CZBC Citizens Bancorp (PK)

 

 

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

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 NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, as defined in Rule 12b-2 of the Act.

Large accelerated filer o            Accelerated filer o            Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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.

Class		Outstanding as of October 26, 2007
Common Stock, no par value		4,671,575

 

 

CITIZENS BANCORP
FORM 10-Q
SEPTEMBER 30, 2007
INDEX

		Page
		Reference
PART I. – FINANCIAL INFORMATION
ITEM 1. – FINANCIAL STATEMENTS – UNAUDITED
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006			1
Condensed Consolidated Statements of Income for the three months and the nine months ended September 30, 2007 and 2006			2
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2007 and 2006			3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006			4
Notes to Condensed Consolidated Financial Statements			5-11
ITEM 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations			11-15
ITEM 3. – Quantitative and Qualitative Disclosure about Market Risk			15
ITEM 4. – Controls and Procedures			16
PART II. – OTHER INFORMATION
ITEM 1. — Legal Proceedings			17
ITEM 1A. – Risk Factors			17
ITEM 2. – Unregistered Sales of Equity Securities and Use of Proceeds			17
ITEM 3. – Defaults Upon Senior Securities			17
ITEM 4. – Submission of Matters to a Vote of Security Holders			17
ITEM 5. — Other Information			17
ITEM 6. – Exhibits			17
SIGNATURES			18
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I FINANCIAL INFORMATION

See accompanying notes.

See accompanying notes.

CITIZENS BANCORP AND SUBSIDARY

Notes to Condensed Consolidated Financial Statements (unaudited)

	1.		Basis of Presentation
			The 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 Statements
			The 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 Securities
			The 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):

	4.		Loan Portfolio
			The composition of the loan portfolio was as follows (dollars in thousands):

Transactions in the allowance for loan losses and unfunded commitments were as follows for the nine months ended September 30:

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.

	5.		Non-Performing Assets
			It 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):

	6.		Borrowings
			The composition of borrowings is as follows (dollars in thousands):

	7.		Basic and Diluted Earnings Per Common Share
			The 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):

	8.		Stock Based Compensation
			In 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.

			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:

Stock option activity for the nine months ended September 30, 2006 was as follows:

			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 Segments
			The 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.

			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.

	10.		Recent Accounting Pronouncements
			At 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.

In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value with changes in fair value reported in earnings. In addition, it requires disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for public companies for years beginning after November 15, 2007. Management does not expect the adoption of SFAS 159 to have a material impact on the Company’s condensed consolidated financial statements.

On September 20, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (FTB 85-4), Accounting for Purchases of Life Insurance” (EITF 06-5). EITF 06-5 addresses the methods by which an entity should determine the amounts that could be realized under an insurance contract at the consolidated balance sheet date when applying FTB 85-4, and whether the determination should be on an individual or group policy basis. EIFT 06-5 is effective for fiscal years beginning after December 15, 2006. The adoption of EITF 06-5 did not have a material impact on the Company’s condensed consolidated financial statements.

In September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No. 06-4 (EITF 06-4) Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements .  A question arose when an employer enters into an endorsement split-dollar life insurance arrangement related to whether the employer should recognize a liability for the future benefits or premiums to be provided to the employee.  EITF 06-4 indicates that an employer should recognize a liability for future benefits and that a liability for the benefit obligation has not been settled through the purchase of an endorsement type policy. An entity should apply the provisions of EITF 06-4 either through a change in accounting principle through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods.  The provisions of EITF 06-4 are effective for fiscal years beginning after December 15, 2007.  Management has not yet completed its evaluation of the impact that EITF 06-4 may have on the Company.

ITEM 2
Management’s Discussion and
Analysis of Financial Condition
And Results of Operations

Cautionary Information
Concerning Forward-looking Statements

The following section 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 differences 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 Credit Losses . Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. Bancorp’s allowance for credit 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 credit 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 credit losses may be affected by changing economic conditions and various external factors in ways currently unforeseen. The allowance for credit 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 by the State of Oregon as a commercial bank with a single office in Corvallis, Citizens Bank. Since then, Citizens Bank has expanded to an additional ten locations in the five counties of Benton, Linn, Lane, Polk, and Yamhill with branches located in the communities of Corvallis, Philomath, Albany, Junction City, McMinnville, Harrisburg, Dallas, Springfield, and Lebanon.

Citizens Bancorp (“the Company” or “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.

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 the development of the Bank over time. Risk levels have been greatly reduced because of expertise in loan, investment, operational, and human resource management.

Bancorp’s primary market focus is to provide commercial bank services to businesses, professionals, and individuals. Bancorp emphasizes the development of meaningful customer relationships and a high level of service. Its employees are well-trained banking professionals who are committed to these objectives.

The Bank offers deposit accounts, safe-deposit boxes, consumer loans, commercial loans, agricultural loans, and commercial and residential real estate loans. Commercial loans include operating lines of credit, equipment and real estate financing, capital needs, and other traditional financing products.

The Bank has an 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 offers health savings accounts to customers with high deductible medical plans. The Bank has found this deposit product to be mutually beneficial to the customer and to the Bank.

2007 Activities

On January 10, 2007, the Company paid a cash dividend to shareholders declared in 2006 of $.52 per share. The cash dividend paid out was $2.5 million of which $1.2 million was reinvested through the Company’s dividend reinvestment plan.

On March 20, 2007 the board of directors of the Bank approved management’s proposal of a new branch to be located in Lebanon, Oregon. The Company acquired property for its Lebanon, Oregon branch located at 2122 S. Santiam Highway. The branch opened in August 2007 doing business out of its mobile unit during the construction of a permanent building. Management anticipates the permanent building to be completed mid-year 2008. The branch will be led by a branch manager skilled in lending which will be mutually beneficial to the Lebanon community and the Company.

The Board of Directors and management decided not to pursue a branch location in Eugene, Oregon. The Company does not have a manager identified for a Eugene branch. The Company’s philosophy is to build a branch around a quality branch manager as opposed to constructing a building and then trying to locate a manager. This strategy supports the Company’s culture of strong branch managers.

On September 11, 2007 the Company filed a preliminary Proxy Statement and Schedule 13E-3 with the Securities and Exchange Commission (“SEC”) disclosing the Company’s plan to submit to shareholders for approval amendments to its Articles of Incorporation (“Articles”) enabling the Company to deregister its common stock with the SEC. Amendments to the Articles would convert certain common shareholders to a new class of preferred stock and other shareholders would have their stock repurchased. On October 23, 2007 and November 5, 2007 the Company filed amended Proxy Statements. Details of the pending deregistration proposal can be found in the documents filed with the SEC at www.sec.gov under Citizens Bancorp/OR.

The Company reported net income of $1,639,000 in the third quarter ending September 30, 2007 or $.34 per common share, as compared to net income of $1,505,000 or $.32 per common share for the same period in 2006. For the first nine months of 2007, the Company earned $4,446,000 or $.93 per common share as compared to the nine month period ending September 30, 2006 of $4,123,000 or $.87 per common share.

Material Changes in Financial Condition

Significant changes in the condensed consolidated balance sheet for the nine months ended September 30, 2007 include an increase in total assets; primarily in loans. Liabilities decreased primarily in short-term borrowings and other liabilities relative to the payment of the cash dividend to shareholders. Overall, the Company experienced an increase in loans and deposits and a decrease in cash and due from banks, interest bearing deposits in banks and investment securities.

At September 30, 2007, total assets increased .8% or approximately $3.0 million as compared to total assets at December 31, 2006. Major components of the change in assets were:

	•		$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%

Loans were generally made to customers within the Company’s market area. Loan growth increased 12.1% for the period ended September 30, 2007 as a result of calling by the Company’s qualified loan officers in the Company’s market areas. The increase in loans was primarily funded by an increase in deposits and by the decreases in various liquid assets as noted above. The Company has a history of minimal loan charge-offs due to its exceptional underwriting policies, standards, and loan review processes. The Company’s loan officers are actively calling on potential and current customers. Management anticipates that the loan portfolio will continue to grow in 2007 with high quality loans that are appropriately priced.

The Company experienced an increase in deposits for the period ending September 30, 2007 as compared to the period ending December 31, 2006. The decrease in short term borrowings resulted from a decrease in balances in customer repurchase sweep accounts (“REPO’S”). The decrease in other liabilities was due primarily to the payment of the cash dividend during the first quarter of 2007. Major components of the change in liabilities for the Company were:

	•		$.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)%

Total deposits increased $11.5 million or 4.3% as of September 30, 2007 as compared to December 31, 2006. Average deposits for the period ending September 30, 2007 have increased $21.8 million or 8.7% as compared to the same period in 2006. Management believes a portion of the increase in deposits is in new core customer relationships due to calling efforts in its market areas. Competition for deposits has been and continues to be very strong within the Company’s market areas. The Company has a low cost of funds/high margin strategy along with building customer relationships. It does not compete for deposits by trying to outbid competitors as the Company enjoys good liquidity and alternate lower cost of funding sources than offering high non-relationship deposit rates. Management anticipates that deposit competition will remain strong but estimates that deposits will slowly grow by continuing to develop strong customer relationships and offering reasonable deposit rates.

Repurchase account deposits decreased approximately $10.4 million or 27.7% as a result of decreases in existing account balances for the period ending September 30, 2007 as compared to December 31, 2006. These accounts tend to have sizeable fluctuations in their balances as these are some of the Company’s large commercial accounts. Additionally two large accounts closed as a result of an estate settlement and the other for business discontinuation purposes.

Material Changes in Results of Operations

The Company reported net income of approximately $4,446,000 or $.93 per common share, for the nine months ended September 30, 2007, compared to net income of approximately $4,123,000 or $.87 per common share, for the same period in 2006. This represents an increase in net income of $323,000 or 7.8%. The increase was primarily the result of a $1.3 million increase in net interest income exceeding a $764,000 increase in non-interest expense. Net income for the quarter ended September 30, 2007, was approximately $1,639,000 or $.34 net income per common share, compared to net income of approximately $1,505,000, or $.32 per common share, for the same period in 2006. This represents an increase in net income of $134,000 or 8.9% for the quarter. The increase during both these periods was largely attributable to an increase in interest income on loans due to a 12.2% growth in loans for the nine month period and 4.1% for the three month period ended September 30, 2007.

Total interest income increased approximately $2.1 million or 13.3% for the nine months and $440,000 or 7.7% for the three months ended September 30, 2007 as compared to the same periods in 2006. The change for the nine month and the three month period was primarily a result of an increase in interest income from loans. The increase in loan interest income was attributable to growth of the portfolio along with an increase in the overall yield of the portfolio.

Total interest expense increased approximately $843,000 or 23.5% for the nine months and increased $50,000 or 3.5% for the three months ended September 30, 2007 as compared to the same periods in 2006. The increase in interest expense on deposits for the period ending September 30, 2007 was the result of deposit growth and higher interest rates paid for customer deposits resulting from overall market rate increases in 2007 compared to the same period in 2006.

Net interest income for the nine months ended September 30, 2007 increased approximately $1.3 million or 10.3% and $390,000 or 9.0% for the three-month period ended September 30, 2007 as compared to the same periods in 2006. The increase in both the three-month and nine-month period ended September 30, 2007 was primarily a result of the increase in interest income on loans more than offsetting the increased interest expense on deposits.

Total non-interest income increased by $77,000 or 4.4% for the nine months and $54,000 or 9.5% for the three months ended September 30, 2007 as compared to the same periods in 2006. Service charge income decreased $133,000 or 13.7% for the nine month period and $19,000 or 6.1% of the three month period ended September 30, 2007 as compared to the same periods in 2006. The decrease is primarily a result of a decrease in overdraft fees on deposit accounts.

Total non-interest expense increased $764,000 or 10.2% for the nine months and $206,000 or 8.1% for the three months ended September 30, 2007, as compared to the same periods in 2006. Salary and benefit expense increased $449,000 or 8.9% for the nine months ended September 30, 2007 as a result of routine salary adjustments, additional staff relative to the new branch in Lebanon, 401K plan expense, and increased costs associated with medical benefits as compared to the same period in 2006.

Allowance for Credit Losses

The Company maintains an allowance for loan losses and unfunded loan commitments for losses 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 nine months ended September 30, 2007, the Company’s provision for loan losses was $130,000 as compared to $114,000 for the same nine-month period of 2006. The Company’s provision for loan losses is based on its analysis of delinquencies, loan types, loan classifications, and other factors affecting the loan portfolio. The Company experienced $33,000 in loan losses and $5,000 in recoveries for the nine months ended September 30, 2007 and $17,000 in losses and $3,000 in recoveries for the period ended September 30, 2006. Historically, the Company’s loan charge-off levels have been very low compared to its peers. Management believes that the allowance for loan losses at September 30, 2007 of $2,797,000 or .99% of total loans is adequate. The allowance for unfunded loan commitment was $180,000 as of September 30, 2007 which management also believes is adequate.

The provision for credit losses represents charges made to operating expenses to maintain an appropriate allowance for credit losses. Management considers various factors in establishing an appropriate allowance. These factors include an assessment of the financial condition of the borrower, a determination of the borrower’s ability to service the debt from cash flow, a conservative assessment of the value of the underlying collateral, the condition of the specific industry of the borrower, the economic health of the local community, a comprehensive analysis of the levels and trends of loan types, and a review of past due and classified loans.

It is Company policy that once each quarter, management makes recommendations to the Board regarding the adequacy of the Company’s allowance for credit losses at quarter end and the amount of the provision that should be charged against earnings. Management’s recommendations are based on an internal loan review process to determine specific potential loss factors on classified loans, risk factor of loan grades, historical loss factors derived from actual net charge-off experience, trends in non-performing loans and other potential risks in the loan portfolio such as industry concentration, the local economy and the volume of loans.

Management uses a loan grading system wherein loan officers assign a risk grade to each of their loans at inception and at intervals based on receipt of financial information, renewal, or when there is an indication that a credit may have improved or weakened. The risk grades in the loan portfolio are used in determining a factor that is used in analyzing the adequacy of the allowance for credit losses.

The Company’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

The Company has adopted policies to maintain a relatively liquid position to enable it to respond to changes in the Company’s financial environment. Generally, the Company’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 condensed consolidated statement of cash flows for the first nine months of 2007. 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 Company’s existing sources of liquidity will enable the Company to fund its requirements in the normal course of business.

As of September 30, 2007, shareholders’ equity totaled $49,857,000 as compared to $46,524,000 at December 31, 2006, an increase of 7.2%. This increase in equity was primarily due to the Company’s net income of $4,446,000 and dividend reinvestment of $1,189,000 which was decreased by the repurchase of common stock of approximately $2,567,000.

Under the Company’s stock bonus plan, 45,365 shares of common stock are authorized for distribution. As of September 30, 2007, 595 shares had been issued under this Plan.

Capital ratios for Citizens Bank were as follows as of the dates indicated:

		September 30, 2007												December 31, 2006
						Adequately				Well								Adequately				Well
		Actual				Capitalized				Capitalized				Actual				Capitalized				Capitalized
		Ratio				Standards				Standards				Ratio				Standards				Standards
Tier 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 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.

PART II. OTHER INFORMATION