UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number: 000-50165
OREGON PACIFIC BANCORP
(Exact name of registrant as specified in its charter)
71-0918151
Oregon (I.R.S. Employer
(State of incorporation) Identification No.)
1355 Highway 101
P.O. Box 22000
Florence, OR 97439
(Address of principal executive offices)
Registrant's telephone number: (541) 997-7121
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes[ ] No [X]
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of February 27, 2004, was $15,137,364.
The number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: 2,178,038 shares of no par
value common stock on March 15, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement dated March 26, 2004, for
the 2004 Annual Meeting of Shareholders ("Proxy Statement") and the 2003 Annual
Report to Shareholders are incorporated by reference in Parts II and III hereof.
OREGON PACIFIC BANCORP
FORM 10-K
TABLE OF CONTENTS
PAGE
Disclosure Regarding Forward Looking Statements 3
PART I
Item 1. Business 3-14
Item 2. Properties 14-15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16-17
Item 6. Selected Financial Data 17-19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-39
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 40
Item 8. Financial Statements and Supplementary Data 41-70
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 71
Item 9A. Controls and Procedures 71
PART III
(Items 10 through 14 are incorporated by reference from
Oregon Pacific Bancorp's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 29, 2004)
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 72
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 72
Item 13. Certain Relationships and Related Transactions 72
Item 14. Principal Accountant Fees and Services 72
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 73-74
Signatures 75-76
Exhibit Index 77
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
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.
PART I
ITEM 1. BUSINESS
GENERAL
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 from its main office and a
full-service Safeway store branch in Florence plus three branches in Roseburg,
Coos Bay and Sutherlin, Oregon. 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 the
branches in Roseburg and Coos Bay.
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 Board of Directors of
the Bank, selected by the Board of Directors of the Company the sole owner of
the Bank. Currently the respective members of the Board of Directors of the
Company and the Bank are identical.
BUSINESS STRATEGY
The Company's strategy is to build on the Bank's position as a leading
community-based provider of financial services in its service areas. The key to
success of this strategy is to continue to provide exceptional personal service
to the communities and to deliver a high level of service to the customers with
prompt, accurate, and friendly banking services. The Bank seeks to maintain high
asset quality through strict adherence to established credit policies, trained
personnel, and periodic loan reviews. The Bank's primary marketing focus is on
small to medium-sized businesses and on professionals and individuals in
Florence, Coos Bay, Roseburg, Sutherlin, Eugene-Springfield, and other coastal
and inland regions in Oregon.
3
CONSUMER PRODUCTS AND SERVICES
The Bank offers a broad range of deposit and loan products and services
tailored to meet the banking requirements of its service areas. Some of these
are detailed below.
Deposit Products. The Bank's consumer deposit products include several
noninterest-bearing checking account products priced at various levels,
interest-bearing checking and savings accounts, money market accounts, and
certificates of deposit. These accounts generally earn interest at rates
established by management based on competitive market factors and management's
desire to increase certain types or maturities of deposit liabilities. The Bank
strives to establish customer relations to attract core deposits in
noninterest-bearing transactional accounts, which reduces its cost of funds.
Technology-Based Products and Services. The Bank uses both traditional
and new technology to support its focus on personal service. These include a
VISA check card (debit card) program, convenient ATM's, and a telephone banking
service ("Banking on Call") that allows 24-hour telephone access to customers'
accounts. The Bank maintains an internet site that describes services provided
by the Bank and permits loan applications.
Consumer Loans. Although the Bank does not actively solicit consumer
loans, the Bank provides loans to individual borrowers, as a convenience to
existing customers, for a variety of purposes including secured and unsecured
personal loans, home equity and personal lines of credit, and motor vehicle
loans.
Senior Customer Services. Since a significant portion of the Bank's
consumer market, especially in Florence, consists of senior citizens the Bank
offers several special products and programs aimed at this group. These include
a reduced rate checking account and other products targeted to the senior
market. The Bank also services customers living at Spruce Point, an assisted
living facility in Florence, via its mobile branch.
Overdraft Protection. Overdraft Protection is a service that provides
qualified customers with virtually automatic protection by establishing an
overdraft privilege amount. Each checking account usually receives an Overdraft
Protection amount of $300 or $500 based on the type of account and other
parameters. Once established, customers are permitted to overdraw their checking
account, up to their Overdraft Protection limit, with each item being charged
the Bank's regular overdraft fee. Customers repay the overdraft with their next
deposit. Overdraft Protection is designed to protect customers from the
embarrassment of having checks declined because of non-sufficient funds.
Investment Products. Through an arrangement with a registered
securities broker-dealer, UVEST Investment Services, an investment and brokerage
service department under the assumed name "Oregon Pacific Financial Services"
offers a wide range of financial products and services to consumers at the
Bank's main branch and at its Roseburg branch. Mutual funds, traditional and
Roth IRAs, SEPs, tax sheltered annuities, and other financial products and
retirement planning services are available.
4
Trust and Asset Management Services. The Bank operates a full service
trust department located at its main branch and in Coos Bay. The department
functions as a trustee for irrevocable trusts, agent for living trusts and
estate settlement, or custodian for self-directed IRAs.
Other Services. Other services offered include safe deposit boxes;
letters of credit; travelers' checks; direct deposit of payroll, social security
and dividend payments; and automatic payment of insurance premiums and mortgage
loans. Online banking will be available in spring 2004.
LENDING ACTIVITIES
The Bank provides a broad range of real estate and commercial lending
services. Currently, the primary focus of the Bank's lending activities involves
residential real estate financing, both for its own loan portfolio and for
resale in the secondary market, and commercial loans, including loans to
professionals and real estate construction loans.
Mortgage Loans. The Bank originates conventional and federally insured
residential mortgage loans, mostly for sale in the secondary market. The Bank
has mortgage loan representation in Florence, Roseburg, Coos Bay, and along the
Oregon coast, north of Florence. The Bank believes that its local
decision-making, which allows for quick response to a mortgage loan request, and
sales of loans to the Federal Home Loan Mortgage Bank (Freddie Mac) that are
serviced locally, provide personalized, quality service to its customers.
Real Estate Construction Loans. The Bank makes construction loans to
individuals and contractors to construct single-family primary residences or
second homes and, to a much lesser extent, small multi-family residential
projects. These loans generally have maturities of 6 to 9 months. Interest rates
are typically adjustable, although fixed-rate loans are also made under
appropriate conditions.
Construction financing generally is considered to involve a higher
degree of risk than long-term financing on improved, occupied real estate. The
risk of loss on construction loans depends largely on the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction costs proves to be inaccurate, the Bank may be required
to advance funds beyond the amount originally committed to permit completion of
the project and to protect its security position. At or prior to maturity of the
loan, the Bank may also be confronted with a project with insufficient value to
ensure full repayment. The Bank's underwriting, monitoring and disbursement
practices for construction financing are intended to ensure that sufficient
funds are available to complete the construction projects. The Bank endeavors to
limit its risk through underwriting procedures requiring the use of only
approved, qualified appraisers, dealing only with qualified builders/borrowers,
and closely monitoring construction projects through completion and sale.
5
Commercial Loans. The Bank offers customized loans to its commercial
customers including operational lines of credit, equipment, accounts receivable,
and inventory financing. Commercial real estate loans are available for the
construction, purchasing, and refinancing of commercial and rental properties. A
significant portion of the Bank's loan portfolio consists of commercial loans.
Lending decisions are based on careful evaluation of the financial strength,
management, and credit history of the borrower and the quality of the collateral
securing the loan. The Bank typically requires personal guarantees and secondary
sources of repayment. Most commercial loans are secured by real property,
although such loans may finance other commercial activities. Where warranted by
the borrower's overall financial condition, loans may be made on an unsecured
basis.
For all of its loans, the Bank at all times seeks to maintain sound
loan underwriting standards with written loan policies, appropriate individual
limits, and loan committee reviews. In the case of large loan commitments or
loan participations, loans are reviewed by the loan committee of the Board of
Directors. Underwriting standards are designed to achieve a high-quality loan
portfolio, compliance with lending regulations, and the desired mix of loan
maturities and industry concentrations. Management seeks to minimize credit
losses by closely monitoring the financial condition of its borrowers and the
value of collateral.
MARKETING
The Bank's ability to increase its market share is driven by a
marketing plan consisting of several key components. A principal objective is to
offer appropriate products and services to existing customers and attempt to
increase the business relationships the Bank shares with these customers. The
Bank regularly examines the desirability and profitability of adding new
products and services to those currently offered. The Bank promotes specific
products by media advertising, but relies also on referrals and direct contacts
for new business. The Bank recognizes the importance of community service and
supports employee involvement in community activities. This participation allows
the Bank to make a contribution to the communities it serves, which management
believes increases its visibility in its market area and thereby increases
business opportunities.
COMPETITION
The market for banking services, including deposit and loan products,
is highly competitive. The Bank's competitors for deposits are commercial banks,
savings and loan associations, credit unions, money market funds, issuers of
corporate and government securities, insurance companies, brokerage firms,
mutual funds, and other financial service providers. These competitors may offer
deposit rates greater than the Bank can or is willing to offer. The Bank
competes for deposits by offering a variety of accounts at rates generally
competitive with financial institutions in its market areas.
The Bank's competition for loans comes principally from commercial
banks, savings and loan associations, mortgage companies, finance companies,
insurance companies, credit unions, and other institutional lenders. The Bank
competes for loan originations through the level of interest rates and loan fees
charged, its array of commercial and mortgage loan products, and the efficiency
and quality of its services to borrowers. Lending activity can also be affected
by the availability of lendable funds, local and national economic conditions,
current interest rate levels, and loan demand. The Bank competes with larger
commercial banks by emphasizing a community bank orientation and efficient
personal service to customers.
6
A newer source of competition is the array of online banking services
offered by traditional commercial banks and other financial service providers,
and by newly formed companies that use the Internet to advertise and sell
competing products. The Bank will be able to fully compete with the larger banks
that offer online banking services as these services will be available in the
spring of 2004. Bank management believes, however, that most of its customers
will continue to want the personal, locally-based services that it offers.
The Bank believes its philosophy of offering financial services with a
personal touch in conjunction with modern technology enables it to compete
effectively with other financial service providers. The Bank's lending officers
and senior management have significant experience in their respective
marketplaces enabling them to maintain close working relationships with their
customers. Management believes that this positions the Bank to succeed in spite
of competitors potentially having branches in more locations, larger lending
capabilities due to their greater size, or capabilities to provide other
services, such as international banking services, that the Bank does not
provide.
EMPLOYEES
As of December 31, 2003, the Bank had 93 full-time equivalent employees
compared to 88 at December 31, 2002. None of the employees are represented by a
collective bargaining group. Management considers its relations with employees
to be excellent.
WEBSITE ACCESS TO PUBLIC FILINGS
The Company began filing period and other required reports with the
Securities and Exchange Commission in 2003. These filings, including exhibits,
may be accessed over the Internet through the website maintained by the
Securities and Exchange Commission at http://www.sec.gov. No Internet access to
the Bank's filings with the Federal Reserve Bank prior to 2003 is available.
SUPERVISION AND REGULATION
GENERAL
The Company and the Bank are extensively regulated under federal and
state law. These laws and regulations are primarily intended to protect
depositors, not shareholders of the Company. The discussion below describes and
summarizes certain statutes and regulations. These descriptions and summaries
are qualified in their entirety by reference to the particular statute or
regulation. Any change in applicable laws or regulations may have a material
effect on the business and prospects of the Bank. The operations of the Bank may
also be affected by changes in the policies of banking and other government
regulators. Management cannot accurately predict the nature or extent of the
effects on its business and earnings that fiscal or monetary policies, or new
federal or state laws, including tax laws, may have in the future.
7
FEDERAL AND STATE BANK REGULATION
General. The Bank is an Oregon state-chartered bank, with deposits
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
Federal Reserve member bank. Accordingly, the Bank files financial and other
reports periodically with, and is regularly examined by, the Oregon Director of
Banks ("Oregon Director"), FDIC, and the Federal Reserve.
CRA. The Community Reinvestment Act (the "CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the Federal Reserve or the FDIC evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. The Bank received an outstanding rating on the
most recent CRA examination.
Insider Credit Transactions. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal Company shareholders, or any related
interests of such persons. Extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, and
follow credit underwriting procedures that are not less stringent than those
prevailing at the time for comparable transactions with persons not covered
above and who are not employees; and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features. Banks are also subject
to certain lending limits and restrictions on overdrafts to such persons. A
violation of these restrictions may result in the assessment of substantial
civil monetary penalties on the affected bank or any officer, director,
employee, agent, or other person participating in the conduct of the affairs of
that bank, the imposition of a cease and desist order, and other regulatory
sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
(the "FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management believes that the Bank meets all such standards, and therefore, does
not believe that these regulatory standards materially affect the Bank's
business operations.
INTERSTATE BANKING LEGISLATION
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Act"), bank holding companies are permitted to acquire
banks located in any state regardless of the state law in effect at the time.
The Interstate Act also provides for the nationwide interstate branching of
banks. Under the Interstate Act, both national and state chartered banks,
including Oregon, are permitted to merge across state lines and thereby create
interstate branch networks.
8
BANK HOLDING COMPANY REGULATION - FEDERAL REGULATIONS
As a bank holding company, the Company is subject to the Bank Holding
Company Act of 1956 ("BHCA"), as amended, which places the Company under the
supervision of the Board of Governors of the Federal Reserve System ("FRB").
BHCA limits the business of bank holding companies to owning or controlling
banks and engaging in other activities related to banking.
The Company must obtain the approval of the FRB: (1) before acquiring
direct or indirect ownership or control of any voting shares of any bank if,
after such acquisition, it would own or control, directly or indirectly, more
than 5% of the voting shares of such a bank; (2) before merging or consolidating
with another bank holding company; and (3) before acquiring substantially all of
the assets of any additional banks. The Company is also required by the BHCA to
file annual and quarterly reports and such other reports as may be required from
time to time by the FRB. In addition, the FRB conducts periodic examinations of
the Company.
Under FRB policy, a bank holding company is expected to act as a source
of financial and managerial strength to, and commit resources to support, each
of its subsidiaries. Any capital loans the Company makes to its subsidiary are
subordinate to deposits and to certain other indebtedness of the subsidiary. The
Crime Control Act of 1990 provides that, in the event of a bank holding
company's bankruptcy, the bankruptcy trustee will assume any commitment the bank
holding company has made to a federal bank regulatory agency to maintain the
capital of a subsidiary and this obligation will be entitled to a priority of
payment.
The Company and the subsidiary are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor its subsidiary may condition an extension of credit to a
customer on either (1) a requirement that the customer obtain additional
services provided by it or (2) an agreement by the customer to refrain from
obtaining other services from a competitor. The bank anti-tying rules do not
apply to the non-bank subsidiaries of a bank holding company.
The Change in Bank Control Act of 1978, as amended, prohibits a person
or group of persons from acquiring "control" of a bank holding company unless
the FRB has been given 60 days prior written notice of the proposed acquisition,
and within that time period, the FRB has not issued a notice disapproving the
proposed acquisition, or extended for up to another 30 days the period during
which such a disapproval may be issued. An acquisition may be made prior to the
expiration of the disapproval period if the FRB issues written notice of its
intent not to disapprove the action. Under a rebuttal resumption established by
the FRB, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control. In addition, any "company" would be
required to obtain the approval of the FRB under the BHCA before acquiring 25%
(5% if the "company" is a bank holding company) or more of the outstanding
shares of the Company, or obtain control over the Company.
9
BANK HOLDING COMPANY REGULATION - STATE REGULATIONS
As a corporation chartered under the laws of the State of Oregon, the
Company is subject to certain limitations and restrictions under applicable
Oregon corporate law. These include limitations and restrictions relating to
indemnification of directors, distributions to shareholders, transactions
involving directors, officers or interested shareholders, maintenance of books,
records, and minutes, and observance of certain corporate formalities.
DEPOSIT INSURANCE
The deposits of the Bank are currently insured to a maximum of $100,000
per depositor through the Bank Insurance Fund ("BIF") administered by the FDIC.
The Bank is required to pay quarterly deposit insurance premium assessments to
the FDIC.
The FDICIA includes provisions to reform the Federal Deposit Insurance
System, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources, or for any other purpose the FDIC deems necessary.
The FDIC has implemented a risk-based insurance premium system under which banks
are assessed insurance premiums based on how much risk they present to the BIF.
Banks with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern. The Bank's FDIC insurance expense for 2003 was
approximately $14,000.
REGULATORY DIVIDEND RESTRICTIONS
The payment of dividends is subject to government regulation, in that
regulatory authorities may prohibit banks and bank holding companies from paying
dividends which would constitute an unsafe or unsound banking practice. In
addition, a bank may not pay cash dividends if that payment could reduce the
amount of its capital below that necessary to meet minimum applicable regulatory
capital requirements. Also, under the Oregon Bank Act, the Oregon Director may
suspend the payment of dividends if it is determined that the payment would
cause a bank's remaining stockholders' equity to be inadequate for the safe and
sound operation of the bank. Other than the laws and regulations noted above,
which apply to all banks and bank holding companies, the Company is not
currently subject to any regulatory restrictions on its dividends.
CAPITAL ADEQUACY
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or non-bank businesses or to
open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for
banks and bank holding companies. These are designed to make such capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimum. The
current guidelines require all bank holding companies and federally regulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier I capital.
10
Tier I capital for state member banks includes common shareholders'
equity, qualifying noncumulative perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, less certain
intangible assets. Tier II capital includes: (i) the allowance for loan losses
of up to 1.25% of risk-weighted assets; (ii) any qualifying perpetual preferred
stock which exceeds the amount which may be included in Tier I capital; (iii)
hybrid capital instruments and equity-contract notes; (iv) subordinated debt and
intermediate-term preferred stock of up to 50% of Tier I capital; (v) and
unrealized holding gains on equity securities. Total capital is the sum of Tier
I and Tier II capital, less reciprocal holdings of other banking organizations'
capital securities, and investments in unconsolidated subsidiaries.
The assets of banks and bank holding companies receive risk-weights of
0%, 20%, 50%, and 100%. In addition, certain off-balance sheet items are given
credit conversion factors to convert them to asset equivalent amounts to which
an appropriate risk-weight will apply. These computations result in total
risk-weighted assets.
Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property, which carry a 50% rating.
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% risk-weight, and direct
obligations of, or obligations guaranteed by, the United States Treasury or
agencies of the federal government, which have 0% risk-weight. In converting
off-balance sheet items, direct credit substitutes, including general guarantees
and standby letters of credit backing financial obligations, are given a 100%
conversion factor. Transaction-related contingencies such as bid bonds, other
standby letters of credit and undrawn commitments, including commercial credit
lines with an initial maturity of more than one year, have a 50% conversion
factor. Short-term, self-liquidating trade contingencies are converted at 20%,
and short-term commitments have a 0% factor.
The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a state member bank may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 4% for banks not having a composite rating of one under the
uniform rating system of banks. However, for all but the most highly rated state
member banks, and for banks seeking to expand, the Federal Reserve expects an
additional cushion of at least 1% to 2%.
The FDICIA created a statutory framework of supervisory actions indexed
to the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories,
depending on its total risk-based capital ratio, Tier I risk-based capital
ratio, and leverage ratio, together with certain subjective factors.
Institutions which are deemed to be "undercapitalized" depending on the category
to which they are assigned are subject to certain mandatory supervisory
corrective actions.
11
EFFECTS OF GOVERNMENT MONETARY POLICY
The earnings and growth of the Bank are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits influence the growth of bank loans, investments and deposits, and also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on the Company
and its subsidiary bank cannot be predicted with certainty.
CHANGES IN REGULATIONS
Sarbanes-Oxley Act of 2002. On July 30, 2002 the President signed into
law the Sarbanes-Oxley Act of 2002 (the "Act") implementing legislative reforms
intended to address corporate and accounting fraud. The Act applies to the
Company with securities registered under the Securities Exchange Act of 1934.
Certain key features of the Act are:
-Certification and Accountability. The Act requires the chief executive
officer and chief financial officer to certify the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement.
-Enhanced Financial Disclosures and Reporting Requirements. The
legislation accelerates the time frame for disclosures by public companies and
insiders, and the Company must more promptly disclose any material changes in
its financial condition or operations. Directors and executive officers must
also provide information for most changes in ownership in company securities
within two business days of the change.
-Audit Committee Requirements. The Act expands the responsibilities of
company audit committees including oversight of the company's auditor. The Act
also requires the independence of all members.
Please also see Item 10 of Part III of this Form 10-K.
SEC Regulations: Certification of Disclosure in Companies' Quarterly and Annual
Reports
As directed by Section 302(a) of the Act, the SEC adopted rules to
require an issuer's principal executive and financial officers each to certify
the financial and other information contained in the issuer's quarterly and
annual reports. The rules also require these officers to certify that: they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of the issuer's internal controls; they have made certain
disclosures to the issuer's auditors and the audit committee of the board of
directors about the issuer's internal controls; and they have included
information in the issuer's quarterly and annual reports about their evaluation
and whether there have been significant changes in the issuer's internal
controls or in other factors that could significantly affect internal controls
subsequent to the evaluation. In addition, the SEC has adopted rules which
require issuers to maintain, and regularly evaluate the effectiveness of,
disclosure controls and procedures designed to ensure that the information
required in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported on a timely basis. The effective date of this
requirement was August 29, 2002. The Company has implemented procedures and
reporting tools to meet the requirements of the SEC certification rules.
12
SEC Regulations: Strengthening the SEC's Requirements Regarding Auditor
Independence
The SEC adopted amendments to its existing requirements regarding
auditor independence to enhance the independence of accountants that audit and
review financial statements and prepare attestation reports filed with the
Commission. The final rules recognize the critical role played by audit
committees in the financial reporting process and the unique position of audit
committees in assuring auditor independence. Consistent with the direction of
Section 208(a) of the Act, the SEC adopted rules to: revise the Commission's
regulations related to the non-audit services that, if provided to an audit
client, would impair an accounting firm's independence; require that an issuer's
audit committee pre-approve all audit and non-audit services provided to the
issuer by the auditor of an issuer's financial statements; prohibit certain
partners on the audit engagement team from providing audit services to the
issuer for more than five or seven consecutive years, depending on the partner's
involvement in the audit, except that certain small accounting firms may be
exempted from this requirement; prohibit an accounting firm from auditing an
issuer's financial statements if certain members of management of that issuer
had been members of the accounting firm's audit engagement team within the
one-year period preceding the commencement of audit procedures; require that the
auditor of an issuer's financial statements report certain matters to the
issuer's audit committee, including "critical" accounting policies used by the
issuer; and require disclosures to investors of information related to audit and
non-audit services provided by, and fees paid to, the auditor of the issuer's
financial statements. In addition, under the final rules, an accountant would
not be independent from an audit client if an audit partner received
compensation based on selling engagements to that client for services other than
audit, review and attest services. The rules are effective May 6, 2003.
SEC Regulations: Disclosure Required by Sections 406 and 407 of the Act
The SEC adopted rules and amendments requiring publicly traded
companies to include two new types of disclosures in their annual reports filed
pursuant to the Securities Exchange Act of 1934. First, the rules require a
company to disclose whether it has at least one "audit committee financial
expert" serving on its audit committee, and if so, the name of the expert and
whether the expert is independent of management. Second, the rules require a
company to disclose whether it has adopted a code of ethics that applies to the
company's principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. A
company which has not adopted such a code must disclose this fact and explain
why it has not done so. A company also will be required to promptly disclose
amendments to, and waivers from, the code of ethics relating to any of those
officers. Companies must comply with the code of ethics disclosure requirements
promulgated under Section 406 of the Act in their annual reports for fiscal
years ending on or after July 15, 2003. They also must comply with the
requirements regarding disclosure of amendments to, and waivers from, their
ethics codes on or after the date on which they file their first annual report
in which the code of ethics disclosure is required. Companies similarly must
comply with the audit committee financial expert disclosure requirements
promulgated under Section 407 of the Sarbanes-Oxley Act in their annual reports
for fiscal years ending on or after July 15, 2003.
13
In 2003 the Company's Board of Directors adopted a formal Code of
Ethics to demonstrate to the public and stockholders the importance the Board
and management place on ethical conduct, and to continue to set forth the
expectations for the conduct of ethical business practices.
USA Patriot Act. Following the events of September 11, 2001, President
Bush, on October 26, 2001, signed into law the United and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001. Also known as the "USA Patriot Act," the law enhances the powers of the
federal government and law enforcement organizations to combat terrorism,
organized crime, and money laundering. The USA Patriot Act significantly amends
and expands the application of the Bank Secrecy Act, including enhanced measures
regarding customer identity, new suspicious activity reporting rules and
enhanced anti-money laundering programs. Under the Act, each financial
institution is required to establish and maintain anti-money laundering
compliance and due diligence programs, which include, at a minimum, the
development of internal policies, procedures, and controls; the designation of a
compliance officer; an ongoing employee training program; and an independent
audit function to test programs.
ITEM 2. PROPERTIES
DATE OWNED (O)
OPENED OR OR
LOCATION ADDRESS ACQUIRED LEASED (L)
- -------------------------- ---------------------------- -------------- ------------
FULL SERVICE BANKING OFFICES:
Florence (Main Branch) 1355 Highway 101 1980 O
Florence (Safeway Branch) 700 Highway 101 1995 L
Roseburg 2555 NW Edenbower 2004 O
Coos Bay 915 S First Street 2003 O
Sutherlin (Ray's Food Place) 330 Dakota Street 2002 L
OTHER OFFICES:
Loan Center 705 Ninth Street, Florence 2002 L
14
The new permanent facilities of the branch offices opened in December
2003 at Coos Bay and January 2004 at Roseburg. Land next to the Coos Bay
property on which the customer parking lot is located is leased. Leases include
multiple renewal options for Florence's Safeway branch and Loan Center and the
Sutherlin branch. The lease for the Coos Bay land has a mandatory purchase
option at the end of four or nine years for $330,000 or $360,000, respectively.
15
ITEM 3. LEGAL PROCEEDINGS
The Bank 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 Bank. The employee
has also filed an administrative claim with the U. S. Department of Labor under
the Sarbanes-Oxley Act of 2002. The Bank 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 the lawsuit.
In addition to the current pending lawsuit, the Bank may become party
to various legal proceedings in the future. These matters have a high degree of
uncertainty associated with them. There can be no assurance that the ultimate
outcome will not be adverse to the financial condition and results of operations
of the Bank. There can also be no assurance that all matters that may be brought
against us are known to us at any point in time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to the vote of stockholders
during the fourth quarter of 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common shares, no par value, of Oregon Pacific Bancorp have been
traded on the OTC Bulletin Board run by NASDAQ, under the symbol OPBP since
January 1, 2003. Prior to the formation of the holding company, Oregon Pacific
Banking Company's stock was traded on the same exchange under the symbol OPBC.
At March 5, 2004, the stock was held by approximately 660 shareholders.
The following table sets forth the high and low bid information for the
Bank's stock (prior to the holding company) for each calendar quarter of 2002
and the Company's stock for 2003 and through February 29, 2004. The information
was obtained from Wedbush Morgan Securities, Inc. and reflects inter-dealer
prices, without retail mark-up, mark-down or commissions and may not represent
actual transactions.
16
COMMON STOCK
HIGH AND LOW CLOSING BID
- ------------------------------------------------------------------------------------ CASH
PERIOD HIGH BID PRICE LOW BID PRICE DIVIDENDS
- --------------------------------- ------------------- ------------------- ------------
January 1 - March 31, 2002 $5.75 $5.10 $0.05
April 1 - June 30, 2002 $7.25 $5.10 $0.05
July 1 - September 30, 2002 $7.40 $6.25 $0.03
October 1 - December 31, 2002 $7.25 $6.75 $0.05
January 1 - March 31, 2003 $6.80 $6.25 $0.05
April 1 - June 30, 2003 $6.50 $5.80 $0.04
July 1 - September 30, 2003 $6.20 $5.90 $0.04
October 1 - December 31, 2003 $7.45 $6.25 $0.04
January 1 - February 29, 2004 $7.50 $6.50
The Bank paid cash dividends of $0.17 and $0.18 per share for the years
2003 and 2002, respectively. Payment of dividends has been at the discretion of
the Company's Board of Directors. Any future decision regarding dividends will
depend on future earnings, future capital needs, and the Company's operating
financial condition, among other factors. Oregon law also generally prohibits
dividends where the effect of paying them would be, in the judgment of the Board
of Directors, to cause the Company to be unable to pay its debts as they become
due in the usual course of business and if the Company's total assets would not
at least equal the sum of its total liabilities.
The transfer agent and registrar for the Common Stock is Registrar and
Transfer, Cranford, New Jersey as of March 2003.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain information concerning the
consolidated financial condition, operating results, and key operating ratios
for Oregon Pacific Bancorp or Oregon Pacific Banking Co. (as noted) at the dates
and for the periods indicated. This information does not purport to be complete,
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of Oregon Pacific Bancorp and Notes thereto.
17
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
========================================================================
2003 2002 2001 2000 1999
============= ============= ============ ============ ==================
INCOME STATEMENT DATA
Interest income $7,155,283 $6,446,028 $6,040,441 $5,905,599 $5,898,843
Interest expense 1,554,368 1,705,955 2,136,830 2,240,901 2,191,145
------------- ------------- ------------ ------------ ------------------
Net interest income 5,600,915 4,740,073 3,903,611 3,664,698 3,707,698
Loan loss provision 170,000 280,100 3,000 55,000 26,000
------------- ------------- ------------ ------------ ------------------
Net interest income after
provision for loan
losses 5,430,915 4,459,973 3,900,611 3,609,698 3,681,698
Noninterest income 2,449,301 2,061,585 1,414,437 1,116,892 932,962
Noninterest expense 6,541,050 5,447,688 4,159,578 3,547,159 3,015,397
------------- ------------- ------------ ------------ ------------------
Income before provision
for income taxes 1,339,166 1,073,870 1,155,470 1,179,431 1,599,263
Provision for income taxes 377,327 252,061 260,635 304,994 488,120
------------- ------------- ------------ ------------ ------------------
Net income $961,839 $821,809 $894,835 $874,437 $1,111,143
============= ============= ============ ============ ==================
DIVIDENDS
Cash dividends declared
and paid $365,701 $381,845 $1,587,648 $568,285 $671,863
Ratio of dividends to net
income 38.02% 46.46% 177.42% 64.99% 60.47%
Cash dividends per share $0.17 $0.18 $0.75 $0.26 $0.30
PER SHARE DATA (1)
Basic earnings per common
share $0.45 $0.39 $0.42 $0.40 $0.49
Diluted earnings per
common share $0.45 $0.39 $0.42 $0.40 $0.49
Book value per common
share $3.97 $3.70 $3.37 $3.63 $3.20
Weighted average shares
outstanding:
Basic 2,155,100 2,124,904 2,118,831 2,178,745 2,245,856
Diluted 2,156,802 2,131,252 2,119,650 2,181,967 2,251,934
BALANCE SHEET DATA
Investment securities $17,844,388 $14,744,887 $22,499,503 $23,360,141 $19,710,106
Loans, net $82,722,328 $70,988,652 $52,843,530 $41,497,012 $42,676,033
Total assets $120,676,292 $107,019,888 $86,586,515 $71,555,503 $72,735,235
Total deposits $97,464,404 $88,515,051 $72,316,796 $57,502,291 $58,914,162
Stockholders' equity $8,635,558 $7,892,922 $7,111,315 $7,715,651 $7,290,929
SELECTED RATIOS (BANK ONLY)
Return on average assets 0.87% 0.88% 1.14% 1.22% 1.46%
Return on average equity 11.65% 10.86% 11.95% 11.59% 14.10%
Total loans to deposits 84.87% 80.20% 73.07% 72.17% 72.44%
Net interest margin 5.35% 5.60% 5.62% 5.80% 5.65%
Efficiency ratio (1) 80.16% 80.09% 78.22% 74.18% 64.98%
ASSET QUALITY RATIOS
Reserve for loans losses
to:
Ending total loans 1.49% 1.51% 1.58% 2.35% 2.24%
Nonperforming
assets(2) 13160.00% 662.71% 207.49% 195.20% 105.05%
Non-performing assets to
ending total assets 0.01% 0.17% 0.50% 0.73% 1.31%
Net loan charge-offs to
average loans 0.03% 0.01% 0.25% 0.08% 0.19%
18
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
========================================================================
2003 2002 2001 2000 1999
============= ============= ============ ============ ==================
CAPITAL RATIOS (BANK)
Average stockholders'
equity to average assets 7.44% 8.08% 9.57% 10.51% 10.37%
Tier I capital ratio (3) 12.6% 9.1% 11.0% 16.3% 15.4%
Total risk-based capital
ratio (4) 13.9% 10.4% 12.3% 17.6% 16.7%
Leverage ratio (5) 10.2% 7.2% 8.7% 10.6% 10.2%
(1) Efficiency ratio is noninterest expense divided by the sum of net interest
income plus noninterest income.
(2) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more, and other real estate owned.
(3) Tier I capital divided by risk-weighted assets.
(4) Total capital divided by risk-weighted assets.
(5) Tier I capital divided by average total assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following discussion should be read together with Oregon Pacific
Bancorp's consolidated financial statements and related notes which are included
elsewhere in this Form 10-K.
Oregon Pacific Bancorp's goal is to grow its earning assets while
maintaining a high return on equity and keeping asset quality high. The key to
this is to emphasize personal, quality banking products and services for its
customers, to hire and retain competent management and administrative personnel,
and to respond quickly to customer demand and growth opportunities. The Company
also intends to continue expansion into markets where opportunities exist due to
mergers and acquisitions and to increase its market penetration in its existing
markets through the introduction of new or existing financial services products.
For the year ended December 31, 2003, consolidated net income was
$962,000, representing an increase of 17.03% from net income of $822,000 earned
during the year ended December 31, 2002. Net income for 2002 was down 8.16% from
net income of $895,000 earned during the year ended December 31, 2001. Diluted
earnings per share were $0.45, $0.39, and $0.42 for the years ended December 31,
2003, 2002, and 2001, respectively. Return on average assets was 0.83% for the
year ended December 31, 2003, compared with 0.88% for the year ended December
31, 2002, and 1.14% in 2001. Return on average equity was 11.21% for the year
ended December 31, 2003, compared with 10.86% for the year ended December 31,
2002, and 11.95% for the year ended December 31, 2001. The increase in earnings
for the year ended December 31, 2003, versus the comparable period in 2002 can
be attributed primarily to the realization of returns from the three de novo
branches started in 2002. The return on average assets has remained fairly
steady due to lower margins earned in the more competitive markets.
19
Company assets grew from $107.02 million to $120.68 million, or 12.76%
from year-end 2002 to 2003, and 23.59% from December 31, 2001 to December 31,
2002 from $86.59 million. Most of the growth was an increase in commercial loans
in the new market areas, as net loans grew from $70.99 million to $82.72
million, an increase of 16.52% from year-end 2002 to 2003, and from $52.84
million, an increase of 34.35% the year before. The net growth in earning assets
in 2003 was funded by a growth in customer deposits and subordinated debt in the
form of Trust Preferred Securities. Stockholders' equity increased in 2003 as
the Bank retained much of the income by reducing dividends paid to stockholders
to facilitate future growth.
While 2003 was a year of realizing profitability from the branches
opened in 2002, we are optimistic that further improvement can be achieved in
2004 and beyond. Of course, unforeseen events such as an economic slowdown or
significant interest rates changes by the Federal Reserve could impact future
results, but nonetheless we believe that the Company's future is bright. We
further believe that our proven business model characterized by strong asset
quality, capital strength, and prudent reserves is the most effective way to
deal with the inevitable economic uncertainties and to maximize shareholder
value over time.
Return on average daily assets and equity and certain other ratios for
the periods indicated are presented below:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- ---------- --------- ----------
(Dollars in Thousands)
Net income $ 962 $ 822 $ 895 $ 874 $ 1,111
Average assets 115,327 93,607 78,174 71,763 76,014
RETURN ON AVERAGE ASSETS 0.83% 0.88% 1.14% 1.22% 1.46%
Net income $ 962 $ 822 $ 895 $ 874 $ 1,111
Average equity 8,578 7,568 7,485 7,542 7,880
RETURN ON AVERAGE EQUITY 11.21% 10.86% 11.95% 11.59% 14.10%
Average equity $ 8,578 $ 7,568 $ 7,485 $ 7,542 $ 7,880
Average assets 115,327 93,607 78,174 71,763 76,014
AVERAGE EQUITY TO ASSET RATIO 7.44% 8.08% 9.57% 10.51% 10.37%
Critical Accounting Policies and Estimates
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as disclosures included elsewhere in this Form
10-K, are based upon our audited financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
the estimates used, including the adequacy of the allowance for loan losses and
contingencies and litigation. 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. The
following critical accounting policies involve the more significant judgments
and assumptions used in the preparation of the consolidated financial
statements.
20
The allowance for loan losses is established to absorb known and
inherent losses attributable to loans outstanding and related off-balance-sheet
commitments. The adequacy of the allowance is monitored on an ongoing basis and
is based on management's evaluation of numerous factors. These factors include
the quality of the current loan portfolio, the trend in the loan portfolio's
risk ratings, current economic conditions, loan concentrations, loan growth
rates, past-due and non-performing trends, evaluation of specific loss estimates
for all significant problem loans, historical charge-off and recovery
experience, and other pertinent information. As of December 31, 2003,
approximately 83% of the Bank's loan portfolio is secured by real estate and a
significant depreciation in real estate values in Oregon would cause management
to increase the allowance for loan losses.
The Bank applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, compensation costs are
recognized as the difference between the exercise price of each option and the
market price of the Bank's stock at the date of each grant. Had compensation
cost for the Bank's 2003, 2002, and 2001 grants for stock-based compensation
plans been determined consistent with SFAS No. 123, its net income and earnings
per common share for December 31, 2003, 2002, and 2001 would approximate the pro
forma amounts below (in thousands, except per share data).
2003 2002 2001
--------- --------- ----------
Net income (in thousand's):
As reported $962 $822 $895
Pro forma $962 $821 $892
Basic earnings per common share:
As reported $0.45 $0.39 $0.42
Pro forma $0.45 $0.39 $0.42
Diluted earnings per common
share:
As reported $0.45 $0.39 $0.42
Pro forma $0.45 $0.39 $0.42
21
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
December 31, 2003, 2002, and 2001:
2003 2002 2001
--------- ---------- -----------
Dividend yield 3.06% 0.05% 0.05%
Expected life 7.5 years 7 years 7 years
Expected volatility 19.72% 0.01% 0.01%
Risk-free rate 3.75 4.84 - 5.04% 4.84 - 5.04%
The effects of applying SFAS No. 123 in the pro forma disclosure are
not indicative of future amounts. Additionally, there can be no assurance that
the Financial Accounting Standards Board will not adopt accounting principles
mandating the application of SFAS No. 123 in the future.
In addition to the current pending lawsuit, the Bank may become party
to various legal proceedings in the future. These matters have a high degree of
uncertainty associated with them. There can be no assurance that the ultimate
outcome will not be adverse to the financial condition and results of operations
of the Bank. There can also be no assurance that all matters that may be brought
against us are known to us at any point in time.
Results of Operations
Net Interest Income
For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loan and investment security portfolios, and interest expense
on customer deposits and borrowed funds. Changes in net interest income result
from changes in "volume," "spread," and "margin." Volume refers to the dollar
level of interest-earning assets and interest-bearing liabilities. Spread refers
to the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities. Net interest margin is the ratio of net interest
income to total average interest-earning assets and is influenced by the
relative level of interest-earning assets and interest-bearing liabilities.
22
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 earning assets or
interest-bearing liabilities:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2003 2002 2001
------------------------- ------------------------ -------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
INCOME YIELDS INCOME YIELDS INCOME YIELDS
AVERAGE OR OR AVERAGE OR OR AVERAGE OR OR
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES
-------- -------- ------- ------- -------- ------- -------- -------- -------
(dollars in thousands)
Interest-earning assets:
Loans $ 83,634 $ 6,367 7.61% $65,386 $ 5,436 8.31% $47,541 $ 4,668 9.82%
Investment securities
Taxable securities (1) 10,751 386 3.59% 9,165 541 5.90% 14,065 826 5.87%
Nontaxable securities (2) 7,629 512 6.71% 8,269 582 7.04% 9,579 688 7.18%
Interest-earning balances due
from banks 6,080 63 1.04% 5,367 84 1.57% 2,715 106 3.90%
-------- -------- ------- -------- ------- --------
Total interest-earning
assets 108,094 7,328 6.78% 88,187 6,643 7.53% 73,900 6,288 8.51%
-------- ------- -------- ------- -------- -------
Cash and due from banks 3,871 2,820 2,284
Premises and equipment, net 3,441 2,332 1,746
Other real estate 27 44 54
Loan loss allowance (1,245) (1,002) (983)
Other assets 1,079 1,226 1,173
-------- ------- -------
Total assets $115,267 $93,607 $78,174
======== ======= =======
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts $ 54,546 $ 658 1.21% $38,104 $ 670 1.76% $30,219 $ 812 2.69%
Time deposit and IRA accounts 21,287 539 2.53% 20,489 689 3.36% 20,036 1,027 5.13%
Borrowed funds 8,550 345 4.04% 8,205 347 4.23% 5,246 298 5.68%
-------- -------- ------- -------- ------- --------
Total interest-bearing
liabilities 84,383 1,542 1.83% 66,798 1,706 2.55% 55,501 2,137 3.85%
-------- ------- -------- ------- -------- -------
Noninterest-bearing
deposits 20,652 17,769 14,064
Other liabilities 1,654 1,472 1,124
-------- ------- -------
Total liabilities 106,689 86,039 70,689
Shareholders' equity 8,578 7,568 7,485
-------- ------- -------
Total liabilities and share-
holders' equity $115,267 $93,607 $78,174
======== ======= =======
Net interest income $ 5,786 $ 4,937 $ 4,151
======== ======== ========
Net interest spread 4.95% 4.98% 4.66%
======= ======= =======
Net interest expense to average
earning assets 1.43% 1.93% 2.89%
======= ======= =======
Net interest margin (3) 5.35% 5.60% 5.62%
======= ======= =======
(1) Trading securities are included in taxable securities.
(2) Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
23
Analysis of Changes in Interest Differential. The following table shows
the dollar amount of the increase (decrease) in Oregon Pacific Banking Co.'s net
interest income and expense and attributes such dollar amounts to changes in
volume as well as changes in rates. Rate and volume variances have been
allocated proportionally between rate and volume changes:
2003 OVER 2002 2002 OVER 2001 2001 OVER 2000
------------------------------- ------------------------------ ------------------------------
NET NET NET
(dollars in thousands) VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
------------------------------ ------------------------------ ------------------------------
Interest-earning assets:
Loans $1,517 $(586) $931 $1,752 $(984) $768 $(125) $487 $362
Investment securities
Taxable securities 94 (249) (155) (288) 3 (285) (149) 44 (105)
Nontaxable
securities (1) (45) (25) (70) (94) (12) (106) 89 (15) 74
Interest-earning balances
due from banks 11 (32) (21) 104 (126) (22) (51) 32 (19)
------------------------------ ------------------------------ ------------------------------
Total 1,577 (892) 685 1,474 (1,119) 355 (236) 548 312
------------------------------ ------------------------------ ------------------------------
Interest-bearing
liabilities:
Interest-bearing checking 289 (301) (12) 212 (354) (142) (34) 134 100
and savings accounts
Time deposits 27 (177) (150) 23 (361) (338) (75) 60 (15)
Borrowed funds 15 (17) (2) 168 (119) 49 (79) 44 (35)
------------------------------ ------------------------------ ------------------------------
Total 331 (495) (164) 403 (834) (431) (188) 238 50
------------------------------ ------------------------------ ------------------------------
Net increase (decrease)
in net interest income $1,246 $(397) $849 $1,071 $(285) $786 $(48) $310 $262
- --------------------------
(1) Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
Net interest income, before the provision for loan loss, for the year
ended December 31, 2003 was $5.60 million, an increase of 18.14% compared to net
interest income of $4.74 million in 2002, and an increase of 21.54% compared to
net interest income of $3.90 million in 2001. The overall tax-equivalent earning
asset yield was 6.78% in 2003 compared to 7.53% in 2002 and 8.51% in 2001. For
the same years, rates on interest-bearing liabilities were 1.83%, 2.55%, and
3.85%, respectively. The declining rates were primarily due to outside economic
factors creating pressure on interest yields and rates.
Total interest-earning assets averaged $108.09 million for the year
ended December 31, 2003, compared to $88.19 million for the corresponding period
in 2002. The increase was due to loan growth primarily from the new branches,
but also Small Business Administration loans originated in Florence.
Interest-bearing liabilities averaged $84.38 million for the year ended
December 31, 2003 compared to $66.80 million during the same period in 2002. The
Bank's deposit growth corresponds with the opening of the new branches as well
as Federal monetary policy. Further competitive pressure is expected in
expanding deposit relationships, and as bank deposits in general are growing
slowly management acknowledges Oregon Pacific Banking Co.'s net interest margins
may be somewhat impacted as other funding mechanisms such as Federal Home Loan
borrowings become a more significant means of funding growth.
24
Loans, which generally carry a higher yield than investment securities
and other earning assets, comprised 77.37% of average earning assets during
2003, compared to 74.14% in 2002 and 64.33% in 2001. During the same periods,
average yields on loans were 7.61% in 2003, 8.31% in 2002, and 9.82% in 2001.
Investment securities comprised 17.00% of average earning assets in 2003, which
was down from 19.77% in 2002 and 31.99% in 2001. Tax equivalent interest yields
on investment securities have ranged from 4.89% in 2003 to 6.44% in 2002 and
6.40% in 2001.
Interest cost, as a percentage of earning assets, decreased to 1.43% in
2003, compared to 1.93% in 2002 and 2.89% in 2001. Local competitive pricing
conditions and funding needs for the Bank's investments in loans have been the
primary determinants of rates paid for deposits during these three years.
Provision for Loan Losses
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed to be sufficient to absorb losses in the loan portfolio.
Factors considered in establishing an appropriate allowance include a careful
assessment of the financial condition of the borrower; a realistic determination
of the value and adequacy of underlying collateral; the condition of the local
economy and the condition of the specific industry of the borrower; a
comprehensive analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans. Oregon Pacific Banking Co. applies a
systematic process for determining the adequacy of the allowance for loan
losses, including an internal loan review function and a monthly analysis of the
adequacy of the allowance. Management believes the reserve for loan losses is
adequate to absorb potential losses on identified problem loans as well as
inherent losses at historical and expected levels.
The recorded values of loans actually removed from the balance sheets
are referred to as charge-offs and, after netting out recoveries on previously
charged-off assets, become net charge-offs. The Bank's policy is to charge off
loans when, in management's opinion, the loan or a portion thereof is deemed
uncollectible, although concerted efforts are made to maximize recovery after
the charge-off. When a charge to the loan loss provision is recorded, the amount
is based on past charge-off experience, a careful analysis of the current
portfolio, and an evaluation of economic trends in the market area. Management
will continue to closely monitor the loan quality of new and existing
relationships through stringent review and evaluation.
For the years ended December 31, 2003 to 2001, Oregon Pacific Banking
Co. charged $170,000, $280,000, and $3,000, respectively, to its provision for
loan losses. The increased allowance in 2003 reflects the 16.53% growth of the
loan portfolio.
For the year ended December 31, 2003, loan charge-offs exceeded
recoveries by $27,000 as compared to 2002, when loan charge-offs exceeded
recoveries by $9,000. All net charge-offs incurred by Oregon Pacific Banking Co.
were small in amount and generally distributed evenly among the Bank's loan
portfolio categories.
Noninterest Income
25
Total noninterest income increased through year-end 2003 from 2001.
Over this three-year period, noninterest income has increased from $1.41 million
in 2001, to $2.06 million in 2002, and to $2.45 million in 2003. Noninterest
income is primarily derived from mortgage loan sales and servicing fees, service
charges and related fees, trust fee income, and investment and brokerage service
sales commissions. The largest increases in noninterest income were derived from
mortgage loan sales and servicing fees that grew to $1.27 million in 2003, from
$1.03 million in 2002, and $606,000 in 2001 and trust fee income which increased
to $442,000 in 2003, from $373,000 in 2002, and $162,000 in 2001. The mortgage
loan sales and servicing fees increase was primarily due to the mortgage rate
environment and the increases in the trust and asset management department's
assets and income reflect the continuing growth and acceptance of the Bank's
trust services within its market areas. Services charges over the past three
years were $494,000 in 2003, $384,000 in 2002, and $365,000 in 2001. The growth
in 2003 reflects the new Overdraft Protection service as other charges have
remained fairly flat since the Bank offers many demand deposit accounts with no
related fees.
Noninterest Expense
Noninterest expenses consist principally of employees' salaries and
benefits, occupancy costs, data processing expenses and other noninterest
expenses. A measure of a bank's ability to contain noninterest expenses is the
efficiency ratio, calculated as total noninterest expenses divided by net
interest income plus noninterest income. For the year ended December 31, 2003,
the efficiency remained flat as measured by the efficiency ratio to 80.16%
compared to 80.09% for the corresponding period of 2002. This is primarily due
to increased headcount and occupancy costs as the Bank opened the Roseburg, Coos
Bay, and Sutherlin branches in January, June, and October 2002, respectively,
while full income potential has not yet been realized.
Total noninterest expense was $6.54 million for the year ended December
31, 2003, an increase from $5.45 million for the year ended December 31, 2002,
and $4.16 million for the year ended December 31, 2001.
Salary and benefit expense, which includes commissions and the
employer-paid portion of payroll taxes, was $4.19 million in 2003, $3.45 million
in 2002, and $2.61 million in 2001. As of December 31, 2003, Oregon Pacific
Banking Co. had 93 full-time equivalent employees, which compares to 88 as of
December 31, 2002 and 66 as of December 31, 2001. Increased health insurance
costs also contributed to the overall increase.
Occupancy expense consists of depreciation on premises and equipment,
maintenance and repair expenses, utilities, and related expenses. The Bank's net
occupancy expense grew by 18.49% in 2003 as the new branches were open for a
full year and the Loan Center doubled in size in August 2003. This expense
category was $628,000 in 2003, an increase of $98,000 over $530,000 in 2002, and
an increase of $105,000 over $425,000 in 2001.
Outside services expense consists of telecommunication expense,
correspondent bank charges, and fees for data processing, accountants, legal
services, Regulators' examinations and other miscellaneous outside services.
Outside services expense has grown from $413,000 in 2002 to $622,000 in 2003, an
increase of $209,000 from the prior year reflecting the increased costs of
business in multiple service areas.
26
Income Taxes
The provision for income taxes was $377,000 in 2003, $252,000 in 2002,
and $261,000 in 2001. The provision resulted in effective combined federal and
state tax rates of 28% in 2003, 23% in 2002, and 26% in 2001. The effective tax
rates differ from combined estimated statutory rates of 38% principally due to
the effects of nontaxable interest income which is recognized for book, but not
for tax purposes.
Financial Condition
The table below provides abbreviated balance sheets at the end of the
respective years indicating the changes that have occurred in the major asset
classifications of the Company over the prior year:
---------------------------------------
DECEMBER 31, INCREASE (DECREASE) INCREASE (DECREASE)
(dollars in -------------------------- 12/31/02 TO 12/31/01 TO
thousands) 2003 2002 2001 12/31/03 12/31/02
-------- -------- -------- ------------------- -------------------
ASSETS
Loans, net of
allowance for loan
losses and
unearned income $ 86,780 $ 76,316 $ 55,753 $ 10,464 13.71 % $ 20,563 36.88 %
Investments 17,844 14,745 22,500 3,099 21.02 (7,755) (34.47)
Interest-bearing
deposits
in banks 4,764 8,079 3,080 (3,315) (41.03) 4,999 162.31
Other assets(1) 11,288 7,880 5,254 3,408 43.25 2,626 49.98
-------- -------- -------- -------- -------- -------- --------
Total assets $120,676 $107,020 $ 86,587 $ 13,656 12.76 % $ 20,433 23.60 %
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND EQUITY
Noninterest-bearing
deposits $ 21,990 $ 18,512 $ 15,174 $ 3,478 18.79 % $ 3,338 22.00 %
Interest-bearing
deposits 75,474 70,003 57,143 5,471 7.82 12,860 22.50
-------- -------- -------- -------- -------- -------- --------
Total deposits 97,464 88,515 72,317 8,949 10.11 16,198 22.40
Other
liabilities(2) 14,576 10,612 7,159 3,964 37.35 3,453 48.23
-------- -------- -------- -------- -------- -------- --------
Total
liabilities 112,040 99,127 79,476 12,913 13.03 19,651 24.73
Total equity 8,636 7,893 7,111 743 9.41 782 11.00
-------- -------- -------- -------- -------- -------- --------
Total
liabilities
and equity $120,676 $107,020 $ 86,587 $ 13,656 12.76 % $ 20,433 23.60 %
======== ======== ======== ======== ======== ======== ========
(1) Includes cash and due from banks, fixed assets, and accrued interest
receivable.
(2) Includes accrued interest payable and other liabilities.
Investments
A year-to-year comparison shows that Oregon Pacific Banking Co.'s
investment portfolio at December 31, 2003, totaled $17.84 million, compared to
$14.75 million at December 31, 2002, and $22.50 million at December 31, 2001.
This represents an increase of 20.95% between 2002 and 2003 and a decrease of
34.44% between 2001 and 2002. Increases or decreases in the investment portfolio
are primarily a function of loan demand and changes in Oregon Pacific Banking
Co.'s deposit structure.
The Bank identifies its investment securities as available-for-sale.
Available-for-sale securities are those that management may sell if liquidity
requirements dictate or if alternative investment opportunities arise. The mix
of available-for-sale investment securities is determined by management, based
on the Bank's asset-liability policy, management's assessment of the relative
liquidity of the Bank, and other factors.
At December 31, 2003, Oregon Pacific Banking Co.'s investment portfolio
had total net unrealized gains, net of taxes, of approximately $410,000. This
compares to unrealized gains of approximately $488,000 at December 31, 2002, and
$210,000 at December 31, 2001. Unrealized gains and losses reflect changes in
market conditions and do not represent the amount of actual profits or losses
the Bank may ultimately realize. Actual realized gains and losses occur at the
time investment securities are sold or redeemed.
Interest-bearing deposits in banks are short-term investments held
primarily at the FHLB. The Bank invests in these instruments to provide for
additional earnings on excess available cash balances. Because of their liquid
nature, these balances fluctuate dramatically on a day-to-day basis. The balance
on any one day is influenced by cash demands, customer deposit levels, loan
activity and other investment transactions. Interest-bearing deposit accounts
totaled $4.76 million at December 31, 2003, compared to $8.08 million at
December 31, 2002, and $3.08 million at December 31, 2001.
During 2001, when interest-bearing deposits in banks began paying an
annualized rate of less than one percent, the Bank deposited excess cash in a
mutual fund that was paying two to eight times the interest that could be earned
on overnight funds. Because the funds were intended to be used as cash was
needed for funding loans or other daily operations, the Bank classified the
funds as trading securities. The balance at December 31, 2001 was $3.28 million.
During 2002 those rates declined eliminating the rate advantage experienced in
2001 and those funds were invested at the FHLB. The Bank invested funds in the
same manner in 2003 but had no remaining balances at December 31, 2003.
28
The following table provides the carrying value of Oregon Pacific
Banking Co.'s portfolio of investment securities as of December 31, 2003, 2002,
and 2001, respectively:
DECEMBER 31,
-----------------------------------------
(dollars in
thousands) 2003 2002 2001
--------- --------- ---------
Investments available-for-sale:
U.S. Treasury and agencies $ 5,209 $ 2,758 $ 4,332
State and political subdivisions 7,177 7,787 9,472
Corporate debt securities 3,990 2,680 2,842
Equity securities of government
agencies - - 726
Mortgage backed securities 469 688 1,063
--------- --------- ---------
16,845 13,913 18,435
Trading securities - - 3,277
Restricted equity securities 999 832 788
--------- --------- ---------
Total investment
securities $ 17,844 $ 14,745 $ 22,500
========= ========= =========
Investment securities at the dates indicated consisted of the following:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------- ------------------------- -------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
(dollars in WEIGHTED WEIGHTED WEIGHTED
thousands)
TYPE AND MATURITY AMORTIZED MARKET AVERAGE AMORTIZED MARKET AVERAGE AMORTIZED MARKET AVERAGE
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
------------------------- ------------------------- -------------------------
U.S. Treasury and
agencies
Due within one year $250 $261 6.56% $1,392 $1,398 4.09% $- $- -
Due after one but within
five years 3,927 3,948 4.53% 1,291 1,360 5.52% 3,250 3,281 4.95%
Due after five but within
ten years 1,000 1,000 4.38% - - - 1,000 1,051 6.71%
----------------- ----------------- -----------------
Total U.S. Treasury and
agencies 5,177 5,209 4.60% 2,683 2,758 4.78% 4,250 4,332 5.36%
----------------- ----------------- -----------------
State and political
subdivisions:
Due within one year 1,081 1,111 7.64% 1,033 1,068 7.84% 470 478 6.74%
Due after one but within
five years 4,061 4,335 6.95% 4,939 5,328 7.37% 3,920 4,075 7.46%
Due after five but within
ten years 1,321 1,434 7.33% 1,268 1,391 7.78% 3,284 3,404 7.61%
Due after ten years 270 297 8.01% - - - 1,478 1,514 8.05%
----------------- ----------------- -----------------
Total state and
political subdivisions
(1) 6,733 7,177 7.18% 7,240 7,787 7.51% 9,152 9,471 7.57%
----------------- ----------------- -----------------
Corporate debt
securities:
Due within one year 1,088 1,112 5.47% - - - 254 263 6.40%
Due after one but within
five years 2,713 2,878 5.43% 2,514 2,680 6.39% 1,732 1,757 6.20%
Due after five but within
ten years - - - - - - 799 822 6.80%
----------------- ----------------- -----------------
Total corporate notes 3,801 3,990 5.44% 2,514 2,680 6.39% 2,785 2,842 6.39%
----------------- ----------------- -----------------
Mortgage backed
securities 451 469 663 688 5.83% 1,034 1,064 7.36%
Equity securities of
gov't. agencies - - - - - - 751 726 5.80%
Trading securities - - - - - - 3,277 3,277 4.12%
Restricted equity
securities 999 999 832 832 788 788
----------------- ----------------- -----------------
Total investment
securities $17,161 $17,844 5.82% $13,932 $14,745 6.65% $22,037 $22,500 6.37%
================= ================= =================
(1) Weighted average yield on state and political subdivisions has been
computed on a 34% tax-equivalent basis.
The Bank does not own bonds of a single issuer whose aggregate market value
or book exceeds 10% of equity.
29
Loans
The Bank's loan policies and procedures establish the basic guidelines
governing its lending operations. Generally, the guidelines address the types of
loans that the Bank seeks, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations, and compliance with
laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrower's
total outstanding indebtedness to Oregon Pacific Banking Co., including the
indebtedness of any guarantor. The policies are reviewed and approved at least
annually by the Board of Directors of the Bank.
Bank officers are charged with loan origination in compliance with
underwriting standards overseen by the loan administration function and in
conformity with established loan policies. Periodically, the Board of Directors
determines the lending authority of the President and other lending officers.
Such delegated authority may include authority related to loans, letters of
credit, overdrafts, uncollected funds, and such other authority as determined by
the Board or the President within the President's delegated authority.
The President has authority to approve loans up to a lending limit set
by the Board of Directors. All loans above the lending limit of the President
and up to a certain limit are reviewed for approval by the executive loan
committee, which currently includes the President and four senior loan or credit
officers. All loans above the lending limit up to Oregon Pacific Banking Co.'s
statutory loan-to-one-borrower limitation (also known as the legal lending
limit) require approval of at least three members of the Board of Directors.
Oregon Pacific Banking Co.'s unsecured legal lending limit was $2,012,000 at
December 31, 2003.
Net outstanding loans, excluding loans held-for-sale, totaled $82.72
million at December 31, 2003, representing an increase of $11.73 million, or
16.52% compared to $70.99 million as of December 31, 2002. Loan commitments
increased to $7.74 million as of December 31, 2003, representing a decrease of
$2.51 million from year-end 2002. Net outstanding loans, excluding loans
held-for-sale, were $52.84 million at December 31, 2001.
Oregon Pacific Banking Co.'s net loan portfolio, excluding loans held
for sale, at December 31, 2003, includes loans secured by real estate (82.98% of
total), commercial loans (9.84% of total), and consumer loans and overdraft
accounts (4.51% of total). These percentages are generally consistent with
previous reporting periods. Loans secured by real estate include loans made for
purposes other than financing purchases of real property, such as inventory
financing and equipment purchases, where real property serves as collateral for
the loan.
30
This table presents the composition of Oregon Pacific Banking Co.'s
loan portfolio by collateral at the dates indicated:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------------------------------------------------
(dollars in thousands) $ % $ % $ %
--------- -------- -------- ------- -------- -------
Real estate $72,014 82.98 % $61,319 80.35 % $43,601 78.20 %
Commercial 8,538 9.84 7,169 9.39 5,243 9.40
Installment 3,223 3.71 3,371 4.42 3,356 6.02
Other 697 0.80 763 1.00 1,821 3.27
Loans held-for-sale 4,058 4.68 5,328 6.98 2,909 5.22
--------- -------- -------- ------- -------- -------
Total 88,530 102.02 77,950 102.14 56,930 102.11
Less allowance for loan
losses (1,316) (1.52) (1,173) (1.54) (902) (1.62)
Less deferred loan fees (434) (0.50) (461) (0.60) (275) (0.49)
--------- -------- -------- ------- -------- -------
Loans receivable, net $86,780 100.00 % $76,316 100.00 % $55,753 100.00 %
========= ======== ======== ======= ======== =======
The following table shows the maturities and sensitivity of Oregon
Pacific Banking Co.'s loans to changes in interest rates at the dates indicated:
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------------ -------------------------------------
DUE AFTER DUE AFTER
ONE YEAR DUE ONE YEAR DUE
DUE IN THROUGH AFTER DUE IN THROUGH AFTER
(dollars in ONE YEAR FIVE FIVE TOTAL ONE YEAR FIVE FIVE TOTAL
thousands) OR LESS YEARS YEARS LOANS OR LESS YEARS YEARS LOANS
-------- -------- --------- -------- ------- -------- ----------- --------
LOAN CATEGORY
Real estate -
mortgage
(includes loans
held-for-sale) $641 $5,294 $15,366 $21,301 $1,417 $4,897 $18,140 $24,454
Real estate -
construction 2,180 1,220 - 3,400 768 360 - 1,128
Real estate - other 9,488 6,331 35,552 51,371 2,548 7,325 31,192 41,065
Installment 669 2,258 296 3,223 479 2,682 210 3,371
Commercial 3,826 3,268 1,444 8,538 3,958 2,724 487 7,169
Other 477 220 - 697 301 462 - 763
-------- -------- --------- -------- ------- -------- ----------- --------
Total loans by
maturity $17,281 $18,591 $52,658 $88,530 $9,471 $18,450 $50,029 $77,950
======== ======== ========= ======== ======= ======== =========== ========
Loans with fixed interest
rates $16,019 $17,968
Loans with variable interest
rates 72,511 59,982
-------- --------
$88,530 $77,950
======== ========
Loan Losses and Recoveries
The allowance for loan losses is established through a provision for
loan losses charged to expenses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal or
a portion thereof is unlikely. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic conditions that
may affect the borrower's ability to pay. Accrual of interest is discontinued on
a loan when management believes, after considering economic and business
conditions, collection efforts, and collateral position that the borrower's
financial condition is such that collection of interest is doubtful.
31
The following table shows Oregon Pacific Banking Co.'s loan loss
experience for the periods indicated:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(dollars in
thousands)
Loans and loans held-for-sale at
year-end. $ 88,530 $ 77,489 $ 56,930 $ 43,311 $ 44,504
========= ========= ========= ========= =========
Average loans and loans held-for-
sale $ 83,634 $ 65,386 $ 47,541 $ 42,410 $ 43,634
========= ========= ========= ========= =========
Allowance for loan losses, beginning
of year $ 1,173 $ 902 $ 1,018 $ 998 $ 1,056
--------- --------- --------- --------- ---------
Loans charged off:
Commercial and other (31) (6) (148) (26) (52)
Real estate - - - (9) (17)
Installment & open end (3) (6) (12) (9) (18)
--------- --------- --------- --------- ---------
Total loans charged off (34) (12) (160) (44) (87)
--------- --------- --------- --------- ---------
Recoveries:
Commercial and other - - 38 1 1
Real estate - - - - -
Installment 7 3 3 8 3
--------- --------- --------- --------- ---------
Total recoveries 7 3 41 9 4
--------- --------- --------- --------- ---------
Net charge-offs (27) (9) (119) (35) (83)
Provision for loan losses 170 280 3 55 26
--------- --------- --------- --------- ---------
Allowance for loan losses, at year-
end $ 1,316 $ 1,173 $ 902 $ 1,018 $ 998
========= ========= ========= ========= =========
Ratio of net loans charged off
(recovered) to average loans
outstanding 0.03 % 0.01 % 0.25 % 0.08 % 0.19 %
Ratio of allowance for loan losses
to loans at year-end 1.49 % 1.51 % 1.58 % 2.35 % 2.24 %
The adequacy of the allowance for loan losses should be measured in the
context of several key ratios: (1) the ratio of the allowance to total
outstanding loans; (2) the ratio of total nonperforming loans to total loans;
and, (3) the ratio of net charge-offs (recoveries) to average loans outstanding.
Since 1999, Oregon Pacific Banking Co.'s ratio of the allowance for loan losses
to total loans has ranged from 1.49 to 2.35%. The amounts provided by these
ratios have been sufficient to fund the Bank's charge-offs, which have not been
historically significant, and to provide for potential losses based upon
year-end analyses conducted by management. These ratios have also been
consistent with the level of nonperforming loans to total loans. From December
31, 1999 through December 31, 2003, nonperforming loans to total loans have
ranged from a low of 0.00% in 2003 to a high of 1.58%. The Bank's historical
ratio of net charge-offs (recoveries) to average outstanding loans illustrates
its favorable loan charge-off and recovery experience. For the years between
December 31, 1999 and 2003, net charge-offs ranged from 0.01% to 0.25% of
average loans. Management believes the Bank's loan underwriting policies and its
loan officers' knowledge of their customers are significant contributors to the
Bank's success in limiting loan losses.
32
During the year ended December 31, 2003, Oregon Pacific Banking Co.
recognized $34,000 in loan losses and $7,000 in recoveries. Charge-offs recorded
in 2003 were consistent with the Bank's historical loss experience.
The following table presents information with respect to nonperforming
loans and other assets:
DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
--------- ---------- --------- --------- ----------
(dollars in thousands)
Nonperforming loans:
Loans past due 90 days or
more $ - $ - $ - $ - $ -
Nonaccrual loans - 60 350 485 703
Restructured loans - - - - -
--------- ---------- --------- --------- ----------
- 60 350 485 703
Other real estate owned 10 117 85 37 247
--------- ---------- --------- --------- ----------
$ 10 $ 177 $ 435 $ 522 $ 950
========= ========== ========= ========= ==========
Allowance for loan losses $ 1,316 $ 1,173 $ 902 $ 1,018 $ 998
Ratio of total nonperforming
assets to total assets 0.01% 0.17% 0.50% 0.73% 1.31%
Ratio of total nonperforming
loans to total loans 0.00% 0.08% 0.61% 1.12% 1.58%
Ratio of allowance for loan
losses to total nonperforming
assets 13160.00% 662.71% 207.49% 195.20% 105.05%
Oregon Pacific Banking Co. has adopted a policy for placement of loans
on nonaccrual status after they become 90 days past due unless documented
factors mitigate such placement. Further, the Bank may place loans that are not
contractually past due or that are deemed fully collateralized on nonaccrual
status to promote better oversight and review of loan arrangements. There were
no loans on nonaccrual status at December 31, 2003, compared to $60,000 at
December 31, 2002 and $350,000 at the end of 2001.
At December 31, 2003, the Bank had $10,000 in the other real estate
owned ("OREO") category, which represents assets held through loan foreclosure
or recovery activities. There was $85,000 in OREO at December 31, 2002, and
$37,000 in 2001.
33
Deposits
The following table sets forth the average balances of the Bank's
interest-bearing deposits, interest expense, and average rates paid for the
periods indicated:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------------ --------- ------------ ---------- --------- -----------
(dollars in thousands)
Interest-bearing checking
and savings accounts $54,546 1.21 % $38,104 1.76 % $30,219 2.69 %
Time deposits 21,287 2.53 20,489 3.36 20,036 5.13
------------ --------- ------------ ---------- --------- -----------
Total interest-bearing
deposits 75,833 1.58 58,593 2.32 50,255 3.66
--------- ---------- -----------
Total noninterest-
bearing
deposits 20,652 17,769 14,064
------------ ------------ ---------
Total interest and non-
interest-bearing
deposits $96,485 1.24 % $76,362 1.78 % $64,319 2.86 %
============ ============ =========
At December 31, 2003, total deposits were $97.46 million, an increase
of $8.94 million or 10.10%, from total deposits of $88.52 million at December
31, 2002. Total deposits in 2002 increased by 22.40% from 2001. The increase in
deposit accounts in 2003 and late 2002 have primarily been in the Bank's
interest-bearing checking account and were largely due to a flight to a premium
rate on accessible funds. The Bank also experienced growth in deposits as full
service banking facilities were opened in the new communities.
Noninterest-bearing demand deposits continued to be a significant portion of
Oregon Pacific Banking Co.'s deposit base. To the extent the Bank can fund
operations with noninterest deposits, net interest spread, which is the
difference between interest income and interest expense, will improve.
Noninterest deposits for 2003 averaged 21.40% of total deposits, down from 23.27
% in 2002, and 21.87% in 2001.
Interest-bearing deposits consist of money market, savings, and time
certificate accounts. Interest-bearing account balances tend to grow or decline
as the Bank adjusts its pricing and product strategies based on market
conditions, including competing deposit products. At December 31, 2003, total
interest-bearing deposit accounts were $75.47 million, an increase of $5.47
million, or 7.81%, from December 31, 2002. Interest-bearing demand accounts
increased $12.86 million, or 22.51%, from December 31, 2001 to 2002. Management
believes deposits will continue to grow as the permanent facilities opened in
Coos Bay in December 2003 and Roseburg in January 2004.
Certificates of deposit are another interest-bearing deposit with a
stated maturity typically at higher interest rates. At December 31, 2003, time
certificates of deposit in excess of $100,000 totaled $7.10 million, or 7.29% of
total outstanding deposits, compared to $7.63 million, or 8.62%, of total
outstanding deposits at December 31, 2002, and $10.14 million, or 14.02%, of
total outstanding deposits at December 31, 2001.
34
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at December 31, 2003:
(dollars in
thousands)
2004 $ 16,210
2005 1,518
2006 254
2007 1,299
2008 820
----------------------------
$ 20,101
============================
The following table sets forth, by time remaining to maturity,
all time certificates of deposit accounts in excess of $100,000 outstanding at
December 31, 2003:
(dollars in thousands)
Dues in less than 3 months $ 2,218
Dues in more than 3 and less than 6 months 2,151
Due in more than 6 and less than 12 months 1,193
Due in more than 12 months 1,541
---------
$ 7,103
=========
Other Borrowings
The following table sets forth certain information with respect to the
Bank's Federal Home Loan Bank of Seattle borrowings:
DECEMBER 31,
----------------------------
(dollars in thousands) 2003 2002 2001
-------- -------- --------
Amount outstanding at year-end $7,923 $8,853 $5,903
Weighted average interest rate at year-end 3.87% 4.03% 3.93%
Maximum amount outstanding at any month-end
during the year $8,815 $9,340 $8,920
Daily average amount outstanding during the
year $8,501 $8,161 $5,246
Weighted average interest rate during the
period 4.03% 4.23% 5.67%
Stockholders' Equity
Consolidated stockholders' equity increased $743,000 during 2003.
Stockholders' equity at December 31, 2003 was $8.64 million compared to $7.89
million at December 31, 2002. This increase reflects net income and
comprehensive income of $883,000 less cash dividends paid of $241,000. In both
2001 and 2002, the Bank approved a stock repurchase plan to provide an
additional vehicle for liquidity of outstanding shares and to retire excess
capital in order to improve future returns on equity. No repurchases of stock
were made in 2003.
35
Dividends declared and paid were $0.17 per share in 2003, $0.18 per
share in 2002, and $0.75 per share in 2001.
Liquidity
Oregon Pacific Banking Co. has adopted policies to maintain a
relatively liquid position to enable it to respond to changes in the financial
environment and ensure sufficient funds are available to meet customers' needs
for borrowing and deposit withdrawals. Generally, the Bank's major sources of
liquidity are customer deposits, sales and maturities of investment securities,
the use of federal funds markets, and net cash provided by operating activities.
Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and unscheduled loan prepayments, which are influenced by general
interest rate levels, interest rates available on other investments,
competition, economic conditions, and other factors, are not. Liquid asset
balances include cash, amounts due from other banks including the FHLB,
securities available-for-sale, and loans held-for-sale. At December 31, 2003,
these liquid assets totaled $30.58 million or 25.34% of total assets as compared
to $31.21 million or 29.16% of total assets at December 31, 2002. Other sources
of liquidity are the ability to borrow from the Federal Home Loan Bank of
Seattle and other correspondent banks, national deposits, and brokered deposits.
The analysis of liquidity also includes a review of the changes that
appear in the statements of cash flows for the year ended December 31, 2003. The
statement of cash flows includes operating, investing and financing categories.
Operating activities include net income of $962,000, which is adjusted for
non-cash items and increases or decreases in cash due to changes in certain
assets and liabilities. Investing activities consist primarily of both proceeds
from and purchases of securities, and the impact of the net growth in loans.
Financing activities present the cash flows associated with deposit accounts,
and reflect dividends paid to shareholders.
At December 31, 2003, Oregon Pacific Banking Co. had outstanding
commitments to make loans of $7.74 million. Nearly all of these commitments
represented unused portions of credit lines available to business and mortgage
loan customers. Many of
these outstanding commitments to extend credit will not be fully drawn upon
and, accordingly, the aggregate commitments do not necessarily represent future
cash requirements. Management believes that the Bank's sources of liquidity are
more than adequate to meet likely calls on outstanding commitments, although
there can be no assurance in this regard.
Capital
The Federal Reserve Board and Federal Deposit Insurance Corporation
have established minimum requirements for capital adequacy for financial
institutions that they oversee. The requirements address both risk-based capital
and leveraged capital. The regulatory agencies may establish higher minimum
requirements if, for example, a bank has previously received special attention
or has a high susceptibility to interest rate risk.
36
The following reflects Oregon Pacific Banking Co.'s various capital
ratios at December 31, 2003, and December 31, 2002, as compared to regulatory
minimums for capital adequacy purposes:
AT AT
DECEMBER 31, DECEMBER 31, REGULATORY
2003 2002 MINIMUM
-------------- -------------- -------------
Tier 1
capital 12.6% 9.1% 4.0%
Total risk-based
capital 13.9% 10.4% 8.0%
Leverage
ratio 10.2% 7.2% 4.0%
In December 2003 the Company issued $4,000,000 in preferred capital
securities through a subsidiary organization that was formed for that purpose.
The Company then invested the net proceeds of the security sales in the Bank as
additional paid-in capital to support the Bank's future growth. All of the $4
million of capital invested by the Company in the Bank is treated as Tier 1
capital of the Bank.
Factors That May Affect Future Results of Operations.
In addition to the other information contained in this report, the
following risks may affect the Bank. If any of these risks occurs, our business,
financial condition or operating results could be adversely affected.
1. Growth and Management. Our financial performance and profitability
will depend on our ability to manage recent and possible future growth. Although
management believes that it can properly manage the growth of the Bank's
operations and assets, there can be no assurance that unforeseen issues relating
to such growth will not adversely affect us. In addition, any future
acquisitions and continued growth may present operating and other problems that
could have an adverse effect on our business, financial condition and results of
operations. Accordingly, there can be no assurance that we will be able to
execute our growth strategy or maintain our level of profitability.
2. Changes in Market Interest Rates. Our earnings are impacted by
changing interest rates. Changes in interest rates impact the demand for new
loans, the credit profile of existing loans, the rates received on loans and
securities and rates paid on deposits and borrowings. The relationship between
the rates received on loans and securities and the rates paid on deposits and
borrowings is known as interest rate spread. Given our current volume and mix of
interest-bearing liabilities and interest-earning assets, our interest rate
spread could be expected to increase during times of rising interest rates and,
conversely, to decline during times of falling interest rates. The 500 basis
point decrease in the target Fed Funds rate by the Federal Reserve throughout
2001 through 2003 resulted in a 29 basis point increase in the Bank's interest
rate spread in 2003. With any further declines in interest rates, our ability to
proportionately decrease the rates on our deposit sources may not be possible
due to competitive pressures. This may result in a decrease in our interest rate
spread. Recent announcements by the Federal Reserve suggest that rate cutting is
over but the speed of any future rate increases is unknown. Although we believe
our current level of interest rate sensitivity is reasonable, significant
fluctuations in interest rates may have an adverse effect on our business,
financial condition and results of operations.
37
3. Geographic Factors. Economic conditions in the communities we serve
could adversely affect our operations. As a result of community bank focus, our
results depend largely upon economic and business conditions in our service
areas. Deterioration in economic and business conditions in our market areas
could have a material adverse impact on the quality of our loan portfolio, and
the demand for our products and services, which in turn may have a material
adverse effect on our results of operations. Also, a continued stall in the
national economy and the deflationary pressures in the global economy might
further exacerbate local economic conditions. The extent of the future impact of
these events on economic and business conditions cannot be predicted.
4. Regulation. We are subject to government regulation that could limit
or restrict our activities, which in turn could adversely impact our operations.
The financial services industry is regulated extensively. Federal and state
regulation is designed primarily to protect the deposit insurance funds and
consumers, and not to benefit our shareholders. These regulations can sometimes
impose significant limitations on our operations. In addition, these regulations
are constantly evolving and may change significantly over time. Significant new
laws or changes in existing laws or repeal of existing laws may cause our
results to differ materially. Further, federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly affects credit
conditions for us.
5. Competition. Competition may adversely affect our performance. The
financial services business in our market areas is highly competitive. It is
becoming increasingly competitive due to changes in regulation, technological
advances, and the accelerating pace of consolidation among financial services
providers. We face competition both in attracting deposits and in making loans.
We compete for loans principally through the interest rates and loan fees we
charge and the efficiency and quality of services we provide. Increasing levels
of competition in the banking and financial services businesses may reduce our
market share or cause the prices we charge for our services to fall. Our results
may differ in future periods depending upon the nature or level of competition.
6. Credit Risk. If a significant number of borrowers, guarantors and
related parties fail to perform as required by the terms of their loans, we will
sustain losses. A significant source of risk arises from the possibility that
losses will be sustained if a significant number of our borrowers, guarantors
and related parties fail to perform in accordance with the terms of their loans.
We have adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying our credit portfolio. These policies and procedures, however, may
not prevent unexpected losses that could materially adversely affect our results
of operations.
Off-Balance Sheet Arrangements
In the normal course of business, the Bank utilizes financial
instruments with off-balance sheet risk to meet the financing needs of its
customers including loan commitments to extend credit, checking lines of credit,
commercial letters of credit, and standby letters of credit.
38
The table below sets forth the distribution of the Bank's contingent
liabilities by off-balance sheet type:
December 31,
-------------------------------------
(dollars in thousands) 2003 2002 2001
----------- ----------- -----------
Commitments to extend credit $7,230 $9,851 $8,547
Undisbursed checking lines of
credit 465 354 476
Commercial and standby letters of
credit 50 50 50
----------- ----------- -----------
Total $7,745 $10,255 $9,073
=========== =========== ===========
Contractual Obligations
The Company's contractual obligations include notes to the Federal Home
Loan Bank, Trust Preferred Securities, operating leases, and deferred
compensation plans. Detailed below is a schedule of contractual obligations by
maturity and/or payment due:
Payment due by Period
Less than More than Unspecified
(dollars in thousands) Total 1 year 1-3 years 3-5 years 5 years maturity
--------- ----------- --------- ----------- ---------- -----------
Long-term debt obligations
Federal Home Loan Bank notes $7,923 $- $6,300 $1,100 $523 $-
Trust Preferred Securities
(1) 4,000 - - - 4,000 -
Operating lease obligations 701 122 247 164 168 -
Other long term liabilities (2) 1,244 - - - 360 884
--------- ----------- --------- ----------- ---------- -----------
Total $13,868 $122 $6,547 $1,264 $5,051 $884
========= =========== ========= =========== ========== ===========
(1) The Company has the right to redeem trust preferred securities on or after
December 17, 2008
(2) Amount includes deferred compensation and a mandatory purchase option
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset-Liability Management and Interest Rate Sensitivity
Oregon Pacific Banking Co.'s results of operations depend substantially
on its net interest income. Interest income and interest expense are affected by
general economic conditions and by competition in the marketplace. The Bank's
interest and pricing strategies are driven by its asset-liability management
analysis and by local market conditions.
The Bank seeks to manage its assets and liabilities to generate a
stable level of earnings in response to changing interest rates and to manage
its interest rate risk. Asset/liability management involves managing the
relationship between interest rate sensitive assets and interest rate sensitive
liabilities. If assets and liabilities do not mature or reprice simultaneously,
and in equal amounts, the potential for exposure to interest rate risk exists,
and an interest rate "gap" is said to be present.
Rising and falling interest rate environments can have various effects
on a bank's net interest income, depending on the interest rate gap, the
relative changes in interest rates that occur when assets and liabilities are
repriced, unscheduled repayments of loans, early withdrawals of deposits, and
other factors. The Bank does not use derivatives including forward and futures
contracts, options, or swaps to manage its market and interest rate risks.
Management believes that the Bank has relatively low interest rate risk
that is somewhat asset-sensitive. This interest rate risk is driven by the fact
that the Bank has assets, commercial and real estate loans with mid-term lives
that reprice more frequently than its liabilities. The Bank has significant
amounts of adjustable rate loans that will reprice as interest rates rise as
economists predict. However, there can be no assurance that fluctuations in
interest rates will not have a material adverse impact on the Bank.
The Bank analyzes its interest rate risk by simulation modeling. The
Bank's sensitivity to gains or losses in future earnings due to hypothetical
immediate decreases or increases in interest rates is as follows:
INCREASE OR % CHANGE
(DECREASE IN) IN NET
INTEREST RATES INCOME
-------------- ------
2.0% 9.58%
1.0% 3.23%
-1.0% -8.09%
-2.0% -10.00%
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Oregon Pacific Bancorp and Subsidiaries
We have audited the accompanying consolidated balance sheets of Oregon Pacific
Bancorp and Subsidiaries, as of December 31, 2003 and 2002, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the period ended
December 31, 2003. These financial statements are the responsibility of Oregon
Pacific Bancorp's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oregon Pacific
Bancorp and Subsidiaries as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Moss Adams LLP
- ------------------
Portland, Oregon
February 6, 2004
41
OREGON PACIFIC BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
----------------------------------------
2003 2002
------------------ ------------------
ASSETS
Cash and cash equivalents $ 4,916,985 $ 3,886,203
Interest-bearing deposits in banks 4,764,248 8,078,510
Available-for-sale securities, at fair value 16,845,288 13,913,137
Restricted equity securities 999,100 831,750
Loans held-for-sale 4,057,664 5,327,661
Loans, net of allowance for loan losses and unearned income 82,722,328 70,988,652
Premises and equipment, net of depreciation and amortization 4,811,107 2,726,595
Other real estate owned 9,746 117,494
Accrued interest and other assets 1,549,826 1,149,886
------------------ ------------------
TOTAL ASSETS $ 120,676,292 $ 107,019,888
================== ==================
LIABILITIES
Deposits:
Demand deposits $ 21,990,360 $ 18,512,436
Interest-bearing demand deposits 39,165,421 35,996,332
Savings deposits 16,207,129 12,750,616
Time certificate accounts:
$100,000 or more 7,102,978 7,629,913
Other time certificate accounts 12,998,516 13,625,754
------------------ ------------------
Total deposits 97,464,404 88,515,051
Federal Home Loan Bank borrowings 7,922,806 8,852,500
Floating rate Junior Subordinated Deferrable Interest
Debentures (Trust Preferred Securities) 4,000,000 -
Deferred compensation liability 884,235 795,272
Accrued interest and other liabilities 1,769,289 964,143
------------------ ------------------
Total liabilities 112,040,734 99,126,966
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY
Common stock, no par and $.44 par value, respectively, 10,000,000 shares
authorized; 2,173,592 and 2,135,244, issued and outstanding at
December 31, 2003
and 2002, respectively 4,894,536 939,507
Surplus - 3,730,019
Undivided profits 3,331,170 2,735,032
Accumulated other comprehensive income, net of tax 409,852 488,364
------------------ ------------------
Total stockholders' equity 8,635,558 7,892,922
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 120,676,292 $ 107,019,888
================== ==================
The accompanying notes are an integral
part of these financial statements.
42
OREGON PACIFIC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
INTEREST INCOME
Interest and fees on loans $ 6,367,365 $ 5,436,283 $ 4,667,733
Interest on investment securities:
U.S. Treasury and agencies 155,220 209,361 344,489
State and political subdivisions 361,704 425,535 547,248
Corporate and other investments 207,586 291,265 374,943
Interest on deposits in banks 63,408 83,584 106,028
-------------- -------------- --------------
Total interest income 7,155,283 6,446,028 6,040,441
-------------- -------------- --------------
INTEREST EXPENSE
Interest-bearing demand deposits 515,407 477,712 612,389
Savings deposits 142,778 192,471 199,413
Time deposits 539,300 688,852 1,027,506
Other borrowings 356,883 346,920 297,522
-------------- -------------- --------------
Total interest expense 1,554,368 1,705,955 2,136,830
-------------- -------------- --------------
Net interest income before provision
for loan losses 5,600,915 4,740,073 3,903,611
PROVISION FOR LOAN LOSSES 170,000 280,100 3,000
-------------- -------------- --------------
Net interest income after provision
for loan losses 5,430,915 4,459,973 3,900,611
-------------- -------------- --------------
NONINTEREST INCOME
Mortgage loan sales and servicing fees 1,266,307 1,029,673 606,463
Service charges and fees 494,144 384,276 365,059
Trust fee income 441,848 373,092 161,674
Investment sales commissions 157,250 186,646 209,847
Other income 89,752 87,898 71,394
-------------- -------------- --------------
Total noninterest income 2,449,301 2,061,585 1,414,437
-------------- -------------- --------------
NONINTEREST EXPENSE
Salaries and benefits 4,193,289 3,450,825 2,605,238
Occupancy 627,582 529,761 425,004
Outside services 621,809 412,569 324,257
Supplies 183,675 184,177 133,312
Loan and collection expense 136,907 149,663 90,483
Securities and trust department expenses 130,153 176,337 152,790
Advertising 116,805 111,525 55,208
Postage and freight 99,132 76,974 57,331
Other expenses 431,698 355,857 315,955
-------------- -------------- --------------
Total noninterest expense 6,541,050 5,447,688 4,159,578
-------------- -------------- --------------
The accompanying notes are an integral
part of these financial statements.
43
OREGON PACIFIC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------
2003 2002 2001
-------------- -------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES $ 1,339,166 $ 1,073,870 $ 1,155,470
PROVISION FOR INCOME TAXES 377,327 252,061 260,635
-------------- -------------- -------------
NET INCOME 961,839 821,809 894,835
-------------- -------------- -------------
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized (loss) gain on available-for-sale
securities, net of tax (78,512) 210,677 170,482
-------------- -------------- -------------
Total other comprehensive (loss) income (78,512) 210,677 170,482
-------------- -------------- -------------
COMPREHENSIVE INCOME $ 883,327 $ 1,032,486 $ 1,065,317
============== ============== =============
BASIC EARNINGS PER SHARE OF COMMON
AND COMMON EQUIVALENT SHARE $ 0.45 $ 0.39 $ 0.42
============== ============== =============
DILUTED EARNINGS PER SHARE OF COMMON
AND COMMON EQUIVALENT SHARE $ 0.45 $ 0.39 $ 0.42
============== ============== =============
The accompanying notes are an integral
part of these financial statements.
44
OREGON PACIFIC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Accumulated
Other Total
Common Stock Undivided Comprehensive Stockholders'
------------------------
Shares Amount Surplus Profits Income Equity
(Loss)
----------- --------- ----------- ----------- ------------- -----------
BALANCE, December 31, 2000 2,128,409 $936,500 $3,684,065 $2,987,881 $ 107,205 $7,715,651
Cash dividends paid - - - (1,444,624) - (1,444,624)
Dividends reinvested in stock 28,009 12,324 130,700 (143,024) - -
Shares acquired in stock
repurchase plan (43,925) (19,327) (205,702) - - (225,029)
Net income and comprehensive
income - - - 894,835 170,482 1,065,317
----------- --------- ----------- ----------- ------------- -----------
BALANCE, December 31, 2001 2,112,493 929,497 3,609,063 2,295,068 277,687 7,111,315
Cash dividends paid - - - (250,879) - (250,879)
Dividends reinvested in stock 22,751 10,010 120,956 (130,966) - -
Net income and comprehensive
income - - - 821,809 210,677 1,032,486
----------- --------- ----------- ----------- ------------- -----------
BALANCE, December 31, 2002 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 2,173,592 $4,894,536 $ - $3,331,170 $ 409,852 $8,635,558
=========== ========= =========== =========== ============= ===========
The accompanying notes are an integral
part of these financial statements.
45
OREGON PACIFIC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------
2003 2002 2001
---------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 961,839 $ 821,809 $ 894,835
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 345,959 319,154 291,031
Provision for loan losses 170,000 280,100 3,000
Deferred income taxes 38,405 (31,838) 62,639
Statutory write-down of other real estate owned 513 - 6,892
Federal Home Loan Bank stock dividends (39,200) (44,250) (42,600)
Net realized gains on available-for-sale securities - (51,340) (944)
Proceeds from sales of mortgage loans held-
for-sale 49,022,302 39,468,407 19,395,236
Production of mortgage loans held-for-sale (47,752,305) (41,887,025) (21,741,286)
Loss (gain) on dispositions of premises, equipment,
and other real estate owned 2,286 (4,864) 3,389
Net decrease (increase) in trading securities - 3,276,527 (3,276,527)
Net increase in accrued interest and other assets (386,004) (104,198) (112,660)
Net increase in accrued interest and other
liabilities 894,109 503,511 263,343
---------------- --------------- ---------------
Net cash from operating activities 3,257,904 2,545,993 (4,253,652)
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities - 369,301 1,689,323
Proceeds from maturities and calls of
available-for-sale
securities 7,008,805 7,972,948 10,721,486
Purchases of available-for-sale securities (10,127,756) (3,446,048) (7,977,496)
Proceeds from sales of restricted equity securities - 450 2,850
Purchases of restricted equity securities (128,150) - -
Net decrease (increase) in interest-bearing deposits
in banks 3,314,262 (4,998,510) (2,065,000)
Net increase in loans (11,903,676) (18,547,932) (11,547,568)
Purchases of premises and equipment (2,416,017) (1,282,144) (223,897)
Proceeds from sales of premises, equipment, and
other real estate owned 146,442 98,662 139,781
---------------- --------------- ---------------
Net cash from investing activities (14,106,090) (19,833,273) (9,260,521)
---------------- --------------- ---------------
The accompanying notes are an integral
part of these financial statements.
46
OREGON PACIFIC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------
2003 2002 2001
---------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposit
accounts $ 10,103,526 $ 18,394,804 $ 7,448,889
Net (decrease) increase in time deposits (1,154,173) (2,196,549) 7,365,616
Proceeds from Federal Home Loan Bank borrowings 550,000 4,000,000 2,500,000
Repayments of Federal Home Loan Bank borrowings (1,479,694) (1,050,000) (1,942,500)
Proceeds from issuance of subordinated debentures 4,000,000 - -
Cash dividends paid (240,691) (250,879) (1,444,624)
Shares issued at exercise of stock options 100,000 - -
Shares acquired in stock repurchase plan - - (225,029)
---------------- --------------- --------------
Net cash from financing activities 11,878,968 18,897,376 13,702,352
---------------- --------------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,030,782 1,610,096 188,179
CASH AND CASH EQUIVALENTS, beginning of year 3,886,203 2,276,107 2,087,928
---------------- --------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 4,916,985 $ 3,886,203 $ 2,276,107
================ =============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 1,574,065 $ 1,742,676 $ 2,153,078
================ =============== ==============
Cash paid for income taxes $ 333,645 $ 200,270 $ 317,471
================ =============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Stock dividends reinvested $ 125,010 $ 130,966 $ 143,024
================ =============== ==============
Unrealized (gain) loss on available-for-sale
securities, net of tax $ (78,512) $ 210,677 $ 170,482
================ =============== ==============
Transfer of loans to other real estate owned $ - $ (122,710) $ (198,050)
================ =============== ==============
The accompanying notes are an integral
part of these financial statements.
47
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization - Oregon Pacific Bancorp (Bancorp) was incorporated on January 1,
2003, and became the holding company of Oregon Pacific Banking Co. (the Bank)
effective January 1, 2003. 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. In December 2003, Bancorp formed Oregon Pacific Statutory
Trust I (OPST-1), a wholly-owned Connecticut statutory business trust, for
purposes of issuing guaranteed undivided beneficial interests in Junior
Subordinated Deferrable Interest Debentures (Trust Preferred Securities). During
December 2003, OPST-1 issued $4 million in Trust Preferred Securities. The Bank
and Bancorp are subject to the regulations of certain federal and state agencies
and undergoes periodic examinations by those regulatory authorities.
All significant intercompany accounts and transactions between Bancorp and its
subsidiaries have been eliminated in the preparation of the consolidated
financial statements.
Management's estimates and assumptions - In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the
consolidated balance sheets, and revenues and expenses for the reporting period.
Estimates and assumptions made by management primarily involve the valuation of
the allowance for loan losses and other real estate owned. Actual results could
differ significantly from those estimates.
Cash and cash equivalents - Cash and cash equivalents normally include cash on
hand, amounts due from banks, and federal funds sold. Cash and due from banks
include amounts the Bank is required to maintain to meet certain average reserve
and compensating balance requirements of the Federal Reserve Bank. As of
December 31, 2003 and 2002, the Bank had reserve requirements to be maintained
at the Federal Reserve Bank of $1,067,000 and $804,000, respectively. Total
clearing balance requirements at December 31, 2003 and 2002, were $400,000.
Investment securities - The Bank is required, under generally accepted
accounting principles, to specifically identify its investment securities as
"trading," "available-for-sale," or "held-to-maturity." Accordingly, management
has determined that all investment securities held at December 31, 2003 and 2002
are available-for-sale.
Available-for-sale securities consist of bonds, notes, debentures, and certain
equity securities. Securities classified as available-for-sale may be sold in
response to such factors as (1) changes in market interest rates and related
changes in the security's prepayment risk, (2) needs for liquidity, (3) changes
in the availability of and the yield on alternative instruments, and (4) changes
in funding sources and terms. Gains and losses on the sale of available-for-sale
securities
48
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
are determined using the specific identification method. Unrealized holding
gains and losses, net of tax, on available-for-sale securities are reported as a
net amount in a separate component of equity until realized. Fair values for
investment securities are based on quoted market prices.
Declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary, result in write-downs of the
individual securities to their fair value. The related write-downs would be
included in earnings as realized losses. Premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
Loans held-for-sale - Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses, if any, are recognized through a valuation
allowance established by charges to income.
Loan servicing - The Bank sells mortgage loans primarily on a servicing-retained
basis. The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated servicing revenues. Impairment of the mortgage
servicing asset is based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on current market interest rates and
prepayment rates. Loan servicing income is recorded when earned.
Loans, net of allowance for loan losses and unearned income - Loans are stated
at the amount of unpaid principal, reduced by an allowance for loan losses and
unearned income. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance for
loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management
believes that the collectibility of principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb probable losses on
existing loans that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their judgment
of information available to them at the time of their examinations.
49
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
Impaired loans are carried at the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's market price, or
the fair value of the collateral if the loan is collateral dependent. Accrual of
interest is discontinued on impaired loans when management believes, after
considering economic and business conditions, collection efforts, and collateral
position, that the borrower's financial condition is such that collection of
interest is doubtful. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
Loan origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the yield of related loans.
Premises and equipment - Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets, which range
from 2 to 30 years.
Other real estate owned - Real estate acquired by the Bank in satisfaction of
debt is carried at the lower of cost or estimated net realizable value. When
property is acquired, any excess of the loan balance over its estimated net
realizable value is charged to the allowance for loan losses. Subsequent
write-downs to net realizable value, if any, or any disposition gains or losses
are included in noninterest income and expense.
Income taxes - Deferred tax assets and liabilities are determined based on the
tax effects of the differences between the book and tax bases of the various
balance sheet assets and liabilities. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Off-balance sheet financial instruments - The Bank holds no derivative financial
instruments. However, in the ordinary course of business, the Bank enters into
off-balance-sheet financial instruments consisting of commitments to extend
credit as well as commercial letters of credit and standby letters of credit.
Such financial instruments are recorded in the consolidated financial statements
when they are funded or related fees are incurred or received.
50
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
Fair value of financial instruments - The following methods and assumptions were
used by the Bank in estimating fair values of financial instruments as disclosed
herein:
Cash and cash equivalents - The carrying amounts of cash and short-term
instruments approximate their fair value.
Available-for-sale securities - Fair values for available-for-sale
investment securities are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
Restricted equity securities - The carrying values of restricted equity
securities approximate fair values.
Loans receivable - For variable rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for fixed-rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Loans held-for-sale - Fair value represents the anticipated proceeds from
sale of the loans.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable rate, fixed-term
money market accounts, and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Federal Home Loan Bank borrowings - The fair values of the Bank's
borrowings from the Federal Home Loan Bank are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest receivable and
payable approximate their fair values.
51
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
Off-balance sheet instruments - The Bank's off-balance sheet instruments include
unfunded commitments to extend credit and standby letters of credit. The fair
value of these instruments is not considered practicable to estimate because of
the lack of quoted market prices and the inability to estimate fair value
without incurring excessive costs.
Advertising - Advertising costs are charged to expense during the year in
which they are incurred.
Stock options - The Bank 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. Accordingly, compensation
costs are recognized as the difference between the exercise price of each option
and the market price of Bancorp's stock at the date of each grant. Had
compensation cost for the Bank's 2003, 2002, and 2001 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 December 31 would approximate
the pro forma amounts below.
2003 2002 2001
------------------- ------------------ -----------------
Net income, as reported $ 961,839 $ 821,809 $ 894,835
Less total stock-based
employee compensation expense
determined under the fair value-
based method for all awards,
net of related tax effects (307) (484) (1,758)
------------------- ------------------ -----------------
Pro forma net income $ 961,532 $ 821,325 $ 893,077
=================== ================== =================
Basic earnings per common share:
As reported $ 0.45 $ 0.39 $ 0.42
Pro forma $ 0.45 $ 0.39 $ 0.42
Diluted earnings per common share:
As reported $ 0.45 $ 0.39 $ 0.42
Pro forma $ 0.45 $ 0.39 $ 0.42
52
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
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
December 31:
2003 2002 2001
----------------- --------------------- ---------------------
Dividend yield 3.06% 0.05% 0.05%
Expected life (years) 7.5 7 7
Expected volatility 19.72% 0.01% 0.01%
Risk-free rate 3.75% 4.84% - 5.04% 4.84% - 5.04%
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
Recently issued accounting standards - In November 2003, the Emerging Issues
Task Force (EITF) researched a consensus that certain quantitative and
qualitative disclosures should be required for debt and marketable equity
securities classified as available-for-sale or held-to-maturity under SFAS No.
115 and No. 124, that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. This EITF consensus is
effective for fiscal years ending after December 15, 2003. Accordingly, Bancorp
has adopted this statement as of December 31, 2003, and the result did not have
an impact on Bancorp's consolidated statement of financial position or results
of operations.
In June 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." This statement establishes standards regarding
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires financial
instruments within the scope of this statement to be classified as liabilities
(or assets in some circumstances). Many of these financial instruments were
previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and was otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. For financial instruments created before the issuance date of this
statement and still existing at the beginning of the interim period of adoption,
transition is achieved by reporting the cumulative effect of a change in an
accounting principle by initially measuring the financial instruments at fair
value. Bancorp's management does not expect that the application of the
provisions of this statement will have a material impact on Bancorp's
consolidated financial statements.
53
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Bancorp's management does not expect that the
application of the provisions of this statement will have a material impact on
Bancorp's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. This interpretation explains how to identify variable
interest entities and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate that entity. In December 2003,
the FASB made revisions and delayed implementation of certain provisions of FIN
46. As a public entity that is not a "Small Business Issuer," Bancorp is now
required to apply FIN 46 to all unconsolidated variable interest entities no
later than March 31, 2004, with the exception of unconsolidated special-purpose
entities, which had an implementation deadline of December 31, 2003.
Special-purpose entities for this provision are expected to include entities
whose activities are primarily related to securitizations or other forms of
asset-backed financings or single-lessee leasing arrangements. Bancorp's
management does not expect that the application of the provisions of this
interpretation will have a material impact on Bancorp's consolidated financial
statements.
Reclassifications - Certain reclassifications have been made to the 2002 and
2001 financial statements to conform with current year presentations.
54
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale securities are
as follows:
Gross
Unrealized
Gross Losses Estimated
Amortized Unrealized Less than Fair
Cost Gains 12 Months Value
--------------- --------------- --------------- ---------------
December 31, 2003:
U.S. Treasury and agencies $ 5,176,837 $ 50,796 $ (18,960) $ 5,208,673
State and political subdivisions 6,732,875 445,759 (1,119) 7,177,515
Corporate notes 3,800,903 189,475 - 3,990,378
Mortgage-backed securities 451,586 17,136 - 468,722
--------------- --------------- --------------- ---------------
$ 16,162,201 $ 703,166 $ (20,079) $ 16,845,288
=============== =============== =============== ===============
December 31, 2002:
U.S. Treasury and agencies $ 2,683,027 $ 74,739 $ - $ 2,757,766
State and political subdivisions 7,239,745 547,375 - 7,787,120
Corporate notes 2,513,580 166,013 - 2,679,593
Mortgage-backed securities 662,845 25,813 - 688,658
--------------- --------------- --------------- ---------------
$ 13,099,197 $ 813,940 $ - $ 13,913,137
=============== =============== =============== ===============
The investment securities shown above currently have fair values less than
amortized costs and therefore contain unrealized losses. 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 decline in
value is not related to any company or industry-specific event. There are three
investment securities with unrealized losses. 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.
55
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES - (continued)
The amortized cost and estimated fair value of available-for-sale securities at
December 31, 2003, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale
Securities
-----------------------------------------
Estimated
Amortized Market
Cost Value
------------------ -------------------
Due in one year or less $ 2,418,655 $ 2,484,366
Due after one year through three years 4,126,302 4,337,190
Due after three years through five years 6,574,364 6,824,083
Due after five years through ten years 2,321,017 2,434,327
Thereafter 270,277 296,599
Mortgage-backed securities 451,586 468,723
------------------ -------------------
$ 16,162,201 $ 16,845,288
================== ===================
At December 31, 2003 and 2002, investment securities with an amortized cost of
$5,298,211 and $5,754,899 and market values of $5,576,323 and $5,449,349,
respectively, were pledged to secure deposits of public funds and for other
purposes as required or permitted by law.
The Bank, as a member of the Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) systems, is required to maintain investments in restricted equity
securities of the FHLB and FRB. FHLB and FRB stocks are not actively traded but
are redeemable at their current book values of $999,100 and $831,750 at December
31, 2003 and 2002, respectively.
56
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio is summarized as follows:
2003 2002
----------------- -----------------
Real estate $ 14,660,603 $ 15,786,018
Commercial 63,422,739 50,608,475
Installment 6,352,442 6,172,952
Overdrafts 36,717 54,995
----------------- -----------------
84,472,501 72,622,440
Less allowance for loan losses (1,315,955) (1,173,025)
Less unearned income (434,218) (460,763)
----------------- -----------------
Loans, net of allowance and for loan
losses and unearned income $ 82,722,328 $ 70,988,652
================= =================
The following is an analysis of the changes in the allowance for loan losses:
2003 2002 2001
------------------- ----------------- -------------------
BALANCE, beginning of year $ 1,173,025 $ 902,104 $ 1,017,726
Provision for loan losses 170,000 280,100 3,000
Loans charged off (33,765) (12,620) (159,910)
Loan recoveries 6,695 3,441 41,288
------------------- ----------------- -------------------
BALANCE, end of year $ 1,315,955 $ 1,173,025 $ 902,104
=================== ================= ===================
Loans serviced for the Federal Home Loan Mortgage Corporation are not included
in the accompanying consolidated balance sheets. The unpaid principal balances
of serviced loans at December 31, 2003 and 2002, were $89,318,728 and
$68,916,942, respectively.
There were no impaired loans having recorded investments at December 31, 2003.
Impaired loans having recorded investments of $59,752 at December 31, 2002, have
been recognized. The average recorded investment in impaired loans during 2003
and 2002 was $29,876 and $204,734, respectively. There was no allowance for loan
losses related to these loans at December 31, 2003. The total allowance for loan
losses related to these loans was $8,963 on December 31, 2002. Interest income
recognized for cash payments received on impaired loans in 2003, 2002, and 2001
was not material to the consolidated financial statements.
57
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - LOAN SERVICING
The Bank's recorded investment in mortgage servicing assets (MSA) totaled
$809,591 and $606,482 at December 31, 2003 and 2002, respectively; mortgage
servicing rights of $479,973 and $404,832 were capitalized in 2003 and 2002,
respectively. Amortization of the MSA totaled $278,537, $182,495, and $107,887
for the years ended December 31, 2003, 2002, and 2001, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
2003 2002
------------------ -----------------
Land $ 1,080,116 $ 1,065,316
Building and improvements 3,490,124 1,631,699
Furniture and equipment 2,537,544 2,131,093
Leasehold improvements 161,344 129,485
------------------ -----------------
7,269,128 4,957,593
Less accumulated depreciation and
amortization (2,458,021) (2,230,998)
------------------ -----------------
Premises and equipment, net of accumulated
depreciation and amortization $ 4,811,107 $ 2,726,595
================== =================
Depreciation expense for the years ended December 31, 2003, 2002, and 2001 was
$290,092, $290,999, and $262,347, respectively.
NOTE 6 - TIME CERTIFICATES
Time certificates of deposit of $100,000 and over aggregated $7,102,978 and
$7,629,913 at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities for time deposits is as follows:
Year ending December 31, 2004 $ 16,210,286
2005 1,517,903
2006 253,980
2007 1,298,821
2008 820,504
-----------------
$ 20,101,494
=================
58
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK
BORROWINGS
The Bank is a member of and has entered into credit arrangements with the FHLB.
The Bank participates in the Cash Management Advance program and also has fixed
and adjustable rate promissory notes with the FHLB. Borrowings under the credit
arrangements are collateralized by mortgage loans or other instruments which may
be pledged. Borrowings available to the Bank under all FHLB credit arrangements
are limited to the lesser of 20% of the Bank's total assets or collateral
availability.
Cash Management Advance program advances are due on demand, or if no demand is
made, in one year. No borrowings were outstanding under the Cash Management
Advance program at December 31, 2003 and 2002.
FHLB promissory notes outstanding at December 31, 2003 and 2002, were $7,922,806
and $8,852,500, respectively. These notes may be prepaid in whole or in part,
with payment of a prepayment fee.
The following summarizes the Bank's outstanding obligation and repayment terms
to the FHLB as of December 31, 2003:
Range of
Interest
Rates Amount
----------------- -----------------
Years ending December 31, 2004 - $ -
2005 1.20 - 7.77% 5,400,000
2006 4.30 - 5.07% 900,000
2007 5.05 - 5.38% 1,100,000
2008 - -
Thereafter 3.27% 522,806
-----------------
$ 7,922,806
=================
59
NOTE 8 - INCOME TAXES
The provision for income taxes consists of the following:
2003 2002 2001
------------------ ------------------ ------------------
Current expense:
Federal $ 259,462 $ 211,456 $ 133,919
State 79,460 72,443 64,077
------------------ ------------------ ------------------
338,922 283,899 197,996
------------------ ------------------ ------------------
Deferred expense (benefit):
Federal 31,839 (26,394) 51,929
State 6,566 (5,444) 10,710
------------------ ------------------ ------------------
38,405 (31,838) 62,639
------------------ ------------------ ------------------
Provision for income taxes $ 377,327 $ 252,061 $ 260,635
================== ================== ==================
Deferred income taxes represent the tax effect of differences in timing between
financial income and taxable income, principally related to the provision for
loan losses, deferred compensation, mortgage servicing rights, and recognition
of depreciation expense. Deferred income taxes, according to the timing
differences which caused them, were as follows:
2003 2002 2001
------------------ ------------------ -----------------
Accounting provision for loan
losses less than (in excess of)
provision for income taxes $ (43,853) $ (93,756) $ 73,703
Accounting depreciation (less than)
in excess of tax depreciation 60,237 20,069 (2,658)
Deferred compensation (78,245) (50,688) (44,660)
Federal Home Loan Bank stock
dividends 15,160 15,924 16,575
Mortgage servicing rights 78,400 84,984 32,108
Vacation accrual - (2,316) (11,580)
Loans held-for-sale 6,815 (6,815) -
Other differences (109) 760 (849)
------------------ ------------------ -----------------
Net deferred income taxes $ 38,405 $ (31,838) $ 62,639
================== ================== =================
60
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES - (continued)
The net deferred tax assets in the accompanying consolidated balance sheets
include the following components:
2003 2002
----------------- -----------------
Deferred tax assets:
Allowance for loan losses $ 389,265 $ 345,412
Deferred compensation 385,220 306,975
Vacation accrual 17,756 17,756
Loans held-for-sale - 6,815
Other 198 89
----------------- -----------------
792,439 677,047
----------------- -----------------
Deferred tax liabilities:
Mortgage servicing rights (312,502) (234,102)
Accumulated depreciation (147,651) (87,414)
Federal Home Loan Bank stock dividends (126,065) (110,905)
----------------- -----------------
(586,218) (432,421)
----------------- -----------------
Net deferred tax assets $ 206,221 $ 244,626
================= =================
Management believes, based upon the Bank's historical performance, the net
deferred tax assets will be realized in the normal course of operations and,
accordingly, management has not reduced the net deferred tax assets by a
valuation allowance.
The provision for income taxes differs from the federal statutory rate of 34%
due principally to the effect of tax exemptions for interest received on
municipal investments.
61
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES - (continued)
A reconciliation between the statutory federal income tax rate and the effective
tax rate is as follows:
2003 2002 2001
------------------- ------------------ -----------------
Federal income taxes at
statutory rate $ 455,316 $ 365,116 $ 392,860
State income tax expense, net
of federal income tax benefit 58,334 46,778 50,332
Effect of nontaxable interest
income (120,196) (152,953) (174,240)
Other (16,127) (6,880) (8,317)
------------------- ------------------ -----------------
$ 377,327 $ 252,061 $ 260,635
=================== ================== =================
Effective tax rate 28% 23% 23%
=================== ================== =================
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Bank is a party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve elements of credit and interest rate risk
similar to the amounts recognized in the accompanying consolidated balance
sheets. The contract or notional amounts of those instruments reflect the extent
of the Bank's involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank's experience has been that nearly
all loan commitments are drawn upon by customers. While most commercial letters
of credit are not utilized, a significant portion of such utilization is on an
immediate payment basis.
62
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK -
(continued)
The Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if it is deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include cash, accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Commercial and standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds cash,
marketable securities, or real estate as collateral supporting those commitments
for which collateral is deemed necessary.
A summary of the notional amounts of the Bank's financial instruments with
off-balance sheet risk at December 31, 2003, were as follows:
Commitments to extend credit $ 7,694,655
Commercial and standby letters of credit 50,000
------------------
$ 7,744,655
==================
Additionally, the Bank sells real estate loans to the Federal Home Loan Mortgage
Corporation (see Note 3). The Federal Home Loan Mortgage Corporation has the
right to reject a loan that it has previously purchased and require the seller
to repurchase the loan in the event of fraud or material misstatement of fact in
the loan application.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. Nearly all such
customers are depositors of the Bank. Investments in state and municipal
securities involve government entities throughout the United States.
Concentrations of credit by type of loan are set forth in Note 3. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers as of December 31, 2003. The Bank's loan
policy does not allow the extension of credit to any single borrower or group of
related borrowers in excess of the Bank's legal lending limit, which is
generally 15% of aggregate common stock and surplus.
63
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying values of the
Bank's financial instruments:
2003 2002
---------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- --------------- --------------- ---------------
Financial assets:
Cash and cash equivalents $ 4,916,985 $ 4,916,985 $ 3,886,203 $ 3,886,203
Interest-bearing deposits
in banks $ 4,764,248 $ 4,764,248 $ 8,078,510 $ 8,078,510
Available-for-sale securities $ 16,845,288 $ 16,845,288 $ 13,913,137 $ 13,913,137
Restricted equity securities $ 999,100 $ 999,100 $ 831,750 $ 831,750
Loans held-for-sale $ 4,057,664 $ 4,057,664 $ 5,327,661 $ 5,327,661
Loans, net of allowance for
loan losses and unearned
income $ 82,722,328 $ 83,147,626 $ 70,988,652 $ 70,915,130
Accrued interest receivable $ 359,835 $ 359,835 $ 335,219 $ 335,219
Financial liabilities:
Demand deposits, interest-
bearing demand deposits,
and savings deposits $ 77,362,910 $ 77,362,910 $ 67,259,384 $ 67,259,384
Time certificate accounts $ 20,101,494 $ 20,270,704 $ 21,255,667 $ 21,394,510
Federal Home Loan Bank
borrowings $ 7,922,806 $ 7,922,806 $ 8,852,500 $ 8,852,500
Accrued interest payable $ 58,254 $ 58,254 $ 90,179 $ 90,179
While estimates of fair value are based on management's judgment of the most
appropriate factors, there is no assurance that were the Bank to have disposed
of such items at December 31, 2003 and 2002, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
2003 and 2002, should not necessarily be considered to apply at subsequent
dates.
In addition, other assets and liabilities of the Bank that are not defined as
financial instruments are not included in the above disclosures, such as
premises and equipment. Also, nonfinancial instruments typically not recognized
in the consolidated financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the trained work force,
customer goodwill, and similar items.
64
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Operating lease commitments - The Bank leases certain branch premises and
equipment. Future minimum lease payments for all noncancellable operating leases
are as follows:
Years ending December 31, 2004 $ 121,690
2005 123,026
2006 123,983
2007 98,368
2008 66,281
Thereafter 167,705
-----------------
$ 701,053
=================
Total rental expense was $184,205, $104,567, and $63,208 in 2003, 2002, and
2001, respectively.
Legal contingencies - In the ordinary course of business, the Bank may become a
defendant in certain claims and legal actions arising in the ordinary course of
business. The Bank has been named in a lawsuit with a former employee. The
effect of the lawsuit on the financial condition of the Bank can not been
estimated at this time.
NOTE 13 - STOCK OPTION PLAN
The Bancorp has an incentive stock option plan which was approved by its
stockholders during 2003. The plan provides for an aggregate of 10% of all
issued and outstanding shares of Bancorp's common stock to be granted to key
employees. The purchase price of optioned shares is not to be less than the fair
market value at the time the options are granted. Options granted are
exercisable on the date five years after the option is granted, and expire ten
years after the grant date or the date the employee ceases employment with the
Bank.
65
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLAN - (continued)
The following table summarizes stock option transactions in 2003, 2002, and
2001:
Weighted
Weighted Weighted Average
Average Average Contractual
Shares Option Price Fair Value Life (Years)
------------ ---------------- -------------- ---------------
Stock options outstanding at
December 31, 2000 31,122 $ 5.46
Stock options granted in 2001 10,392 $ 4.81 $ 1.35 10 10
------------ ============== ===============
Stock options outstanding at
December 31, 2001 41,514 $ 5.30
Stock options cancelled in 2002 (5,195) $ 4.81
------------
Stock options outstanding at
December 31, 2002 36,319 $ 5.30
Stock options granted in 2003 4,863 $ 6.17 $ 1.15 10 10
============== ===============
Stock options exercised in 2003 (20,000) $ 5.00
Stock options cancelled in 2003 (11,585) $ 6.04
------------
Stock options outstanding at
December 31, 2003 9,597 $ 5.73
============
At December 31, 2003, no stock options were exercisable. At December 31, 2002
and 2001, 20,000 stock options were exercisable at a weighted average price of
$5 per share.
NOTE 14 - PROFIT SHARING, DEFERRED COMPENSATION, AND INCENTIVE
PLANS
Effective January 1, 1998, the Bank adopted a Simple Retirement Plan which
covers substantially all employees once minimum length of employment criteria
have been met. Contributions to the plan totaled $77,405, $50,926, and $43,926
during 2003, 2002, and 2001, respectively.
The Bank has also established a nonqualified deferred compensation and an
incentive plan for a group of key management employees. The Bank may, but is not
required to, award incentive compensation, which is credited to Incentive
Contribution Accounts maintained for each of these participants. Participants
are also allowed to elect to defer a portion of their compensation. For the
years ended December 31, 2003, 2002, and 2001, the Bank recorded expenses of
$91,845, $73,437, and $66,485, respectively, to fund the program.
66
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the year. Diluted earnings per share reflects the potential
dilution that could occur if common shares were issued pursuant to the exercise
of options under the Bank's stock option plans. The following table illustrates
the computations of basic and diluted earnings per common share for the years
ended December 31:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------- -------------
2003
- -----------------------------------------------------
Basic earnings per common share:
Income available to common
stockholders $ 961,839 2,155,100 $ 0.45
=============
Effect of dilutive securities:
Outstanding common stock options - 1,702
----------------- -------------------
Income available to common stock-
holders plus assumed conversions $ 961,839 2,156,802 $ 0.45
================= =================== =============
2002
- ----------------------------------------------------
Basic earnings per common share:
Income available to common
stockholders $ 821,809 2,124,904 $ 0.39
=============
Effect of dilutive securities:
Outstanding common stock options - 6,348
----------------- -------------------
Income available to common stock-
holders plus assumed conversions $ 821,809 2,131,252 $ 0.39
================= =================== =============
2001
- ----------------------------------------------------
Basic earnings per common share:
Income available to common
stockholders $ 894,835 2,118,831 $ 0.42
=============
Effect of dilutive securities:
Outstanding common stock options - 819
----------------- -------------------
Income available to common stock-
holders plus assumed conversions $ 894,835 2,119,650 $ 0.42
================= =================== =============
67
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are customers
of and have had banking transactions with the Bank in the ordinary course of
business, and the Bank expects to have such transactions in the future. All
loans and commitments to loan included in such transactions were made in
compliance with applicable laws on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons and, in the opinion of the management of the
Bank, do not involve more than the normal risk of collectibility or present any
other unfavorable features. Transactions with directors, executive officers,
principal stockholders, and companies with which they are associated as of
December 31, 2003 and 2002, and for the years then ended were as follows:
2003 2002
----------------- -----------------
Loans outstanding, beginning of year $ 868,501 $ 1,331,784
Additions 449,184 50,864
Repayments (115,890) (514,147)
----------------- -----------------
Loans outstanding, end of year $ 1,201,795 $ 868,501
================= =================
NOTE 17 - REGULATORY MATTERS
Bancorp and the Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on Bancorp's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
banks must meet specific capital guidelines that involve quantitative measures
of Bancorp's and the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bancorp and the Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (a defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 2003, that
Bancorp and the Bank meet all capital adequacy requirements to which they are
subject.
68
NOTE 17 - REGULATORY MATTERS - (continued)
As of the most recent notifications from their regulatory agencies, Bancorp and
the Bank were categorized as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as adequately capitalized, Bancorp
and the Bank must maintain minimum total risk-based capital, Tier 1 risk-based
capital, and Tier 1 leverage capital ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes may have changed Bancorp's and the Bank's category.
Bancorp's and the Bank's capital ratios are substantially equivalent. Actual
capital amounts for Bancorp and the Bank are presented in the following table:
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ------------ -------- ------------ ---------
As of December 31, 2003:
(in thousands)
Total capital to risk-
weighted assets $ 13,302 13.9% $ 7,674 >8.0% $ 9,594 >10.0%
- -
Tier 1 capital to risk-
weighted assets $ 12,102 12.6% $ 3,837 >4.0% $ 5,756 >6.0%
- -
Tier 1 capital to average
assets $ 12,102 10.2% $ 4,747 >4.0% $ 5,934 >5.0%
- -
As of December 31, 2002:
(in thousands)
Total capital to risk-
weighted assets $ 8,424 10.4% $ 6,527 >8.0% $ 8,158 >10.0%
- -
Tier 1 capital to risk-
weighted assets $ 7,405 9.1% $ 3,263 >4.0% $ 4,895 >6.0%
- -
Tier 1 capital to average
assets $ 7,405 7.2% $ 3,744 >4.0% $ 4,680 >5.0%
- -
69
OREGON PACIFIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - TRUST PREFERRED SECURITIES
In December 2003, Bancorp formed a wholly-owned Connecticut statutory business
trust subsidiary, Oregon Pacific Statutory Trust 1 (OPST-1), which issued
$4,000,000 of guaranteed undivided beneficial interests in Bancorp's floating
rate Junior Subordinated Deferrable Interest Debentures (Trust Preferred
Securities). These debentures qualify as Tier 1 capital under regulatory
guidelines. All common securities of OPST-1 are owned by Bancorp. The proceeds
from the issuance of the common securities and the Trust Preferred Securities
were used by OPST-1 to purchase $4,124,000 of subordinated deferrable interest
debentures of Bancorp. The debentures, which represent the sole asset of OPST-1,
possess the same terms as the Trust Preferred Securities and accrue interest
annually at a rate of 4.02% until March 17, 2004, after which the rate will be
applicable to the three-month London Interbank Offered Rate (LIBOR) plus 2.85%
per annum. The accrued interest on the debentures is paid to OPST-1 by Bancorp,
and OPST-1 in turn distributes the interest income as dividends on the Trust
Preferred Securities. Interest payments are deferrable at the discretion of
Bancorp for the first five years. As of December 31, 2003, all interest payments
to OPST-1 and all dividend payments by OPST-1 were current.
In conjunction with the issuance of the Trust Preferred Securities, Bancorp
entered into contractual arrangements which, taken collectively, fully and
unconditionally guarantee payment of (1) accrued and unpaid distributions
required to be paid on the Trust Preferred Securities, (2) the redemption price
with respect to any Trust Preferred Securities called for redemption by OPST-1,
and (3) payments due upon a voluntary or involuntary dissolution, winding up, or
liquidation of OPST-1. The Trust Preferred Securities are mandatorily redeemable
upon maturity of the debentures on December 17, 2033, or upon earlier redemption
as provided in the indenture. Bancorp has the right to redeem the debentures
purchased by OPST-1 in whole or in part, on or after December 17, 2008. As
specified in the indenture, if the debentures are redeemed prior to maturity,
the redemption price will be the principal amount and any accrued but unpaid
interest. For the year-ended December 31, 2003, no interest on the debentures or
dividends on the Trust Preferred Securities had been paid.
NOTE 19 - SUBSEQUENT EVENTS
On January 20, 2004, the Board of Directors of Bancorp authorized a cash
dividend of $.04 per share payable on February 13, 2004, to stockholders of
record on January 30, 2004.
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. Our principal executive and financial officers supervised and
participated in this evaluation. Based on this evaluation, our principal
executive and financial officers each concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic reports to the SEC. The design of any
system of controls is based in part upon various assumptions about the
likelihood of future events, and there can be no assurance that any of our
plans, products, services or procedures will succeed in achieving their intended
goals under future conditions. In addition, there have been no significant
changes in our internal controls or in other factors known to management that
could significantly affect our internal controls subsequent to our most recent
evaluation. We have found no facts that would require us to take any corrective
actions with regard to significant deficiencies or material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Audit Committee. We have a separately designated standing Audit
Committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of
1934. Our Audit Committee is composed of directors who are independent from
management and free from any relationship that, in the opinion of the directors,
would interfere with their independent exercise of judgment. The Audit Committee
is primarily concerned with the effectiveness of audits of the Company by its
internal auditor and the independent auditors on accounting matters and internal
controls; advising the Board on the scope of audits; reviewing the Company's
annual financial statements and the accounting standards and principles
followed; and appointment of independent auditors. The members of the Audit
Committee are Richard L. Yecny (Chair), Robert R. King, and Marteen L. Wick.
The Company's Board of Directors has determined that Richard L. Yecny,
a member of the Company's Audit Committee, is an audit committee financial
expert as defined by Item 401(h) of Regulation S-K of the Exchange Act and is
independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the
Securities Exchange Act of 1934.
The Company has adopted a written code of ethics within the meaning of
Item 406 of Regulation S-K that applies to its executive officers, including its
Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. A
copy of the code of ethics will be available by April 30, 2004 on the Company's
website, www.opbc.com.
71
Any additional information called for by this item is contained in the
Company's definitive proxy statement for the annual meeting of shareholders to
be held on April 29, 2004, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is contained in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
April 29, 2004, and is incorporated herein by reference.
Information concerning the Company's equity compensation plans,
including both stockholder approved plans and non-stockholder approved plans,
required by this item is set forth under the heading "Executive
Compensation--Equity Compensation Plan Information" in the definitive proxy
statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information called for by this item is contained in the Company's
definitive proxy statement for the Annual Meeting of Shareholders to be held
April 29, 2004, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is contained in the Company's
definitive proxy statement for the Annual Meeting of Shareholders to be held
April 29, 2004, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this item is contained under the caption
"Audit Fees" in the on Company's definitive proxy statement for the Annual
Meeting to be held April 29, 2004, and is incorporated herein by this reference.
72
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits.
The following documents are filed as part of this Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2003.
Independent Auditors Report
Consolidated Balance Sheets for the Years Ended December 31, 2003 and
2002
Consolidated Statements of Income and Comprehensive Income for the
Years Ended December 31, 2003, 2002, and 2001
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(Note: The per share earnings computation statement required by Item
601(b)(11) of Regulation S-K is contained in Note 15 of the consolidated
financial statements contained in Part II, Item 8 of this Form 10-K, and is
hereby incorporated herein by this reference.)
The following documents are either being filed with, or incorporated by
reference into, this Form 10-K for the year ended December 31, 2003 filed with
the Securities and Exchange Commission.
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(ii) 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 Inventive Plan (incorporated herein by reference to
Exhibit 1 to Oregon Pacific Bancorp's Form DEF14A filed with the filed with the
Securities and Exchange Commission on March 23, 2003.)
10.2 Oregon Pacific Banking Co. Deferred Compensation and Incentive
Plan.
14. Code of Ethics.
21.1 List of Subsidiaries.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
73
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to 18 U.S.C Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports Filed on Form 8-K
None.
(c) Exhibits.
The exhibits to be filed with this Form 10-K are set forth under Item
(a) above.
- -------------------------
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATED: March 30, 2004 OREGON PACIFIC BANCORP
By: /s/ Thomas K. Grove
--------------------
Thomas K. Grove
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
DATED: March 30, 2004 Principal Executive Officer and Director:
By: /s/ Thomas K. Grove
--------------------
Thomas K. Grove
President, Chief Executive Officer and
Director
Principal Financial and Accounting Officer:
By: /s/ Joanne A. Forsberg
----------------------
Joanne A. Forsberg
Secretary & Chief Financial Officer
Directors:
/s/ A. J. Brauer
----------------
A. J. Brauer, Chairman of the Board
/s/ Richard L. Yecny
--------------------
Richard L. Yecny, Vice Chairman of the Board
75
/s/ Lydia G. Brackney
---------------------
Lydia G. Brackney, Director
/s/ Douglas B. Feldkamp
-----------------------
Douglas B. Feldkamp, Director
/s/ Robert R. King
------------------
Robert R. King, Director
/s/ Jon Thompson
Jon Thompson, Director
/s/ Marteen L. Wick
-------------------
Marteen L. Wick, Director
76
EXHIBIT INDEX
1. Exhibits Attached.
The following exhibits are attached to this Form 10-K.
EXHIBITS PAGE
10.2 Oregon Pacific Banking Co. Deferred Compensation and Incentive Plan 78-83
14. Code of Ethics 84
21.1 List of Subsidiaries 85
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 86
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 87
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 88
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 89
77