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OREGON PACIFIC BANCORP - Quarter Report: 2004 March (Form 10-Q)

FORM 10-Q

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

(Mark one)


|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended March 31, 2004

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the transition period from ____________ to ____________

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


Oregon   71-0918151
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

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


Part I Financial Information  

  Item 1. Financial statements  

    Consolidated balance sheets 3
    Consolidated statements of income and comprehensive income 4-5
    Consolidated statements of changes in stockholders’ equity 6
    Consolidated statements of cash flows 7-8
    Notes to consolidated financial statements 9-11

  Item 2. Management’s Discussion and Analysis or Plan of Operation 11-14

  Item 3. Quantitive and Qualitive Disclosures about Market Risk 14-15

  Item 4. Controls and Procedures 15-16

Part II. Other Information 16-17
  Signatures 18
  Certifications of Chief Executive Officer and Chief Financial Officer 19-22

2



PART 1. FINANCIAL INFORMATION

Item 1. Financial statements

OREGON PACIFIC BANCORP
CONSOLIDATED BALANCE SHEETS


 
Unaudited

MARCH 31,
2004

 
Audited

DECEMBER 31,
2003

 
ASSETS                
 
Cash and due from banks     $ 4,109,603   $ 4,916,985  
Interest-bearing deposits in banks       12,850,397     4,764,248  
Available-for-sale securities, at fair value       11,754,632     16,845,288  
Restricted equity securities       1,006,300     999,100  
Loans held for sale       4,496,527     4,057,664  
Loans, net of allowance for loan    
   losses and unearned income       87,920,179     82,722,328  
Premises & equipment, net       5,146,157     4,811,107  
Other real estate owned       9,746     9,746  
Accrued interest and other assets       1,673,432     1,549,826  
 
 
 
         Total assets     $ 128,966,973   $ 120,676,292  
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
 
Deposits    
   Demand deposits     $ 24,849,185   $ 21,990,360  
   Interest-bearing demand deposits       42,191,712     39,165,421  
   Savings deposits       17,867,641     16,207,129  
   Time certificate accounts:    
      $100,000 or more       7,794,804     7,102,978  
      Other time certificate accounts       12,590,491     12,998,516  
 
 
 
         Total deposits       105,293,833     97,464,404  
 
 
 
Other liabilities    
   Federal Home Loan Bank borrowings       8,909,056     7,922,806  
   Floating rate Junior Subordinated Deferrable Interest    
      Debentures (Trust Preferred Securities)       4,124,000     4,000,000  
   Deferred compensation liability       1,022,757     884,235  
   Accrued interest and other liabilities       726,237     1,769,289  
 
 
 
         Total liabilities       120,075,883     112,040,734  
 
 
 
Stockholders’ equity                
   Common stock, no par value, 10,000,000 shares                
      authorized with 2,178,038 and 2,173,592 issued                
      and outstanding at March 31, 2004 and                
      December 31, 2003, respectively       4,924,945     4,894,536  
   Undivided profits       3,611,079     3,331,170  
   Accumulated other comprehensive                
      income, net of tax       355,066     409,852  
 
 
 
         Total stockholders’ equity       8,891,090     8,635,558  
 
 
 
         Total liabilities and stockholders’ equity     $ 128,966,973   $ 120,676,292  
 
 
 

See accompanying notes.

3



OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME

(Unaudited)


 
Three Months Ended March 31,
 
 
2004

 
2003

 
INTEREST INCOME            
   Interest and fees on loans     $ 1,653,009   $ 1,530,299  
   Interest on investment securities:                
      U.S. Teasuries and agencies       49,362     29,169  
      State and political subdivisions       79,210     88,996  
      Corporate and other investments       91,770     62,267  
   Interest on deposits in banks       18,142     22,871  
 
 
 
                 
      Total interest income       1,891,493     1,733,602  
 
 
 
INTEREST EXPENSE    
   Interest-bearing demand deposits       86,054     161,553  
   Savings deposits       30,713     39,805  
   Time deposits       109,829     146,635  
   Other borrowings       119,884     92,159  
 
 
 
     
      Total interest expense       346,480     440,152  
 
 
 
                 
      Net interest income       1,545,013     1,293,450  
                 
PROVISION (BENEFIT) FOR LOAN LOSSES       (360,000 )   50,000  
 
 
 
     
      Net interest income after provision (benefit) for loan losses       1,905,013     1,243,450  
 
 
 
NONINTEREST INCOME                
   Mortgage loan sales and servicing fees       141,453     386,714  
   Service charges and fees       165,007     102,055  
   Trust fee income       143,062     102,162  
   Investment sales commissions       41,736     25,496  
   Other income       19,213     15,978  
 
 
 
     
      Total noninterest income       510,471     632,405  
 
 
 

4



OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME

(Unaudited)
(continued)


 
Three Months Ended March 31,
 
 
2004

 
2003

 
NONINTEREST EXPENSE            
   Salaries and benefits       1,210,438     1,002,829  
   Occupancy       191,881     156,827  
   Supplies       63,029     50,461  
   Postage and freight       17,501     22,891  
   Outside services       140,988     155,322  
   Advertising       51,622     36,036  
   Loan collection expense       31,838     39,538  
   Securities and trust department expenses       33,095     33,207  
   Other expenses       117,732     117,358  
 
 
 
     
      Total noninterest expense       1,858,124     1,614,469  
 
 
 
                 
INCOME BEFORE INCOME TAXES       557,360     261,386  
                 
PROVISION FOR INCOME TAXES       190,508     73,000  
 
 
 
     
NET INCOME       366,852     188,386  
     
OTHER COMPREHENSIVE INCOME                
      Unrealized holding loss arising during the period       (54,786 )   (1,955 )
 
 
 
     
COMPREHENSIVE INCOME     $ 312,066   $ 186,431  
 
 
 
                 
EARNINGS PER SHARE OF COMMON STOCK    
   Basic earnings per share     $ 0.17   $ 0.09  
 
 
 
   Diluted earnings per share     $ 0.17   $ 0.09  
 
 
 
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING    
   Basic earnings per share       2,175,888     2,138,196  
 
 
 
   Diluted earnings per share       2,177,848     2,152,012  
 
 
 

See accompanying notes.

5



OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


 
Common Stock
 
 
 
Undivided
 
Accumulated
Other
Comprehensive
 
Total
Stockholders’
 
 
Shares

 
Amount

 
Surplus

 
Profits

 
Income

 
Equity

 
Balance, December 31, 2002 (Audited)       2,135,244   $ 939,507   $ 3,730,019   $ 2,735,032   $ 488,364   $ 7,892,922  
                                         
Change in capitalization as a result of    
   holding company formation           3,730,019     (3,730,019 )            
     
Exercise of stock options       20,000     100,000                 100,000  
     
Cash dividends paid                   (240,691 )       (240,691 )
     
Dividends reinvested in stock       18,348     125,010         (125,010 )        
     
Net income and comprehensive income                   961,839     (78,512 )   883,327  
     
Balance, December 31, 2003 (Audited)       2,173,592   $ 4,894,536   $   $ 3,331,170   $ 409,852   $ 8,635,558  
 
 
 
 
 
 
 
                                         
Cash dividends paid                   (56,534 )       (56,534 )
                                         
Dividends reinvested in stock       4,446     30,409         (30,409 )        
                                         
Net income and comprehensive income                   366,852     (54,786 )   312,066  
 
 
 
 
 
 
 
     
Balance, March 31, 2004 (Unaudited)       2,178,038   $ 4,924,945   $   $ 3,611,079   $ 355,066   $ 8,891,090  
 
 
 
 
 
 
 

See accompanying notes.

6



OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


 
Three Months Ended March 31,
 
 
2004

 
2003

 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income     $ 366,852   $ 188,386  
Adjustments to reconcile net income to net cash                
      from operating activities:    
   Depreciation and amortization       108,400     82,759  
   Provision (benefit) for loan losses       (360,000 )   50,000  
   Federal Home Loan Bank stock dividends       (7,200 )   (11,500 )
   Net change in mortgage loans held-for-sale       (438,863 )   1,670,532  
   Loss on disposition of premises, equipment, and other real estate           2,286  
   Net increase (decrease) in accrued interest and other assets       (87,083 )   (342,933 )
   Net decrease in accrued interest and other liabilities       (904,530 )   (435,168 )
 
 
 
                 
      Net cash from operating activities       (1,322,423 )   1,204,362  
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES    
   Proceeds from sales and maturities of available-for-sale securities       4,991,027     1,055,347  
   Purchases of available-for-sale-securities           (1,517,560 )
   Purchase of restricted equity securities           (650 )
   Net increase in interest-bearing deposits in banks       (8,086,149 )   (388,926 )
   Loans originated, net of principal repayments       (4,837,851 )   (5,174,641 )
   Purchase of premises and equipment       (435,130 )   (162,234 )
   Proceeds from sale of other real estate           104,949  
 
 
 
                 
      Net cash from investing activities       (8,368,103 )   (6,083,715 )
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES    
   Net increase in demand and savings deposit accounts       7,545,628     2,412,913  
   Net increase in time deposits       283,801     1,678,828  
   Proceeds from Federal Home Loan Bank borrowings       1,000,000      
   Repayment of Federal Home Loan Bank borrowings       (13,750 )   (112,500 )
   Proceeds from issuance of subordinated debentures       124,000      
   Proceeds from other bank borrowing           250,000  
   Cash dividends paid       (56,534 )   (71,180 )
 
 
 
                 
      Net cash from financing activities       8,883,145     4,158,061  
 
 
 
     
NET DECREASE IN CASH AND CASH EQUIVALENTS       (807,382 )   (721,292 )

7



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


 
Three Months Ended March 31,
 
 
2004

 
2003

 
                 
CASH AND CASH EQUIVALENTS, beginning of period     $ 4,916,985   $ 3,886,203  
 
 
 
     
CASH AND CASH EQUIVALENTS, end of period     $ 4,109,603   $ 3,164,911  
 
 
 
     
SUPPLEMENTAL CASH FLOW INFORMATION    
   Cash paid for interest     $ 311,575   $ 435,976  
 
 
 
   Cash paid for income taxes     $ 29,719   $ 2,880  
 
 
 
     
SCHEDULE OF NONCASH ACTIVITIES    
   Stock dividends reinvested     $ 30,409   $ 35,559  
 
 
 
   Unrealized loss on available for sale securities, net of tax     $ (54,786 ) $ (1,955 )
 
 
 

See accompanying notes.

8



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.


 
3 Months Ended
March 31,
 
 
2004

 
2003

 
Net earnings, as reported     $ 366,852   $ 188,386  
Deduct: Total stock-based employee    
         compensation expense determined                
         under the fair value-based method    
         for all awards, net of related tax effects       (210 )   (121 )
 
 
 
                 
Pro forma net earnings     $ 366,642   $ 188,265  
 
 
 
     
Basic earnings per common share:                
         As reported     $ 0.17   $ 0.09  
         Pro forma     $ 0.17   $ 0.09  
     
Diluted earnings per common share:                
         As reported     $ 0.17   $ 0.09  
         Pro forma     $ 0.17   $ 0.09  

9



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:


 
2004

 
2003

 
Dividend yield       2.25 %   0.05 %
Expected life (years)       7.5     7  
Expected volatility       19.72 %   0.01 %
Risk-free rate       3.75 %   4.84-5.04 %

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:


 
MAR. 31, 2004

 
DEC. 31, 2003

 
Real estate     $ 16,771,063   $ 14,660,603  
Commercial       69,919,868     63,422,739  
Installment       3,260,361     6,352,442  
Overdrafts       66,148     36,717  
 
 
 
     
        90,017,440     84,472,501  
Allowance for loan losses       (1,642,728 )   (1,315,955 )
Unearned loan fees       (454,533 )   (434,218 )
 
 
 
      $ 87,920,179   $ 82,722,328  
 
 
 

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


 
MAR. 31, 2004

 
MAR. 31, 2003

 
Balance, beginning of period     $ 1,315,955   $ 1,173,025  
Provision for (benefit of) loan losses       (360,000 )   50,000  
Loans charged off       (33,252 )    
Loan recoveries       720,025     550  
 
 
 
     
Balance, end of period     $ 1,642,728   $ 1,223,575  
 
 
 

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.

10



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.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

11



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:

12



   
Three Months Ended
Mar 31, 2004

 
Three Months Ended
Mar 31, 2003

 
Increase (Decrease)

 
   
Average
 
Interest
Income or
 
Average
Yield or
 
Average
 
Interest
Income or
 
Average
Yield or
 
Due to change in
 
Net
 
(dollars in thousands)
 
 
Balance

 
Expense

 
Rates

 
Balance

 
Expense

 
Rates

 
Volume

 
Rate

 
Change

 
Interest-earning assets:                                                        
   Loans(2)   $ 89,932   $ 1,653     7.35%   $ 79,593   $ 1,530     7.69%   $ 199   $ (76 ) $ 123  
   Investment securities                                                        
      Taxable securities     8,520     141     6.62%     7,412     97     5.23%     15     29     44  
      Nontaxable securities(1)     6,376     120     7.51%     6,881     126     7.31%     (9 )   3     (6 )
   Interest-earning balances                                                        
       due from banks     8,082     18     0.89%     7,582     23     1.21%     2     (7 )   (5 )
   
 
       
 
       
 
 
 
      Total interest-earning                                                        
         assets     112,910     1,932     6.84%     101,468     1,776     7.00%     206     (50 )   156  
       
 
     
 
 
 
 
 
   Cash and due from banks     4,702                 3,706                                
   Premises and equipment, net     5,001                 2,780                                
   Other real estate     10                 79                                
   Loan loss allowance     (1,302 )               (1,192 )                              
   Other assets     2,141                 1,732                                
   
             
                               
      Total assets   $ 123,462               $ 108,573                                
   
             
                               
Interest-bearing liabilities:                                                        
   Interest-bearing checking                                                        
      and savings accounts   $ 58,164   $ 117     0.80%   $ 50,465   $ 201     1.59%   $ 31   $ (115 ) $ (84 )
   Time deposit and IRA  
      accounts     20,144     110     2.18%     21,297     147     2.76%     (8 )   (29 )   (37 )
   Borrowed funds     8,144     78     3.83%     8,793     92     4.19%     (7 )   (7 )   (14 )
   
 
       
 
       
 
 
 
      Total interest-bearing                                                        
         liabilities     86,452     305     1.41%     80,555     440     2.18%     16     (151 )   (135 )
       
 
     
 
 
 
 
 
      Noninterest-bearing                                                        
         deposits     22,602                 18,065                                
      Other liabilities     1,745                 1,929                                
   
             
                               
         Total liabilities     110,799                 100,549                                
      Shareholders’ equity     12,663                 8,024                                
   
             
                               
      Total liabilities and                                                        
         shareholders’ equity   $ 123,462               $ 108,573                                
   
             
                               
Net interest income         $ 1,627               $ 1,336         $ 190   $ 101   $ 291  
         
             
       
 
 
 
Net interest spread                 5.43%                 4.82%                    
                 
               
                   
Net interest expense to                                                        
   average earning assets                 1.08%                 1.73%                    
                 
               
                   
Net interest margin                 5.76%                 5.27%                    
                 
               
                   


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

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

13



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.


Item 3. Quantitive and Qualitive Disclosures about Market Risk

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.

In an effort to assess market risk, the Bank utilizes a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net income. Certain assumptions are made regarding loan prepayments and decay rates of demand deposit accounts. Because it is difficult to accurately project the market reaction of depositors and borrowers, the effects of actual changes in interest on these assumptions may differ from simulated results.

Using net income simulation and given a parallel shift of 2% in interest rates, policy requires the estimated net interest margin not to decrease by more than 25% within a one-year period. The following table illustrates the simulated impact of a 1% or 2% upward or downward movement in interest rates on net income. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve month period from the March 31, 2004 levels.


 
INCREASE OR
DECREASE IN
INTEREST RATES 
 
ESTIMATED FINANCIAL
IMPACT ON
NET INCOME  
 
                         
        2.0%     $ 486,000        
        1.0%     $ 113,000        
        -1.0%     ($ 264,000 )      
        -2.0%     ($ 4,000 )      

The smaller impact on net income with a decrease in interest rates of two percent results from the floor rates on most loans. There has not been a material change in the quantitative and qualitative market risks faced by the Bank from the risk disclosures reported in Bank’s form 10-K covering the fiscal year ended December 31, 2003.


Item 4. Controls and Procedures

(a) The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures as of March 31, 2004. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concludes that as of March 31, 2004, the Company maintained effective disclosure controls and procedures in all material respects, including those to ensure that information required to be disclosed in reports filed or submitted with the SEC is recorded, processed, and reported within the time periods specified by the SEC, and is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decision regarding required disclosure.

(b) Changes in Internal Controls: In the quarter ended March 31, 2004, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.

  Disclosure Controls and Internal Controls. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all to permit the preparation of financial statement in conformity with accounting principles generally accepted in the United States of America.

15



  Limitations on the Effectiveness of Controls. The Company’s management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal proceedings.

The Company and its Chief Executive Officer are defendants in a lawsuit filed in the Lane County, Oregon Circuit Court in August, 2003 by a former Bank employee. The suit alleges breach of contract and other claims arising from the plaintiff’s employment and compensation arrangements with the Company. The former employee also filed an administrative claim with the U. S. Department of Labor under the Sarbanes-Oxley Act of 2002. The Company and its Chief Executive Officer deny any liability in these proceedings, and have retained counsel to vigorously defend the claims. The plaintiff has not alleged any specific dollar amount of damages in her lawsuit.

In the normal course of its business, the Bank is a party to various debtor-creditor legal actions, none of which, individually or in the aggregate, are presently material to the Bank’s business, operations or financial condition. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings.


Item 2. Changes in securities and use of proceeds.

  None.

Item 3. Defaults upon senior securities.

  None.

Item 4. Submission of matters to a vote of security holders.

  None.

Item 5. Other information.

  None.

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Item 6. Exhibits and reports on Form 8-K.

(a) Exhibits.

The following documents are filed as part of this Form 10-Q as required by Item 601 of Regulation S-K:


  3.1 Articles of Incorporation of Oregon Pacific Bancorp (incorporated herein by reference to Exhibit 3(i) to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003).

  3.2 Bylaws of Oregon Pacific Bancorp (incorporated herein by reference to Exhibit 3(i) to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003).

  10.1 2003 Stock Incentive Plan (incorporated by reference to Exhibit 1 to Oregon Pacific Bancorp’s Form DEF 14A filed with the Securities and Exchange Commission on March 23, 2003).

  10.2 Oregon Pacific Banking Co. Deferred Compensation and Incentive Plan (incorporated herein by reference to Exhibit 10.2 to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 30, 2004).

  31.1 Certification of Chief Executive Officer pursuant to rule 13a-14(a) or Rule 15d-14(a) and Section 302(a) of the Sarbanes-Oxley Act of 2002.**

  31.2 Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002**

  32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

  32.2 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

  _________________
** Filed herewith.

(b) On February 12, 2004 a Form 8-K was filed under items 12 and 5 announcing 2003 fourth quarter and year earnings. The report also included a press release disclosing the retirement of Company directors.

17



SIGNATURES

        In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto, duly authorized, in the City of Florence, State of Oregon, on May 13, 2004.


OREGON PACIFIC BANCORP


By: /s/ Thomas K. Grove
——————————————————
       Thomas K. Grove
       President, Chief Executive Officer
       And Director (Chief Executive Officer)


By: /s/ Joanne Forsberg
——————————————————
       Joanne Forsberg
       Secretary and Chief Financial Officer
       (Principal Financial Officer)

18