##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2004 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to Commission file number 000-23277 CITIZENS BANCORP/OR  Oregon
(State of Incorporation)
    
    91-1841688
(I.R.S. Employer Identification Number)
 275 Southwest Third Street
Corvallis, Oregon 97339
(Address of principal executive offices) (541) 752-5161
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  YES  x  NO  o Indicate whether the Registrant is an accelerated filer as defined by
Exchange Act Rule 12b-2.  YES  o  NO  x Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. 4,619,590 shares as of October 31, 2004, no par value.




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##### Table of Contents



CITIZENS BANCORP
FORM 10-Q
SEPTEMBER 30, 2004
INDEX PageReferencePART I. FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTS  UNAUDITEDCondensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the three months and the nine months ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Changes in Shareholders Equity for the nine months ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
    
    
    4Notes to Consolidated Financial Statements
    
    
    5  7ITEM 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
    
    
    12PART II.  OTHER INFORMATIONITEM 1.  Legal Proceedings
    
    
    13ITEM 2.  Changes in Securities
    
    
    13ITEM 3.  Defaults Upon Senior Securities
    
    
    13ITEM 4.  Submission of Matters to a Vote of Security Holders
    
    
    13ITEM 5.  Other Information
    
    
    13ITEM 6.  Exhibits and Reports on Form 8-K
    
    
    13SIGNATURES
    
    
    14EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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




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




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CITIZENS BANCORP AND SUBSIDIARY 
 
 Nine Months Ended September 30, 2004 and 2003Number ofCommon
    
    Common
    
    
    
    
    
    AccumulatedShares
    
    Stock
    
    Retained
    
    Other ComprehensiveOutstanding
    
    Amount
    
    Earnings
    
    Income (Loss)
    
    TotalBalance, at December 31, 2002
    
    
    4,084,210
    
    
    $
    19,459
    
    
    $
    12,498
    
    
    $
    373
    
    
    $
    32,330COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    3,875
    
    
    
    
    
    
    
    3,875Other comprehensive income, net of tax:Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    (250
    )Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,625Issuance of common stock
    
    
    66,065
    
    
    
    804
    
    
    
    
    
    
    
    
    
    
    
    804Repurchase of common stock
    
    
    (12,536
    )
    
    
    (173
    )
    
    
    
    
    
    
    
    
    
    
    (173
    )Stock options exercised
    
    
    2,290
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    27Stock Dividend
    
    
    413,522
    
    
    
    7,030
    
    
    
    (7,030
    )
    
    
    
    
    
    
    Balance, at September 30, 2003
    
    
    4,553,551
    
    
    $
    27,147
    
    
    $
    9,343
    
    
    $
    123
    
    
    $
    36,613Balance, at December 31, 2003
    
    
    4,554,242
    
    
    $
    27,155
    
    
    $
    8,385
    
    
    $
    77
    
    
    $
    35,617COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    3,430
    
    
    
    
    
    
    
    3,430Other comprehensive income, net of tax:Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (248
    )
    
    
    (248
    )Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,182Issuance of common stock
    
    
    61,727
    
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958Stock Grants
    
    
    135
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Stock options exercised
    
    
    3,329
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Balance, at September 30, 2004
    
    
    4,619,433
    
    
    $
    28,152
    
    
    $
    11,815
    
    
    
    ($171
    )
    

    $
    39,796
 3




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




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##### Table of Contents



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 nine months ended
September 30, 2004, are not necessarily indicative of the results which
may be obtained for the full year ending December 31, 2004. 2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIALS The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. 3. SHAREHOLDERS EQUITY AND NET INCOME PER COMMON SHARE The Board of Directors declared a $.46 per share dividend to Bancorp
shareholders of record on December 16, 2003, payable on January 12, 2004.
Through the Dividend Reinvestment Plan (DRIP), 61,727 shares were
purchased at a price of $15.52 per share. Basic earnings per share are based on the average number of common shares
outstanding, assuming no dilution. Diluted earnings per common share are
computed assuming the exercise of stock options. Dollars in thousands, except for
    
    Net Income
    
    Shares
    
    Per Shareper share amounts
    
    (Numerator)
    
    (Denominator)
    
    AmountNine months ended September 30, 2004Basic earnings per share:Net Income
    
    $
    3,430
    
    
    
    4,615,819
    
    
    $
    0.74Effect of dilutive securities:Options
    
    
    
    
    
    
    37,368
    
    
    
    -0-Diluted earnings per share:Net Income
    
    $
    3,430
    
    
    
    4,653,817
    
    
    $
    0.74Nine months ended September 30, 2003Basic earnings per share:Net Income
    
    $
    3,875
    
    
    
    4,557,359
    
    
    $
    0.85Effect of dilutive securities:Options
    
    
    
    
    
    
    23,713
    
    
    
    -0-Diluted earnings per share:Net Income
    
    $
    3,875
    
    
    
    4,581,072
    
    
    $
    0.85
 5




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Dollars in thousands, except for per
    
    Net Income
    
    Shares
    
    Per Shareshare amounts
    
    (Numerator)
    
    (Denominator)
    
    AmountThree months ended September 30, 2004Basic earnings per share:Net Income
    
    $
    1,312
    
    
    
    4,619,411
    
    
    $
    0.28Effect of dilutive securities:Options
    
    
    
    
    
    
    34,823
    
    
    
    -0-Diluted earnings per share:Net Income
    
    $
    1,312
    
    
    
    4,654,234
    
    
    $
    0.28Three months ended September 30, 2003Basic earnings per share:Net Income
    
    $
    1,275
    
    
    
    4,553,078
    
    
    $
    0.28Effect of dilutive securities:Options
    
    
    
    
    
    
    39,026
    
    
    
    -0-Diluted earnings per share:Net Income
    
    $
    1,275
    
    
    
    4,592,104
    
    
    $
    0.28
 4. STOCK-BASED COMPENSATION Bancorp has a stock-based employee compensation plan. Bancorp applies the
recognition and measurement principles of APB No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, no
stock-based compensation cost is reflected in net income as all options
granted under this plan had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if Bancorp had
applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensationto stock based employee compensation. Nine Months EndedSeptember 30,(Dollars in thousands, except per share amounts)
    
    2004
    
    2003Net income, as reported
    
    $
    3,430
    
    
    $
    3,875Less total stock-based compensation expense determined
under fair value method for all qualifying awards
    
    
    (125
    )
    
    
    (98
    )Pro forma net income
    
    $
    3,305
    
    
    $
    3,777Earnings per share:Basic:As reported
    
    $
    0.74
    
    
    $
    0.85Pro forma
    
    $
    0.72
    
    
    $
    0.83Diluted:As reported
    
    $
    0.74
    
    
    $
    0.85Pro forma
    
    $
    0.71
    
    
    $
    0.83
 Three Months EndedSeptember 30,(Dollars in thousands, except per share amounts)
    
    2004
    
    2003Net income, as reported
    
    $
    1,312
    
    
    $
    1,275Less total stock-based compensation expense determined
Under fair value method for all qualifying awards
    
    
    (42
    )
    
    
    (33
    )Pro forma net income
    
    $
    1,270
    
    
    $
    1,242Earnings per share:Basic:As reported
    
    $
    0.28
    
    
    $
    0.28Pro forma
    
    $
    0.28
    
    
    $
    0.27Diluted:As reported
    
    $
    0.28
    
    
    $
    0.28Pro forma
    
    $
    0.27
    
    
    $
    0.27
 6




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##### Table of Contents



5. CONTINGENCIES Unfunded loan commitments totaled $43.0 million as of September 30, 2004
and $31.0 million as of December 31, 2003. 6. RECENT ACCOUNTING PRONOUNCEMENTS In March, 2004 the Financial Accounting Standards Board (FASB) issued an
exposure draft entitled: Share-Based Payment, an Amendment of FASB
Statements No. 123 and 95. This proposed statement would eliminate the
ability to account for stock-based compensation using APB 25 and require
such transactions be recognized as compensation expense in the income
statement based on their fair values at the date of grant. Companies
transitioning to fair value based accounting for stock-based compensation
will be required to use the modified prospective method whereby
companies must recognize equity compensation cost from the beginning of
the year in which the recognition provisions are first applied as if the
fair value method had been used to account for all equity compensation
awards granted, modified, or settled in fiscal years beginning after
December 31, 1994. As proposed, this statement would be effective for
Bancorp beginning after June 15, 2005. 
 ITEM 2 MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS In addition to historical information, this report contains certain forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. This statement is included for the purpose of availing
Bancorp the protection of the safe harbor provisions of this Act. The forward
looking statements contained in this report are subject to factors, risks and
uncertainties that may cause actual results to differ materially from those
projected. Factors that might result in such material difference include, but
are not limited to economic conditions, the regulatory environment, rapidly
changing technology, new legislation, competitive factors, the interest rate
environment and the overall condition of the banking industry. Forward looking
statements can be identified by such words as estimate, believe, expect,
intend, anticipate, should, may, will, or other similar words or
phrases. Although Bancorp believes that the expectations reflected in such
forward looking statements are reasonable, it can give no assurances that such
expectations will prove to have been correct. Readers are therefore cautioned
not to place undue reliance on such forward looking statements, which reflect
managements analysis only as of the date of the statement. Bancorp does not
intend to update these forward-looking statements other than in its periodic
filings under applicable security laws. OVERVIEW Citizens Bank (the Bank) was chartered October 1, 1957 (charter #333) by the
State of Oregon as a commercial bank. Since its beginning with a single office
in Corvallis, Citizens Bank has expanded to an additional ten locations in the
five counties of Benton, Linn, Lane, Polk, and Yamhill. Branches are located
in the communities of Corvallis, Philomath, Albany, Junction City, McMinnville,
Harrisburg, Dallas, and Springfield. Citizens Bancorp (Bancorp), an Oregon Corporation and financial holding
company, was formed in 1996 for the purpose of becoming the holding company of
Citizens Bank. Bancorp is headquartered in Corvallis, Oregon. Its principal
business activities are conducted through its full-service, commercial bank
subsidiary, Citizens Bank. Bancorp operates through a two-tiered corporate structure. At the holding
company level the affairs of Bancorp are overseen by a Board of Directors
elected by the shareholders of Bancorp at the annual meeting of shareholders.
The business of the Bank is overseen by a Board of Directors elected by
Bancorp, the sole owner of the Bank. As of the date of this Form 10-Q the
respective members of the Board of Directors of the Bank and the Board of
Directors of Bancorp are identical. Bancorps culture focuses on the tenets of collaborative leadership, branch
autonomy, assertive business development, a positive working environment, a
commitment to the community, outstanding customer service, and relationship
banking. Management believes that a healthy culture together with a
progressive management style will result in constantly improved shareholder
value. Bancorps primary goal is to improve shareholder value through increased
earnings while maintaining a high level of safety and soundness. Bancorp is
committed to independence and long-term performance strategies. The long-term benefit to Bancorp of its cultural and management style is
consistent growth and development of the Bank over time. Risk levels have been
greatly reduced because of expertise in loan, investment, operational, and
human resource management. Bancorps primary market focus is to provide commercial bank services to
businesses, professionals, and individuals. Bancorp emphasizes the development
of meaningful customer relationships and a high level of service. Its
employees are well-trained banking professionals who are committed to these
objectives. 7




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##### Table of Contents



The Bank offers deposit accounts, safe-deposit boxes, consumer loans,
commercial loans, agricultural loans, and commercial and residential real
estate loans. Commercial loans include operating lines of credit, equipment
and real estate financing, capital needs, and other traditional financing
products. The Bank has a growing emphasis in financing farm operations, equipment, and
property. The Bank has also emphasized loans to professionals with its
professional line of credit products. The Banks loan portfolio has some
concentrations in real estate secured loans, primarily commercial properties.
The Bank also operates a small residential mortgage loan origination department
that originates loans and sells them into the secondary market. Deposit products include regular and package checking accounts, savings
accounts, certificates of deposit, money market accounts, and IRA accounts. The
Bank offers debit cards, check guarantee cards, and ATM cards as well as credit
cards as part of its retail banking services. The Bank offers extended banking hours in selected locations as well as
Saturday banking. ATM machines are also available at ten (10) locations
offering 24-hour transaction services, including cash withdrawals, deposits,
account transfers, and balance inquiries. The Bank also offers its customers a
24-hour automated telephone service that offers account transfers and balance
inquiries. The Banks on-line banking product offers services to both
individuals and business account customers. Business customers have a
comprehensive cash management option. All online users have the availability of
the bill payment feature. The Bank expects to continually enhance its on-line
banking product while maintaining its quality people to people customer
service. Citizens on-line banking can be reached at www.CitizensEBank.com. Bancorp completed the sale of its Veneta Branch to Siuslaw Bank on September
24, 2004. Bancorp had a gain on the sale of $339,000, a loss on the sale of the
branchs furniture and equipment of $48,000, for a net gain on the sale of the
branch of $291,000. Bancorp reported net income of $1,312,000 in the third quarter ending September
30, 2004, or $.28 per common share, an increase of 2.9% from the third quarter
net income of $1,275,000 in 2003 or $.28 per common share. For the first nine
months of 2004, Bancorp earned $3,430,000, or $.74 per common share, a decrease
of 11.5% from the nine month 2003 earnings of $3,875,000 or $.85 per common
share. LOAN PORTFOLIO The composition of the loan portfolio, including loans held for sale, was as
follows (in thousands): September 30, 2004
    
    December 31, 2003Commercial
    
    $
    20,657
    
    
    $
    21,765Agriculture
    
    
    21,504
    
    
    
    17,013Real Estate
Construction
    
    
    5,368
    
    
    
    6,5861-4 Family
    
    
    22,534
    
    
    
    26,292Multi family
    
    
    13,500
    
    
    
    10,398Commercial
    
    
    99,254
    
    
    
    93,593Farmland
    
    
    13,720
    
    
    
    9,069Consumer Loans
    
    
    2,932
    
    
    
    3,523199,469
    
    
    
    188,239Less: net deferred loan fees
    
    
    (447
    )
    
    
    (421
    )Total Loans
    
    
    199,022
    
    
    
    187,818Less: allowance for credit losses
    
    
    (2,802
    )
    
    
    (2,765
    )Net Loans
    
    $
    196,220
    
    
    $
    185,083
 Transactions in the allowance for credit losses were as follows for the nine
months ended September 30 (in thousands): 2004
    
    2003Balance at beginning of period
    
    $
    2,765
    
    
    $
    2,546Provision charged to operations
    
    
    109
    
    
    
    221Loans recovered
    
    
    0
    
    
    
    3Loans charged off
    
    
    (72
    )
    
    
    (26
    )Balance at end of period
    
    $
    2,802
    
    
    $
    2,744
 8




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##### Table of Contents



It is the policy of the Bank to place loans on nonaccrual after they become 90
days past due unless the loans are well secured and in the process of
collection. The Bank may place loans that are not contractually past due or
that are deemed fully collateralized on nonaccrual status as a management tool
to actively oversee specific loans. Loans on non-accrual status as of September 30, 2004 and December 31, 2003 were
approximately $5,192,000 and $2,164,000 respectively. There were $73,000 in
loans past due 90 days or more on which the Bank continued to accrue interest
at September 30, 2004 and $12,000 at December 31, 2003. There were no loans
with modified terms as of September 30, 2004. Non-performing assets (defined
as loans on non-accrual status and loans past due 90 days or more) are deemed
by management to have adequate collateral or have specific reserves set aside
to cover potential losses. Two loans constitute the majority of approximately $5,192,000 in non-accrual
status as of September 30, 2004. One loan of approximately $502,000 is a farm
loan. Management is working with the borrower to have the loan refinanced out
of the bank or the farm sold or liquidated. In managements estimation the
collateral value is sufficient to cover the debt. The second loan of
approximately $4,400,000 is commercial real estate. The Bank has served the
borrower with notice of default, election to sell and trustee notice of sale.
The Bank is working with the borrower to negotiate a deed in lieu of
foreclosure. Concurrently, the borrower is actively marketing the property for
sale. In managements estimation the collateral value is sufficient to cover
the debt. INVESTMENT SECURITIES The amortized cost and estimated book value of the investment securities held
by the Bank, including unrealized gains and losses, at September 30, 2004 and
December 31, 2003, are as follows (in thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedSeptember 30, 2004
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueAvailable for SaleU.S. Government and Agency Securities
    
    $
    86,345
    
    
    $
    12
    
    
    
    ($292
    )
    
    $
    86,065Held to MaturityState and Municipal Securities
    
    $
    11,211
    
    
    $
    458
    
    
    
    ($3
    )
    
    $
    11,666
 Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedDecember 31, 2003
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueAvailable for SaleU.S. Government and Agency Securities
    
    $
    80,028
    
    
    $
    215
    
    
    
    ($89
    )
    
    $
    80,154Held to MaturityState and Municipal Securities
    
    $
    11,931
    
    
    $
    582
    
    
    
    ($4
    )
    
    $
    12,509
 MATERIAL CHANGES IN FINANCIAL CONDITION Changes in the balance sheet for the nine months ended September 30, 2004
include an increase in total assets, primarily in loans, securities available
for sale and interest bearing deposits in banks, and an increase in liabilities
primarily in savings and interest bearing demand deposits, and non-interest
bearing demand deposits. At September 30, 2004, total assets increased .2% or approximately $.5 million
over total assets at December 31, 2003. Major components of the change in
assets were:  -
    
    $18.5 million decrease in cash and due from banks-
    
    $2.0 million increase in interest bearing deposits in banks-
    
    $5.9 million increase in securities available for sale-
    
    $8.0 million increase in net loans Loans were generally made to customers within Bancorps market area. The
increases were primarily funded by proceeds from increased deposits. Management
believes the economic conditions in its market areas have been slowly improving
which, along with continuing market penetration, has contributed to the loan
growth as of September 30, 2004 as compared to December 31, 2003. Citizens Bank
has a history of conservative loan underwriting and management is unwilling to
compromise its standards for growth. The Bank has a history of minimal loan
charge-offs due to its exceptional underwriting policies, standards, and loan
review processes. The Banks loan officers are actively calling and management
anticipates that the loan portfolio will continue to grow in 2004 with high
quality loans that are appropriately priced. 9




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##### Table of Contents



Bancorp experienced an increase in demand and savings and interest bearing
deposits, and a decrease in time certificates of deposit and repurchase
agreements during the nine months ended September 30, 2004, specifically as
follows:  -
    
    $1.8 million increase in demand deposits-
    
    $5.2 million increase in savings and interest bearing demand-
    
    $7.1 million decrease in time certificates of deposits-
    
    $1.9 million decrease in repurchase agreements-
    
    $2.0 million decrease in other liabilities Management believes the growth in demand deposits and savings and interest
bearing demand is a result of continuing penetration into the market area as a
result of its emphasis on customer service and its relationship style of
banking. The decrease in repurchase agreements was due to the closing of one
large account as a result of an estate settlement. The decrease in time
certificates of deposits was a result of managements decision not to pay
above-market rates for time deposits in competition with other financial
institutions when liquidity was well within its established asset-liability
management guidelines. The decrease in other liabilities is attributable to the
payment of the cash dividend. MATERIAL CHANGES IN RESULTS OF OPERATIONS Bancorp reported net income of approximately $3,430,000 or $.74 per common
share, for the nine months ended September 30, 2004, compared to net income of
approximately $3,875,000 or $.85 per common share, for the same period in 2003.
This represents an decrease in net income of 11.5%. Net income for the
quarter ended September 30, 2004, was approximately $1,312,000 or $.28 net
income per common share, compared to net income of approximately $1,275,000, or
$.28 per common share, for the same period in 2003. This represents an
increase in net income of 2.9%. The increase during this period was largely
attributable to the net gain of $291,000 gain on the sale of the Veneta Branch. Total interest income decreased approximately $955,000 or 7.7% for the nine
months and $182,000 or 4.4% for the three months ended September 30, 2004 as
compared to the same periods in 2003. These decreases for both the nine-month
and three-month periods were primarily the result of the overall decrease in
market rates from the comparable periods in 2003, which offset the earnings on
increased levels of loans, investments, and interest bearing deposit accounts. Total interest expense decreased approximately $491,000 or 29.5% for the nine
months and $52,000 or 11.4% for the three months ended September 30, 2004 as
compared to the same periods in 2003. The decrease in interest expense on
deposits for these periods was the result of lower interest rates paid
resulting from overall market rate decreases compared to the same periods in
2003. The effect of the rate decrease was greater than interest expense related
to increased levels of deposits. Interest expense on repurchase agreements
decreased as a result of lower balances in the related underlying accounts and
a decrease in the interest rates paid on those accounts compared to the same
period in 2003. Net interest income for the nine months ended September 30, 2004 was down
$464,000 or 4.3% and down $130,000 or 3.6% for the three-month period ended
September 30, 2004 as compared to the same periods in 2003. The decrease in
both the three-month and nine-month period ended September 30, 2004 was a
result of the decrease in interest income on loans and securities despite the
growth in volume due to overall lower market rates as compared to the same
periods in 2003. Total non-interest income increased approximately $399,000 or 12.8% for the
nine months and $392,000 or 38.6% for the three months ended September 30, 2004
as compared to the same periods in 2003. The primary increase was the result of
the sale of the Veneta Branch along with an increase in merchant bankcard
income and an increase in service charges on deposit accounts resulting from
increases in volume and customer relationships. Total non-interest expense increased $779,000 or 10.3% for the nine months and
increased $220,000 or 8.4% for the three months ended September 30, 2004, as
compared to the same periods in 2003. Non-interest expense increased for the
nine months ending September 30, 2004 as a result of routine adjustments in
staff salaries, salary expense related to the new Springfield branch, expenses
associated with technology enhancements, products, occupancy, other real estate
owned, a decrease in loan origination costs accounted for under FASB 91, and
expenses related to compliance with Sarbanes Oxley 404. CREDIT LOSS PROVISION The Bank maintains an allowance for credit losses on loans that occur from time
to time as an incidental part of the business of banking. The allowance is
increased by provisions charged to earnings and by recoveries on loans
previously charged off, and is reduced by loan charge offs. During the first nine months ended September 30, 2004, the Bank funded the
allowance for credit losses $109,000 from operations as compared to $221,000
for the same nine-month period of 2003. For the three month period ending
September 30, 2004, the Bank funded the allowance for credit losses $32,000 as
compared to $50,000 for the same three month period in 2003. The Bank decreased
the provision for credit losses based on its analysis of delinquencies, loan
types, loan classifications, and other factors affecting the loan portfolio at
September 30, 2004. The Bank experienced $72,000 in credit losses and $-0- in
recoveries for the nine months ended September 30, 2004 and $21,000 in net
losses and $1,000 in recoveries for the same period ended September 30, 2003.
Historically, the Banks loan charge-off levels have been very low compared to
its peers. 10




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##### Table of Contents



Management believes that the allowance for credit losses at September 30, 2004
of $2,802,000 or 1.41% of total loans is adequate. The provision for credit losses represents charges made to operating expenses
to maintain an appropriate allowance for credit losses. Management considers
various factors in establishing an appropriate allowance. These factors
include an assessment of the financial condition of the borrower, a
determination of the borrowers ability to service the debt from cash flow, a
conservative assessment of the value of the underlying collateral, the
condition of the specific industry of the borrower, the economic health of the
local community, a comprehensive analysis of the levels and trends of loan
types, and a review of past due and classified loans. It is Bank policy that once each quarter, Bank management makes recommendations
to the Board regarding the adequacy of the Banks allowance for credit losses
at quarter end and the amount of the provision that should be charged against
earnings for the next three months. Managements recommendations are based on
an internal loan review process to determine specific potential loss factors on
classified loans, risk factor of loan grades, historical loss factors derived
from actual net charge-off experience, trends in non-performing loans and other
potential risks in the loan portfolio such as industry concentration, the local
economy and the volume of loans. Management uses a loan grading system wherein loan officers assign a risk grade
to each of their loans at inception and at intervals based on receipt of
financial information, renewal, or when there is an indication that a credit
may have improved or weakened. The risk grades in the loan portfolio are used
in determining a factor that is used in analyzing the adequacy of the allowance
for credit losses. The Banks policy is to charge off loans when, in managements opinion, the
loan or a portion of the loan is deemed uncollectible following a concerted
collection effort. Management continues to pursue collection after a loan is
charged-off until all possibilities for collection have been exhausted. LIQUIDITY AND CAPITAL RESOURCES Bancorps subsidiary, the Bank, has adopted policies to maintain a relatively
liquid position to enable it to respond to changes in the Banks financial
environment. Generally, the Banks major sources of liquidity are customer
deposits, sales and maturities of securities, the use of borrowing lines with
correspondent banks including Federal Home Loan bank borrowings, loan
repayments and net cash provided by operating activities. The analysis of liquidity should also include a review of the changes that
appear in the consolidated statement of cash flows for the first nine months of
2004. The statement of cash flows includes operating, investing and financing
categories. Operating activities include net income that is adjusted for
non-cash items and increases or decreases in cash due to certain changes in
assets and liabilities. Investing activities consist primarily of both
proceeds from maturities and purchases of securities, and the net growth in
loans. Financing activities present the cash flows associated with the Banks
deposit accounts, repurchase agreements, and common stock related items. Management believes that the Banks existing sources of liquidity will enable
the Bank to fund its requirements in the normal course of business. As of September 30, 2004, shareholders equity totaled $39,796,000 as compared
to $35,617,000 at December 31, 2003, an increase of 11.7%. This increase in
equity was primarily due to Bancorps net income. The total number of shares of Bancorps common stock that may be issued upon
the exercise of all options granted under the Incentive Stock Option Plan may
not exceed in the aggregate four percent (4%) of Bancorps issued and
outstanding shares of common stock. As of October 31, 2004, the maximum number
of shares issuable under the Incentive Stock Option Plan was 181,460 shares.
As of October 31, 2004, options for 177,364 shares had been granted, options
for 6,621 shares exercised, and options for 14,912 shares expired under this
Plan. The total number of shares of Bancorps common stock that may be issued under
the Stock Bonus Plan may not exceed in the aggregate one percent (1%) of
Bancorps issued and outstanding shares of common stock. As of October 31,
2004, the maximum number of shares issuable under the Stock Bonus Plan was
45,365 on that date. As of October 31, 2004, 135 shares had been issued under
this Plan. 11




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##### Table of Contents



Capital ratios for Citizens Bancorp and Citizens Bank were as follows as of the
dates indicated: September 30, 2004
    
    
    
    
    
    December 31, 2003Adequately
    
    Well
    
    
    
    
    
    Adequately
    
    WellCapitalized
    
    Capitalized
    
    
    
    
    
    Capitalized
    
    CapitalizedRatio
    
    Standards
    
    Standards
    
    Ratio
    
    Standards
    
    StandardsTier 1 Leverage CapitalCitizens Bancorp
    
    
    11.86
    %
    
    
    4
    %
    
    
    5
    %
    
    
    10.81
    %
    
    
    4
    %
    
    
    5
    %Citizens Bank
    
    
    11.84
    %
    
    
    4
    %
    
    
    5
    %
    
    
    10.79
    %
    
    
    4
    %
    
    
    5
    %Tier 1 Risk Based CapitalCitizens Bancorp
    
    
    16.62
    %
    
    
    4
    %
    
    
    6
    %
    
    
    15.64
    %
    
    
    4
    %
    
    
    6
    %Citizens Bank
    
    
    16.60
    %
    
    
    4
    %
    
    
    6
    %
    
    
    15.62
    %
    
    
    4
    %
    
    
    6
    %Total Risk Based CapitalCitizens Bancorp
    
    
    17.79
    %
    
    
    8
    %
    
    
    10
    %
    
    
    16.86
    %
    
    
    8
    %
    
    
    10
    %Citizens Bank
    
    
    17.77
    %
    
    
    8
    %
    
    
    10
    %
    
    
    16.84
    %
    
    
    8
    %
    
    
    10
    %
 
 ITEM 3. QUANTITATIVE & QUALITATIVE ANALYSIS ABOUT MARKET RISK Interest rate, credit, and operations risks are the most significant market
risks impacting the Banks performance. The Bank relies on loan review,
prudent loan underwriting standards and an adequate allowance for credit losses
to mitigate credit risk. The Bank uses an asset/liability management simulation model to measure
interest rate risk. The model quantifies interest rate risk through simulating
forecasted net interest income over a 12 month time period under various rate
scenarios, as well as monitoring the change in the present value of equity
under the same rate scenarios. The present value of equity is defined as the
difference between the market value of current assets less current liabilities.
By measuring the change in the present value of equity under different rate
scenarios, management is able to identify interest rate risk that may not be
evident in simulating changes in forecasted net interest income. The Bank is currently slightly liability sensitive, meaning that interest
bearing liabilities mature or reprice more quickly than interest earning assets
in a given period. An increase or decrease in market rates of interest will
not materially impact net interest income. It should be noted that the simulation model does not take into account future
management actions that could be undertaken if there were a change in actual
market interest rate during the year. Also, certain assumptions are required
to perform modeling simulations that may have significant impact on the
results. These include assumptions regarding the level of interest rates and
balance changes on deposit products that do not have stated maturities. These
assumptions have been developed through a combination of industry standards and
future expected pricing behavior. The model also includes assumptions about
changes in the composition or mix of the balance sheet. The results derived
from the simulation model could vary significantly by external factors such as
changes in the prepayment assumptions, early withdrawals of deposits and
competition. Management has assessed these risks and believes that there has
been no material change since December 31, 2003. 
 ITEM 4. CONTROLS AND PROCEDURES Based on their most recent evaluation which was completed as of the end of the
period of this Form 10-Q, Bancorps Chief Executive Officer and Chief Financial
Officer believe Bancorps disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) are effective. There were no significant
changes in Bancorps internal controls or in other factors that could
significantly affect Bancorps internal controls subsequent to the Evaluation
Date, nor any significant deficiencies or material weaknesses in such controls
requiring corrective actions. As a result, no corrective actions were taken. 12




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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) Exhibits31.1
    
    Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes Oxley Act of 2002.32.1
    
    Chief Executive Officer certification pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.32.2
    
    Chief Financial Officer certification pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
 (b) Reports on Form 8-K On July 14, 2004 Bancorp filed a report relative to the sale of the
Veneta Branch. 13




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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: November 10, 2004
    
    
    
    /s/ William V. HumphreysBy:
    
    William V. HumphreysPresident and
Chief Executive OfficerDate: November 10, 2004
    
    
    
    /s/ Lark E. WyshamBy:
    
    Lark E. WyshamExecutive Vice President and
Chief Financial Officer
 14