Provision for Loan Loss
No provision for loan loss was recorded in the three months ended June 30, 2004 compared to $40,000 in the same period in 2003. A benefit was recorded in the amount of $360,000 for the six months ended June 30, 2004 compared to a provision of $90,000 in 2003. The allowance for loan losses at June 30, 2004 was 1.7% of gross loans compared to 1.6% at December 31, 2003. There were no non-performing loans at June 30, 2004. Management is satisfied that the reserve is adequate for potential loan losses in the loan portfolio at June 30, 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 $80,000 or 6.5% for the six months ended June 2004 as compared to the same period in 2003, and increased $42,000 or 7.1% for the second quarter of 2004. These smaller changes were after the significant mortgage fee increases in 2003 of 32.6% and 41.5%, respectively, during a period of the lowest mortgage interest rates in forty years. Other than mortgage loan sales and servicing fees, noninterest income increased 45.1% and 40.7% for the six months and three months ended June 2004 as compared to the same period in 2003.
Noninterest Expense
Noninterest expense increased $765,000 or 23.3% for the six months and $521,000 or 31.3% for the three months ended June 30, 2004 over the same periods one year ago. The increase is attributable primarily to an increase in salaries and benefits and occupancy expense as expected with the Bank’s opening of the new facilities in Roseburg and Coos Bay. “Other” expenses increased primarily as a result of a litigation settlement as mentioned above.
The provision for income taxes at both June 30, 2004 and 2003 remained consistent with expected statutory rates adjusted for anticipated permanent differences arising primarily from nontaxable income earned on municipal security investments except for the adjustment discussed above.
Liquidity and Capital Resources
Liquidity management involves the ability to meet cash flow requirements. The Bank’s major sources of liquidity are customer deposits, maturities or calls of investment securities, the use of borrowing arrangements with the Federal Home Loan Bank of Seattle, and net cash provided by operating activities. The Bank’s investment portfolio is another source of funds, if needed. The investment portfolio is of good 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 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 sufficient at June 30, 2004. 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 June 30, 2004, the Bank’s leverage and total risk-based ratios were 9.46% and 12.60% respectively, which exceed the well-capitalized threshold.
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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.
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, the estimated net interest margin may not 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 June 30, 2004 levels.
INCREASE OR
DECREASE IN
INTEREST RATES | | | ESTIMATED FINANCIAL
IMPACT ON NET
INTEREST MARGIN | |
| | |
| |
| | | | | | |
| 2.0 | % | | | | $ | 501,000 | | |
| 1.0 | % | | | | $ | 191,000 | | |
| -1.0 | % | | | | $ | (244,000 | ) | |
| -2.0 | % | | | | $ | (215,000 | ) | |
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 June 30, 2004. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concludes that as of June 30, 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 June 30, 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. |
16
| 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. |
| |
| 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. |
|
|
Item 1. | Legal proceedings. |
| |
| 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. |
| |
| The Company is not currently involved in any material litigation or legal proceeding, and is not aware of any potential material litigation or proceeding threatened against it. The compensation and employment claims lawsuit filed by a former Bank employee, reported in previous Company filings, has been settled and dismissed. |
| |
Item 2. | Changes in securities and use of proceeds. |
| |
| None. |
| |
Item 3. | Defaults upon senior securities. |
| |
| None. |
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Item 4. | Submission of matters to a vote of security holders. |
| |
| The Annual Meeting of Stockholders was held on April 29, 2004. There were 2,177,870 shares of common stock that could be voted, and 1,734,437 shares present at the meeting by holders thereof by proxy, which constituted a quorum. The following is a summary of the results of the vote: |
| |
| Vote for the election of Directors: |
| Nominees | | Term | | Votes: | | For | | Withheld | | Against | |
|
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | |
| Thomas K. Grove | | Three Years | | | | | | 1,732,960 | | | 1,477 | | | 0 | |
| Robert King | | Three Years | | | | | | 1,723,676 | | | 10,761 | | | 0 | |
| Jon Thompson | | Three Years | | | | | | 1,726,427 | | | 8,010 | | | 0 | |
Item 5. | Other information. |
| |
| None. |
| |
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. Amended and Restated Deferred Compensation Plan.** |
| | |
| 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.** |
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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 August 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) |
| | | | |
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