713       -0-  
Diluted earnings per share:
                       
Net Income
  $ 3,875       4,581,072     $ 0.85  

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Dollars in thousands, except for per   Net Income   Shares   Per Share
share amounts   (Numerator)   (Denominator)   Amount
Three months ended September 30, 2004
                       
Basic earnings per share:
                       
Net Income
  $ 1,312       4,619,411     $ 0.28  
Effect of dilutive securities:
                       
Options
          34,823       -0-  
Diluted earnings per share:
                       
Net Income
  $ 1,312       4,654,234     $ 0.28  
Three months ended September 30, 2003
                       
Basic earnings per share:
                       
Net Income
  $ 1,275       4,553,078     $ 0.28  
Effect of dilutive securities:
                       
Options
          39,026       -0-  
Diluted earnings per share:
                       
Net Income
  $ 1,275       4,592,104     $ 0.28  

4. STOCK-BASED COMPENSATION

Bancorp has a stock-based employee compensation plan. Bancorp 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 Bancorp had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation to stock based employee compensation.

                 
    Nine Months Ended
    September 30,
(Dollars in thousands, except per share amounts)   2004   2003
Net income, as reported
  $ 3,430     $ 3,875  
Less total stock-based compensation expense determined under fair value method for all qualifying awards
    (125 )     (98 )
Pro forma net income
  $ 3,305     $ 3,777  
Earnings per share:
               
Basic:
               
As reported
  $ 0.74     $ 0.85  
Pro forma
  $ 0.72     $ 0.83  
Diluted:
               
As reported
  $ 0.74     $ 0.85  
Pro forma
  $ 0.71     $ 0.83  
                 
    Three Months Ended
    September 30,
(Dollars in thousands, except per share amounts)   2004   2003
Net income, as reported
  $ 1,312     $ 1,275  
Less total stock-based compensation expense determined Under fair value method for all qualifying awards
    (42 )     (33 )
Pro forma net income
  $ 1,270     $ 1,242  
Earnings per share:
               
Basic:
               
As reported
  $ 0.28     $ 0.28  
Pro forma
  $ 0.28     $ 0.27  
Diluted:
               
As reported
  $ 0.28     $ 0.28  
Pro forma
  $ 0.27     $ 0.27  

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5. CONTINGENCIES

Unfunded loan commitments totaled $43.0 million as of September 30, 2004 and $31.0 million as of December 31, 2003.

6. RECENT ACCOUNTING PRONOUNCEMENTS

In March, 2004 the Financial Accounting Standards Board (FASB) issued an exposure draft entitled: “Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.” This proposed statement would eliminate the ability to account for stock-based compensation using APB 25 and require such transactions be recognized as compensation expense in the income statement based on their fair values at the date of grant. Companies transitioning to fair value based accounting for stock-based compensation will be required to use the “modified prospective” method whereby companies must recognize equity compensation cost from the beginning of the year in which the recognition provisions are first applied as if the fair value method had been used to account for all equity compensation awards granted, modified, or settled in fiscal years beginning after December 31, 1994. As proposed, this statement would be effective for Bancorp beginning after June 15, 2005.

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, McMinnville, Harrisburg, Dallas, and Springfield.

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 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 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 completed the sale of its Veneta Branch to Siuslaw Bank on September 24, 2004. Bancorp had a gain on the sale of $339,000, a loss on the sale of the branch’s furniture and equipment of $48,000, for a net gain on the sale of the branch of $291,000.

Bancorp reported net income of $1,312,000 in the third quarter ending September 30, 2004, or $.28 per common share, an increase of 2.9% from the third quarter net income of $1,275,000 in 2003 or $.28 per common share. For the first nine months of 2004, Bancorp earned $3,430,000, or $.74 per common share, a decrease of 11.5% from the nine month 2003 earnings of $3,875,000 or $.85 per common share.

LOAN PORTFOLIO

The composition of the loan portfolio, including loans held for sale, was as follows (in thousands):

                 
    September 30, 2004   December 31, 2003
Commercial
  $ 20,657     $ 21,765  
Agriculture
    21,504       17,013  
Real Estate Construction
    5,368       6,586  
1-4 Family
    22,534       26,292  
Multi family
    13,500       10,398  
Commercial
    99,254       93,593  
Farmland
    13,720       9,069  
Consumer Loans
    2,932       3,523  
 
   
 
     
 
 
 
    199,469       188,239  
Less: net deferred loan fees
    (447 )     (421 )
Total Loans
    199,022       187,818  
Less: allowance for credit losses
    (2,802 )     (2,765 )
 
   
 
     
 
 
Net Loans
  $ 196,220     $ 185,083  
 
   
 
     
 
 

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

                 
    2004
  2003
Balance at beginning of period
  $ 2,765     $ 2,546  
Provision charged to operations
    109       221  
Loans recovered
    0       3  
Loans charged off
    (72 )     (26 )
 
   
 
     
 
 
Balance at end of period
  $ 2,802     $ 2,744  
 
   
 
     
 
 

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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, 2004 and December 31, 2003 were approximately $5,192,000 and $2,164,000 respectively. There were $73,000 in loans past due 90 days or more on which the Bank continued to accrue interest at September 30, 2004 and $12,000 at December 31, 2003. There were no loans with modified terms as of September 30, 2004. 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.

Two loans constitute the majority of approximately $5,192,000 in non-accrual status as of September 30, 2004. One loan of approximately $502,000 is a farm loan. Management is working with the borrower to have the loan refinanced out of the bank or the farm sold or liquidated. In management’s estimation the collateral value is sufficient to cover the debt. The second loan of approximately $4,400,000 is commercial real estate. The Bank has served the borrower with notice of default, election to sell and trustee notice of sale. The Bank is working with the borrower to negotiate a deed in lieu of foreclosure. Concurrently, the borrower is actively marketing the property for sale. In management’s estimation the collateral value is sufficient to cover the 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, 2004 and December 31, 2003, are as follows (in thousands):

                                 
            Gross   Gross    
    Amortized   Unrealized   Unrealized    
September 30, 2004   Cost
  Gains
  Losses
  Fair Value
Available for Sale
                               
U.S. Government and Agency Securities
  $ 86,345     $ 12       ($292 )   $ 86,065  
Held to Maturity
                               
State and Municipal Securities
  $ 11,211     $ 458       ($3 )   $ 11,666  
                                 
            Gross   Gross    
    Amortized   Unrealized   Unrealized    
December 31, 2003   Cost
  Gains
  Losses
  Fair Value
Available for Sale
                               
U.S. Government and Agency Securities
  $ 80,028     $ 215       ($89 )   $ 80,154  
Held to Maturity
                               
State and Municipal Securities
  $ 11,931     $ 582       ($4 )   $ 12,509  

MATERIAL CHANGES IN FINANCIAL CONDITION

Changes in the balance sheet for the nine months ended September 30, 2004 include an increase in total assets, primarily in loans, securities available for sale and interest bearing deposits in banks, and an increase in liabilities primarily in savings and interest bearing demand deposits, and non-interest bearing demand deposits.

At September 30, 2004, total assets increased .2% or approximately $.5 million over total assets at December 31, 2003. Major components of the change in assets were:

-   $18.5 million decrease in cash and due from banks
 
-   $2.0 million increase in interest bearing deposits in banks
 
-   $5.9 million increase in securities available for sale
 
-   $8.0 million increase in net loans

Loans were generally made to customers within Bancorp’s market area. The increases were primarily funded by proceeds from increased deposits. Management believes the economic conditions in its market areas have been slowly improving which, along with continuing market penetration, has contributed to the loan growth as of September 30, 2004 as compared to December 31, 2003. Citizens Bank has a history of conservative loan underwriting and management is unwilling to compromise its standards for growth. The Bank has a history of minimal loan charge-offs due to its exceptional underwriting policies, standards, and loan review processes. The Bank’s loan officers are actively calling and management anticipates that the loan portfolio will continue to grow in 2004 with high quality loans that are appropriately priced.

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Bancorp experienced an increase in demand and savings and interest bearing deposits, and a decrease in time certificates of deposit and repurchase agreements during the nine months ended September 30, 2004, specifically as follows:

-   $1.8 million increase in demand deposits
 
-   $5.2 million increase in savings and interest bearing demand
 
-   $7.1 million decrease in time certificates of deposits
 
-   $1.9 million decrease in repurchase agreements
 
-   $2.0 million decrease in other liabilities

Management believes the growth in demand deposits and savings and interest bearing demand is a result of continuing penetration into the market area as a result of its emphasis on customer service and its relationship style of banking. The decrease in repurchase agreements was due to the closing of one large account as a result of an estate settlement. 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 decrease in other liabilities is attributable to the payment of the cash dividend.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Bancorp reported net income of approximately $3,430,000 or $.74 per common share, for the nine months ended September 30, 2004, compared to net income of approximately $3,875,000 or $.85 per common share, for the same period in 2003. This represents an decrease in net income of 11.5%. Net income for the quarter ended September 30, 2004, was approximately $1,312,000 or $.28 net income per common share, compared to net income of approximately $1,275,000, or $.28 per common share, for the same period in 2003. This represents an increase in net income of 2.9%. The increase during this period was largely attributable to the net gain of $291,000 gain on the sale of the Veneta Branch.

Total interest income decreased approximately $955,000 or 7.7% for the nine months and $182,000 or 4.4% for the three months ended September 30, 2004 as compared to the same periods in 2003. These decreases for both the nine-month and three-month periods were primarily the result of the overall decrease in market rates from the comparable periods in 2003, which offset the earnings on increased levels of loans, investments, and interest bearing deposit accounts.

Total interest expense decreased approximately $491,000 or 29.5% for the nine months and $52,000 or 11.4% for the three months ended September 30, 2004 as compared to the same periods in 2003. The decrease in interest expense on deposits for these periods was the result of lower interest rates paid resulting from overall market rate decreases compared to the same periods in 2003. The effect of the rate decrease was greater than interest expense related to increased levels of deposits. Interest expense on repurchase agreements decreased as a result of lower balances in the related underlying accounts and a decrease in the interest rates paid on those accounts compared to the same period in 2003.

Net interest income for the nine months ended September 30, 2004 was down $464,000 or 4.3% and down $130,000 or 3.6% for the three-month period ended September 30, 2004 as compared to the same periods in 2003. The decrease in both the three-month and nine-month period ended September 30, 2004 was a result of the decrease in interest income on loans and securities despite the growth in volume due to overall lower market rates as compared to the same periods in 2003.

Total non-interest income increased approximately $399,000 or 12.8% for the nine months and $392,000 or 38.6% for the three months ended September 30, 2004 as compared to the same periods in 2003. The primary increase was the result of the sale of the Veneta Branch along with an increase in merchant bankcard income and an increase in service charges on deposit accounts resulting from increases in volume and customer relationships.

Total non-interest expense increased $779,000 or 10.3% for the nine months and increased $220,000 or 8.4% for the three months ended September 30, 2004, as compared to the same periods in 2003. Non-interest expense increased for the nine months ending September 30, 2004 as a result of routine adjustments in staff salaries, salary expense related to the new Springfield branch, expenses associated with technology enhancements, products, occupancy, other real estate owned, a decrease in loan origination costs accounted for under FASB 91, and expenses related to compliance with Sarbanes Oxley 404.

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. The allowance is increased by provisions charged to earnings and by recoveries on loans previously charged off, and is reduced by loan charge offs.

During the first nine months ended September 30, 2004, the Bank funded the allowance for credit losses $109,000 from operations as compared to $221,000 for the same nine-month period of 2003. For the three month period ending September 30, 2004, the Bank funded the allowance for credit losses $32,000 as compared to $50,000 for the same three month period in 2003. 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 September 30, 2004. The Bank experienced $72,000 in credit losses and $-0- in recoveries for the nine months ended September 30, 2004 and $21,000 in net losses and $1,000 in recoveries for the same period ended September 30, 2003. Historically, the Bank’s loan charge-off levels have been very low compared to its peers.

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Management believes that the allowance for credit losses at September 30, 2004 of $2,802,000 or 1.41% 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 at quarter end 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 nine months of 2004. The statement of cash flows includes operating, investing and financing categories. Operating activities include net income that 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 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, repurchase agreements, and common stock related items.

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 September 30, 2004, shareholders’ equity totaled $39,796,000 as compared to $35,617,000 at December 31, 2003, an increase of 11.7%. This increase in equity was primarily due to Bancorp’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 October 31, 2004, the maximum number of shares issuable under the Incentive Stock Option Plan was 181,460 shares. As of October 31, 2004, options for 177,364 shares had been granted, options for 6,621 shares exercised, and options for 14,912 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 October 31, 2004, the maximum number of shares issuable under the Stock Bonus Plan was 45,365 on that date. As of October 31, 2004, 135 shares had been issued under this Plan.

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Capital ratios for Citizens Bancorp and Citizens Bank were as follows as of the dates indicated:

                                                 
            September 30, 2004           December 31, 2003
            Adequately   Well           Adequately   Well
            Capitalized   Capitalized           Capitalized   Capitalized
    Ratio
  Standards
  Standards
  Ratio
  Standards
  Standards
Tier 1 Leverage Capital
                                               
Citizens Bancorp
    11.86 %     4 %     5 %     10.81 %     4 %     5 %
Citizens Bank
    11.84 %     4 %     5 %     10.79 %     4 %     5 %
Tier 1 Risk Based Capital
                                               
Citizens Bancorp
    16.62 %     4 %     6 %     15.64 %     4 %     6 %
Citizens Bank
    16.60 %     4 %     6 %     15.62 %     4 %     6 %
Total Risk Based Capital
                                               
Citizens Bancorp
    17.79 %     8 %     10 %     16.86 %     8 %     10 %
Citizens Bank
    17.77 %     8 %     10 %     16.84 %     8 %     10 %

ITEM 3. QUANTITATIVE & QUALITATIVE ANALYSIS ABOUT MARKET RISK

Interest rate, credit, and operations risks are the most significant market risks impacting the Bank’s performance. The Bank relies on loan review, prudent loan underwriting standards and an adequate allowance for credit losses to mitigate credit risk.

The Bank uses an asset/liability management simulation model to measure interest rate risk. The model quantifies interest rate risk through simulating forecasted net interest income over a 12 month time period under various rate scenarios, as well as monitoring the change in the present value of equity under the same rate scenarios. The present value of equity is defined as the difference between the market value of current assets less current liabilities. By measuring the change in the present value of equity under different rate scenarios, management is able to identify interest rate risk that may not be evident in simulating changes in forecasted net interest income.

The Bank is currently slightly liability sensitive, meaning that interest bearing liabilities mature or reprice more quickly than interest earning assets in a given period. An increase or decrease in market rates of interest will not materially impact net interest income.

It should be noted that the simulation model does not take into account future management actions that could be undertaken if there were a change in actual market interest rate during the year. Also, certain assumptions are required to perform modeling simulations that may have significant impact on the results. These include assumptions regarding the level of interest rates and balance changes on deposit products that do not have stated maturities. These assumptions have been developed through a combination of industry standards and future expected pricing behavior. The model also includes assumptions about changes in the composition or mix of the balance sheet. The results derived from the simulation model could vary significantly by external factors such as changes in the prepayment assumptions, early withdrawals of deposits and competition. Management has assessed these risks and believes that there has been no material change since December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

Based on their most recent evaluation which was completed as of the end of the period of this Form 10-Q, Bancorp’s Chief Executive Officer and Chief Financial Officer believe Bancorp’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective. There were no significant changes in Bancorp’s internal controls or in other factors that could significantly affect Bancorp’s internal controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions. As a result, no corrective actions were taken.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     
(a) Exhibits
 
   
31.1
  Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
 
   
31.2
  Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
 
   
32.1
  Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
   
32.2
  Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

(b) Reports on Form 8-K

On July 14, 2004 Bancorp filed a report relative to the sale of the Veneta Branch.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

             
  Date: November 10, 2004       /s/ William V. Humphreys
         
 
      By:   William V. Humphreys
          President and Chief Executive Officer
 
           
  Date: November 10, 2004       /s/ Lark E. Wysham
         
 
      By:   Lark E. Wysham
          Executive Vice President and Chief Financial Officer

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