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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 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 000-23277 CITIZENS BANCORP/OR  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 [  ]Indicate whether the Registrant is an accelerated filer as defined by
Exchange Act Rule 12b-2. YES [   ] NO [ X ]Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.4,618,471 shares as of April 30, 2004, no par value.




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CITIZENS BANCORP
FORM 10-Q
MARCH 31, 2004
INDEX PageReferencePART I.  FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTS  UNAUDITEDCondensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the three months ended
March 31, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Changes in Shareholders Equity for the three
months ended March 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for three months ended
March 31, 2004 and 2003
    
    
    4Notes to Consolidated Financial Statements
    
    
    5  6ITEM 2.  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    7  12ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
    
    
    12ITEM 4.  Controls and Procedures
    
    
    13PART II.  OTHER INFORMATIONITEM 1.  Legal Proceedings
    
    
    14ITEM 2.  Changes in Securities
    
    
    14ITEM 3.  Defaults Upon Senior Securities
    
    
    14ITEM 4.  Submission of Matters to a Vote of Security Holders
    
    
    14ITEM 5.  Other Information
    
    
    14ITEM 6.  Exhibits and Reports on Form 8-K
    
    
    14SIGNATURES
    
    
    15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I FINANCIAL INFORMATION 
 ITEM 1
  
 
 March 31, 2004
    
    December 31, 2003AssetsCash and due from banks
    
    $
    20,974
    
    
    $
    30,799Interest bearing deposits in banks
    
    
    15,545
    
    
    
    2,181Securities available for sale
    
    
    77,632
    
    
    
    80,154Securities held to maturity
    
    
    12,029
    
    
    
    11,931Federal Home Loan Bank stock
    
    
    401
    
    
    
    396Loans held for sale
    
    
    553
    
    
    
    0Loans, net
    
    
    183,562
    
    
    
    185,053Premises and equipment
    
    
    7,797
    
    
    
    7,508Foreclosed real estate
    
    
    444
    
    
    
    476Accrued interest receivable
    
    
    1,944
    
    
    
    1,884Cash surrender value of life insurance
    
    
    3,985
    
    
    
    3,937Other assets
    
    
    1,986
    
    
    
    1,950Total assets
    
    $
    326,852
    
    
    $
    326,269Liabilities and Shareholders EquityLiabilitiesDeposits:Demand, non-interest bearing
    
    $
    47,487
    
    
    $
    47,308Savings and interest bearing demand
    
    
    143,538
    
    
    
    139,486Time
    
    
    46,888
    
    
    
    48,965Total deposits
    
    
    237,913
    
    
    
    235,759Repurchase agreements
    
    
    49,533
    
    
    
    50,907Other borrowings
    
    
    633
    
    
    
    808Accrued interest payable
    
    
    38
    
    
    
    43Other liabilities
    
    
    996
    
    
    
    3,135Total liabilities
    
    
    289,113
    
    
    
    290,652Shareholders EquityCommon stock (no par value); authorized 10,000,000 shares;Issued and outstanding: 2004  4,618,218 shares;
2003  4,554,242 shares;
    
    
    28,136
    
    
    
    27,155Retained earnings
    
    
    9,401
    
    
    
    8,385Accumulated other comprehensive income
    
    
    202
    
    
    
    77Total shareholders equity
    
    
    37,739
    
    
    
    35,617Total liabilities and shareholders equity
    
    $
    326,852
    
    
    $
    326,269
 See accompanying notes 1




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CITIZENS BANCORP AND SUBSIDIARY 
 
 Three Months EndedMarch 31,2004
    
    2003Interest Income:Loans
    
    $
    3,208
    
    
    $
    3,501Interest bearing deposits
    
    
    21
    
    
    
    36Securities available for sale
    
    
    366
    
    
    
    524Securities held to maturitytax-exempt
    
    
    105
    
    
    
    104Other interest income
    
    
    5
    
    
    
    17Total interest income
    
    
    3,705
    
    
    
    4,182Interest Expense:Deposits
    
    
    244
    
    
    
    426Borrowed funds
    
    
    1
    
    
    
    2Repurchase agreements
    
    
    150
    
    
    
    203Total interest expense
    
    
    395
    
    
    
    631Net Interest Income
    
    
    3,310
    
    
    
    3,551Provision for credit losses
    
    
    (44
    )
    
    
    (91
    )Net interest income after provision for credit losses
    
    
    3,266
    
    
    
    3,460Non-interest Income:Service charges on deposit accounts
    
    
    435
    
    
    
    410Gain on sales of investments available for sale
    
    
    25
    
    
    
    76Merchant bankcard
    
    
    320
    
    
    
    298Other
    
    
    246
    
    
    
    240Total non-interest income
    
    
    1,026
    
    
    
    1,024Non-interest Expense:Salaries and employee benefits
    
    
    1,630
    
    
    
    1,421Occupancy and equipment
    
    
    334
    
    
    
    335Merchant bankcard
    
    
    271
    
    
    
    259Other
    
    
    510
    
    
    
    486Total non-interest expense
    
    
    2,745
    
    
    
    2,501Income before income tax expense
    
    
    1,547
    
    
    
    1,983Income tax expense
    
    
    (531
    )
    
    
    (740
    )Net income
    
    $
    1,016
    
    
    $
    1,243Per share data:Basic and diluted earnings per share
    
    $
    0.22
    
    
    $
    0.27Weighted average number of common
Shares outstanding:Basic
    
    
    4,609,270
    
    
    
    4,557,227Diluted
    
    
    4,649,993
    
    
    
    4,559,373Return on Average Assets
    
    
    1.26
    %
    
    
    1.64
    %
 See accompanying notes 2




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CITIZENS BANCORP AND SUBSIDIARY 
 
  Three Months Ended March 31, 2004 and 2003Number of
    
    
    
    
    
    
    
    
    
    AccumulatedCommon
    
    Common
    
    
    
    
    
    OtherShares
    
    Stock
    
    Retained
    
    ComprehensiveOutstanding
    
    Amount
    
    Earnings
    
    Income (Loss)
    
    TotalBalance, at December 31, 2002
    
    
    4,084,210
    
    
    $
    19,459
    
    
    $
    12,498
    
    
    $
    373
    
    
    $
    32,330COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    1,243
    
    
    
    
    
    
    
    1,243Other comprehensive income, net of tax:Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    (60
    )Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,183Issuance of common stock
    
    
    66,065
    
    
    
    804
    
    
    
    
    
    
    
    
    
    
    
    804Balance, at March 31, 2003
    
    
    4,150,275
    
    
    $
    20,263
    
    
    $
    13,741
    
    
    $
    313
    
    
    $
    34,317Balance, at December 31, 2003
    
    
    4,554,242
    
    
    $
    27,155
    
    
    $
    8,385
    
    
    $
    77
    
    
    $
    35,617COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    1,016
    
    
    
    
    
    
    
    1,016Other comprehensive income, net of tax:Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    125Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,141Issuance of common stock
    
    
    61,727
    
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958Stock grants
    
    
    45
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Stock options exercised
    
    
    2,204
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Balance, at March 31, 2004
    
    
    4,618,218
    
    
    $
    28,136
    
    
    $
    9,401
    
    
    $
    202
    
    
    $
    37,739
 See accompanying notes 3




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CITIZENS BANCORP AND SUBSIDIARY 
 
 Three Months EndedMarch 31,2004
    
    2003Cash Flows from Operating ActivitiesNet income
    
    $
    1,016
    
    
    $
    1,243Adjustments to reconcile net income to net
cash provided by operating activities:Provision for credit losses
    
    
    44
    
    
    
    91Depreciation and amortization
    
    
    143
    
    
    
    134Gains on sales of securities available for sale
    
    
    (25
    )
    
    
    (76
    )Stock dividends received
    
    
    (5
    )
    
    
    (6
    )(Increase) decrease in accrued interest receivable
    
    
    (60
    )
    
    
    153Decrease in accrued interest payable
    
    
    (5
    )
    
    
    (5
    )Other
    
    
    (59
    )
    
    
    33Net cash provided by operating activities
    
    
    1,049
    
    
    
    1,567Cash Flows from Investing ActivitiesNet (increase) decrease in interest bearing deposits in banks
    
    
    (13,364
    )
    
    
    4,049Proceeds from maturities of available for sale securities
    
    
    13,700
    
    
    
    29,000Proceeds from sales of available for sale securities
    
    
    17,791
    
    
    
    2,079Purchases of securities available for sale
    
    
    (28,879
    )
    
    
    (22,693
    )Purchases of securities held to maturity
    
    
    (101
    )
    
    
    0(Increase) decrease in loans made to customers, net of principal collections
    
    
    915
    
    
    
    (6,978
    )Purchases of premises and equipment and other
    
    
    (427
    )
    
    
    (415
    )Net cash provided by (used in) investing activities
    
    
    (10,365
    )
    
    
    5,042Cash Flows from Financing ActivitiesNet increase in deposits
    
    
    2,154
    
    
    
    2,742Net decrease in repurchase agreements and other borrowings
    
    
    (1,549
    )
    
    
    (8,606
    )Payment of dividends, net of dividends reinvested
    
    
    (1,137
    )
    
    
    (1,034
    )Stock grants
    
    
    1
    
    
    
    0Exercised stock options
    
    
    22
    
    
    
    0Net cash provided by (used in) financing activities
    
    
    (509
    )
    
    
    (6,898
    )Net (decrease) increase in cash and due from banks
    
    ($
    9,825
    )
    
    ($
    289
    )Cash and Due from BanksBeginning of period
    
    
    30,799
    
    
    
    17,722End of period
    
    $
    20,974
    
    
    $
    17,433Supplemental Disclosure of Cash Flow InformationInterest paid
    
    
    400
    
    
    
    636Income taxes paid
    
    
    715
    
    
    
    0Supplemental Schedule of Non-cash Investing and Financing ActivitiesFair value adjustment of securities available for sale, net of tax
    
    
    125
    
    
    
    (60
    )Issuance of common stock through dividend reinvestment plan
    
    
    958
    
    
    
    804
 See accompanying notes 4




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CITIZENS BANCORP 
   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 three months ended March
31, 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 Shareper share amounts
    
    (Numerator)
    
    (Denominator)
    
    AmountThree months ended March 31, 2004Basic earnings per share:Net Income
    
    $
    1,016
    
    
    
    4,609,270
    
    
    $
    0.22Effect of dilutive securities:Options
    
    
    
    
    
    
    40,723
    
    
    
    -0-Diluted earnings per share:Net Income
    
    $
    1,016
    
    
    
    4,649,993
    
    
    $
    0.22Three months ended March 31, 2003Basic earnings per share:Net Income
    
    $
    1,243
    
    
    
    4,557,227
    
    
    $
    0.27Effect of dilutive securities:Options
    
    
    
    
    
    
    2,146
    
    
    
    -0-Diluted earnings per share:Net Income
    
    $
    1,243
    
    
    
    4,559,373
    
    
    $
    0.27
 5




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4.
    
    STOCK-BASED COMPENSATION The Company has a stock-based employee compensation plan. The Company
applies the recognition and measurement principles of APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, no stock-based compensation cost is reflected in net income
as all options granted under this plan had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensationto stock based
employee compensation. Three Months EndedMarch 31,(Dollars in thousands, except per share amounts)
    
    2004
    
    2003Net income, as reported
    
    $
    1,016
    
    
    $
    1,243Less total stock-based compensation expense determined
under fair value method for all qualifying awards
    
    
    (42
    )
    
    
    (33
    )Pro forma net income
    
    $
    974
    
    
    $
    1,210Earnings per share:Basic and diluted:As reported
    
    $
    0.21
    
    
    $
    0.27Pro forma
    
    $
    0.21
    
    
    $
    0.27
  5.
    
    CONTINGENCIES Unfunded loan commitments totaled $40.8 million as of March 31, 2004 and
$31.0 million as of December 31, 2003.  5.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn 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 compensations 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 the Corporation on January 1, 2005. The proposal is
controversial and subject to public comment. Accordingly, the provisions of
the final statement, which the FASB expects to issue in late 2004, could
significantly differ from those proposed. 6




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ITEM 2 MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS In addition to historical information, this report contains certain forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. This statement is included for the purpose of availing
Bancorp the protection of the safe harbor provisions of this Act. The forward
looking statements contained in this report are subject to factors, risks and
uncertainties that may cause actual results to differ materially from those
projected. Factors that might result in such material difference include, but
are not limited to economic conditions, the regulatory environment, rapidly
changing technology, new legislation, competitive factors, the interest rate
environment and the overall condition of the banking industry. Forward looking
statements can be identified by such words as estimate, believe, expect,
intend, anticipate, should, may, will, or other similar words or
phrases. Although Bancorp believes that the expectations reflected in such
forward looking statements are reasonable, it can give no assurances that such
expectations will prove to have been correct. Readers are therefore cautioned
not to place undue reliance on such forward looking statements, which reflect
managements analysis only as of the date of the statement. Bancorp does not
intend to update these forward-looking statements other than in its periodic
filings under applicable security laws. OVERVIEW Citizens Bank (the Bank) was chartered October 1, 1957 (charter #333) by the
State of Oregon as a commercial bank. Since its beginning with a single office
in Corvallis, Citizens Bank has expanded to an additional ten locations in the
five counties of Benton, Linn, Lane, Polk, and Yamhill. Branches are located
in the communities of Corvallis, Philomath, Albany, Junction City, Veneta,
McMinnville, Harrisburg, Dallas, and Springfield. 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. 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. 7




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Deposit products include regular and package checking accounts, savings
accounts, certificates of deposit, money market accounts, and IRA accounts. The
Bank offers debit cards, check guarantee cards, and ATM cards as well as credit
cards as part of its retail banking services. The Bank offers extended banking hours in selected locations as well as
Saturday banking. ATM machines are also available at eleven (11) locations
offering 24-hour transaction services, including cash withdrawals, deposits,
account transfers, and balance inquiries. The Bank also offers its customers a
24-hour automated telephone service that offers account transfers and balance
inquiries. The Banks on-line banking product offers services to both
individuals and business account customers. Business customers have a
comprehensive cash management option. All online users have the availability of
the bill payment feature. The Bank expects to continually enhance its on-line
banking product while maintaining its quality people to people customer
service. Citizens on-line banking can be reached at www.CitizensEBank.com. Bancorp reported net income of $1,016,000 for the first three months ended
March 31, 2004 or $.22 per common share, compared to net income of $1,243,000
or $.27 per common share for the same period in 2003. LOAN PORTFOLIO The composition of the loan portfolio, including loans held for sale, was as
follows (in thousands): March 31, 2004
    
    December 31, 2003Commercial
    
    $
    23,297
    
    
    $
    21,765Agriculture
    
    
    17,312
    
    
    
    17,013Real EstateConstruction
    
    
    4,256
    
    
    
    6,5861-4 Family
    
    
    25,050
    
    
    
    26,292Other
    
    
    114,356
    
    
    
    113,060Consumer Loans
    
    
    3,098
    
    
    
    3,523187,369
    
    
    
    188,239Less: net deferred loan fees
    
    
    (449
    )
    
    
    (421
    )Total Loans
    
    
    186,920
    
    
    
    187,818Less: allowance for credit losses
    
    
    (2,805
    )
    
    
    (2,765
    )Net Loans
    
    $
    184,115
    
    
    $
    185,053
 8




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Transactions in the allowance for credit losses were as follows for the three
months ended March 31: 2004
    
    2003Balance at beginning of period
    
    $
    2,765
    
    
    $
    2,546Provision charged to operations
    
    
    44
    
    
    
    91Loans recovered
    
    
    0
    
    
    
    1Loans charged off
    
    
    (4
    )
    
    
    (15
    )Balance at end of period
    
    $
    2,805
    
    
    $
    2,623
 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 March 31, 2004 and December 31, 2003 were
approximately $2,274,000 and $2,164,000 respectively. There were no loans past
due 90 days or more on which the Bank continued to accrue interest at March 31,
2004 and $12,000 at December 31, 2003. There were no loans with modified terms
as of March 31, 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. Four loans constitute the majority of approximately $2,274,000 in non-accrual
status as of March 31, 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
$541,000 is a farm loan that is being restructured into a three-year pay out.
Management anticipates the loan will cash flow and will be paid out at the end
of the term. In managements estimation the value of the collateral supports
the debt. The third loan in the approximate amount of $369,000 is commercial
real estate. Management is beginning foreclosure procedures against the
borrowers property, which the bank holds as collateral. The appraisal value of
the real estate supports the outstanding debt. The fourth loan is commercial
real estate of approximately $605,000. The property is in foreclosure and the
Bank anticipates securing title in thirty to forty-five days. The Bank has a
potential buyer and anticipates closing on the sale thirty days after the Bank
has secured title. The Bank is anticipating a loss on the sale of
approximately $45,000 which has been incorporated in managements analysis of
loan loss reserve levels. INVESTMENT SECURITIES The amortized cost and estimated book value of the investment securities held
by the Bank, including unrealized gains and losses, at March 31, 2004 and
December 31, 2003, are as follows (in thousands): Gross Unrealized
    
    Gross UnrealizedMarch 31, 2004
    
    Amortized Cost
    
    Gains
    
    Losses
    
    Fair ValueAvailable for SaleU.S. Government and Agency SecuritiesTotal
    
    $
    77,302
    
    
    $
    337
    
    
    
    ($7
    )
    
    $
    77,632Held to MaturityState and Municipal SecuritiesTotal
    
    $
    12,029
    
    
    $
    597
    
    
    
    ($1
    )
    
    $
    12,625
 Gross Unrealized
    
    Gross UnrealizedDecember 31, 2003
    
    Amortized Cost
    
    Gains
    
    Losses
    
    Fair ValueAvailable for SaleU.S. Government and Agency SecuritiesTotal
    
    $
    80,028
    
    
    $
    215
    
    
    
    ($89
    )
    
    $
    80,154Held to MaturityState and Municipal SecuritiesTotal
    
    $
    11,931
    
    
    $
    582
    
    
    
    ($4
    )
    
    $
    12,509
 9




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MATERIAL CHANGES IN FINANCIAL CONDITION Changes in the balance sheet for the three months ended March 31, 2004 include
a slight increase in total assets, primarily in interest bearing deposits in
banks, and a decrease in liabilities primarily in time deposits, repurchase
agreements, and other liabilities. The Bank experienced a decrease in loans and
an increase in deposits. At March 31, 2004, total assets increased only a slight .2% or approximately
$583,000 as compared to total assets at December 31, 2003. Major components of
the change in assets were:  -
    
    $9.8 million decrease in cash and due from banks-
    
    $13.4 million increase in interest bearing deposits in banks-
    
    $2.5 million decrease in securities available for sale-
    
    $1.5 million decrease in net loans Loans are generally made to customers within the Companys market area. The
decrease in loans was primarily due to the pay down of operating lines of
credit and slow loan demand in the Banks market areas. Management believes
the economic condition in its market areas has been the most significant factor
for the slow loan demand. Citizens Bank has a history of conservative loan
underwriting and management is unwilling to compromise its standards just for
growth. The Bank has a history of minimal loan charge-offs due to its
exceptional underwriting policies and standards. The Bank is beginning to see
loan demand pick up in our market areas and our loan officers are actively
calling on prospective new customers. Management anticipates that the
portfolio will grow in 2004 with high quality loans with appropriate pricing. The Company experienced an increase in deposits, and a decrease in repurchase
agreements, and other liabilities, which was due to the payment of the cash
dividend during the three months ended March 31, 2004, specifically as follows:  -
    
    $4.1 million increase in savings and interest bearing deposits-
    
    $2.1 million decrease in time certificates of deposits-
    
    $1.4 million decrease in repurchase agreements-
    
    $2.1 million decrease in other liabilities, due to the payment of the cash dividend to shareholders Management believes the growth in deposits 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 is due to the normal balance fluctuations in these accounts. 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 The Company reported net income of approximately $1,016,000 or $.22 per common
share, for the three months ended March 31, 2004, compared to net income of
approximately $1,243,000 or $.27 per common share, for the same period in 2003.
This represents a decrease in net income of 18.3 percent. The decrease during
this period was largely attributable to a decrease in interest income which was
a result of slower loan growth, lower interest rates earned on loans and
investments and a decrease in mortgage department fee income due to the decline
in the mortgage loan business. Total interest income decreased approximately $477,000 or 11.4%for the three
months ended March 31, 2004 as compared to the same period in 2003. The change
for the three-month period was primarily a result of a decrease in interest
income on loans and security investments available for sale. The decrease is
directly related to the overall decrease in market interest rates from the
comparable period in 2003, as well as the decrease in loan volume. Total interest expense decreased approximately $236,000 or 37.4% for the three
months ended March 31, 2004 as compared to the same period in 2003 The decrease
in interest expense on deposits was the result of lower interest rates paid on
deposits compared to the same period in 2003. The effect of the decrease was
greater than interest expense related to increased levels of deposits.
Interest expense on repurchase agreements decreased due to lower balances in
the related underlying balances and a decrease in the interest rate paid on
those accounts compared to the same period in 2003. 10




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##### Table of Contents



Net interest income for the three months ended March 31, 2004 decreased
$241,000 or 6.8% from the comparable period in 2003. The decrease was the
result of the decrease in interest income on loans and investments due to
overall lower market rates and lower loan volume as compared to the same period
in 2003. Total non-interest income increased approximately $2,000 or .2% for the three
months ended March 31, 2004 as compared to the same period in 2003. The
primary increases resulted from the growth in Bankcard income as a result of
volume increases and increased service charges on customer accounts due to an
increase in both the number of relationships and fee increases. The Bank
realized lower gains on the sale of securities available for sale for the three
months ended March 31, 2004 compared to the same period in 2003. The Bank
generally only sells a security to reposition the portfolio from an
asset-liability strategy or to fund loan demand. The Bank also experienced
lower mortgage fee income due to the slow down in the mortgage business as
compared to the same period in 2003. Total non-interest expense increased $244,000 or 9.8 percent for the three
months ended March 31, 2004, as compared to the same period in 2003.
Non-interest expense increased as a result of routine adjustments in staff
salaries and benefits along with the increase in staff relative to the new
Springfield branch, and expenses related with technology enhancements,
products, and occupancy. 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 three months ended March 31, 2004, the Bank funded the
allowance for credit losses $44,000 from operations as compared to $91,000 for
the same three-month period of 2003. The Bank decreased the provision for
credit losses for the three month period in 2004 as compared to the same period
in 2003, based on its analysis of delinquencies, loan types, loan
classifications, and other factors affecting the loan portfolio at March 31,
2004. The Bank experienced $4,000 in credit losses and no recoveries for the
three months ended March 31, 2004 and $15,000 in net losses for the same period
ended March 31, 2003. Historically, the Banks loan charge-off levels have
been very low compared to its peers. Management believes that the allowance
for credit losses at March 31, 2004 of $2,805,000 or 1.50% 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 reserve
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. 11




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##### Table of Contents



The analysis of liquidity should also include a review of the changes that
appear in the consolidated statement of cash flows for the first three 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. 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 March 31, 2004, shareholders equity totaled $37,739,000 as compared to
$35,617,000 at December 31, 2003, an increase of 6.0%. This increase in equity
was primarily due to the Company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 April 30, 2004 the maximum number of
shares issuable under the Incentive Stock Option Plan was 181,460 shares. As
of April 30, 2004, options for 177,364 shares had been granted, options for
5,744 shares exercised, and options for 8,773 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 April 30, 2004
the maximum number of shares issuable under the Stock Bonus Plan was 45,365
shares. As of April 30, 2003, 50 shares had been issued under this Plan. Capital ratios for the Company were as follows as of the dates indicated: AdequatelyCapitalized
    
    WellCapitalized
    
    BancorpStandards
    
    Standards
    
    March 31, 2004
    
    December 31, 2003Tier 1 Leverage Ratio
    
    
    4
    %
    
    
    5
    %
    
    
    11.69
    %
    
    
    10.81
    %Tier 1 Risk Based Capital Ratio
    
    
    4
    %
    
    
    6
    %
    
    
    16.45
    %
    
    
    15.64
    %Total Risk Based Capital Ratio
    
    
    8
    %
    
    
    10
    %
    
    
    17.68
    %
    
    
    16.86
    %
 
 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. 12




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES Based on their most recent evaluation which was completed within 90 days of the
filing of this Form 10-Q, the Companys Chief Executive Officer and Chief
Financial Officer believe the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) are effective. 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. 13




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##### Table of Contents



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 None 14




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##### Table of Contents



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: May 7, 2004
    
    
    
    /s/ William V. HumphreysBy:
    
    William V. HumphreysPresident andChief Executive OfficerDate: May 7, 2004
    
    
    
    /s/ Lark E. WyshamBy:
    
    Lark E. WyshamExecutive Vice President andChief Financial Officer
 15