FORM 10-Q

UNITED STATES
FEDERAL RESERVE BOARD
Washington, D.C. 20551

(Mark one)

OREGON PACIFIC BANCORP
(Exact name of small business issuer as specified in its charter)

1355 Highway 101
Florence, Oregon 97439
(Address of principal executive offices)

(541) 997-7121
(Issuer’s telephone number)

        Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes |X|        No |_|

        The number of shares outstanding of the issuer’s Common Stock, no par value, as of April 30, 2004, was 2,178,038.

OREGON PACIFIC BANCORP

INDEX

2

OREGON PACIFIC BANCORP
CONSOLIDATED BALANCE SHEETS

See accompanying notes.

3

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)

4

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(continued)

See accompanying notes.

5

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

See accompanying notes.

6

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

7

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)

See accompanying notes.

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Notes to Financial Statements

March 31, 2004 and 2003
(Unaudited)

Note 1 – Organization and Basis of Presentation

Oregon Pacific Bancorp (the “Company”), an Oregon Corporation and financial bank holding company, became the holding company of Oregon Pacific Banking Co. (the “Bank”) effective January 1, 2003 through a Plan of Share Exchange approved by Bank shareholders on December 19, 2002. The Bank is a state-chartered institution authorized to provide banking services by the State of Oregon, from its headquarters in Florence, Oregon. Full-service banking products are offered to the Bank’s customers who live primarily in Lane, Douglas, and Coos counties and on the central Oregon coast. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

The financial information included in this interim report has been prepared by management without audit by independent public accountants. The unaudited interim financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. All adjustments including normal recurring accruals necessary for fair presentation of results of operations for the interim periods included herein have been made. However, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts and balances for the periods presented. Actual results could differ from those estimated. Additionally, the results of operations for the three months ended March 31, 2004 are not necessarily indicative of results to be anticipated for the year ending December 31, 2004. The interim financial statements should be read in conjunction with the audited financial statements, including the notes thereto, contained in the Bank’s 2003 Annual Report to Shareholders.

Stock options – The Company measures compensation cost using the intrinsic value method, which computes compensation cost as the difference between a company’s stock price and the option price at the grant date. No compensation cost has been recognized for the Company’s stock option plans while one option was granted during the quarter ended March 31, 2004. Had compensation cost for the Company’s grants for stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” its net income and earnings per common share for March 31, 2004 and 2003 would approximate the pro forma amounts below.

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The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for March 31, 2004 and 2003:

In the first quarter of 2004, Bancorp adopted Financial Accounting Standards Board’s (“FASB”) Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities” which provided guidance on how to identify the primary beneficiary of a variable interest entity (VIE) and determine when the primary beneficiary of a VIE should include the VIE within its consolidated financial statements. As a result of adoption of FIN 46, Bancorp was required to no longer consolidate Oregon Pacific Statutory Trust I (the “Trust”) within its financial statements and to recognize $4.1 million as junior subordinated debentures due to the Trust effective March 31, 2004.

Reclassifications – Certain reclassifications have been made to the 2003 financial statements to conform to current year presentations.

Note 2 – Loans and Allowance for Loan Losses

The composition of the loan portfolio was as follows as of the dates presented:

Changes in the allowance for loan losses were as follows for the three-months ended:

It is the policy of the Bank to place loans on nonaccrual status whenever the collection of all or a part of the principal is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination, and may or may not be secured by collateral. There were no loans on nonaccrual status at March 31, 2004 or December 31, 2003.

The Bank had no loans past due 90 days or more on which it continued to accrue interest at either March 31, 2004 or December 31, 2003.

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Note 3 – Earnings per Share of Common Stock

Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under stock option plans. Weighted average shares outstanding consist of common shares outstanding and common stock equivalents attributable to outstanding stock options.

This report contains a number of forward looking statements about our anticipated business, operations, financial performance and cash flows. Statements in this report that relate to future plans, events and circumstances are provided to describe management’s intentions and expectations based on currently available information, and readers should not construe these statements as assurances or guarantees. As with any predictions, these statements are inherently difficult to make with any degree of assurance, and actual results may differ materially and adversely from management’s expectations described herein. Likewise, management’s plans described in this report may not come to pass because unforeseen events may force management to deviate from its expressed intentions. Forward-looking statements often can be identified by the use of predictive or prospective terms such as “expect,” “anticipate,” “believe,” “plan,” “intend,” and words of similar construction or meaning. Some of the events or circumstances that may cause our actual results to deviate from management’s expectations include the impact of competition and local and regional economic factors upon our customer base, our deposits and our loan portfolio; economic and regulatory limits on our ability to grow our assets and manage our business; customer acceptance of our products; interest rate fluctuations that may adversely impact our revenues and expenses; and the impact of impairment charges upon our intangible and other assets. Other factors that may adversely impact our performance are discussed in this report as well as other disclosures we make from time to time in our filings with the Securities and Exchange Commission or other federal agencies. Readers also should note that forward-looking statements expressed in this report are made as of the date of this report, and management cannot undertake to update those statements to reflect future events or circumstances.

Critical Accounting Policies and Estimates

On an ongoing basis, management evaluates the estimates used, including the adequacy of the allowance for loan losses and contingencies and the mortgage servicing asset. Estimates are based upon historical experience, current economic conditions, and other factors that management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources as well as assessing and identifying the accounting treatments of commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

Overview

Oregon Pacific Bancorp (the “Company”), an Oregon corporation and financial bank holding company, is the holding company of Oregon Pacific Banking Co. (the “Bank”). The Company is headquartered in Florence, Oregon.

The Bank is an Oregon banking corporation organized under the Oregon Bank Act on December 17, 1979. The Bank is a full-service commercial bank that provides a broad range of depository and lending services to commercial enterprises, governmental entities and individuals. In 2002, the Bank expanded from its main office and a full-service Safeway store branch, both in Florence, to three additional Oregon locations including Roseburg, Coos Bay and Sutherlin. The Bank also provides trust and asset management services, and investment and brokerage services, at its main office in Florence and at offices in Roseburg and Coos Bay, Oregon.

The Company has a two-tiered corporate structure. At the holding company level, the affairs of the Company are overseen by a Board of Directors elected by the shareholders of the Company. The business of the Bank is overseen by a Board of Directors of the Company, the sole owner of the Bank. Currently the respective members of the Board of Directors of the Bank and of the Company are identical.

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The Company reported net income of $367,000, or $.17 per basic share, for the three months ended March 31, 2004. This compares to Bank income of $188,000, or $.09 per basic share, for the same three month period in the prior year. The increase in earnings is largely attributable to a large recovery of a loan charged off in 1998 and a benefit from the provision for loan losses that resulted from the recovery.

Financial Condition

Total assets at March 31, 2004 were $128,967,000 compared to $120,676,000 at December 31, 2003, an increase of $8,291,000 (6.9%). The increase was due primarily to interest-bearing deposits ($8.09 million) and new loans ($5.20 million), partially offset by the decrease of securities available-for-sale ($5.09 million).

Total deposits increased $7,829,000 (8.0%) in the three-month period since December 31, 2003. The increase was primarily due to the opening of the new facilities in both Coos Bay and Roseburg that attracted new customers.

March 31, 2004 stockholders’ equity was $8,891,000, an increase of $256,000 from December 31, 2003. This change resulted from consolidated net income partially offset by cash dividends paid ($91,000).

Results of Operations

Net interest income

Net interest income is the Bank’s primary source of revenue. Net interest income is the difference between interest income earned from loans and the investment portfolio, and interest expense paid on customer deposits and debt. Changes in net interest income result from changes in volume and changes in rate. Volume refers to the dollar level of interest earning assets and interest bearing liabilities. Rate refers to the underlying yields on assets and costs of liabilities.

Net interest income on a tax-equivalent basis was $1,627,000 for the quarter ended March 31, 2004 compared to $1,336,000 for the same period in 2003 (see Table 1). The $291,000 increase was due to an increase in the volume of loans and a decrease in the cost of funds. The effective rate on interest-bearing liabilities for the quarter was 1.41% compared to 2.18% for the same period in 2003. The increase in interest income of $156,000 was due to a $199,000 increase from the increase in average loans outstanding of $10,339,000 from the same period one year ago, partially offset by decreased average rates earned.

Table 1

Average Balances and Average Rates Earned and Paid. The following table shows average balances and interest income or interest expense, with the resulting average yield or rates by category of average earning asset or interest-bearing liability:

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        (1) Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.

        (2) Nonaccrual loans are included in the average balance.

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Provision for Loan Losses

A benefit of $360,000 was recorded for the three months ended March 31, 2004 compared to a provision of $50,000 in the same period in 2003. The allowance for loan losses at March 31, 2004 was 1.8% of gross loans, as compared to 1.5% at December 31, 2003. Management is satisfied that the reserve is adequate for probable loan losses in the loan portfolio at March 31, 2004. Management’s assessment of the adequacy of the allowance for loan loss is based on a number of factors including current delinquent and non-performing loans, past loan loss experience, evaluation of customers’ financial strength, and economic trends impacting areas and customers served by the Bank. The allowance is based on estimates, and actual losses may vary from those currently estimated.

Noninterest Income

Noninterest income decreased $122,000 or 19.3% for the three months ended March 31, 2004 as compared to the same period in 2003. The decrease was primarily the result of decreased mortgage loan sales from the prior year as 2003 loan refinances during that period of historically low mortgage rates. The decrease was partially offset by increases in all other categories of noninterest income.

Noninterest Expense

Noninterest expense increased $244,000 or 15.1% for the three months ended March 31, 2004 over the same period one year ago. The increase is attributable to costs associated with the opening of new facilities at two locations and the related costs of increased headcount and furnishings.

The provision for income taxes at both March 31, 2004 and 2003 remained consistent with expected statutory rates adjusted for anticipated permanent differences arising primarily from nontaxable income earned on municipal security investments.

Liquidity and Capital Resources

Liquidity management involves the ability to meet cash flow requirements. The Bank’s major sources of liquidity are customer deposits, calls and maturities of investment securities, the use of borrowing arrangements through the Federal Home Loan Bank of Seattle, and net cash provided by operating activities. Sales of the Bank’s investment portfolio are another source of funds, if needed. The investment portfolio is of high quality and is highly marketable although a gain or loss would be realized if the market value of securities sold were not equal to their adjusted book value at the date of sale.

The Bank maintains liquidity levels adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments. Management is satisfied that liquidity is more than sufficient at March 31, 2004 and purchases for the Bank’s investment portfolio were made. There are no known trends, events, regulatory authority recommendations, or uncertainties that management is aware of that will have or that are likely to have a material adverse effect on the Bank’s liquidity, capital resources, or operations.

For purposes of determining a bank’s deposit insurance assessment, the FDIC has issued regulations that define a “well capitalized” bank as one with a leverage ratio of 5% or more and a total risk-based ratio of 10% or more. At March 31, 2004, the Bank’s leverage and total risk-based ratios were 10.10% and 13.40% respectively, which exceed the well-capitalized threshold.

Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk arises principally from interest rate risk in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Bank manages other risks, such as credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be a significant market risk which could have the largest material effect on the Bank’s financial condition and results of operations.

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Through the Bank’s Asset/Liability Management Committee (“ALCO”), which is comprised of senior management, the Bank monitors the level and general mix of earning assets and interest-bearing liabilities, with special attention to those assets and liabilities which are rate-sensitive. The primary objective of ALCO is managing the Company’s assets and liabilities in a manner that balances profitability, interest rate risk, and various other risks including liquidity.  ALCO operates under policies and within risk limits prescribed by, reviewed and approved by the Board of Directors. The Bank’s strategy has included the funding of certain fixed rate loans with medium term borrowed funds in order to mitigate a margin squeeze should interest rates rise.