##### 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 March 31, 2005 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
    
    91-1841688(State of Incorporation)
    
    (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 þ X o NO Indicate whether the Registrant is an accelerated filer as defined by Exchange Act Rule
12b-2. YES o NO þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. 4,660,464 shares as of April 30, 2005, no par value.




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CITIZENS BANCORP
FORM 10-Q
MARCH 31, 2005
INDEX PageReferencePART I.  FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTS  UNAUDITEDCondensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    1Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004
    
    2Condensed Consolidated Statements of Changes in Shareholders Equity for the three months ended March 31, 2005 and 2004
    
    3Condensed Consolidated Statements of Cash Flows for three months ended March 31, 2005 and 2004
    
    4Notes to Condensed Consolidated Financial Statements
    
    5  6ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    7  11ITEM 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, Use of Proceeds, and Issuer Purchase of Equity 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
    
    13SIGNATURES
    
    14EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I FINANCIAL INFORMATION 
 ITEM 1  
    March 31, 2005
    
    
    December 31, 2004AssetsCash and due from banks
    
    $
    12,676
    
    
    $
    13,562Interest bearing deposits in banks
    
    
    499
    
    
    
    6,993Federal funds sold
    
    
    
    
    
    
    5,787Securities available for sale
    
    
    69,690
    
    
    
    70,947Securities held to maturity
    
    
    9,959
    
    
    
    9,956Federal Home Loan Bank stock
    
    
    610
    
    
    
    625Loans, net
    
    
    222,010
    
    
    
    210,951Premises and equipment
    
    
    7,384
    
    
    
    7,604Accrued interest receivable
    
    
    1,999
    
    
    
    1,821Cash surrender value of life insurance
    
    
    4,139
    
    
    
    4,101Other assets
    
    
    2,277
    
    
    
    2,241Total assets
    
    $
    331,243
    
    
    $
    334,588Liabilities and Shareholders EquityLiabilitiesDeposits:Demand, non-interest bearing
    
    $
    48,651
    
    
    $
    51,801Savings and interest bearing demand
    
    
    147,856
    
    
    
    142,909Time
    
    
    38,638
    
    
    
    40,772Total deposits
    
    
    235,145
    
    
    
    235,482Repurchase agreements
    
    
    51,631
    
    
    
    55,446Other borrowings
    
    
    2,865
    
    
    
    1,713Accrued interest payable
    
    
    40
    
    
    
    34Other liabilities
    
    
    1,379
    
    
    
    3,512Total liabilities
    
    
    291,060
    
    
    
    296,187Shareholders EquityCommon stock (no par value); authorized 10,000,000 shares;
Issued and outstanding: 2005  4,660,454 shares;
2004  4,620,250 shares;
    
    
    28,805
    
    
    
    28,163Retained earnings
    
    
    11,940
    
    
    
    10,612Accumulated other comprehensive (loss)
    
    
    (562
    )
    
    
    (374
    )Total shareholders equity
    
    
    40,183
    
    
    
    38,401Total liabilities and shareholders equity
    
    $
    331,243
    
    
    $
    334,588
 See accompanying notes 1




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##### Table of Contents



Three Months EndedMarch 31,2005
    
    
    2004Interest Income:Loans
    
    $
    3,812
    
    
    $
    3,208Interest bearing deposits
    
    
    25
    
    
    
    21Securities available for sale
    
    
    402
    
    
    
    366Securities held to maturitytax-exempt
    
    
    94
    
    
    
    105Other interest income
    
    
    12
    
    
    
    5Total interest income
    
    
    4,345
    
    
    
    3,705Interest Expense:Deposits
    
    
    322
    
    
    
    244Borrowed funds
    
    
    8
    
    
    
    1Repurchase agreements
    
    
    258
    
    
    
    150Total interest expense
    
    
    588
    
    
    
    395Net Interest Income
    
    
    3,757
    
    
    
    3,310Provision for credit losses
    
    
    (33
    )
    
    
    (44
    )Net interest income after provision for credit losses
    
    
    3,724
    
    
    
    3,266Non-interest Income:Service charges on deposit accounts
    
    
    360
    
    
    
    435Gain on sales of investments available for sale
    
    
    
    
    
    
    25Merchant bankcard
    
    
    387
    
    
    
    320Gain on sale of assets
    
    
    92
    
    
    
    Other
    
    
    225
    
    
    
    246Total non-interest income
    
    
    1,064
    
    
    
    1,026Non-interest Expense:Salaries and employee benefits
    
    
    1,615
    
    
    
    1,630Occupancy and equipment
    
    
    323
    
    
    
    334Merchant bankcard
    
    
    329
    
    
    
    271Other
    
    
    493
    
    
    
    510Total non-interest expense
    
    
    2,760
    
    
    
    2,745Income before income tax expense
    
    
    2,028
    
    
    
    1,547Income tax expense
    
    
    700
    
    
    
    531Net income
    
    $
    1,328
    
    
    $
    1,016Comprehensive Income
    
    $
    1,140
    
    
    $
    1,141Earnings per share:Basic
    
    $
    0.29
    
    
    $
    0.22Diluted
    
    $
    0.28
    
    
    $
    0.22Weighted average number of common shares outstandingBasic
    
    
    4,652,365
    
    
    
    4,609,270Diluted
    
    
    4,721,842
    
    
    
    4,649,993Return on Average Assets
    
    
    1.60
    %
    
    
    1.26
    %
 See accompanying notes 2




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Three Months Ended March 31, 2005 and 2004Number of
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon
    
    
    Common
    
    
    
    
    
    
    OtherShares
    
    
    Stock
    
    
    Retained
    
    
    ComprehensiveOutstanding
    
    
    Amount
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance, at December 31, 2003
    
    
    4,554,242
    
    
    $
    27,155
    
    
    $
    8,385
    
    
    $
    77
    
    
    $
    35,617COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    1,016
    
    
    
    
    
    
    
    1,016Other comprehensive income, net of tax:Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    125Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,141Issuance of common stock
    
    
    61,727
    
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958Stock grants
    
    
    45
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Stock options exercised
    
    
    2,204
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Balance, at March 31, 2004
    
    
    4,618,218
    
    
    $
    28,136
    
    
    $
    9,401
    
    
    $
    202
    
    
    $
    37,739Balance, at December 31, 2004
    
    
    4,620,250
    
    
    $
    28,163
    
    
    $
    10,612
    
    
    $
    (374
    )
    
    $
    38,401COMPREHENSIVE INCOME:Net Income
    
    
    
    
    
    
    
    
    
    
    1,328
    
    
    
    
    
    
    
    1,328Other comprehensive income, net of tax:Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    (188
    )Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,140Issuance of common stock
    
    
    31,614
    
    
    
    549
    
    
    
    
    
    
    
    
    
    
    
    549Stock grants
    
    
    35
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Stock options exercised
    
    
    8,555
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92Balance, at March 31, 2005
    
    
    4,660,454
    
    
    $
    28,805
    
    
    $
    11,940
    
    
    $
    (562
    )
    
    $
    40,183
 See accompanying notes 3




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##### Table of Contents



Three Months EndedMarch 31,2005
    
    
    2004Cash Flows from Operating ActivitiesNet income
    
    $
    1,328
    
    
    $
    1,016Adjustments to reconcile net income to net
cash provided by operating activities:Provision for credit losses
    
    
    33
    
    
    
    44Depreciation and amortization
    
    
    186
    
    
    
    143Gains on sales of assets and investments available for sale
    
    
    (92
    )
    
    
    (25
    )Stock dividends received
    
    
    
    
    
    
    (5
    )(Increase) in accrued interest receivable
    
    
    (178
    )
    
    
    (60
    )(Increase) decrease in accrued interest payable
    
    
    6
    
    
    
    (5
    )Other
    
    
    (5
    )
    
    
    (59
    )Net cash provided by operating activities
    
    
    1,278
    
    
    
    1,049Cash Flows from Investing ActivitiesNet (increase) decrease in interest bearing deposits in banks
    
    
    6,494
    
    
    
    (13,364
    )Net decrease in federal funds sold
    
    
    5,787
    
    
    
    Proceeds from maturities of available for sale securities
    
    
    6,000
    
    
    
    13,700Proceeds from sales of available for sale securities
    
    
    
    
    
    
    17,791FHLB stock redeemed
    
    
    14
    
    
    
    Purchases of securities available for sale
    
    
    (5,039
    )
    
    
    (28,879
    )Purchases of securities held to maturity
    
    
    
    
    
    
    (101
    )(Increase) decrease in loans made to customers, net of principal collections
    
    
    (11,103
    )
    
    
    915Purchases of premises and equipment
    
    
    (6
    )
    
    
    (427
    )Proceeds from sale of premises and equipment
    
    
    172
    
    
    
    Net cash provided by (used in) investing activities
    
    
    2,319
    
    
    
    (10,365
    )Cash Flows from Financing ActivitiesNet increase (decrease) in deposits
    
    
    (337
    )
    
    
    2,154Net decrease in repurchase agreements and other borrowings
    
    
    (2,663
    )
    
    
    (1,549
    )Payment of dividends, net of dividends reinvested
    
    
    (1,576
    )
    
    
    (1,137
    )Stock grants
    
    
    1
    
    
    
    1Exercised stock options
    
    
    92
    
    
    
    22Net cash (used in) financing activities
    
    
    (4,483
    )
    
    
    (509
    )Net (decrease) in cash and due from banks
    
    
    (886
    )
    
    
    (9,825
    )Cash and Due from BanksBeginning of period
    
    
    13,562
    
    
    
    30,799End of period
    
    $
    12,676
    
    
    $
    20,974Supplemental Disclosure of Cash Flow InformationInterest paid
    
    $
    582
    
    
    $
    400Income taxes paid
    
    
    90
    
    
    
    715Supplemental Schedule of Non-cash Investing and Financing ActivitiesFair value adjustment of securities available for sale, net of tax
    
    
    (188
    )
    
    
    125Issuance of common stock through dividend reinvestment plan
    
    
    549
    
    
    
    958
 See accompanying notes 4




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##### Table of Contents



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, 2004 consolidated financial statements, including notes there to, included
in Bancorps 2004 Annual Report to shareholders. The results of operations for the three
months ended March 31, 2005, are not necessarily indicative of the results which may be
obtained for the full year ending December 31, 2005.  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 November 16, 2004 payable on January 10, 2005. Through the Dividend Reinvestment Plan
(DRIP), 31,614 shares were purchased at a price of $17.37 per share. Basic earnings per share are based on the average number of common shares outstanding,
assuming no dilution. Diluted earnings per common share are computed assuming the exercise
of stock options. Dollars in thousands, except for
    
    
    
    
    
    Net Income
    
    
    
    
    
    
    Shares
    
    
    Per Shareper share amounts
    
    
    
    
    
    (Numerator)
    
    
    
    
    
    
    (Denominator)
    
    
    AmountThree months ended March 31, 2005Basic earnings per share:Net Income
    
    
    
    
    
    
    
    
    
    $
    1,328
    
    
    
    4,652,365
    
    
    $
    0.29Effect of dilutive securities:Options
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    69,477
    
    
    
    0.01Diluted earnings per share:Net Income
    
    
    
    
    
    
    
    
    
    $
    1,328
    
    
    
    4,721,842
    
    
    $
    0.28Three months ended March 31, 2004Basic earnings per share:Net Income
    
    
    
    
    
    
    
    
    
    $
    1,016
    
    
    
    4,609,270
    
    
    $
    0.22Effect of dilutive securities:Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,723
    
    
    
    -0-Diluted earnings per share:Net Income
    
    
    
    
    
    
    
    
    
    $
    1,016
    
    
    
    4,649,993
    
    
    $
    0.22
 5




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4.
    STOCK-BASED COMPENSATION The Company has a stock-based employee compensation plan. The Company applies the
recognition and measurement principles of APB No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no stock-based compensation cost is
reflected in net income as all options granted under this plan had an exercise price equal
to the market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation
to stock based employee compensation. (Dollars in thousands, except per share amounts) Three Months EndedMarch 31,2005
    
    
    2004Net income, as reported
    
    $
    1,328
    
    
    $
    1,016Less total stock-based compensation expense determined
under fair value method for all qualifying awards
    
    
    (32
    )
    
    
    (42
    )Pro forma net income
    
    $
    1,296
    
    
    $
    974Earnings per share:Basic:As reported
    
    $
    0.29
    
    
    $
    0.22Pro forma
    
    $
    0.28
    
    
    $
    0.21Diluted:As reported
    
    $
    0.28
    
    
    $
    0.22Pro forma
    
    $
    0.27
    
    
    $
    0.21
  5.
    CONTINGENCIES Unfunded loan commitments totaled $47.9 million as of March 31, 2005 and $44.5 million as of
December 31, 2004.  4.
    RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement No. 123(Revised), Share-Based
Payment(FAS 123®). This Statement establishes standards for accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or services that are based
on the fair value of the entitys equity instruments, or that may be settled by the issuance of
those equity instruments. Statement No. 123® covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. FAS123® replaces existing requirements
under FASB Statement No. 123, Accounting for Stock-Based Compensation, and eliminates the ability
to account for share-based compensation transactions using APB Opinion No 25, Accounting for Stock
Issued to Employees. For the Company, the Statement is effective for the interim reporting period
beginning December 15, 2005. Adoption of the Standard will impact the consolidated financial
statements by requiring compensation expense to be recorded for grants after the effective date and
the unvested portion of stock options, which have been granted. On September 30, 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Emerging Issues Task Force (EITF) Issue No. 03-1-1 delaying the effective date of paragraphs
10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, which provides guidance for determining the meaning of other-than-temporarily
impaired and its application to certain debt and equity securities within the scope of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, and investments accounted
for under the cost method. The guidance requires that investments which have declined in value due
to credit concerns or solely due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold
the security for a period of time sufficient to allow for a recovery of fair value up to or beyond
the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1
will be superseded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP
Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed
for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and
evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company. 6




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##### Table of Contents



ITEM 2MANAGEMENT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. CRITICAL ACCOUNTING POLICIES Critical accounting policies are defined as those that include significant judgments and
uncertainties, and could potentially result in materially different results under various
assumptions and conditions. Bancorp believes that its most critical accounting policy upon which
financial condition depends, and which involves the most complex or subjective decisions or
assessments is the Allowance for Loan Losses.Arriving at an appropriate level of allowance for
loan losses involves a high degree of judgment. Bancorps allowance for loan losses provides for
probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information, national statistics relating to the probability of loss,
and the prevailing business environment to assess the adequacy of the allowance for loan losses. In
addition, the adequacy of the allowance is reviewed no less than quarterly in conjunction with a
concurrent analysis of specific problem credits in the portfolio, both in terms of risk trending
and the likelihood of default. The allowance for loan losses may be affected by changing economic
conditions and various external factors in ways currently unforeseen. The allowance for loan losses
is increased by provisions for loan losses and by recoveries of loans previously charged-off and
reduced by loans charged-off. 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 nine 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. The Bank began offering health savings accounts to customers with high deductible medical plans in
August 2004. The Bank has found this deposit product to be mutually beneficial to the customer and
to the Bank. Bancorp reported net income of $1,328,000 for the first three months ended March 31, 2005 or $.29
per common share, compared to net income of $1,016,000 or $.22 per common share for the same period
in 2004. LOAN PORTFOLIO The composition of the loan portfolio, including loans held for sale, was as follows (in
thousands): March 31, 2005
    
    
    December 31, 2004
    
    
    March 31, 2004Commercial
    
    $
    22,154
    
    
    $
    21,141
    
    
    $
    23,297Agriculture
    
    
    22,706
    
    
    
    19,508
    
    
    
    17,312Real Estate
Construction
    
    
    6,451
    
    
    
    8,200
    
    
    
    4,2561-4 Family
    
    
    24,788
    
    
    
    22,916
    
    
    
    25,050Multi-family
    
    
    29,029
    
    
    
    22,791
    
    
    
    10,824Commercial
    
    
    101,204
    
    
    
    102,623
    
    
    
    11,086Farmland
    
    
    15,526
    
    
    
    13,449
    
    
    
    92,446Consumer Loans
    
    
    3,296
    
    
    
    3,552
    
    
    
    3,098225,154
    
    
    
    214,180
    
    
    
    187,369Less: net deferred loan fees
    
    
    (432
    )
    
    
    (439
    )
    
    
    (449
    )Total Loans
    
    
    224,722
    
    
    
    213,741
    
    
    
    186,920Less: allowance for credit losses
    
    
    (2,712
    )
    
    
    (2,790
    )
    
    
    (2,805
    )Net Loans
    
    $
    222,010
    
    
    $
    210,951
    
    
    $
    184,115
 Transactions in the allowance for credit losses were as follows for the three months ended March
31: 2005
    
    
    2004Balance at beginning of period
    
    $
    2,790
    
    
    $
    2,765Provision charged to operations
    
    
    33
    
    
    
    44Loans recovered
    
    
    0
    
    
    
    0Loans charged off
    
    
    (111
    )
    
    
    (4
    )Balance at end of period
    
    $
    2,712
    
    
    $
    2,805
 It is the policy of the Bank to place loans on nonaccrual after they become 90 days past due unless
the loans are well secured and in the process of collection. The Bank may place loans that are not
contractually past due or that are deemed fully collateralized on nonaccrual status as a management
tool to actively oversee specific loans. Loans on non-accrual status as of March 31, 2005 and December 31, 2004 were approximately
$1,654,000 and $6,190,000 respectively. There were no loans past due 90 days or more on which the
Bank continued to accrue interest at March 31, 8




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##### Table of Contents



2005 and at December 31, 2004. There were no loans with modified terms as of March 31, 2005.
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 $1,654,000 in non-accrual loan status as of
March 31, 2005. Both loans totaling approximately $1,589,000 are farm loans. One loan is in
foreclosure and management believes the collateral is adequate to cover the loan balance. The other
loan is being reduced from a sale of property with the balance being restructured into a workout
loan. Collateral is adequate to cover the loan and management believes this loan will be paid out
at the end of the workout period. INVESTMENT SECURITIES The amortized cost and estimated book value of the investment securities held by the Bank,
including unrealized gains and losses, at March 31, 2005 and December 31, 2004, are as follows (in
thousands): Gross Unrealized
    
    
    Gross UnrealizedMarch 31, 2005
    
    Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable for SaleU.S. Government and Agency SecuritiesTotal
    
    $
    70,541
    
    
    $
    0
    
    
    ($
    851
    )
    
    $
    69,690Held to MaturityState and Municipal SecuritiesTotal
    
    $
    9,959
    
    
    $
    221
    
    
    ($
    11
    )
    
    $
    10,169
 Gross Unrealized
    
    
    Gross UnrealizedDecember 31, 2004
    
    Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable for SaleU.S. Government and Agency SecuritiesTotal
    
    $
    71,560
    
    
    $
    
    
    
    ($
    613
    )
    
    $
    70,947Held to MaturityU.S. Government and Agency SecuritiesTotal
    
    $
    9,956
    
    
    $
    357
    
    
    ($
    10
    )
    
    $
    10,303
 MATERIAL CHANGES IN FINANCIAL CONDITION Changes in the balance sheet for the three months ended March 31, 2005 include a decrease in total
assets, primarily in interest bearing deposits in banks, and a decrease in liabilities primarily in
time deposits, repurchase agreements, and other liabilities. The Bank experienced an increase in
loans and a slight decrease in deposits. At March 31, 2005, total assets decreased 1.0% or approximately $3,345,000 as compared to total
assets at December 31, 2004. Major components of the change in assets were:  -
    $.9 million decrease in cash and due from banks-
    $6.5 million decrease in interest bearing deposits in banks-
    $1.3 million decrease in securities available for sale-
    $11.1 million increase in net loans Loans were generally made to customers within Bancorps market area. The increases in loans were
primarily funded by cash, interest bearing deposits, and matured securities. 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 March 31, 2005 as compared to December
31, 2004. 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 2005 with high quality
loans that are appropriately priced. The Company experienced a decrease in deposits and repurchase agreements. Other liabilities
decreased which was due primarily to the payment of the cash dividend during the three months ended
March 31, 2005. Major components of the change in liabilities were:  -
    $3.2 million decrease in demand deposits-
    $4.9 million increase in savings and interest bearing deposits-
    $2.1 million decrease in time certificates of deposits-
    $3.8 million decrease in repurchase agreements-
    $2.1 million decrease in other liabilities, due to the payment of the cash dividend to shareholders 9




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##### Table of Contents



Total demand deposits decreased as of March 31, 2005 when compared to December 31, 2004. Management
believes this to be within the normal range of the day to day fluctuation in customer demand
deposits. Management anticipates deposits to grow in 2005 as it penetrates its market areas through
business development. Repurchase deposits decreased by approximately $3.8 million. The majority of these funds were
transferred into money market accounts by one large customer. The increase in savings and interest
bearing deposits was a result of this transfer from repurchase accounts and to growth in interest
bearing demand balances. 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 $1,328,000 or $.29 per common share, for the three
months ended March 31, 2005, compared to net income of approximately $1,016,000 or $.22 per common
share, for the same period in 2004. This represents an increase in net income of 30.7%. The
increase during this period was largely attributable to an increase in interest income on loans as
a result of loan growth. Total interest income increased approximately $640,000 or 17.3% for the three months ended March
31, 2005 as compared to the same period in 2004. The change for the three-month period was
primarily a result of an increase in interest income on loans and security investments available
for sale and the recovery of approximately $140,000 in interest from a non-accrual loan that paid
off in early January 2005. The increase in loan interest income
was mainly attributable to the growth in the loan
portfolio as compared to the same period in 2004. Total interest expense increased approximately $193,000 or 48.9% for the three months ended March 31, 2005 as compared to the same period in 2004. The increase in interest expense on deposits was
the result of higher interest rates paid on deposits compared to the same period in 2004. The
effect of the increase was greater despite a decreased level of
interest bearing deposits.
Interest expense on repurchase agreements increased as a result of the higher interest rate paid on
those accounts compared to the same period in 2004. Net interest income for the three months ended March 31, 2005 increased $491,000 or 15.0% from the
comparable period in 2004. The increase was mainly the result of the increase in interest income
on loans and due to increased loan volumes as compared to the same period in 2004. Total non-interest income increased approximately $38,000 or 3.7% for the three months ended March
31, 2005 as compared to the same period in 2004. The primary increases resulted from the growth in
Bankcard income as a result of volume increases. The decrease in service charges was primarily
attributed to the loss of service charge income from the Veneta branch deposit accounts, which were
sold in September 2004. The Bank also experienced lower mortgage fee income due to the slow down in
the mortgage business as compared to the same period in 2004. Total non-interest expense increased $15,000 or .6 percent for the three months ended March 31,
2005, as compared to the same period in 2004. Non-interest expense increased as a result of
routine adjustments in staff salaries and benefits. The increase in salary and benefit expense was
mitigated by the reduction in the number of employees as a result of the Veneta branch sale and an
increase in loan origination fees accounted for under FASB91 as a result of the increase in loan
volume. Non-interest expense increased in Merchant Bankcard as a result of increases in volume and
the number of merchant accounts. CREDIT LOSS PROVISION The Bank maintains an allowance for credit losses on loans that occur from time to time as an
incidental part of the business of banking. The allowance is increased by provisions charged to
earnings and by recoveries on loans previously charged off, and is reduced by loan charge offs. During the first three months ended March 31, 2005, the Bank funded the allowance for credit losses
$33,000 from operations as compared to $44,000 for the same three-month period of 2004. The Bank
decreased the provision for credit losses for the three month period in 2005 as compared to the
same period in 2004, based on its analysis of delinquencies, loan types, loan classifications, and
other factors affecting the loan portfolio at March 31, 2005. The Bank experienced $111,000 in
credit losses and no recoveries for the three months ended March 31, 2005 and $4,000 in net losses
and no recoveries for the same period ended March 31, 2004. Historically, the Banks loan
charge-off levels have been very low compared to its peers. Management believes that the allowance
for credit losses at March 31, 2005 of $2,712,000 or 1.21% 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, 10




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##### Table of Contents



the economic health of the local community, a comprehensive analysis of the levels and trends of
loan types, and a review of past due and classified loans. It is Bank policy that once each quarter, Bank management makes recommendations to the Board
regarding the adequacy of the Banks allowance for credit losses at quarter end and the amount of
the provision that should be charged against earnings for the next three months. Managements
recommendations are based on an internal loan review process to determine specific potential loss
factors on classified loans, risk factor of loan grades, historical loss factors derived from
actual net charge-off experience, trends in non-performing loans and other potential risks in the
loan portfolio such as industry concentration, the local economy and the volume of loans. Management uses a loan grading system wherein loan officers assign a risk grade to each of their
loans at inception and at intervals based on receipt of financial information, renewal, or when
there is an indication that a credit may have improved or weakened. The risk grades in the loan
portfolio are used in determining a factor that is used in analyzing the adequacy of the reserve
for credit losses. The Banks policy is to charge off loans when, in managements opinion, the loan or a portion of
the loan is deemed uncollectible following a concerted collection effort. Management continues to
pursue collection after a loan is charged-off until all possibilities for collection have been
exhausted. LIQUIDITY AND CAPITAL RESOURCES Bancorps subsidiary, the Bank, has adopted policies to maintain a relatively liquid position to
enable it to respond to changes in the Banks financial environment. Generally, the Banks major
sources of liquidity are customer deposits, sales and maturities of securities, the use of
borrowing lines with correspondent banks including Federal Home Loan bank borrowings, loan
repayments and net cash provided by operating activities. The analysis of liquidity should also include a review of the changes that appear in the
consolidated statement of cash flows for the first three months of 2005. 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 and repurchase agreements. Management believes that the Banks existing sources of liquidity will enable the Bank to fund its
requirements in the normal course of business. As of March 31, 2005, shareholders equity totaled $40,183,000 as compared to $38,401,000 at
December 31, 2004, an increase of 4.6%. This increase in equity was primarily due to the Companys
net income. The total number of shares of Bancorps common stock that may be issued upon the exercise of all
options granted under the Incentive Stock Option Plan may not exceed in the aggregate four percent
(4%) of Bancorps issued and outstanding shares of common stock. As of April 30, 2005 the maximum
number of shares issuable under the Incentive Stock Option Plan was 181,460 shares. As of April
30, 2005, options for 179,077 shares had been granted, options for 15,938 shares exercised, and
options for 17,244 shares expired under this Plan. The total number of shares of Bancorps common stock that may be issued under the Stock Bonus Plan
may not exceed in the aggregate one percent (1%) of Bancorps issued and outstanding shares of
common stock. As of April 30, 2005 the maximum number of shares issuable under the Stock Bonus
Plan was 45,365 shares. As of April 30, 2005, 235 shares had been issued under this Plan. Capital ratios for Citizens Bancorp and Citizens Bank were as follows as of the dates indicated: March 31, 2005
    
    
    
    
    
    
    
    
    
    
    December 31, 2004Adequately
    
    
    
    
    
    
    
    
    
    
    AdequatelyCapitalized
    
    
    Well Capitalized
    
    
    
    
    
    
    Capitalized
    
    
    Well CapitalizedRatio
    
    
    Standards
    
    
    Standards
    
    
    Ratio
    
    
    Standards
    
    
    StandardsTier 1 Leverage CapitalConsolidated
    
    
    12.30
    %
    
    
    4
    %
    
    
    5
    %
    
    
    11.58
    %
    
    
    4
    %
    
    
    5
    %Bank
    
    
    12.26
    %
    
    
    4
    %
    
    
    5
    %
    
    
    11.69
    %
    
    
    4
    %
    
    
    5
    %Tier 1 Risk Based CapitalConsolidated
    
    
    16.52
    %
    
    
    4
    %
    
    
    6
    %
    
    
    15.29
    %
    
    
    4
    %
    
    
    6
    %Bank
    
    
    16.46
    %
    
    
    4
    %
    
    
    6
    %
    
    
    15.25
    %
    
    
    4
    %
    
    
    6
    %Total Risk Based CapitalConsolidated
    
    
    17.62
    %
    
    
    8
    %
    
    
    10
    %
    
    
    16.39
    %
    
    
    8
    %
    
    
    10
    %Bank
    
    
    17.56
    %
    
    
    8
    %
    
    
    10
    %
    
    
    16.35
    %
    
    
    8
    %
    
    
    10
    %
 11




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##### Table of Contents



ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURE 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 asset sensitive, meaning that interest bearing assets mature or
reprice more quickly than interest earning liabilities 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,
2004. 
 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. 12




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS None 
 ITEM 2. CHANGES IN
SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASE OF EQUITY SECURITIES Changes in Securities  None to be
reported Use of Proceeds  None to be reported Issuer Purchase of Equity
Securities  None to be reported 
 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 (a) Exhibits  31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes Oxley Act of 2002.31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes Oxley Act of 2002.32.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.32.2 Chief Financial Officer certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. 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: May 2, 2005
    
    
    
    /s/ William V. HumphreysBy:
    
    William V. HumphreysPresident andChief Executive OfficerDate: May 2, 2005
    
    
    
    /s/ Lark E. WyshamBy:
    
    Lark E. WyshamExecutive Vice President andChief Financial Officer
 14