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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark one)

OREGON PACIFIC BANCORP

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 o

     The number of shares outstanding of the issuer’s Common Stock, no par value, as of July 31, 2003, was 2,164,573.

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OREGON PACIFIC BANCORP

INDEX

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PART 1. FINANCIAL INFORMATION

Item 1. Financial statements

OREGON PACIFIC BANCORP
CONSOLIDATED BALANCE SHEETS

See Accompanying Notes

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OREGON PACIFIC BANKING CO.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

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OREGON PACIFIC BANKING CO.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(continued)

See Accompanying Notes

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OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

See Accompanying Notes

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OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

See Accompanying Notes

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Oregon Pacific Banking Co.
Notes to Financial Statements
June 30, 2003 and 2002
(Unaudited)

Note 1 – 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 Bank have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 six months ended June 30, 2003 are not necessarily indicative of results to be anticipated for the year ending December 31, 2003. The interim financial statements should be read in conjunction with the audited financial statements, including the notes thereto, contained in the Bank’s 2002 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 and no options were granted during the quarter ended June 30, 2003. 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 June 30, 2003 and 2002 would approximate the pro forma amounts below.

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The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for June 30, 2003 and 2002:

Reclassifications – Certain reclassifications have been made to the 2002 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:

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

It is the policy of the Bank to place loans on nonaccrual status whenever the collection of all or a part of the principal is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination, and may or may not be secured by collateral. There were no loans on nonaccrual status at June 30, 2003 compared to $350,000 at December 31, 2002.

The Bank had no loans past due 90 days or more on which it continued to accrue interest at either June 30, 2003 or December 31, 2002.

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 or plan of operation

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

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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, became the holding company of Oregon Pacific Banking Co. (the “Bank”) effective January 1, 2003. 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 located in Florence to three additional Oregon locations including Roseburg, Coos Bay and Sutherlin. Additional financial services provided by the Bank include trust and asset management services and investment and brokerage services. Such services are provided at the main office in Florence and at offices in Roseburg and Coos Bay, Oregon.

The Company operates through 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 at the annual meeting of shareholders. The business of the bank is overseen by a

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Board of Directors selected by the Company, the sole owner of the Bank. Currently the respective members of the Board of Directors of the Bank and the Company are identical.

The Company reported net income of $254,000 or $.12 per basic share and $442,000 or $.21 per basic share for the three months and six months ended June 30, 2003. This compares to Bank income of $227,000 or $.11 per basic share and $442,000 or $.21 per basic share for the same periods in the prior year. Earnings for the six month periods are nearly the same, but the second quarter of 2003 shows a growth in both net interest income and noninterest income while noninterest expense growth began to level off following the opening of three branches in 2002 that required a growth in infrastructure. Net income before income taxes for the three month period ending June 30, 2003 was $318,000 compared to $289,000 for the same period in the prior year for an increase of 10.0% primarily from loan growth. The provision for income taxes did not increase proportionately due to a refund of 1998 taxes following the outcome of an Internal Revenue Service audit.

Financial Condition

Total assets at June 2003 were $116,027,000 compared to $107,020,000 at December 31, 2002, an increase of $9,007,000 (8.4%). The increase was due primarily to an increase in net loans of $7,397,000 funded by an increase in customer deposits which increased $8,872,000, or 10.0%. The increase primarily was in interest-bearing demand deposits as the Bank’s interest rate on one newer demand deposit product is attractive to depositors.

Premises and equipment increased by $365,000 as construction on has begun on permanent facilities for the two branches located in Roseburg and Coos Bay.

June 30, 2003 shareholders’ equity was $8,361,000, an increase of $468,000 from December 31, 2002. This change resulted from net income, an exercise of stock options by an executive officer ($100,000), and an increase in unrealized gains on available-for-sale securities ($56,000), partially offset by cash dividends paid ($128,000).

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 $2,808,000 for the six months ended June 30, 2003 compared to $2,362,000 for the same period in 2002 (see Table 1). The $446,000 increase primarily was due to an increase in average loans, and was partially offset a decrease in the rates earned on loans. The increase in interest-bearing liabilities was almost fully offset by the decrease in the rates paid on deposits. Average loans were up $21,431,000, while average rates on loans were down 0.68%. Average interest-bearing liability balances were up $21,470,000 while average rates on deposits and borrowed funds were down 0.59%. The net interest spread, which is the difference between the yield of interest-earning assets less the cost of interest-

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bearing liabilities, decreased 0.22% during the first half of 2003 compared with the first half of 2002. As a consequence of the historically low interest rate climate of the past year, the net interest margin eased to 5.35% compared to 5.80% for the six month period in the prior year. The ongoing low interest rate climate continues to cause declining loan yields that compress against an already low cost of funds.

Table I

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

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