##### 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, 2007
 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 24, 2007Common Stock, no par value
    
    4,671,313




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##### 



PageReferencePART I.  FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTS  UNAUDITEDCondensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    1Condensed Consolidated Statements of Income for the three months and the six months ended June 30, 2007 and 2006
    
    
    2Condensed Consolidated Statements of Changes in Shareholders Equity for the six months ended June 30, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5-10ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11-15ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
    
    
    15ITEM 4.  Controls and Procedures
    
    
    15PART II.  OTHER INFORMATIONITEM 1.  Legal Proceedings
    
    
    16ITEM 1A.  Risk Factors
    
    
    16ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16ITEM 3.  Defaults Upon Senior Securities
    
    
    16ITEM 4.  Submission of Matters to a Vote of Security Holders
    
    
    16ITEM 5.  Other Information
    
    
    16ITEM 6.  Exhibits
    
    
    16SIGNATURES
    
    
    17Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1
 
 
 June 30,
    
    
    December 31,2007
    
    
    2006AssetsCash and due from banks
    
    $
    14,615
    
    
    $
    17,227Interest bearing deposits in banks
    
    
    1,817
    
    
    
    11,709Federal funds sold
    
    
    662
    
    
    
    9,340Securities available for sale
    
    
    42,026
    
    
    
    46,204Securities held to maturity (estimated fair value $5,501 and $5,542)
    
    
    5,480
    
    
    
    5,462Federal Home Loan Bank stock, at cost
    
    
    905
    
    
    
    905Loans held for sale
    
    
    95
    
    
    
    53Loans
    
    
    272,645
    
    
    
    253,027Allowance for credit losses
    
    
    2,950
    
    
    
    2,875Net loans
    
    
    269,695
    
    
    
    250,152Premises and equipment
    
    
    9,437
    
    
    
    8,439Accrued interest receivable
    
    
    2,217
    
    
    
    2,112Cash value of life insurance
    
    
    4,500
    
    
    
    4,416Other assets
    
    
    3,130
    
    
    
    3,010Total assets
    
    $
    354,579
    
    
    $
    359,029Liabilities and Shareholders EquityLiabilitiesDeposits:Demand, non-interest bearing
    
    $
    58,489
    
    
    $
    58,514Savings and interest-bearing demand
    
    
    171,343
    
    
    
    171,580Time
    
    
    41,263
    
    
    
    40,516Total deposits
    
    
    271,095
    
    
    
    270,610Short-term borrowings
    
    
    33,183
    
    
    
    37,489Accrued interest payable
    
    
    97
    
    
    
    100Other liabilities
    
    
    2,097
    
    
    
    4,306Total liabilities
    
    
    306,472
    
    
    
    312,505Commitments and Contingencies
    
    
    
    
    
    
    Shareholders EquityCommon stock (no par value); authorized 10,000,000 shares;
issued and outstanding: 2007 - 4,671,199 shares; 2006 - 4,733,644 shares
    
    
    28,731
    
    
    
    30,027Retained earnings
    
    
    19,411
    
    
    
    16,604Accumulated other comprehensive loss
    
    
    (35
    )
    
    
    (107
    )Total shareholders equity
    
    
    48,107
    
    
    
    46,524Total liabilities and shareholders equity
    
    $
    354,579
    
    
    $
    359,029
 See accompanying notes.
  1




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##### Table of Contents



Six Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest Income:Loans
    
    $
    10,105
    
    
    $
    8,760
    
    
    $
    5,246
    
    
    $
    4,515Federal funds sold and deposits in banks
    
    
    265
    
    
    
    72
    
    
    
    75
    
    
    
    26Securities:Taxable
    
    
    1,186
    
    
    
    1,038
    
    
    
    544
    
    
    
    514Tax-exempt
    
    
    124
    
    
    
    155
    
    
    
    63
    
    
    
    76Other
    
    
    4
    
    
    
    4
    
    
    
    2
    
    
    
    2Total interest and dividend income
    
    
    11,684
    
    
    
    10,029
    
    
    
    5,930
    
    
    
    5,133Interest Expense:Deposits
    
    
    2,405
    
    
    
    1,616
    
    
    
    1,215
    
    
    
    854Borrowed funds
    
    
    44
    
    
    
    68
    
    
    
    32
    
    
    
    36Repurchase agreements
    
    
    512
    
    
    
    484
    
    
    
    232
    
    
    
    251Total interest expense
    
    
    2,961
    
    
    
    2,168
    
    
    
    1,479
    
    
    
    1,141Net Interest Income
    
    
    8,723
    
    
    
    7,861
    
    
    
    4,451
    
    
    
    3,992Provision for credit losses
    
    
    100
    
    
    
    82
    
    
    
    60
    
    
    
    34Net interest income after provision for credit losses
    
    
    8,623
    
    
    
    7,779
    
    
    
    4,391
    
    
    
    3,958Non-interest Income:Service charges on deposit accounts
    
    
    546
    
    
    
    660
    
    
    
    275
    
    
    
    328Earnings on life insurance policies
    
    
    84
    
    
    
    78
    
    
    
    44
    
    
    
    41Gain on sale of assets
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    575
    
    
    
    454
    
    
    
    292
    
    
    
    233Total non-interest income
    
    
    1,215
    
    
    
    1,192
    
    
    
    611
    
    
    
    602Non-interest Expense:Salaries and employee benefits
    
    
    3,614
    
    
    
    3,323
    
    
    
    1,736
    
    
    
    1,608Occupancy and equipment
    
    
    710
    
    
    
    643
    
    
    
    351
    
    
    
    321Other
    
    
    1,205
    
    
    
    1,005
    
    
    
    626
    
    
    
    532Total non-interest expense
    
    
    5,529
    
    
    
    4,971
    
    
    
    2,713
    
    
    
    2,461Income before income tax expense
    
    
    4,309
    
    
    
    4,000
    
    
    
    2,289
    
    
    
    2,099Income tax expense
    
    
    1,502
    
    
    
    1,382
    
    
    
    795
    
    
    
    732Net income
    
    $
    2,807
    
    
    $
    2,618
    
    
    $
    1,494
    
    
    $
    1,367Earnings per common share:Basic
    
    $
    0.59
    
    
    $
    0.55
    
    
    $
    0.31
    
    
    $
    0.29Diluted
    
    $
    0.58
    
    
    $
    0.55
    
    
    $
    0.31
    
    
    $
    0.29Weighted average number of common shares outstanding:Basic
    
    
    4,781
    
    
    
    4,733
    
    
    
    4,781
    
    
    
    4,735Diluted
    
    
    4,805
    
    
    
    4,763
    
    
    
    4,805
    
    
    
    4,762
 See accompanying notes.
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##### Table of Contents



Six Months Ended June 30, 2007 and 2006AccumulatedNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    Comprehensive
    
    
    TotalShares
    
    
    Comprehensive
    
    
    Stock
    
    
    Retained
    
    
    Income
    
    
    Shareholders'Outstanding
    
    
    Income
    
    
    Amount
    
    
    Earnings
    
    
    (Loss)
    
    
    EquityBalance, at December 31, 2005
    
    
    4,670,386
    
    
    
    
    
    
    $
    28,938
    
    
    $
    13,606
    
    
    $
    (248
    )
    
    $
    42,296COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    $
    2,618
    
    
    
    
    
    
    
    2,618
    
    
    
    
    
    
    
    2,618Other comprehensive income,
net of tax:Unrealized gain on securities
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    64Comprehensive Income
    
    
    
    
    
    $
    2,682Stock based compensation
expense
recognized in earnings
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Issuance of common stock
under dividend reinvestment
plan
    
    
    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
    )
    
    $
    46,251Balance, at December 31, 2006
    
    
    4,733,644
    
    
    
    
    
    
    $
    30,027
    
    
    $
    16,604
    
    
    $
    (107
    )
    
    $
    46,524COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    $
    2,807
    
    
    
    
    
    
    
    2,807
    
    
    
    
    
    
    
    2,807Other comprehensive
income, net of tax:Unrealized gain on securities
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    72Comprehensive Income
    
    
    
    
    
    $
    2,879Stock based compensation
expense
recognized in earnings
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Issuance of common stock
under dividend reinvestment
plan
    
    
    75,197
    
    
    
    
    
    
    
    1,189
    
    
    
    
    
    
    
    
    
    
    
    1,189Stock grants
    
    
    135
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Stock options exercised
    
    
    4,942
    
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    61Income tax benefit from stock
options exercised
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Repurchase of common stock
    
    
    (142,719
    )
    
    
    
    
    
    
    (2,567
    )
    
    
    
    
    
    
    
    
    
    
    (2,567
    )Balance, at June 30, 2007
    
    
    4,671,199
    
    
    
    
    
    
    $
    28,731
    
    
    $
    19,411
    
    
    $
    (35
    )
    
    $
    48,107
 See accompanying notes.
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##### Table of Contents



Six Months EndedJune 30,2007
    
    
    2006Net cash provided by operating activities
    
    $
    2,730
    
    
    $
    1,537Cash Flows from Investing Activities:Net (increase) decrease in interest bearing deposits in banks
    
    
    9,892
    
    
    
    (1,487
    )Net decrease in federal funds sold
    
    
    8,678
    
    
    
    435Activity in securities available for sale:Purchases
    
    
    (14,019
    )
    
    
    (28,022
    )Maturities
    
    
    18,420
    
    
    
    40,750Activitiy in securities held to maturity:Purchases
    
    
    (471
    )
    
    
    Maturities
    
    
    460
    
    
    
    1,745Increase in loans made to customers, net of principal collections
    
    
    (19,716
    )
    
    
    (13,137
    )Purchases of premises and equipment
    
    
    (1,265
    )
    
    
    (1,105
    )Other real estate sold
    
    
    270
    
    
    
    Net cash provided (used) by investing activities
    
    
    2,249
    
    
    
    (821
    )Cash Flows from Financing Activities:Net increase (decrease) in deposits
    
    
    485
    
    
    
    (6,688
    )Net increase (decrease) in repurchase agreements and other borrowings
    
    
    (4,306
    )
    
    
    1,336Payment of dividends, net of dividends reinvested
    
    
    (1,272
    )
    
    
    (1,206
    )Exercise of stock options
    
    
    61
    
    
    
    118Repurchase of common stock
    
    
    (2,567
    )
    
    
    (1
    )Tax benefit from options exercised
    
    
    8
    
    
    
    Net cash used in financing activities
    
    
    (7,591
    )
    
    
    (6,441
    )Net decrease in cash and due from banks
    
    
    (2,612
    )
    
    
    (5,725
    )Cash and Due from BanksBeginning of period
    
    
    17,227
    
    
    
    18,518End of period
    
    $
    14,615
    
    
    $
    12,793Supplemental Disclosure of Cash Flow InformationInterest paid
    
    $
    2,964
    
    
    $
    2,159Income taxes paid
    
    $
    1,060
    
    
    $
    1,450Supplemental Schedule of Non-cash Investing and Financing ActivitiesFair value adjustment of securities available for sale, net of tax
    
    $
    72
    
    
    $
    64Issuance of common stock through dividend reinvestment plan
    
    $
    1,189
    
    
    $
    1,127Stock grants
    
    $
    2
    
    
    $
    1
 See accompanying notes.
  4




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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 condensed consolidated financial statements are unaudited but have been prepared
in accordance with accounting principles generally accepted in the United States for interim
condensed financial information and with instructions to form 10-Q. Accordingly, the condensed
consolidated interim financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States. 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, 2006 consolidated financial statements, including notes thereto, included
in Bancorps 2006 Annual Report to shareholders. The results of operations for the six
months ended June 30, 2007, are not necessarily indicative of the results which may be
obtained for the full year ending December 31, 2007.Certain amounts in 2006 have been reclassified to conform with the 2007 presentation.2.
    
    Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements, in conformity with accounting principles generally
accepted in the United States, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of income
and expenses during the reporting period. Actual results could differ from those estimates.3.
    
    Investment SecuritiesThe amortized cost and estimated fair value of the investment securities held by the Bank,
including unrealized gains and losses, at June 30, 2007 and December 31, 2006, are as
follows (in thousands):
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedJune 30, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable for SaleU.S. Government and Agency Securities
    
    $
    42,083
    
    
    $
    4
    
    
    $
    (61
    )
    
    $
    42,026Held to MaturityState and Municipal Securities
    
    $
    5,480
    
    
    $
    31
    
    
    $
    (10
    )
    
    $
    5,501December 31, 2006Available for SaleU.S. Government and Agency Securities
    
    $
    46,379
    
    
    $
    39
    
    
    $
    (214
    )
    
    $
    46,204Held to MaturityState and Municipal Securities
    
    $
    5,462
    
    
    $
    80
    
    
    $
    
    
    
    $
    5,542
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4.
    
    Loan PortfolioThe composition of the loan portfolio was as follows (dollars in thousands):
 June 30, 2007
    
    
    December 31, 2006Commercial
    
    $
    32,548
    
    
    $
    27,810Agriculture
    
    
    25,851
    
    
    
    18,715Real EstateConstruction
    
    
    18,129
    
    
    
    16,6471-4 Family
    
    
    25,159
    
    
    
    25,254Multi-family
    
    
    23,681
    
    
    
    23,530Commercial
    
    
    128,442
    
    
    
    120,614Farmland
    
    
    16,148
    
    
    
    17,508Consumer Loans
    
    
    3,193
    
    
    
    3,382273,151
    
    
    
    253,460Less: net deferred loan fees
    
    
    506
    
    
    
    433Total Loans
    
    
    272,645
    
    
    
    253,027Less: allowance for credit losses
    
    
    2,950
    
    
    
    2,875Net Loans
    
    $
    269,695
    
    
    $
    250,152
  2007
    
    
    2006Balance at beginning of period
    
    $
    2,875
    
    
    $
    2,750Provision charged to operations
    
    
    100
    
    
    
    82Loans recovered
    
    
    4
    
    
    
    Loans charged off
    
    
    (29
    )
    
    
    (8
    )Balance at end of period
    
    $
    2,950
    
    
    $
    2,824
 5.
    
    Non-Performing AssetsIt is the policy of the Bank to place loans on non-accrual 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
non-accrual status as a management tool to actively oversee specific loans.Loans on non-accrual status as of June 30, 2007 and December 31, 2006 were approximately
$1,598,000 and $1,436,000 respectively. There were no loans with modified terms as of June
30, 2007. Non-performing assets (defined as loans on non-accrual status and loans past due
90 days or more) are deemed by management to have adequate collateral or have specific
reserves set aside to cover potential losses.Two agricultural loan relationships constitute $1.3 million of the approximately $1.6
million in non-accrual status as of June 30, 2007. One of the agriculture loans, with a
balance of about $292 thousand, is fully secured by real estate. The farm operation is going
through a Chapter 12 bankruptcy procedure. The Company is fully secured and does not expect
a loss. The second agriculture relationship consists of two loans; one in the amount of
approximately $625 thousand which is fully secured by agriculture real estate and the other
loan is approximately $426 thousand and has a 90 % Farm Service Agency (FSA) guarantee, but
no other collateral support. The Company is exposed on the second loan in the amount of $42
thousand, but expects to get paid in full over the next 18 to 24 months through normal farm
operating cash flow. The remaining four non-accrual loans of approximately $255 thousand
are fully secured by real estate and management does not anticipate any loss.
  6




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June 30,
    
    
    December 31,2007
    
    
    2006Loans on non-accrual status
    
    $
    1,598
    
    
    $
    1,436Loans past due 90 days or more but not on non-accrual status
    
    
    
    
    
    
    187Total non-performing assets
    
    $
    1,598
    
    
    $
    1,623Percentage of non-performing assets to total assets
    
    
    0.45
    %
    
    
    0.45
    %
 6.
    
    BorrowingsThe composition of borrowings is as follows (dollars in thousands):
 June 30, 2007
    
    
    December 31, 2006Treasury tax and loan deposit note
    
    $
    1,497
    
    
    $
    1,890Federal Home Loan Bank  short term borrowings
    
    
    3,000
    
    
    
    12Repurchase agreements
    
    
    28,686
    
    
    
    35,587Total borrowings
    
    $
    33,183
    
    
    $
    37,489
 7.
    
    Basic and Diluted Earnings Per Common ShareThe Companys basic earnings per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. The Companys
diluted earnings per common share is computed by dividing net income by the weighted-average
number of common shares outstanding plus the incremental shares arising from the dilutive
effect of stock-based compensation.The numerators and denominators used in computing basic and diluted earnings per common
share for the six months and three months ended June 30, 2007 and 2006 can be reconciled as
follows (dollars and share data in thousands):
 Six Months EndedJune 30,2007
    
    
    2006Net income
    
    $
    2,807
    
    
    $
    2,618Weighted average shares outstanding  basic
    
    
    4,781
    
    
    
    4,733Basic earnings per common share
    
    $
    0.59
    
    
    $
    0.55Incremental shares arising from stock-based compensation
    
    
    24
    
    
    
    30Weighted average shares outstanding  diluted
    
    
    4,805
    
    
    
    4,763Diluted earnings per common share
    
    $
    0.58
    
    
    $
    0.55
 Three Months EndedJune 30,2007
    
    
    2006Net income
    
    $
    1,494
    
    
    $
    1,367Weighted average shares outstanding  basic
    
    
    4,781
    
    
    
    4,735Basic earnings per common share
    
    $
    0.31
    
    
    $
    0.29Incremental shares arising from stock-based compensation
    
    
    24
    
    
    
    27Weighted average shares outstanding  diluted
    
    
    4,805
    
    
    
    4,762Diluted earnings per common share
    
    $
    0.31
    
    
    $
    0.29
  7




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##### Table of Contents



8.
    
    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.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) superseded 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. Prior to January 1, 2006, 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) required the Company 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 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, 2007 and 2006.The Company adopted SFAS No. 123(R) using the modified prospective transition method. In
accordance with the modified prospective transition method, the Companys consolidated
financial statements prior to January 1, 2006 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 six months ended June 30, 2007 and 2006 totaled $11 thousand and $28
thousand, respectively. At June 30, 2007, unrecognized stock-based compensation totaled $15
thousand. These costs are expected to be recognized over a weighted average period of 8
months.Stock option activity for the period ended June 30, 2007 was as follows:
 Weighted
    
    
    Weighted Average
    
    
    AggregateNumber of
    
    
    Average Exercise
    
    
    Remaining Contractual
    
    
    Intrinsic ValueShares
    
    
    Price
    
    
    Term (years)
    
    
    (in thousands)Stock options outstanding, December 31,
2006
    
    
    128,884
    
    
    $
    14.40
    
    
    
    N/A
    
    
    
    N/AGranted
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    (4,942
    )
    
    $
    12.45
    
    
    
    N/A
    
    
    
    N/AForfeited
    
    
    (2,160
    )
    
    $
    18.12
    
    
    
    N/A
    
    
    
    N/AStock options outstanding, June 30, 2007
    
    
    121,782
    
    
    $
    14.46
    
    
    
    5.60
    
    
    $
    449Stock options exercisable, June 30, 2007
    
    
    105,123
    
    
    $
    13.96
    
    
    
    5.35
    
    
    $
    437
  8




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##### Table of Contents



Weighted Average
    
    
    AggregateNumber of
    
    
    Weighted Average
    
    
    Remaining Contractual
    
    
    Intrinsic ValueShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    (in thousands)Stock options outstanding, December 31,
2005
    
    
    151,651
    
    
    $
    14.17
    
    
    
    N/A
    
    
    
    N/AGranted
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    (9,336
    )
    
    $
    12.74
    
    
    
    N/A
    
    
    
    N/AForfeited
    
    
    (2,940
    )
    
    $
    16.66
    
    
    
    N/A
    
    
    
    N/AStock options outstanding, June 30, 2006
    
    
    139,375
    
    
    $
    14.21
    
    
    
    6.67
    
    
    $
    527Stock options exercisable, June 30, 2006
    
    
    99,477
    
    
    $
    13.37
    
    
    
    6.13
    
    
    $
    455
 The total intrinsic value of options exercised during the period ended June 30, 2007 and
2006 was $26 thousand and $47 thousand, respectively, and the total fair value of stock
options that vested was $9 thousand for both periods. The amount of cash received from
options exercised during the period ended June 30, 2007 and 2006 was $62 thousand and $118
thousand, respectively.9.
    
    ContingenciesUnfunded loan commitments totaled $71 million as of June 30, 2007 and $68 million as of
December 31, 2006.10.
    
    Operating SegmentsThe Company has operating segments which have been aggregated into three reporting segments
as provided in SFAS No. 131 Disclosure about Segments of an Enterprise and Related
Information.Management has evaluated the Companys overall operation and determined that its business
consists of certain reportable segments as of June 30, 2007 and 2006. Our operating segments
are aggregated into reportable segments based primarily upon similar economic
characteristics, products, services, customers, and delivery methods. These segments are
community banking operations, mortgage department services, and treasury services. The
following describes these segments:Community Banking  The principal business activities of this segment are
attracting deposits from the general public and originating commercial and real estate loans
for small and medium size businesses in the Companys branch market areas. This segments
primary sources of revenue are interest income and fees earned in connection with loans and
deposits. This segments principal expenses consist of interest paid on deposits, personnel,
occupancy, and other general expenses.Mortgage Department  The principal business activities of this segment are to
originate process, underwrite, fund and sell residential 1-4 family real estate loans. A
small portion of loans are retained (less than 5 percent of originations) in the
departments portfolio. This segments primary sources of revenues are from interest from
retained loans, loan fees, and servicing released premiums. This segments primary expenses
are personnel, occupancy, and other general expenses.Treasury Services  The treasury function of the Company, although not considered a
line of business, is responsible for the management of the investment portfolio, data
processing and holding company activities. This segments primary source of revenue is
interest income from the investment portfolio. This segments primary expenses are personnel
expenses, data processing expense, the Companys state and federal income tax expense, and
other general and administrative expenses.The financial results of each segment are derived from the Companys general ledger system.
Selected financial information on the Companys segments is presented below for the six
months ended June 30, 2007 and 2006.
  9




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##### Table of Contents



Six months ended June 30, 2007Treasury
    
    
    Mortgage
    
    
    Community(Dollars in thousands)
    
    Services
    
    
    Department
    
    
    Banking
    
    
    ConsolidatedInterest income
    
    $
    1,664
    
    
    $
    235
    
    
    $
    9,785
    
    
    $
    11,684Interest expense
    
    
    170
    
    
    
    
    
    
    
    2,791
    
    
    
    2,961Net interest income
    
    
    1,494
    
    
    
    235
    
    
    
    6,994
    
    
    
    8,723Provision for credit losses
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Non-interest income
    
    
    52
    
    
    
    27
    
    
    
    1,136
    
    
    
    1,215Non-interest expense
    
    
    2,882
    
    
    
    88
    
    
    
    2,559
    
    
    
    5,529Income (loss) before income tax expense
    
    
    (1,436
    )
    
    
    174
    
    
    
    5,571
    
    
    
    4,309Provision for income tax expense
    
    
    1,502
    
    
    
    
    
    
    
    
    
    
    
    1,502Net income (loss)
    
    $
    (2,938
    )
    
    $
    174
    
    
    $
    5,571
    
    
    $
    2,807Assets
    
    $
    71,305
    
    
    $
    5,392
    
    
    $
    277,882
    
    
    $
    354,579Loans
    
    $
    4
    
    
    $
    5,368
    
    
    $
    267,273
    
    
    $
    272,645Deposits
    
    $
    1,732
    
    
    
    
    
    
    $
    269,363
    
    
    $
    271,095
 Six months ended June 30, 2006Treasury
    
    
    Mortgage
    
    
    Community(Dollars in thousands)
    
    Services
    
    
    Department
    
    
    Banking
    
    
    ConsolidatedInterest income
    
    $
    1,349
    
    
    $
    174
    
    
    $
    8,506
    
    
    $
    10,029Interest expense
    
    
    143
    
    
    
    
    
    
    
    2,025
    
    
    
    2,168Net interest income
    
    
    1,206
    
    
    
    174
    
    
    
    6,481
    
    
    
    7,861Provision for credit losses
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    82Non-interest income
    
    
    73
    
    
    
    25
    
    
    
    1,094
    
    
    
    1,192Non-interest expense
    
    
    2,579
    
    
    
    84
    
    
    
    2,308
    
    
    
    4,971Income (loss) before income tax expense
    
    
    (1,382
    )
    
    
    115
    
    
    
    5,267
    
    
    
    4,000Provision for income tax expense
    
    
    1,382
    
    
    
    
    
    
    
    
    
    
    
    1,382Net income (loss)
    
    $
    (2,764
    )
    
    $
    115
    
    
    $
    5,267
    
    
    $
    2,618Assets
    
    $
    78,813
    
    
    $
    3,982
    
    
    $
    252,084
    
    
    $
    334,879Loans
    
    $
    5
    
    
    $
    3,962
    
    
    $
    242,464
    
    
    $
    246,431Deposits
    
    $
    1,491
    
    
    
    
    
    
    $
    245,903
    
    
    $
    247,394
 11.
    
    Recent Accounting PronouncementsAt January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109. FIN 48 prescribes a comprehensive model for how
a company will recognize, measure, present, and disclose in its financial statements
uncertain tax positions that it has taken or expects to take on a tax return. The Company is
subject to U.S. federal income tax and income of the State of Oregon. As of January 1, 2007
and June 30, 2007, the Company had no uncertain tax positions. The adoption of the
accounting standard did not have a material impact on the Companys condensed consolidated
financial statements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. It clarifies that fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the market in which the reporting entity transacts. This
Statement does not require any new fair value measurements, but rather, it provides enhanced
guidance to other pronouncements that require or permit assets or liabilities to be measured
at fair value. This Statement is effective for fiscal years beginning after November 15,
2007, with earlier adoption permitted. The Company does not expect that the adoption of
this Statement will have a material impact on the Companys condensed consolidated financial
statements.In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 provides entities with an option to report certain
financial assets and liabilities at fair value with changes in fair value reported in
earnings. In addition, it requires disclosures related to an entitys election to use fair
value reporting. It also requires entities to display the fair value of those assets and
liabilities for which the entity has elected to use fair value on the face of the balance
sheet. SFAS No. 159 is effective for years beginning after November 15, 2007. Management
does not expect the adoption of SFAS 159 to have a material impact on the Companys
condensed consolidated financial statements.On September 20, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue 06-5,
Accounting for Purchases of Life Insurance  Determining the Amount That Could Be Realized
in Accordance with FASB Technical Bulletin No. 85-4 (FTB 85-4), Accounting for Purchases of
Life Insurance (EITF 06-5). EITF 06-5 addresses the methods by which an entity should
determine the amounts that could be realized under an insurance contract at the consolidated
balance sheet date when applying FTB 85-4, and whether the determination should be on an
individual or group policy basis. EIFT 06-5 is effective for fiscal years beginning after
December 15, 2006. The adoption of EITF 06-5 did
not have a material impact on the Companys condensed consolidated financial statements.In September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No.
06-4 (EITF 06-4) Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. A question arose when an employer
enters into an endorsement split-dollar life insurance arrangement related to whether the
employer should recognize a liability for the future benefits or premiums to be provided to
the employee. EITF 06-4 indicates that an employer should recognize a liability for future
benefits and that a liability for the benefit obligation has not been settled through the
purchase of an endorsement type policy. An entity should apply the provisions of EITF 06-4
either through a change in accounting principle through a cumulative effect adjustment to
retained earnings as of the beginning of the year of adoption or a change in accounting
principle through retrospective application to all prior periods. The provisions of EITF
06-4 are effective for fiscal years beginning after December 15, 2007. Management has not
yet completed its evaluation of the impact that EITF 06-4 may have on the Company.
  10




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##### Table of Contents



ITEM 2
Managements Discussion and
Analysis of Financial Condition
And Results of Operations
 Cautionary Information  Concerning Forward-looking Statements
  Critical Accounting Policies
 .
 Overview
      11




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##### Table of Contents



2007 Activities
     Material Changes in Financial Condition
   
    
    $2.6 million decrease in cash and due from banks or (15.2)%
    
    $9.9 million decrease in interest bearing deposits in banks or (84.5)%
    
    $8.7 million decrease in federal funds sold or (92.9)%
    
    $4.2 million decrease in securities available for sale or (9.0%)
    
    $19.5 million increase in net loans or 7.8%
  12




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##### Table of Contents




    
    $.237 million decrease in savings and interest bearing deposits or (.1%)
    
    $.747 million increase in time certificates of deposits or 1.8%
    
    $6.9 million decrease in repurchase agreements or (19.4)%
    
    $2.2 million decrease in other liabilities, primarily due to the
payment of the cash dividend to shareholders or (51.3)%
   Material Changes in Results of Operations
       13




---



##### Table of Contents



Provisions for Credit Losses
       Liquidity and Capital Resources
       14




---



##### Table of Contents



June 30, 2007
    
    
    December 31, 2006Adequately
    
    
    Well
    
    
    
    
    
    
    Adequately
    
    
    WellActual
    
    
    Capitalized
    
    
    Capitalized
    
    
    Actual
    
    
    Capitalized
    
    
    CapitalizedRatio
    
    
    Standards
    
    
    Standards
    
    
    Ratio
    
    
    Standards
    
    
    StandardsTier 1 Leverage Ratio
    
    
    13.51
    %
    
    
    4
    %
    
    
    5
    %
    
    
    13.17
    %
    
    
    4
    %
    
    
    5
    %Tier 1 Risk Based Capital
    
    
    15.30
    %
    
    
    4
    %
    
    
    6
    %
    
    
    15.67
    %
    
    
    4
    %
    
    
    6
    %Total Risk Based Capital
    
    
    16.24
    %
    
    
    8
    %
    
    
    10
    %
    
    
    16.64
    %
    
    
    8
    %
    
    
    10
    %
 
 ITEM 3. Quantitative & Qualitative Disclosures About Market Risk
     
 ITEM 4. Controls and Procedures
 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.
  15




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##### Table of Contents



PART II. OTHER INFORMATION
 
   
   
   
   
  (a)
    
    April 17, 2007, Annual Meeting(b)
    
    Need not be completed(c)
    
    The following matters were voted upon at the Annual Meeting of
Shareholders on April 17, 2007
 (1)
    
    The re-election of three (3) Directors for terms expiring in
2010 or until their successors have been elected and qualified.Directors:
 Michael A. Butler
    
    
    Sidney A. Huwaldt
    
    
    William V. Humphreys, Sr.Votes cast for:
    
    
    3,550,623
    
    
    Votes cast for:
    
    
    3,550,683
    
    
    Votes cast for:
    
    
    3,547,853Votes withheld:
    
    
    8,528
    
    
    Votes withheld:
    
    
    8,468
    
    
    Votes withheld:
    
    
    11,298
 
   
  (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.
  16




---



##### Table of Contents



Date: August 10, 2007
    By:
    /s/ William V. HumphreysWilliam V. HumphreysPresident and
Chief Executive OfficerDate:  August 10, 2007
    By:
    /s/ Lark E. WyshamLark E. WyshamExecutive Vice President and
Chief Financial Officer  17




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##### Table of Contents



ExhibitNo.
    
    Description31.1
    
    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.
  18