FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2005
[ ] 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 Registrant as specified in its charter)
Oregon 71-0918151
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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, 2005, was 2,149,898.
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 9-12
Item 2. Management's Discussion and Analysis or Plan of Operation 12-15
Item 3. Quantitive and Qualitive Disclosures about Market Risk 16
Item 4. Controls and Procedures 16-17
Part II. Other Information 17-18
Signatures 19
Certifications of Chief Executive Officer and Chief Financial
Officer 20-22
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial statements
OREGON PACIFIC BANCORP
CONSOLIDATED BALANCE SHEETS
Unaudited Audited
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
-------------- --------------
Cash and cash equivalents $ 4,299,506 $ 4,341,385
Interest-bearing deposits in banks 1,080,407 873,806
Available-for-sale securities, at fair value 15,008,970 15,424,419
Restricted equity securities 1,023,100 1,020,100
Loans held-for-sale 1,162,718 1,016,087
Loans, net of allowance for loan losses and
deferred fees 110,587,923 108,707,038
Premises & equipment, net 5,125,024 5,188,594
Other real estate owned - -
Accrued interest and other assets 1,784,130 1,677,458
-------------- --------------
Total assets $ 140,071,778 $ 138,248,887
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 29,273,228 $ 26,591,202
Interest-bearing demand deposits 40,085,680 42,189,535
Savings deposits 19,177,697 19,362,923
Time certificate accounts:
$100,000 or more 9,368,072 10,072,427
Other time certificate accounts 12,968,484 12,844,634
-------------- --------------
Total deposits 110,873,161 111,060,721
-------------- --------------
Federal Home Loan Bank borrowings 13,554,056 11,867,806
Floating rate Junior Subordinated Deferrable
Interest Debentures (Trust Preferred
Securities) 4,124,000 4,124,000
Deferred compensation liability 1,283,805 1,102,953
Accrued interest and other liabilities 1,090,181 1,201,110
-------------- --------------
Total liabilities 130,925,203 129,356,590
-------------- --------------
Stockholders' equity
Common stock, no par value, 10,000,000 shares
authorized with 2,149,898 and 2,148,616 issued
and outstanding at March 31, 2005 and
December 31, 2004, respectively 4,707,301 4,698,162
Undivided profits 4,362,269 3,983,420
Accumulated other comprehensive income, net of
tax 77,005 210,715
-------------- --------------
Total stockholders' equity 9,146,575 8,892,297
-------------- --------------
Total liabilities and stockholders' equity $ 140,071,778 $ 138,248,887
============== ==============
See accompanying notes.
3
OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
2005 2004
------------ ------------
INTEREST INCOME
Interest and fees on loans $ 2,379,305 $ 1,653,009
Interest on investment securities:
U.S. Teasuries and agencies 58,969 49,362
State and political subdivisions 80,812 79,210
Corporate and other investments 28,143 91,770
Interest on deposits in banks 15,025 18,142
------------ ------------
Total interest income 2,562,254 1,891,493
------------ ------------
INTEREST EXPENSE
Interest-bearing demand deposits 113,598 86,054
Savings deposits 24,350 30,713
Time deposits 133,451 109,829
Other borrowings 171,677 119,884
------------ ------------
Total interest expense 443,076 346,480
------------ ------------
Net interest income before provision for loan
losses 2,119,178 1,545,013
PROVISION (BENEFIT) FOR LOAN LOSSES 170,000 (360,000)
------------ ------------
Net interest income after provision (benefit)
for loan losses 1,949,178 1,905,013
------------ ------------
NONINTEREST INCOME
Mortgage loan sales and servicing fees, net 161,949 141,453
Service charges and fees 232,134 165,007
Trust fee income 145,804 143,062
Investment sales commissions 27,893 41,736
Other income 97,758 19,213
------------ ------------
Total noninterest income 665,538 510,471
------------ ------------
4
OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(continued)
Three Months Ended March 31,
2005 2004
------------ ------------
NONINTEREST EXPENSE
Salaries and benefits 1,140,417 1,210,438
Occupancy 208,914 191,881
Supplies 47,034 63,029
Postage and freight 21,017 17,501
Outside services 173,871 140,988
Advertising 20,799 51,622
Loan collection expense 13,848 31,838
Securities and trust department expenses 37,969 33,095
Other expenses 156,304 117,732
------------ ------------
Total noninterest expense 1,820,173 1,858,124
------------ ------------
INCOME BEFORE INCOME TAXES 794,543 557,360
PROVISION FOR INCOME TAXES 309,083 190,508
------------ ------------
NET INCOME 485,460 366,852
OTHER COMPREHENSIVE INCOME
Unrealized loss on available-for-sale
securities, net of tax (133,710) (54,786)
------------ ------------
COMPREHENSIVE INCOME $ 351,750 $ 312,066
============ ============
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share $ 0.23 $ 0.17
============ ============
Diluted earnings per share $ 0.23 $ 0.17
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic earnings per share 2,147,719 2,175,888
============ ============
Diluted earnings per share 2,151,674 2,177,848
============ ============
See accompanying notes.
5
OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other Total
Common Stock Undivided Comprehensive Stockholders'
Shares Amount Profits Income Equity
----------- ------------ ------------ ---------- ------------
Balance, December 31, 2003 (Audited) 2,173,592 $ 4,894,536 $ 3,331,170 $ 409,852 $ 8,635,558
Shares acquired in stock repurchase plan (46,275) (344,714) - - (344,714)
Cash dividends paid - - (266,130) - (266,130)
Dividends reinvested in stock 21,299 148,340 (148,340) - -
Net income and comprehensive income - - 1,066,720 (199,137) 867,583
----------- ------------ ------------ ---------- ------------
Balance, December 31, 2004 (Audited) 2,148,616 $ 4,698,162 $ 3,983,420 $ 210,715 $ 8,892,297
=========== ============ ============ ========== ============
Shares acquired in stock repurchase plan (4,300) (31,609) - - (31,609)
Sale of nonregistered stock 137 1,003 1,003
Cash dividends paid - - (66,866) - (66,866)
Dividends reinvested in stock 5,445 39,745 (39,745) - -
Net income and comprehensive income - - 485,460 (133,710) 351,750
----------- ------------ ------------ ---------- ------------
Balance, March 31, 2005 (Unaudited) 2,149,898 $ 4,707,301 $ 4,362,269 $ 77,005 $ 9,146,575
=========== ============ ============ ========== ============
See accompanying notes.
6
OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 485,460 $ 366,852
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 117,523 108,400
Provision (benefit) for loan losses 170,000 (360,000)
Federal Home Loan Bank stock dividends (3,000) (7,200)
Net change in mortgage loans held-for-sale (146,631) (438,863)
Net increase in accrued interest and other assets (17,532) (87,083)
Net increase (decrease) in accrued interest and
other liabilities 69,923 (904,530)
------------ ------------
Net cash from operating activities 675,743 (1,322,424)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of
available-for-sale securities 189,200 4,991,027
Net increase in interest-bearing deposits in banks (206,601) (8,086,149)
Loans originated, net of principal repayments (2,050,885) (4,837,851)
Purchase of premises and equipment (50,554) (435,130)
------------ ------------
Net cash from investing activities (2,118,840) (8,368,103)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposit accounts 392,945 7,545,628
Net (decrease) increase in time deposits (580,505) 283,801
Proceeds from Federal Home Loan Bank borrowings 1,700,000 1,000,000
Repayment of Federal Home Loan Bank borrowings (13,750) (13,750)
Proceeds from issuance of subordinated debentures - 124,000
Shares acquired in stock repurchase plan (31,609) -
Proceeds for issuance of common stock 1,003 -
Cash dividends paid (66,866) (56,534)
------------ ------------
Net cash from financing activities 1,401,218 8,883,145
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (41,879) (807,382)
CASH AND CASH EQUIVALENTS, beginning of period $ 4,341,385 $ 4,916,985
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 4,299,506 $ 4,109,603
============ ============
7
OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Three Months Ended March 31,
2005 2004
------------ ------------
Cash paid for interest $ 349,469 $ 311,575
============ ============
Cash paid for income taxes $ 195,446 $ 29,719
============ ============
SCHEDULE OF NONCASH ACTIVITIES
Stock dividends reinvested $ 39,745 $ 30,409
============ ============
Unrealized loss on available for sale securities,
net of tax $ (133,710) $ (54,786)
============ ============
See accompanying notes.
8
Oregon Pacific Bancorp and Subsidiaries
Notes to Financial Statements
March 31, 2005
(Unaudited)
Note 1 - Organization and Basis of Presentation
Oregon Pacific Bancorp ("Bancorp"), an Oregon Corporation and financial bank
holding company, became the holding company of Oregon Pacific Banking Co. (the
"Bank") (collectively, "the Company") 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 accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, the consolidated financial
statements reflect all normal recurring adjustments necessary for a fair
presentation of the results for the interim periods.
These statements should be read in conjunction with the audited consolidated
financial statements and related notes included in the Company's 2004 Annual
Report on Form 10-K. Operating results for the three months ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
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 2004
financial statements to conform to current year presentations.
Note 2 - Securities Available-for-Sale
The following table presents the fair value of investments with continuous
unrealized losses for less than or more than 12 months as of March 31, 2005. One
municipal bond's market value has been less than book value for thirteen months,
but the bond's market value has continued to be greater than par value.
9
Gross Gross
Unrealized Unrealized
Gross Losses Losses Estimated
Amortized Unrealized Less than More than Fair
Cost Gains 12 Months 12 Months Value
------------- ---------- ----------- --------- -------------
March 31, 2005:
U.S. Treasury and agencies $ 6,000,000 $ - $ (97,188) $ - $ 5,902,812
State and political subdivisions 7,291,994 201,608 (11,887) (3,746) $ 7,477,969
Corporate notes 1,588,634 39,555 - - $ 1,628,189
------------- ---------- ----------- --------- -------------
$ 14,880,628 $ 241,163 $ (109,075) $ (3,746) $ 15,008,970
============= ========== =========== ========= =============
December 31, 2004
U.S. Treasury and agencies $ 5,999,145 $ - $ (16,296) $ - $ 5,982,849
State and political subdivisions 7,481,028 304,683 (1,562) - 7,784,149
Corporate notes 1,593,054 64,367 - - 1,657,421
------------- ---------- ----------- --------- -------------
$ 15,073,227 $ 369,050 $ (17,858) $ - $ 15,424,419
============= ========== =========== ========= =============
For the two securities exhibiting unrealized losses, that is, they currently
have fair values less than amortized costs, the Bank has evaluated these
securities and has determined that the decline in value is temporary and is
related to the change in market interest rates since purchase. The following
information was also considered in determining that the impairments are not
other-than-temporary. U.S. Government agencies securities have minimal credit
risk as they play a vital role in the nation's financial markets. State and
political subdivisions and corporate securities have a credit rating of at least
investment grade by one of the nationally recognized rating agencies. The
decline in value is not related to any company or industry-specific event and
the Bank anticipates full recovery of amortized costs with respect to these
securities at maturity or sooner in the event of a more favorable market
interest rate environment.
Note 3 - Loans and Allowance for Loan Losses
The composition of the loan portfolio was as follows as of the dates presented:
MAR. 31, 2005 DEC. 31, 2004
-------------- --------------
Real estate $ 16,410,993 $ 16,821,917
Commercial 89,585,819 87,338,080
Installment 6,824,580 6,644,550
Overdrafts 53,910 51,564
-------------- --------------
Total Loans 112,875,302 110,856,111
Less allowance for loan losses (1,809,040) (1,640,060)
Less deferred loan fees (478,339) (509,013)
-------------- --------------
Loans, net of allowance for loan losses
and deferred loan fees $ 110,587,923 $ 108,707,038
============== ==============
10
Changes in the allowance for loan losses were as follows for the three-months
ended:
MAR. 31, 2005 MAR. 31, 2004
-------------- --------------
Balance, beginning of period $ 1,640,060 $ 1,315,955
Provision for (benefit of) loan losses 170,000 (360,000)
Loans charged off (1,480) (33,252)
Loan recoveries 460 720,025
-------------- --------------
Balance, end of period $ 1,809,040 $ 1,642,728
============== ==============
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. Loans in the amount
of $130,878 and $112,706 were on nonaccrual status at March 31, 2005 and
December 31, 2004.
The Bank had no loans past due 90 days or more on which it continued to accrue
interest at either March 31, 2005 or December 31, 2004.
Note 4 - 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.
Note 5 - Stock option plans
The Company accounts for its stock option plan under the intrinsic value method
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation cost is computed 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 and no options were granted
during the quarter ended September 30, 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, 2005 and 2004 would approximate the pro forma amounts below.
3 Months Ended March 31,
2005 2004
---------- ----------
Net earnings, as reported $ 485,460 $ 366,852
Deduct: Total stock-based employee
compensation expense determined
under the fair value-based method
for all awards, net of related tax effects (1,212) (210)
---------- ----------
Pro forma net earnings $ 484,248 $ 366,642
========== ==========
Basic earnings per common share:
As reported $ 0.23 $ 0.17
Pro forma $ 0.23 $ 0.17
Diluted earnings per common share:
As reported $ 0.23 $ 0.17
Pro forma $ 0.23 $ 0.17
11
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, 2005 and 2004:
2005 2004
---------- ----------
Dividend yield 2.44% 2.25%
Expected life (years) 7.5 7.5
Expected volatility 14.39% 19.72%
Risk-free rate 4.50% 3.75%
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 ("Bancorp"), an Oregon corporation and financial bank
holding company, is the holding company of Oregon Pacific Banking Co. (the
"Bank") (collectively, the "Company"). 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 two
additional Oregon locations including Roseburg and Coos Bay. The Bank also
provides trust and asset management services, and investment and brokerage
services.
12
The Company has a two-tiered corporate structure. At the holding company level
the affairs of Bancorp, the sole owner of the Bank, are overseen by a Board of
Directors elected by the shareholders of the Company. The business of the Bank
is overseen by the Bank's Board of Directors selected by Bancorp's Board.
Currently the respective members of the Board of Directors of the Bank and of
Bancorp are identical.
The Company reported net income of $485,000, or $.23 per basic share, for the
three months ended March 31, 2004. This compares to Bank income of $367,000, or
$.17 per basic share, for the same three month period in the prior year. Both
years included unusual items pertaining to the same previously charged off note:
In 2005 the amounts received were recorded directly to interest income; in 2004
the Bank received full payment of the principal balance which was recorded as a
recovery to the allowance for loan losses.
Financial Condition
Total assets at March 31, 2005 were $140,072,000 compared to $138,249,000 at
December 31, 2004, an increase of $1,823,000 (1.3%). The increase was due
primarily to new loans ($1.89 million) funded by increases in Federal Home Loan
Bank overnight funds.
March 31, 2005 stockholders' equity was $9,147,000, an increase of $254,000 from
December 31, 2004. This change resulted from consolidated net income partially
offset by cash dividends paid ($67,000) and unrealized losses on
available-for-sale securities caused by rising interest rates.
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, and excluding the one-time
interest payment discussed above, was $1,783,000 for the quarter ended March 31,
2005 compared to $1,585,000 for the same period in 2004 (see Table 1). The
$198,000 increase was due to an increase in the volume of loans partially offset
by an increase in the cost of funds and decreases in the rates earned on loans
and securities. The increase in interest income of $294,000 was primarily due to
a $394,000 increase from the increase in average loans outstanding of
$21,420,000 from the same period one year ago, partially offset by decreased
average rates earned resulting from the low interest rate environment in mid
2004. The effective rate on interest-bearing liabilities for the quarter was
1.77% compared to 1.53% for the same period in 2004 which reflect rising
interest rates.
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:
13
OREGON PACIFIC BANCORP
Changes in NIM by Rate/Volume
Three Months Ended Three Months Ended
Mar 31, 2005 Mar 31, 2004 Increase (Decrease)
--------------------------- ---------------------------- ------------------------
Interest Average Interest Average
Income Yield Income Yield
Average or or Average or or Due to change in Net
(dollars in thousands) Balance Expense Rates Balance Expense Rates Volume Rate Change
---------- -------- ------- --------- --------- ------- ------ ------- -------
Interest-earning assets:
Loans (2) $ 111,352 $ 2,002 7.19% $ 89,932 $ 1,653 7.35% $ 394 $ (45) $ 349
Investment securities
Taxable securities 8,716 89 4.08% 8,520 141 6.62% 3 (55) (52)
Nontaxable securities (1) 7,321 120 6.54% 6,376 120 7.51% 18 (18) 0
Interest-earning balances due from banks 2,557 15 2.35% 8,082 18 0.89% (12) 9 (3)
---------- -------- ------- --------- --------- ------- ------ ------- -------
Total interest-earning assets 129,946 2,226 6.85% 112,910 1,932 6.84% 403 (109) 294
-------- ------- --------- ------- ------ ------- -------
Cash and due from banks 4,215 4,702
Premises and equipment, net 5,173 5,001
Other real estate 0 10
Loan loss allowance (1,720) (1,302)
Other assets 3,371 2,245
---------- ---------
Total assets $ 140,985 $123,566
========== =========
Interest-bearing liabilities:
Interest-bearing checking and savings accounts $ 60,716 $ 138 0.91% $ 58,164 $ 117 0.80% $ 5 $ 16 $ 21
Time deposit and IRA accounts 23,173 133 2.30% 20,144 110 2.18% 17 6 23
Borrowed funds 16,132 172 4.26% 12,268 120 3.91% 38 14 52
---------- -------- ------- --------- --------- ------- ------ ------- -------
Total interest-bearing liabilities 100,021 443 1.77% 90,576 347 1.53% 60 36 96
-------- ------- --------- ------- ------ ------- -------
Noninterest-bearing deposits 29,452 22,579
Other liabilities 2,510 1,849
---------- ---------
Total liabilities 131,983 115,004
Shareholders' equity 9,002 8,562
---------- ---------
Total liabilities and shareholders' equity $ 140,985 $123,566
========== =========
Net interest income $ 1,783 $ 1,585 $ 343 $ (145) $ 198
======== ========= ====== ======= ======
Net interest spread 5.08% 5.31%
======= =======
Net interest expense to average earning assets 1.36% 1.23%
======= =======
Net interest margin 5.49% 5.61%
======= =======
____________
(1) Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
(2) Nonaccrual loans are included in the average balance.
14
Provision for Loan Losses
A provision of $170,000 was recorded for the three months ended March 31, 2005
compared to a benefit of $360,000 in the same period in 2004. The allowance for
loan losses at March 31, 2005 was 1.6% of gross loans, as compared to 1.5% at
December 31, 2004. Management is satisfied that the reserve is adequate for
probable loan losses in the loan portfolio at March 31, 2005. 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 increased $155,000 or 30.4% for the three months ended March
31, 2005 as compared to the same period in 2004. The increase was the result of
increased service charges earned as new accounts have opened primarily in the
newer branches of Coos Bay and Roseburg and the reimbursement of costs
associated with the debt repayment disclosed above.
Noninterest Expense
Noninterest expense decreased $38,000 or 2.0% for the three months ended March
31, 2005 from the same period one year ago. The decrease is attributable to
staff adjustments primarily in the real estate mortgage department resulting
from a lower volume of mortgage loan refinancing.
The provision for income taxes at both March 31, 2005 and 2004 remained
consistent with expected statutory rates adjusted for anticipated permanent
differences arising primarily from nontaxable income earned on municipal
security investments and timing differences associated with the tax treatment of
bad debt.
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.
The Bank's liquidity position decreased during the quarter ended March 31, 2005
as loan volume continues to exceed the growth rate of deposits. As a result,
during the quarter, the loan-to-deposit ratio tightened further and exceeded
100% at March 31, 2005. Liquidity previously maintained as excess cash and
generally invested as interest-earning deposits with the FHLB decreased during
the quarter. As of March 31, 2005, the Bank had $1.0 million in such funds
compared to $2.3 million at December 31, 2004. Management believes its liquidity
planning will adequately provide the funds necessary to enable the Bank to fund
loan commitments and meet customer withdrawals of deposits in the normal course
of business.
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 9.21% and 11.95%
respectively, which exceed the well-capitalized threshold.
15
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 taking, and borrowing activities. A sudden and substantial
increase in interest rates could adversely impact the Company's earnings, to the
extent that the interest rates borne by assets and liabilities do not change at
the same speed, to the same extent, or on the same basis.
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. There have been no significant
changes in the Company's market risk exposure since December 31, 2004.
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, 2005. Based on this evaluation, the
Chief Executive Officer and the Chief Financial Officer each concludes that
as of March 31, 2005, 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, 2005, 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.
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.
16
PART II. OTHER INFORMATION
Item 1. Legal proceedings.
As of the date of filing this Form 10-Q neither Bancorp nor the Bank was
a party to any material legal proceedings. Further, management is not aware of
any threatened or pending lawsuits or other proceedings against the Company
which, if determined adversely, would have a material effect on the business or
its financial position. Bancorp or the Bank may from time to time become a party
to litigation in the ordinary course of business, such as debt collection
litigation or through an appearance as a creditor in a bankruptcy case.
Item 2. Changes in securities and use of proceeds.
In September 2004, the Board of Directors approved a stock repurchase
plan to purchase up to $500,000 of stock. $345,000 of stock at an average price
of $7.45 was purchased prior to year-end 2004. In January 2005, 4,300 shares
were repurchased at a price of $7.35 per share.
In August 2004 the Board of Directors approved the Bancorp Amended
Dividend Reinvestment Plan that permits the direct purchase of additional shares
of Bancorp Common Stock for cash in addition to the automatic reinvestment of
cash dividends. On February 18, 2005, 137 shares were sold at $7.30 per share as
part of the new Plan.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None.
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).
17
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 25, 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 rule 13a-14(a) or
Rule 15d-14(a) and Section 302(a) of the Sarbanes-Oxley Act of 2002.**
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. **
__________________
** Filed herewith.
(b) On February 18, 2005 a Form 8-K was filed under items 2.02 and 9.01
announcing 2004 fourth quarter and year earnings.
18
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, 2005.
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
Chief Financial Officer and Secretary
(Principal Financial Officer)
19