##### 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 September 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 October 26, 2007Common Stock, no par value
    
    4,671,575




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##### 



PageReferencePART I.  FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTS  UNAUDITEDCondensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    1Condensed Consolidated Statements of Income for the three months and the nine months ended
September 30, 2007 and 2006
    
    
    2Condensed Consolidated Statements of Changes in Shareholders Equity for the nine months ended September 30,
2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2007 and 2006
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5-11ITEM 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
    
    
    16PART II.  OTHER INFORMATIONITEM 1.  Legal Proceedings
    
    
    17ITEM 1A.  Risk Factors
    
    
    17ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17ITEM 3.  Defaults Upon Senior Securities
    
    
    17ITEM 4.  Submission of Matters to a Vote of Security Holders
    
    
    17ITEM 5.  Other Information
    
    
    17ITEM 6.  Exhibits
    
    
    17SIGNATURES
    
    
    18Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1
  
    September 30,
    
    
    December 31,2007
    
    
    2006AssetsCash and due from banks
    
    $
    15,027
    
    
    $
    17,227Interest bearing deposits in banks
    
    
    1,004
    
    
    
    11,709Federal funds sold
    
    
    340
    
    
    
    9,340Securities available for sale
    
    
    39,224
    
    
    
    46,204Securities held to maturity (estimated fair value $4,982 and $5,542)
    
    
    4,919
    
    
    
    5,462Federal Home Loan Bank stock, at cost
    
    
    905
    
    
    
    905Loans held for sale
    
    
    151
    
    
    
    53Loans
    
    
    283,540
    
    
    
    253,027Allowance for credit losses
    
    
    2,797
    
    
    
    2,875Net loans
    
    
    280,743
    
    
    
    250,152Premises and equipment
    
    
    9,799
    
    
    
    8,439Accrued interest receivable
    
    
    2,560
    
    
    
    2,112Cash value of life insurance
    
    
    4,543
    
    
    
    4,416Other assets
    
    
    2,799
    
    
    
    3,010Total assets
    
    $
    362,014
    
    
    $
    359,029Liabilities and Shareholders EquityLiabilitiesDeposits:Demand, non-interest bearing
    
    $
    59,085
    
    
    $
    58,514Savings and interest-bearing demand
    
    
    181,669
    
    
    
    171,580Time
    
    
    41,382
    
    
    
    40,516Total deposits
    
    
    282,136
    
    
    
    270,610Short-term borrowings
    
    
    27,112
    
    
    
    37,489Accrued interest payable
    
    
    99
    
    
    
    100Other liabilities
    
    
    2,810
    
    
    
    4,306Total liabilities
    
    
    312,157
    
    
    
    312,505Commitments and Contingencies
    
    
    
    
    
    
    Shareholders EquityCommon stock (no par value); authorized 10,000,000
shares; issued and outstanding: 2007 - 4,671,496 shares; 2006 - 4,733,644
shares
    
    
    28,740
    
    
    
    30,027Retained earnings
    
    
    21,050
    
    
    
    16,604Accumulated other comprehensive gain (loss)
    
    
    67
    
    
    
    (107
    )Total shareholders equity
    
    
    49,857
    
    
    
    46,524Total liabilities and shareholders equity
    
    $
    362,014
    
    
    $
    359,029
 See accompanying notes.
  1




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##### Table of Contents



Nine Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest Income:Loans
    
    $
    15,698
    
    
    $
    13,644
    
    
    $
    5,593
    
    
    $
    4,884Federal funds sold and deposits in banks
    
    
    295
    
    
    
    109
    
    
    
    30
    
    
    
    37Securities:Taxable
    
    
    1,677
    
    
    
    1,757
    
    
    
    491
    
    
    
    719Tax-exempt
    
    
    178
    
    
    
    220
    
    
    
    54
    
    
    
    65Other
    
    
    6
    
    
    
    29
    
    
    
    2
    
    
    
    25Total interest and dividend income
    
    
    17,854
    
    
    
    15,759
    
    
    
    6,170
    
    
    
    5,730Interest Expense:Deposits
    
    
    3,625
    
    
    
    2,689
    
    
    
    1,220
    
    
    
    1,073Borrowed funds
    
    
    91
    
    
    
    141
    
    
    
    47
    
    
    
    73Repurchase agreements
    
    
    713
    
    
    
    756
    
    
    
    201
    
    
    
    272Total interest expense
    
    
    4,429
    
    
    
    3,586
    
    
    
    1,468
    
    
    
    1,418Net Interest Income
    
    
    13,425
    
    
    
    12,173
    
    
    
    4,702
    
    
    
    4,312Provision for credit losses
    
    
    130
    
    
    
    114
    
    
    
    30
    
    
    
    32Net interest income after provision for credit losses
    
    
    13,295
    
    
    
    12,059
    
    
    
    4,672
    
    
    
    4,280Non-interest Income:Service charges on deposit accounts
    
    
    839
    
    
    
    972
    
    
    
    293
    
    
    
    312Earnings on life insurance policies
    
    
    127
    
    
    
    118
    
    
    
    43
    
    
    
    40Other
    
    
    869
    
    
    
    668
    
    
    
    284
    
    
    
    214Total non-interest income
    
    
    1,835
    
    
    
    1,758
    
    
    
    620
    
    
    
    566Non-interest Expense:Salaries and employee benefits
    
    
    5,469
    
    
    
    5,020
    
    
    
    1,855
    
    
    
    1,697Occupancy and equipment
    
    
    1,082
    
    
    
    966
    
    
    
    372
    
    
    
    323Other
    
    
    1,739
    
    
    
    1,540
    
    
    
    534
    
    
    
    535Total non-interest expense
    
    
    8,290
    
    
    
    7,526
    
    
    
    2,761
    
    
    
    2,555Income before income tax expense
    
    
    6,840
    
    
    
    6,291
    
    
    
    2,531
    
    
    
    2,291Income tax expense
    
    
    2,394
    
    
    
    2,168
    
    
    
    892
    
    
    
    786Net income
    
    $
    4,446
    
    
    $
    4,123
    
    
    $
    1,639
    
    
    $
    1,505Earnings per common share:Basic
    
    $
    0.93
    
    
    $
    0.87
    
    
    $
    0.34
    
    
    $
    0.32Diluted
    
    $
    0.93
    
    
    $
    0.87
    
    
    $
    0.34
    
    
    $
    0.32Weighted average number of common shares outstanding:Basic
    
    
    4,781,269
    
    
    
    4,736,758
    
    
    
    4,781,433
    
    
    
    4,743,481Diluted
    
    
    4,804,522
    
    
    
    4,761,115
    
    
    
    4,802,790
    
    
    
    4,762,589
 See accompanying notes.
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Nine Months Ended September 30, 2007 and 2006Number ofCommon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedOther
    
    
    TotalShares
    
    
    Comprehensive
    
    
    Common
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersOutstanding
    
    
    Income
    
    
    Stock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, at December 31, 2005
    
    
    4,670,386
    
    
    
    
    
    
    $
    28,938
    
    
    $
    13,606
    
    
    $
    (248
    )
    
    $
    42,296COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    $
    4,123
    
    
    
    
    
    
    
    4,123
    
    
    
    
    
    
    
    4,123Other
comprehensive income, net of tax:Unrealized gain on securities
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    123
    
    
    
    123Comprehensive Income
    
    
    
    
    
    $
    4,246Stock based compensation expense
recognized in earnings
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Issuance of common stock
under dividend reinvestment plan
    
    
    64,951
    
    
    
    
    
    
    
    1,127
    
    
    
    
    
    
    
    
    
    
    
    1,127Stock grants
    
    
    90
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Stock options exercised
    
    
    10,080
    
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    127Repurchase of common stock
    
    
    (6,261
    )
    
    
    
    
    
    
    (94
    )
    
    
    
    
    
    
    
    
    
    
    (94
    )Balance, at September 30, 2006
    
    
    4,739,246
    
    
    
    
    
    
    $
    30,141
    
    
    $
    17,729
    
    
    $
    (125
    )
    
    $
    47,745Balance, at December 31, 2006
    
    
    4,733,644
    
    
    
    
    
    
    $
    30,027
    
    
    $
    16,604
    
    
    $
    (107
    )
    
    $
    46,524COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    $
    4,446
    
    
    
    
    
    
    
    4,446
    
    
    
    
    
    
    
    4,446Other
comprehensive income, net of tax:Unrealized gain on securities
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    174Comprehensive Income
    
    
    
    
    
    $
    4,620Stock based compensation expense
recognized in earnings
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    16Issuance of common stock
under dividend reinvestment plan
    
    
    75,197
    
    
    
    
    
    
    
    1,189
    
    
    
    
    
    
    
    
    
    
    
    1,189Stock grants
    
    
    195
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Stock options exercised
    
    
    5,179
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Income tax benefit from stock
options exercised
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Repurchase of common stock
    
    
    (142,719
    )
    
    
    
    
    
    
    (2,567
    )
    
    
    
    
    
    
    
    
    
    
    (2,567
    )Balance, at September 30, 2007
    
    
    4,671,496
    
    
    
    
    
    
    $
    28,740
    
    
    $
    21,050
    
    
    $
    67
    
    
    $
    49,857
 See accompanying notes.
  3




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Nine Months EndedSeptember 30,2007
    
    
    2006Net cash provided by operating activities
    
    $
    4,823
    
    
    $
    3,729Cash Flows from Investing Activities:Net (increase) decrease in interest bearing deposits in banks
    
    
    10,705
    
    
    
    (2,015
    )Net decrease in federal funds sold
    
    
    9,000
    
    
    
    204Activity in securities available for sale:Purchases
    
    
    (14,019
    )
    
    
    (35,000
    )Maturities
    
    
    21,420
    
    
    
    55,500Activitiy in securities held to maturity:Purchases
    
    
    (471
    )
    
    
    Maturities
    
    
    1,025
    
    
    
    1,995Increase in loans made to customers, net of principal collections
    
    
    (30,588
    )
    
    
    (26,609
    )Purchases of premises and equipment
    
    
    (1,747
    )
    
    
    (1,459
    )Other real estate sold
    
    
    270
    
    
    
    Net cash used by investing activities
    
    
    (4,405
    )
    
    
    (7,384
    )Cash Flows from Financing Activities:Net increase in deposits
    
    
    11,526
    
    
    
    6,922Net decrease in repurchase agreements and other borrowings
    
    
    (10,377
    )
    
    
    (4,394
    )Payment of dividends, net of dividends reinvested
    
    
    (1,272
    )
    
    
    (1,206
    )Exercise of stock options
    
    
    64
    
    
    
    127Repurchase of common stock
    
    
    (2,567
    )
    
    
    (94
    )Tax benefit from options exercised
    
    
    8
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (2,618
    )
    
    
    1,355Net decrease in cash and due from banks
    
    
    (2,200
    )
    
    
    (2,300
    )Cash and Due from BanksBeginning of period
    
    
    17,227
    
    
    
    18,518End of period
    
    $
    15,027
    
    
    $
    16,218Supplemental Disclosure of Cash Flow InformationInterest paid
    
    $
    4,430
    
    
    $
    3,561Income taxes paid
    
    $
    1,785
    
    
    $
    1,950Supplemental Schedule of Non-cash Investing and Financing ActivitiesFair value adjustment of securities available for sale, net of tax
    
    $
    174
    
    
    $
    123Issuance of common stock through dividend reinvestment plan
    
    $
    1,189
    
    
    $
    1,127Stock grants
    
    $
    3
    
    
    $
    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 nine
months ended September 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
Company, including unrealized gains and losses, at September 30, 2007 and December 31, 2006,
are as follows (in thousands):
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedSeptember
30, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable for SaleU.S. Government and Agency Securities
    
    $
    39,114
    
    
    $
    136
    
    
    $
    26
    
    
    $
    39,224Held to MaturityState and Municipal Securities
    
    $
    4,919
    
    
    $
    63
    
    
    $
    
    
    
    $
    4,982December 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):
 September 30, 2007
    
    
    December 31, 2006Commercial
    
    $
    33,477
    
    
    $
    27,810Agriculture
    
    
    27,004
    
    
    
    18,715Real EstateConstruction
    
    
    22,524
    
    
    
    16,6471-4 Family
    
    
    25,617
    
    
    
    25,254Multi-family
    
    
    22,384
    
    
    
    23,530Commercial
    
    
    132,907
    
    
    
    120,614Farmland
    
    
    17,127
    
    
    
    17,508Consumer Loans
    
    
    2,980
    
    
    
    3,382284,020
    
    
    
    253,460Less: net deferred loan fees
    
    
    480
    
    
    
    433Total Loans
    
    
    283,540
    
    
    
    253,027Less: allowance for credit losses
    
    
    2,797
    
    
    
    2,875Net Loans
    
    $
    280,743
    
    
    $
    250,152
 Transactions in the allowance for loan losses and unfunded commitments were as follows for
the nine months ended September 30:
 Allowance for loan losses
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    2,875
    
    
    $
    2,750Provision charged to operations
    
    
    130
    
    
    
    114Loans recovered
    
    
    5
    
    
    
    3Loans charged off
    
    
    (33
    )
    
    
    (17
    )Reclassification of allowance for unfunded commitments
    
    
    (180
    )
    
    
    Balance at end of period
    
    $
    2,797
    
    
    $
    2,850
 Allowance for unfunded commitmentsBalance at beginning of period
    
    
    Reclassificaiton of allowance for unfunded commitments
    
    $
    180Balance at end of period
    
    $
    180
 Allowance for credit lossesAllowance for loan losses
    
    $
    2,797Allowance for unfunded commitments
    
    
    180Total allowance for credit losses
    
    $
    2,977
 The Company reclassified a specific reserve for unfunded loan commitments as of September
30, 2007. The allowance for credit losses has historically contained a component for a
reserve for unfunded commitments but the component has now been classified in other
liabilities. At September 30, 2007 the Company had approximately $80.6 million in
outstanding commitments to extend credit, compared to approximately $67.6 million at
year-end 2006.
  6




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5.
    
    Non-Performing AssetsIt is the policy of the Company 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 Company 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 September 30, 2007 and December 31, 2006 were
approximately $1,506,000 and $1,436,000 respectively. There were no loans with modified
terms as of September 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 $1.5
million in non-accrual status as of September 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 three non-accrual loans of approximately $162 thousand
are fully secured by real estate and management does not anticipate any loss.Risk of nonpayment exists with respect to all loans, which could result in the
classification of such loans as non-performing. The following table presents information
with respect to non-performing assets at September 30, 2007 and December 31, 2006 (dollars
in thousands):
 September 30,
    
    
    December 31,2007
    
    
    2006Loans on non-accrual status
    
    $
    1,506
    
    
    $
    1,436Loans past due 90 days or more but not on non-accrual status
    
    
    113
    
    
    
    187Total non-performing assets
    
    $
    1,619
    
    
    $
    1,623Percentage of non-performing assets to total assets
    
    
    0.45
    %
    
    
    0.45
    %
 6.
    
    BorrowingsThe composition of borrowings is as follows (dollars in thousands):
 September 30, 2007
    
    
    December 31, 2006Treasury tax and loan deposit note
    
    $
    1,752
    
    
    $
    1,890Federal Home Loan Bank  short term borrowings
    
    
    
    
    
    
    12Repurchase agreements
    
    
    25,360
    
    
    
    35,587Total borrowings
    
    $
    27,112
    
    
    $
    37,489
  7




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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 nine months and three months ended September 30, 2007 and 2006 can be
reconciled as follows (dollars and weighted average shares in thousands):
 Nine Months EndedSeptember 30,2007
    
    
    2006Net income
    
    $
    4,446
    
    
    $
    4,123Weighted average shares outstanding  basic
    
    
    4,781
    
    
    
    4,737Basic earnings per common share
    
    $
    0.93
    
    
    $
    0.87Incremental shares arising from stock-based compensation
    
    
    23
    
    
    
    24Weighted average shares outstanding  diluted
    
    
    4,804
    
    
    
    4,761Diluted earnings per common share
    
    $
    0.93
    
    
    $
    0.87
 Three Months EndedSeptember 30,2007
    
    
    2006Net income
    
    $
    1,639
    
    
    $
    1,505Weighted average shares outstanding  basic
    
    
    4,781
    
    
    
    4,743Basic earnings per common share
    
    $
    0.34
    
    
    $
    0.32Incremental shares arising from stock-based compensation
    
    
    21
    
    
    
    19Weighted average shares outstanding  diluted
    
    
    4,802
    
    
    
    4,762Diluted earnings per common share
    
    $
    0.34
    
    
    $
    0.32
 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 nine months ended September 30, 2007 and 2006.
  8




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##### Table of Contents



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 nine months ended September 30, 2007 and 2006 totaled $16 thousand
and $42 thousand, respectively. At September 30, 2007, unrecognized stock-based compensation
totaled $10 thousand. These costs are expected to be recognized over a weighted average
period of 5 months.Stock option activity for the nine months ended September 30, 2007 was as follows:
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average
    
    
    Contractual
    
    
    Intrinsic ValueShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    (in thousands)Stock options outstanding, December 31, 2006
    
    
    128,885
    
    
    $
    14.40
    
    
    
    N/A
    
    
    
    N/AGranted
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    (5,179
    )
    
    $
    12.39
    
    
    
    N/A
    
    
    
    N/AForfeited
    
    
    (2,160
    )
    
    $
    18.12
    
    
    
    N/A
    
    
    
    N/AStock options outstanding, September 30, 2007
    
    
    121,546
    
    
    $
    14.46
    
    
    
    5.60
    
    
    $
    434Stock options exercisable, September 30, 2007
    
    
    104,887
    
    
    $
    13.96
    
    
    
    5.35
    
    
    $
    425
 Stock option activity for the nine months ended September 30, 2006 was as follows:
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average
    
    
    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
    
    
    (10,080
    )
    
    $
    12.65
    
    
    
    N/A
    
    
    
    N/AForfeited
    
    
    (2,940
    )
    
    $
    16.66
    
    
    
    N/A
    
    
    
    N/AStock options outstanding, September 30, 2006
    
    
    138,631
    
    
    $
    14.23
    
    
    
    6.38
    
    
    $
    631Stock options exercisable, September 30, 2006
    
    
    98,733
    
    
    $
    13.38
    
    
    
    5.84
    
    
    $
    380
 The total intrinsic value of options exercised during the period ended September 30, 2007
and 2006 was $27 thousand and $50 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 September 30, 2007 and 2006 was $64 thousand and
$127 thousand, respectively.9.
    
    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 September 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.
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##### Table of Contents



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 nine
months ended September 30, 2007 and 2006.
 Nine months ended September 30, 2007Treasury
    
    
    Mortgage
    
    
    Community(Dollars in thousands)
    
    Services
    
    
    Department
    
    
    Banking
    
    
    ConsolidatedInterest income
    
    $
    2,284
    
    
    $
    339
    
    
    $
    15,231
    
    
    $
    17,854Interest expense
    
    
    250
    
    
    
    
    
    
    
    4,179
    
    
    
    4,429Net interest income
    
    
    2,034
    
    
    
    339
    
    
    
    11,052
    
    
    
    13,425Provision for credit losses
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    130Non-interest income
    
    
    103
    
    
    
    46
    
    
    
    1,686
    
    
    
    1,835Non-interest expense
    
    
    4,383
    
    
    
    130
    
    
    
    3,777
    
    
    
    8,290Income (loss) before income tax expense
    
    
    (2,376
    )
    
    
    255
    
    
    
    8,961
    
    
    
    6,840Provision for income tax expense
    
    
    2,394
    
    
    
    
    
    
    
    
    
    
    
    2,394Net income (loss)
    
    $
    (4,770
    )
    
    $
    255
    
    
    $
    8,961
    
    
    $
    4,446Assets
    
    $
    67,504
    
    
    $
    5,470
    
    
    $
    289,039
    
    
    $
    362,014Loans
    
    $
    4
    
    
    $
    5,442
    
    
    $
    278,094
    
    
    $
    283,540Deposits
    
    $
    1,918
    
    
    
    
    
    
    $
    280,218
    
    
    $
    282,136
 Nine months ended September 30, 2006Treasury
    
    
    Mortgage
    
    
    Community(Dollars in thousands)
    
    Services
    
    
    Department
    
    
    Banking
    
    
    ConsolidatedInterest income
    
    $
    2,230
    
    
    $
    279
    
    
    $
    13,250
    
    
    $
    15,759Interest expense
    
    
    215
    
    
    
    
    
    
    
    3,371
    
    
    
    3,586Net interest income
    
    
    2,015
    
    
    
    279
    
    
    
    9,879
    
    
    
    12,173Provision for credit losses
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    114Non-interest income
    
    
    148
    
    
    
    36
    
    
    
    1,574
    
    
    
    1,758Non-interest expense
    
    
    3,843
    
    
    
    124
    
    
    
    3,559
    
    
    
    7,526Income (loss) before income tax expense
    
    
    (1,794
    )
    
    
    191
    
    
    
    7,894
    
    
    
    6,291Provision for income tax expense
    
    
    2,168
    
    
    
    
    
    
    
    
    
    
    
    2,168Net income (loss)
    
    $
    (3,962
    )
    
    $
    191
    
    
    $
    7,894
    
    
    $
    4,123Assets
    
    $
    74,652
    
    
    $
    4,861
    
    
    $
    265,138
    
    
    $
    344,651Loans
    
    $
    5
    
    
    $
    4,837
    
    
    $
    252,332
    
    
    $
    257,174Deposits
    
    $
    1,500
    
    
    
    
    
    
    $
    259,505
    
    
    $
    261,005
 10.
    
    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 September 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.
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##### Table of Contents



Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split-Dollar Life Insurance Arrangements
 
 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
    www.sec.gov
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##### Table of Contents



Material Changes in Financial Condition
   
    
    $2.2 million decrease in cash and due from banks or (12.8)%
    
    $10.7 million decrease in interest bearing deposits in banks or (91.4)%
    
    $9.0 million decrease in federal funds sold or (96.4)%
    
    $7.0 million decrease in securities available for sale or (15.1%)
    
    $30.6 million increase in net loans or 12.1%
   
    
    $.571 million increase in demand, non-interest bearing deposits or 1.0%
    
    $10.1 million increase in savings and interest bearing deposits or 5.9%
    
    $.866 million increase in time certificates of deposits or 2.1%
    
    $10.4 million decrease in repurchase agreements or (27.7)%
    
    $1.5 million decrease in other liabilities, primarily due to the
payment of the cash dividend to shareholders or (34.7)%
   Material Changes in Results of Operations
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Allowance for Credit Losses
        14




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##### Table of Contents



Liquidity and Capital Resources
       September 30, 2007
    
    
    December 31, 2006Adequately
    
    
    Well
    
    
    
    
    
    
    Adequately
    
    
    WellActual
    
    
    Capitalized
    
    
    Capitalized
    
    
    Actual
    
    
    Capitalized
    
    
    CapitalizedRatio
    
    
    Standards
    
    
    Standards
    
    
    Ratio
    
    
    Standards
    
    
    StandardsTier 1 Leverage Ratio
    
    
    13.86
    %
    
    
    4
    %
    
    
    5
    %
    
    
    13.17
    %
    
    
    4
    %
    
    
    5
    %Tier 1 Risk Based Capital
    
    
    15.30
    %
    
    
    4
    %
    
    
    6
    %
    
    
    15.67
    %
    
    
    4
    %
    
    
    6
    %Total Risk Based Capital
    
    
    16.22
    %
    
    
    8
    %
    
    
    10
    %
    
    
    16.64
    %
    
    
    8
    %
    
    
    10
    %
 
 ITEM 3. Quantitative & Qualitative Disclosures About Market Risk
      15




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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.
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##### Table of Contents



PART II. OTHER INFORMATION
 
   
   
   
   
   
   
   31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes Oxley Act of 2002.32.1
    
    Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.32.2
    
    Chief Financial Officer certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
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##### Table of Contents



Date: November 13, 2007
    
    
    
    
    
    /s/ William V. HumphreysBy:
    
    William V. HumphreysPresident and
Chief Executive OfficerDate: November 13, 2007
    
    
    
    
    
    /s/ Lark E. WyshamBy:
    
    Lark E. WyshamExecutive Vice President and
Chief Financial Officer
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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.
  19