##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 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
  Oregon
(State of Incorporation)
    
    91-1841688
(I.R.S. Employer Identification Number)
 
 
 þ o
  o o þ
 o þ
  Class
    
    Outstanding as of July 28, 2006Common Stock, no par value
    
    4,744,357




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##### 



PageReferencePART I.  FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTS  UNAUDITEDCondensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    1Condensed Consolidated Statements of Income for the three months and the six months ended June 30, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Changes in Shareholders Equity for the six months ended June 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Cash Flows for six months ended June 30, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5  7ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8  13ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
    
    
    14ITEM 4.  Controls and Procedures
    
    
    14PART II.  OTHER INFORMATIONITEM 1.  Legal Proceedings
    
    
    15ITEM 1A.  Risk Factors
    
    
    15ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15ITEM 3.  Defaults Upon Senior Securities
    
    
    15ITEM 4.  Submission of Matters to a Vote of Security Holders
    
    
    15ITEM 5.  Other Information
    
    
    15ITEM 6.  Exhibits
    
    
    15SIGNATURES
    
    
    16EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1
  
   June 30, 2006
    
    
    December 31, 2005(Unaudited)AssetsCash and due from banks
    
    $
    12,793
    
    
    $
    18,518Interest bearing deposits in banks
    
    
    1,653
    
    
    
    166Federal funds sold
    
    
    
    
    
    
    435Securities available for sale
    
    
    51,514
    
    
    
    63,863Securities held to maturity
    
    
    6,134
    
    
    
    7,871Federal Home Loan Bank stock
    
    
    905
    
    
    
    905Loans held for sale
    
    
    
    
    
    
    548Loans, net
    
    
    243,607
    
    
    
    230,547Premises and equipment
    
    
    8,499
    
    
    
    7,456Accrued interest receivable
    
    
    2,169
    
    
    
    1,852Cash surrender value of life insurance
    
    
    4,336
    
    
    
    4,257Other assets
    
    
    3,269
    
    
    
    2,482Total assets
    
    $
    334,879
    
    
    $
    338,900Liabilities and Shareholders EquityLiabilitiesDeposits:Demand, non-interest bearing
    
    $
    52,683
    
    
    $
    56,608Savings and interest bearing demand
    
    
    156,158
    
    
    
    159,678Time
    
    
    38,553
    
    
    
    37,797Total deposits
    
    
    247,394
    
    
    
    254,083Repurchase agreements
    
    
    30,311
    
    
    
    36,590Other borrowings
    
    
    9,493
    
    
    
    1,878Accrued interest payable
    
    
    71
    
    
    
    62Other liabilities
    
    
    1,359
    
    
    
    3,991Total liabilities
    
    
    288,628
    
    
    
    296,604Shareholders EquityCommon stock (no par value); authorized 10,000,000 shares;
Issued and outstanding: 2006  4,744,663 shares;
2005  4,670,386 shares;
    
    
    30,211
    
    
    
    28,938Retained earnings
    
    
    16,224
    
    
    
    13,606Accumulated other comprehensive loss
    
    
    (184
    )
    
    
    (248
    )Total shareholders equity
    
    
    46,251
    
    
    
    42,296Total liabilities and shareholders equity
    
    $
    334,879
    
    
    $
    338,900
  1




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##### Table of Contents



Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Interest Income:Loans
    
    $
    8,760
    
    
    $
    7,751
    
    
    $
    4,515
    
    
    $
    3,939Interest bearing deposits in banks
    
    
    72
    
    
    
    32
    
    
    
    26
    
    
    
    7Securities available for sale
    
    
    1,038
    
    
    
    812
    
    
    
    514
    
    
    
    410Securities held to maturity  tax exempt
    
    
    155
    
    
    
    187
    
    
    
    76
    
    
    
    93Other interest income
    
    
    4
    
    
    
    15
    
    
    
    2
    
    
    
    3Total interest income
    
    
    10,029
    
    
    
    8,797
    
    
    
    5,133
    
    
    
    4,452Interest Expense:Deposits
    
    
    1,616
    
    
    
    790
    
    
    
    854
    
    
    
    468Borrowed funds
    
    
    68
    
    
    
    59
    
    
    
    36
    
    
    
    51Repurchase agreements
    
    
    484
    
    
    
    454
    
    
    
    251
    
    
    
    196Total interest expense
    
    
    2,168
    
    
    
    1,303
    
    
    
    1,141
    
    
    
    715Net Interest Income
    
    
    7,861
    
    
    
    7,494
    
    
    
    3,992
    
    
    
    3,737Provisions for credit losses
    
    
    (82
    )
    
    
    (67
    )
    
    
    (34
    )
    
    
    (34
    )Net interest income after provision for credit losses
    
    
    7,779
    
    
    
    7,427
    
    
    
    3,958
    
    
    
    3,703Non-interest Income:Service charges on deposit accounts
    
    
    660
    
    
    
    720
    
    
    
    328
    
    
    
    360Merchant Bankcard
    
    
    96
    
    
    
    841
    
    
    
    96
    
    
    
    454Gain on sale of assets
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    Other
    
    
    436
    
    
    
    426
    
    
    
    178
    
    
    
    201Total non-interest income
    
    
    1,192
    
    
    
    2,079
    
    
    
    602
    
    
    
    1,015Non-interest Expense:Salaries and employee benefits
    
    
    3,323
    
    
    
    3,256
    
    
    
    1,608
    
    
    
    1,641Occupancy and equipment
    
    
    643
    
    
    
    621
    
    
    
    321
    
    
    
    298Merchant Bankcard
    
    
    1
    
    
    
    707
    
    
    
    1
    
    
    
    378Other
    
    
    1,004
    
    
    
    999
    
    
    
    531
    
    
    
    506Total non-interest expense
    
    
    4,971
    
    
    
    5,583
    
    
    
    2,461
    
    
    
    2,823Income before income taxes
    
    
    4,000
    
    
    
    3,923
    
    
    
    2,099
    
    
    
    1,895Income taxes
    
    
    1,382
    
    
    
    1,315
    
    
    
    732
    
    
    
    615Net income
    
    $
    2,618
    
    
    $
    2,608
    
    
    $
    1,367
    
    
    $
    1,280Comprehensive Income
    
    $
    2,682
    
    
    $
    2,647
    
    
    $
    1,372
    
    
    $
    1,507Earnings per share:Basic
    
    $
    0.55
    
    
    $
    0.56
    
    
    $
    0.29
    
    
    $
    0.27Diluted
    
    $
    0.55
    
    
    $
    0.56
    
    
    $
    0.29
    
    
    $
    0.27Weighted average number of common shares outstandingBasic
    
    
    4,733,362
    
    
    
    4,657,031
    
    
    
    4,734,953
    
    
    
    4,661,646Diluted
    
    
    4,763,754
    
    
    
    4,688,891
    
    
    
    4,761,637
    
    
    
    4,691,584Return on Average Assets
    
    
    1.64
    %
    
    
    1.56
    %
    
    
    1.64
    %
    
    
    1.53
    %Return on Average Equity
    
    
    12.41
    %
    
    
    12.89
    %
    
    
    11.96
    %
    
    
    12.50
    %
  2




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Six Months Ended June 30, 2006 and 2005Number of
    
    
    
    
    
    
    
    
    
    AccumulatedCommon
    
    Common
    
    
    
    
    
    OtherShares
    
    Stock
    
    Retained
    
    ComprehensiveOutstanding
    
    Amount
    
    Earnings
    
    Income (Loss)
    
    TotalBalance, at December 31, 2004
    
    
    4,620,250
    
    
    $
    28,163
    
    
    $
    10,612
    
    
    
    ($374
    )
    
    $
    38,401COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    2,608
    
    
    
    
    
    
    
    2,608Other comprehensive income, net of tax:Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    39Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,647Issuance of common stock
    
    
    31,614
    
    
    
    549
    
    
    
    
    
    
    
    
    
    
    
    549Stock grants
    
    
    55
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Stock options exercised
    
    
    11,042
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    120Balance, at June 30, 2005
    
    
    4,662,961
    
    
    $
    28,833
    
    
    $
    13,220
    
    
    
    ($335
    )
    
    $
    41,718Balance, at December 31, 2005
    
    
    4,670,386
    
    
    $
    28,938
    
    
    $
    13,606
    
    
    
    ($248
    )
    
    $
    42,296COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    2,618
    
    
    
    
    
    
    
    2,618Other comprehensive income, net of tax:Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    64Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,682Stock based compensation expense
recognized in earnings
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Issuance of common stock
    
    
    64,951
    
    
    
    1,127
    
    
    
    
    
    
    
    
    
    
    
    1,127Stock grants
    
    
    75
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Stock options exercised
    
    
    9,336
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Stock repurchase
    
    
    (85
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Balance, at June 30, 2006
    
    
    4,744,663
    
    
    $
    30,211
    
    
    $
    16,224
    
    
    
    ($184
    )
    
    $
    46,251
  3




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005Cash Flows from Operating ActivitiesNet income
    
    $
    2,618
    
    
    $
    2,608Adjustments to reconcile net income to net
cash provided by operating activities:Provision for credit losses
    
    
    82
    
    
    
    67Depreciation and amortization
    
    
    (224
    )
    
    
    351Origination of loans held for sale
    
    
    (4,566
    )
    
    
    (6,068
    )Proceeds of loans held for sale
    
    
    5,154
    
    
    
    5,605Gain on sale of loans
    
    
    (40
    )
    
    
    (50
    )Gain on sales of assets and securities available for sale
    
    
    
    
    
    
    (92
    )Stock dividends received
    
    
    
    
    
    
    (2
    )(Increase) in accrued interest receivable
    
    
    (317
    )
    
    
    (288
    )Increase in accrued interest payable
    
    
    9
    
    
    
    12Other
    
    
    (1,206
    )
    
    
    (1,196
    )Stock based compensation expense
    
    
    28
    
    
    
    Net cash provided by operating activities
    
    
    1,537
    
    
    
    946Cash Flows from Investing ActivitiesNet (increase) decrease in interest bearing deposits in banks
    
    
    (1,487
    )
    
    
    4,242Net decrease in federal funds sold
    
    
    435
    
    
    
    5,787Proceeds from maturities of available for sale securities
    
    
    40,750
    
    
    
    8,000FHLB stock redeemed
    
    
    
    
    
    
    14Proceeds from maturities of securities held to maturity
    
    
    1,745
    
    
    
    1,510Purchases of securities available for sale
    
    
    (28,022
    )
    
    
    (5,331
    )Increase in loans made to customers, net of principal collections
    
    
    (13,137
    )
    
    
    (22,815
    )Purchases of premises and equipment
    
    
    (1,105
    )
    
    
    (104
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    172Net cash (used in) investing activities
    
    
    (821
    )
    
    
    (8,525
    )Cash Flows from Financing ActivitiesNet increase (decrease) in deposits
    
    
    (6,689
    )
    
    
    16,778Net increase (decrease) in repurchase agreements and other borrowings
    
    
    1,336
    
    
    
    (8,351
    )Payment of dividends, net of dividends reinvested
    
    
    (1,206
    )
    
    
    (1,576
    )Exercised stock options
    
    
    118
    
    
    
    120Repurchase and retirement of common stock
    
    
    (1
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (6,441
    )
    
    
    6,972Net (decrease) in cash and due from banks
    
    
    (5,725
    )
    
    
    (607
    )Cash and Due from BanksBeginning of period
    
    
    18,518
    
    
    
    13,562End of period
    
    $
    12,793
    
    
    $
    12,955Supplemental Disclosure of Cash Flow InformationInterest paid
    
    $
    2,159
    
    
    $
    1,291Income taxes paid
    
    
    1,450
    
    
    
    1,530Supplemental Schedule of Non-cash Investing and Financing ActivitiesFair value adjustment of securities available for sale, net of tax
    
    
    64
    
    
    
    39Issuance of common stock through dividend reinvestment plan
    
    
    1,127
    
    
    
    549
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##### Table of Contents



1.
    
    BASIS OF PRESENTATIONThe interim condensed consolidated financial statements include the accounts of Citizens
Bancorp (Bancorp or the Company), 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, 2005 consolidated financial statements, including notes there to, included in
Bancorps 2005 Annual Report to shareholders. The results of operations for the six months
ended June 30, 2006, are not necessarily indicative of the results which may be obtained for
the full year ending December 31, 2006.2.
    
    USE OF ESTIMATES IN THE PREPARATION OF FINANCIALSThe 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.
    
    STOCK BASED COMPENSATIONIn 1999, the Company adopted a qualified incentive stock option plan that allows for grants of
incentive stock options to certain employees. The plan authorized a total of 181,460 shares for
options. For each stock option grant, the Board of Directors determines and approves option
exercise prices, numbers of options granted, vesting periods and expiration dates. Cash was not
used to settle any equity instruments previously granted. The Company issues shares from
authorized but unissued shares upon the exercise of stock options. The Company does not
currently expect to repurchase shares from any source to satisfy such obligations under its
stock option plan.On January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 123 (Revised 2004) that requires the measurement
and recognition of compensation expense for all stock-based payment awards made to employees
and directors.SFAS No. 123(R) supersedes the Companys previous accounting under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, the Company
measured compensation cost for options in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees and related interpretations.
Accordingly, no accounting recognition was given to these prior stock options granted at fair
market value until they were exercised. Upon exercise, net proceeds, including tax benefits
realized, were credited to equity.SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods in the
Companys consolidated statement of income. The Company has adopted the accelerated method for
graded vested options which recognizes compensation expense for each vesting tranche over its
vesting period.The Company uses the Black-Scholes option-pricing model to value stock options. The
Black-Scholes model requires the use of employee exercise behavior data and the use of a number
of assumptions including volatility of the Companys stock price, dividend yield, weighted
average risk-free interest rate, and weighted average expected life of the options. There were
no options granted during the six months ended June 30, 2006 and 2005.The Company adopted SFAS No. 123(R) using the modified prospective transition method, which
requires adoption as of January 1, 2006, the first day of the Companys 2006 fiscal year. In
accordance with the modified prospective transition method, the Companys consolidated
financial statements for prior periods have not been restated to reflect, and do not include,
the impact of SFAS No. 123(R). Stock-based compensation expense recognized under SFAS No.
123(R) for the quarter ended June 30, 2006 totaled $28,000, no tax benefit was realized, and
related to currently vesting employee stock options that were granted in prior years. At June
30, 2006, unrecognized stock-based compensation totaled $63 thousand. These costs are expected
to be recognized over a weighted average period of 20 months.
 5




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Weighted Average
    
    
    AggregateNumber of
    
    
    Weighted Average
    
    
    Remaining
    
    
    Intrinsic ValueShares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    (in thousands)Stock options outstanding, December 31, 2005
    
    
    151,651
    
    
    $
    14.17Granted
    
    
    
    
    
    
    Exercised
    
    
    (9,336
    )
    
    $
    12.74Forfeited
    
    
    (2,940
    )
    
    $
    16.66Stock options outstanding, June 30, 2006
    
    
    139,375
    
    
    $
    14.21
    
    
    
    6.67
    
    
    $
    527Stock options exercisable June 30, 2006
    
    
    99,477
    
    
    $
    13.37
    
    
    
    6.13
    
    
    $
    455
  Weighted Average
    
    
    AggregateNumber of
    
    
    Weighted Average
    
    
    Remaining
    
    
    Intrinsic ValueShares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    (in thousands)Stock options outstanding, December 31, 2004
    
    
    172,541
    
    
    $
    14.11Granted
    
    
    
    
    
    
    Exercised
    
    
    (11,042
    )
    
    $
    10.90Forfeited
    
    
    (847
    )
    
    $
    16.42Stock options outstanding, June 30, 2005
    
    
    160,652
    
    
    $
    14.12
    
    
    
    7.60
    
    
    $
    503Stock options exercisable June 30, 2005
    
    
    83,559
    
    
    $
    12.70
    
    
    
    6.59
    
    
    $
    363
   Six Months Ended
    
    
    Three Months Ended(dollars in thousands)
    
    June 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    2,608
    
    
    $
    1,280Less total stock-based employee
compensation expense determined
under fair value based methods
for all qualifying awards
    
    
    (64
    )
    
    
    (32
    )Pro forma net income
    
    $
    2,544
    
    
    $
    1,248Earnings per share:Basic  as reported
    
    $
    0.56
    
    
    $
    0.27Basic  pro forma
    
    $
    0.56
    
    
    $
    0.27Diluted  as reported
    
    $
    0.56
    
    
    $
    0.27Diluted  pro forma
    
    $
    0.55
    
    
    $
    0.27
   6




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##### Table of Contents



Six Months EndedJune 30,(dollars in thousands)
    
    2006
    
    
    2005Net income
    
    $
    2,618
    
    
    $
    2,608Weighed average shares outstanding  basic
    
    
    4,733
    
    
    
    4,657$
    0.55
    
    
    $
    0.56Incremental shares arising from stock-based compensation
    
    
    30
    
    
    
    32Weighted average shares outstanding  diluted
    
    
    4,763
    
    
    
    4,689Diluted net income per common share
    
    $
    0.55
    
    
    $
    0.56
           7




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##### Table of Contents



ITEM 2
 
   .
          8




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##### Table of Contents



June 30, 2006
    
    
    December 31, 2005
    
    
    June 30, 2005Commercial
    
    $
    26,103
    
    
    $
    22,478
    
    
    $
    22,979Agriculture
    
    
    17,689
    
    
    
    18,249
    
    
    
    24,855Real EstateConstruction
    
    
    16,576
    
    
    
    11,049
    
    
    
    6,9641-4 Family
    
    
    25,479
    
    
    
    22,787
    
    
    
    23,045Multi-family
    
    
    22,869
    
    
    
    25,419
    
    
    
    24,895Commercial
    
    
    119,240
    
    
    
    116,180
    
    
    
    117,245Farmland
    
    
    15,872
    
    
    
    14,046
    
    
    
    13,487Consumer Loans
    
    
    3,019
    
    
    
    3,502
    
    
    
    3,399246,847
    
    
    
    233,710
    
    
    
    236,869Less: net deferred loan fees
    
    
    (416
    )
    
    
    (413
    )
    
    
    (439
    )Total Loans
    
    
    246,431
    
    
    
    233,297
    
    
    
    236,430Less: allowance for credit losses
    
    
    (2,824
    )
    
    
    (2,750
    )
    
    
    (2,745
    )Net Loans
    
    $
    243,607
    
    
    $
    230,547
    
    
    $
    233,685
 9




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##### Table of Contents



2006
    
    
    2005Balance at beginning of period
    
    $
    2,750
    
    
    $
    2,790Provision charged to operations
    
    
    82
    
    
    
    67Loans recovered
    
    
    0
    
    
    
    4Loans charged off
    
    
    (8
    )
    
    
    (116
    )Balance at end of period
    
    $
    2,824
    
    
    $
    2,745
      Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedJune 30, 2006
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueAvailable for SaleU.S. Government and Agency SecuritiesTotal
    
    
    $51,816
    
    
    
    $0
    
    
    
   ($302
    )
    
    
   $51,514Held to MaturityState and Municipal SecuritiesTotal
    
    
$6,134
    
    
    
    $76
    
    
    
$0
    
    
    
    6,210
 Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedDecember 31, 2005
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueAvailable for SaleU.S. Government and Agency SecuritiesTotal
    
    
$64,269
    
    
    
$92
    
    
    
($406
    )
    
    
$63,863Held to MaturityState and Municipal SecuritiesTotal
    
    
$7,871
    
    
    
$146
    
    
    
($5)
    
    
    
$8,012
   10




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##### Table of Contents



-
    
    $5.7 million decrease in cash and due from banks or (30.9%)-
    
    $1.5 million increase in interest bearing deposits in banks or 895.8%-
    
    $12.3 million decrease in securities available for sale or (19.3%)-
    
    $13.1 million increase in net loans or 5.7%-
    
    $1.0 million increase in premises and equipment or 14.0%
    -
    
    $3.9 million decrease in demand deposits or (6.9%)-
    
    $3.5 million decrease in savings and interest bearing deposits or (2.2%)-
    
    $.756 million increase in time certificates of deposits or 2.0%-
    
    $6.3 million decrease in repurchase agreements or (17.2%)-
    
    $7.6 million increase in other borrowings or 405.5%-
    
    $2.6 million decrease in other liabilities, primarily due to the
payment of the cash dividend to shareholders or (65.9%)
        11




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##### Table of Contents



12




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##### Table of Contents



June 30, 2006
    
    December 31, 2005Adequately
    
    Well
    
    
    
    
    
    Adequately
    
    WellCapitalized
    
    Capitalized
    
    
    
    
    
    Capitalized
    
    CapitalizedRatio
    
    Standards
    
    Standards
    
    Ratio
    
    Standards
    
    StandardsTier 1 Leverage CapitalCompany
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    12.39%
    
    
    
    4%
    
    
    
    5%Bank
    
    
    13.87%
    
    
    
    4%
   
    
    
        5%
    
    
    
        12.37%
    
    
    
    4%
    
    
    
    5%Tier 1 Risk Based CapitalCompany
    
    
   N/A
    
    
    
N/A
    
    
    
N/A
    
    
    
    15.57%
    
    
    
4%
    
    
    
6%Bank
    
    
    16.34%
    
    
    
    4%
    
    
    
        6%
    
    
    
    15.56%
    
    
    
   4%
    
    
    
   6%Total Risk Based CapitalCompany
    
    
N/A
    
    
    
N/A
    
    
    
N/A
    
    
    
16.58%
    
    
    
8%
    
    
    
10%Bank
    
    
   17.34%
    
    
    
    8%
    
    
    
    10%
    
    
    
16.57%
    
    
    
8%
    
    
    
10%
 13




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##### Table of Contents



a)
    
    Evaluation of Disclosure Controls and Procedures:An evaluation of the Companys disclosure
controls and procedures (as defined in Section 13(a)-15(e) and 15d-15(e)) of the Securities
Exchange Act of 1934 was carried out under the supervision and with the participation of the
Companys Chief Executive Officer, Chief Financial Officer and several other members of the
Companys senior management as of the end of the period covered by this quarterly report. The
Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures as currently in effect are effective in ensuring that the
information required to be disclosed by the Company in the reports it files or submits under
the Act is (1) accumulated and communicated to the Companys management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (2) recorded,
processed, summarized and reported within the time periods specified in the SECs rules and
forms.b)
    
    Changes in Internal Controls:There were no significant changes in the Companys internal
controls or in other factors that could significantly affect the Company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.
 14




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##### Table of Contents



PART II. OTHER INFORMATION
 
   
   
  
 
   
  (a)
    
    April 18, 2006, Annual Meeting(b)
    
    Need not be completed(c)
    
    The following matters were voted upon at the Annual Meeting of
Shareholders on April 18, 2006
 (1)
    
    The re-election of three (3) Directors for terms expiring in
2009 or until their successors have been elected and qualified.Directors:
 Eric Thompson
    
    
    
    
    
    James E. Richards
    
    
    
    
    
    Jock GibsonVotes cast for:
    
    
    3,555,746
    
    
    Votes cast for:
    
    
    3,555,706
    
    
    Votes cast for:
    
    
    3,555,746Votes withheld:
    
    
    43,901
    
    
    Votes withheld:
    
    
    43,941
    
    
    Votes withheld:
    
    
    43,901
 (2)
    
    The election of one (1) Director for a term expiring in 2007
or until his successor has been elected and qualified.Director:
 Michael A. ButlerVotes cast for:
    
    
    3,554,423Votes withheld:
    
    
    45,224
 
   
  (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.
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##### Table of Contents



Date: August 10, 2006
    
    By:
    
    /s/ William V. HumphreysWilliam V. HumphreysPresident andChief Executive OfficerDate: August 10, 2006
    
    By:
    
    /s/ Lark E. WyshamLark E. WyshamExecutive Vice President andChief Financial Officer
 16