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U.S. 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 March 31, 2004

[   ] 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:  0-24159

CITIZENS BANCORP OF VIRGINIA, INC.

(Exact Name of Registrant as Specified in its Charter)

434-292-7221

(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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

2,448,000 shares of common stock, par value of $.50 per share,

outstanding as of May 14, 2004

CITIZENS BANCORP OF VIRGINIA, INC.

INDEX

Part I.    Financial Information

      Page No.

Item 1.  Financial Statements

Consolidated Balance Sheets

 3

Consolidated Statements of Income

 4

Consolidated Statements of Changes in Stockholders’ Equity

 5

Consolidated Statements of Cash Flows

 6

Notes to Consolidated Financial Statements

 7

 Item 2.  Management’s Discussion and Analysis of Financial

  Condition and Results of Operations

10

 Item 3.  Quantitative and Qualitative Disclosures About Market Risk

13

 Item 4.  Controls and Procedures

14

Part II.     Other Information

Item 1.  Legal Proceedings

15

Item 2   Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

15

Item 3.  Defaults upon Senior Securities

15

Item 4.  Submission of Matters to a Vote of Security Holders

15

Item 5.  Other Information

15

Item 6.  Exhibits and Reports on Form 8-K

15

Signatures

16

Part I – Financial Information  

Item 1.  Financial Statements

CITIZENS BANCORP OF VIRGINIA, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except share data)

See accompanying Notes to Interim Financial Statements.

3

4

See accompanying Notes to Interim Financial Statements.

5

CITIZENS BANCORP, INC. OF VIRGINIA AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

6

CITIZENS BANCORP OF VIRGINIA, INC. AND SUBSIDIARY

Notes to Interim Financial Statements

(Unaudited)

Note 1.

General

7

 Note 2.

Securities

Note  3.

Loans

The loan portfolio is composed of the following:

The Company has $2.7 million in non-performing loans at March 31, 2004.

8

Note 4.   

 Allowance for Loan Losses

The following is a summary of transactions in the allowance for loan losses:

Note 5.  

Earnings Per Share

The weighted average number of shares used in computing earnings per share was 2,448,000 shares for the three months ended March 31, 2004 and 2003.

Note 6.

Defined Benefit Pension Plan

Components of Net Periodic Benefit Cost

Three months ended March 31,

Note 7.

Recent Accounting Pronouncements

There were no new Financial Accounting Standards Board promulgations in the first quarter of 2004 that will impact Citizens Bancorp of Virginia, Inc. and Subsidiary.  See the discussion of Accounting Rule Changes in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003.  

9

Part I – Financial Information

Item 2.    

Management’s Discussion and Analysis of Financial Condition and Results of  Operations

The following discussion provides information about the major components of the results of operations and financial condition, liquidity, and capital resources of the Company.  This discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

Critical Accounting Policies

General

The  financial  condition  and results of  operations  presented in the Financial  Statements,  accompanying  Notes  to  the  Financial  Statements and  management's  discussion and analysis are, to a large degree,   dependent  upon  the  accounting  policies  of Citizens Bancorp of Virginia, Inc. (the Company).  The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

Presented below is a discussion of those accounting policies that management believes are the most important (Critical Accounting Policies) to the portrayal and understanding of the Company’s financial condition and results of operations.   These Critical Accounting Policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain.  In the event that different assumptions or conditions were to prevail,  and depending  upon the severity of such changes,  the  possibility of a materially different  financial  condition  or  results  of  operations  is  a reasonable  likelihood.  

Allowance for Loan Losses

 The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan and lease portfolio.  The Company maintains policies and procedures that address the systems of controls  over  the  following  areas  of  maintenance  of  the  allowance:  the systematic  methodology used to determine the appropriate level of the allowance to  provide  assurance they are  maintained  in  accordance  with  accounting principles  generally  accepted in the United States of America;  the accounting policies for loan charge-offs and recoveries;  the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

 The Company evaluates various loans individually for impairment as required by Statement of Financial   Accounting Standards (SFAS) No.  114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.  Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management.  The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies, with a group of loans that have similar characteristics.

 For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS No. 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type.  A loss rate  reflecting  the  expected  loss inherent in a group of loans is derived  based upon  estimates of default  rates for a given loan grade,  the  predominant  collateral type for the group and the terms of the loan.  The  resulting  estimate  of losses  for groups of loans are adjusted  for  relevant  environmental  factors  and  other  conditions  of  the portfolio of loans and leases, including:  borrower and industry concentrations; levels and  trends in delinquencies,  charge-offs  and  recoveries;  changes in underwriting  standards and risk  selection;  level of  experience,  ability and depth of lending management; and national and local economic conditions.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loans and lease losses.  This estimate of losses is compared to the allowance for loan  losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses.  The Company recognizes the inherent imprecision in estimates of losses due to various  uncertainties and variability related to the  factors  used,  and  therefore  a  reasonable  range  around the estimate of losses is derived and used to ascertain whether the allowance is too high.  If  different  assumptions  or  conditions  were  to  prevail  and  it is determined  that the  allowance  is not  adequate to absorb the new  estimate of probable  losses,  an additional  provision for loan losses would be made, which amount may be material to the Financial Statements.

10

OVERVIEW AND FINANCIAL CONDITION

The Company reported quarterly net income and earnings per share of $695,000 and $.28, respectively, compared to $668,000 and $.27 for the same quarter last year.  The Company also reported an increase in average ROA and average ROE from 1.01% and 8.53% as of March 31, 2003 compared to 1.03% and 8.61% as of March 31, 2004.  

Total assets for the Company increased to $270.3 million at March 31, 2004 compared to $269.3 million at December 31, 2003, representing an increase of $1.0 million or 3.7%. The Company competes aggressively for loans in its market areas.  As a result, total loans at March 31, 2004 were $180.3 million, an increase of $4.9 million from December 31, 2003 balance of $175.4 million. In addition, net loans as a percent of total assets were 65.9% at March 31, 2004, as compared to 64.31% at December 31, 2003.  Net loan volume for the first three months of 2004 was $22.3 million compared to $17.2 million for the first three months of 2003.

The securities portfolio was a primary source of funds for increased loan demand. The portfolio decreased $4.6 million from $60.3 million at December 31, 2003 to $55.7 million at March 31, 2004, a decrease of 7.6%.   Another source of liquidity used was Federal Funds sold.   On March 31, 2004, Fed Funds were $10.9 million, compared to $12.2 million at December 31, 2003.  

Total deposits of $236.3 million at quarter end represented an increase of $.1 million, or .4% from $236.4 million at December 31, 2003. It has been the Company’s position to allow higher rate Certificates of Deposits to flow out of the Company or into other products.  As a result, total Certificates of Deposits at March 31, 2004 were $123.3 million, down $5.5 million, or 4.3%, from December 31, 2003.  The deposit shift experienced during the three months ended March 31, 2004 was offset by increase in non-interest-bearing demand deposits of $2.0 million combined with an increase in both interest-bearing and savings account of deposit of $4.5 million.    

Stockholders’ equity was $33.0 million at March 31, 2004.  This amount represents an increase of 2 .8% from the December 31, 2003 balance of $32.1 million.  The book value per common share was $13.47 at March 31, 2004 compared to $13.10 at December 31, 2003.

Financial Accounting Standards Board Pronouncement #115 requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled “Accumulated other comprehensive income” in the Shareholders’ Equity section of the Balance Sheet and was $581,000 at March 31, 2004, a increase of $543,000 from December 31, 2003. The increase in the equity effect of the change in the value of securities in the quarter ended March 31, 2004 compared to the period ended December 31, 2003 results primarily from appreciation caused by a decrease in market interest rates in the quarter ended March 31, 2004.

Net Interest Income

Net interest income is the Company’s primary source of earnings and represents the difference between interest and fees earned on loans and other earning assets and the interest expense paid on deposits and other interest bearing liabilities.  Net interest income totaled $2.3 million for the first three months of 2004 compared to $2.5 million for the same period in 2003.  The decrease is largely due to a decline in the yield on loans as rates remained low.  The decline in asset yields is offset by the decline in interest rates on deposits for the same period.  Conversely, interest income on loans decreased $327,000, while interest expense on deposits decreased $349,000, a positive variance of $22,000.   The remaining impact comes from interest income on the investment portfolio and fed funds position which was a decrease of $206,000 for the same period.  

Non-interest Income

Non-interest income increased 78.1% to $358,000 for the first three months of 2004 compared to $200,000  for the same period in 2003. The Company realized $27,000 in net gains on investment sales for the three months ended March 31, 2004 along with $71,000 in income from Bank Owned Life Insurance and $17,000  in dividends from Title Company.  Other increases in Non-Interest Income resulted from additional Fee Income.

11

Non-interest Expense

Non-interest expense includes employee-related costs, occupancy and equipment expense and other overhead.  Total non-interest expense was $1.8 million for the first three months of 2004 compared to $1.7 million for the same period in 2003, an increase of $100,000.  One component of Non-Interest Expense is Compensation and Benefits which increased $149,000 for the same period comparison.  Compensation increased as a result of increased salary expense attributed to additional employees in the operating and lending functions.  Benefit Expense increased as a result of enhanced 401(k) and medical insurance benefits for the employees.  

Occupancy Expense decreased $32,000 for the first three months of 2004 compared to the same period in 2003 due to increased building maintenance expenses realized in the prior year from the Company’s overall efforts to refurbish and revitalize its facilities.   

Equipment Expense increased $92,000 for the first three months of 2004 compared to the same period in 2003 as the Company updated its technology to improve services to its customers.  

Allowance for Loan Losses

The allowance for loan losses at March 31, 2004 was $2.1 million compared to $2.34 million at December 31, 2003.  The allowance for loan losses was 1.16% of total loans outstanding at March 31, 2004 and 1.35% of loans outstanding at December 31, 2003.  After considering portfolio and economic conditions, delinquency trends, past loan loss experience, the volume of loans as well as other factors deserving recognition, management felt that the allowance for loan losses was adequate. Management also believes the allowance for loan losses is adequate to cover credit losses inherent in the loan portfolio at March 31, 2004.  Loans classified as loss, doubtful, substandard or special mention are adequately reserved for and are not expected to have a material impact beyond what has been reserved.

The Company has $2.7 million in non-performing loans at March 31, 2004.

Liquidity

The Company maintains required liquidity positions through cash on hand, correspondent bank balances, investment in Federal Funds Sold, by maintaining its investment portfolio in Available for Sale status and through the availability of borrowing lines at the Federal Home Loan Bank of Atlanta and at its correspondent banks.  The Company monitors its liquidity position on a regular basis and continuously adjusts its assets to maintain adequate liquidity levels.  The Company has established satisfactory liquidity targets, monitors its liquidity position daily, and reports its liquidity ratios to the Board of Directors on a monthly basis. We consider our sources of liquidity to be ample to meet our estimated needs.

Capital Resources

Stockholders’ equity at March 31, 2004 and December 31, 2003 was $33.0 million and $32.1 million, respectively.  Total common shares outstanding at March 31, 2004 were 2,448,000.

At March 31, 2004, the Company’s Tier 1 and total risk-based capital ratios were 19.2% and 20.5%, respectively, compared to 19.6% and 20.91% at December 31, 2003.  The Company’s leverage ratio was        12.0% at March 31, 2004 compared to 11.8% at December 31, 2003.  The Bank’s capital structure places it well above the regulatory guidelines, which affords the Company the opportunity to take advantage of business opportunities while ensuring that it has the resources to protect against risk inherent in its business.

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.  Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans, such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company.  Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For additional on known and unknown risks, see the “Caution About Forward-Looking Statements” section in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003.

12

Item 3.

Quantitative and Qualitative Disclosures about Market Risk      

Interest Rate Risk

In order to more closely measure interest sensitivity, the Company uses earnings simulation models on a quarterly basis.  These models utilize the Company’s financial data and various management assumptions as to growth and earnings to forecast a base level of net interest income and earnings over a one-year period.  This base level of earnings is then shocked assuming a sudden increase or decrease in interest rates.  At December 31, 2003, the model indicates that the Company’s interest rate risk profile remains modestly asset sensitive in the short-term with exposure to declining rates.  By year two, the Company adopts a slightly liability sensitive rate risk profile with material negative convexity attributable to margin compression in an extremely low rate environment.  This condition is common in community banks and will persist until short-term rates begin to rise. Since the earnings model uses numerous assumptions regarding the effect of changes in interest rates on the timing and extent of re-pricing characteristics, future cash flows and customer behavior, the model cannot precisely estimate net income and the effect on net income from sudden changes in interest rates.  Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.  

As there have been no material changes in market risk since 2003 year-end, the December 31, 2003 static gap table illustrates the Company’s interest rate sensitivity between interest earnings assets and interest-bearing liabilities over time:  

13

Item 4.

Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, including, without limitation, those controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (and principal financial officer). Based on and as of the date of such evaluation, the Company’s Chief Executive Officer concluded that the Company’s disclosure controls and procedures were effective.

The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to monitor its effectiveness. There have been no significant changes to this system of internal controls or in other factors that could significantly affect those controls subsequent to the date of the Company’s evaluation.

14

Part II.  Other Information

Item 1.  Legal Proceedings.

None

Item 2.  Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

None

Item 3.  Defaults upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders.

None

Item 5.  Other Information.

None

Item 6.

Exhibits and Reports on Form 8-K.

a)

Exhibit  31  

Rule 13a-14(a) Certification of Principal Executive Officer and Principal Financial Officer

Exhibit  32  

Statement of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. ss.1350

b)

Reports on Form 8-K

On February 6, 2004, the Company filed a Current Report on Form 8-K dated December 18, 2003, to report under Item 5 that the Company had acquired all of the outstanding stock of the Bank in a statutory share exchange transaction and that the Company’s common stock was being registered under Rule 12g-3 under the Securities Exchange Act of 1934, as amended.

On February 6, 2003, the Company furnished a Current Report on Form 8-K dated January 30, 2004, to report under Item 12, and incorporate by reference therein, a press release that reported the Company’s financial results for the year ended December 31, 2003.

15

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CITIZENS BANCORP OF VIRGINIA, INC.

    (Registrant)

Date:  May 17, 2004

By:  /s/ Mark C. Riley

Mark C. Riley

President and Chief Executive Officer

16

EXHIBIT INDEX

Exhibit Number

31

Rule 13a-14(a) Certification of Principal Executive Officer and Principal Financial Officer

32

Statement of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. ss.1350