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, 2004
[ ] 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)
Oregon 71-0918151
(State of incorporation) (I.R.S. Employer
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 28, 2004, was $17,199,184.
The number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 2,149,898 shares of no par value
common stock on March 15, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement dated March 28, 2005, for the
2005 Annual Meeting of Shareholders ("Proxy Statement") and the 2004 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
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15-16
Item 6. Selected Financial Data 16-18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-38
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 40-69
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 70
Item 9A. Controls and Procedures 70
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 26, 2005)
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 71
Item 13. Certain Relationships and Related Transactions 71
Item 14. Principal Accountant Fees and Services 71
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 72-73
Signatures 74-75
Exhibit Index 76
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 two branches in Roseburg, and
Coos Bay, Oregon. Additional financial services provided by the Bank include
trust and asset management services and investment and brokerage services.
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, 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. The Bank now offers
on-line real-time Internet banking services through its dedicated website at
http://www.opbc.com. Additionally, the Bank offers "Banking on Call", an
interactive voice response system through which customers can check account
balances and activity, as well as initiate money transfers between their
accounts. Automated Teller Machines (ATMs) are located at each of the four
branch locations, as well as two machines in non-Bank locations. Visa debit
cards are also offered, providing customers with free access to their deposit
account balances at point of sale locations throughout most of the world.
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.
4
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.
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.
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 has online banking services on a real-time basis
providing instant balances compared to most financial providers having only
nightly updates. 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, 2004, the Bank had 88 full-time equivalent employees
compared to 93 at December 31, 2003. None of the employees are represented by a
collective bargaining group. Management considers its relations with employees
to be good.
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 rebutable presumption 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 2004 was
approximately $15,000.
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.
10
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.
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%.
11
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.
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)
SQUARE OPENED OR OR
LOCATION ADDRESS FEET ACQUIRED LEASED(L)
- ------------------------------ ----------------------------------------- ----------- -----------
FULL SERVICE BANKING OFFICES:
Florence (Main Branch) 1355 Highway 101 12,896 1980 O
Florence (Safeway Branch) 700 Highway 101 475 1995 L
Roseburg 2555 NW Edenbower 9,731 2004 O
Coos Bay 915 S First Street 7,834 2003 O
OTHER OFFICES:
Loan Center 705 Ninth Street, Florence 7,826 2002 L
The Company's office is located in the main branch of the Bank. Leases
include multiple renewal options for Florence's Safeway branch and the Loan
Center. The Sutherlin branch was closed on December 31, 2004. Land next to the
Coos Bay property on which the customer parking lot is located is leased. That
lease has a mandatory purchase option at the end of three or eight years for
$330,000 or $360,000, respectively.
14
ITEM 3. LEGAL PROCEEDINGS
As of the date of filing of this Form 10-K neither the Company nor its
subsidiary were a party to any material legal proceedings. Further, management
is not aware of any threatened or pending lawsuits or other proceedings against
the Company or its subsidiary which, if determined adversely, would have a
material effect on the business or financial position of either of them. The
Company or the Bank may from time to time become a party to litigation in the
ordinary course of business, such as debt collection litigation or through an
appearance as a creditor in a bankruptcy case.
ITEM 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 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of Bancorp's common stock, no par value, have been available for
purchase and sale on the OTC Bulletin Board of NASDAQ, under the symbol "OPBP,"
since January 1, 2003. Prior to the formation of the Bancorp as the Bank's
holding company, Oregon Pacific Banking Company's stock was traded on the same
system under the symbol "OPBC." At March 16, 2005, the stock was held by
approximately 670 shareholders.
The following table sets forth the high and low bid information for the
Company's stock for each calendar quarter of 2003 and 2004 and through February
28, 2005. 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.
15
COMMON STOCK
HIGH AND LOW CLOSING BID
- ---------------------------------------------------------------- CASH
PERIOD HIGH BID PRICE LOW BID PRICE DIVIDENDS
- ----------------------------- -------------- ------------- ---------
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 - March 31, 2004 $8.35 $6.90 $0.04
April 1 - June 30, 2004 $8.00 $7.10 $0.05
July 1 - September 30, 2004 $7.15 $6.60 $0.05
October 1 - December 31, 2004 $7.80 $7.10 $0.05
January 1 - February 28, 2005 $8.00 $7.25
The Bank paid cash dividends of $0.19 and $0.17 per share for the years
2004 and 2003, 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.
In September 2004, the Bank approved a stock repurchase plan to repurchase
up to $500,000 of stock. As of December 31, 2004, the Company had repurchased
46,275 shares of stock under this plan, at a total cost of $345,000 and an
average price of $7.45 per share.
The transfer agent and registrar for the Common Stock has been Registrar
and Transfer, Cranford, New Jersey since 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.
16
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
===================================================================
2004 2003 2002 2001 2000
============= ============= ============= ============ ============
INCOME STATEMENT DATA
Interest income $7,993,911 $7,155,283 $6,446,028 $6,040,441 $5,905,599
Interest expense 1,483,995 1,554,368 1,705,955 2,136,830 2,240,901
------------- ------------- ------------- ------------ ------------
Net interest income 6,509,916 5,600,915 4,740,073 3,903,611 3,664,698
Loan loss provision (355,000) 170,000 280,100 3,000 55,000
------------- ------------- ------------- ------------ ------------
Net interest income after
provision for loan losses 6,864,916 5,430,915 4,459,973 3,900,611 3,609,698
Noninterest income 2,407,276 2,449,301 2,061,585 1,414,437 1,116,892
Noninterest expense 7,688,388 6,541,050 5,447,688 4,159,578 3,547,159
------------- ------------- ------------- ------------ ------------
Income before provision for income taxes 1,583,804 1,339,166 1,073,870 1,155,470 1,179,431
Provision for income taxes 517,084 377,327 252,061 260,635 304,994
------------- ------------- ------------- ------------ ------------
Net income $1,066,720 $961,839 $821,809 $894,835 $874,437
============= ============= ============= ============ ============
DIVIDENDS
Cash dividends declared and paid $414,470 $365,701 $381,845 $1,587,648 $568,285
Ratio of dividends to net income 38.85% 38.02% 46.46% 177.42% 64.99%
Cash dividends per share $0.19 $0.17 $0.18 $0.75 $0.26
PER SHARE DATA (1)
Basic earnings per common share $0.49 $0.45 $0.39 $0.42 $0.40
Diluted earnings per common share $0.49 $0.45 $0.39 $0.42 $0.40
Book value per common share $4.14 $3.97 $3.70 $3.37 $3.63
Weighted average shares outstanding:
Basic 2,178,531 2,155,100 2,124,904 2,118,831 2,178,745
Diluted 2,180,609 2,156,802 2,131,252 2,119,650 2,181,967
BALANCE SHEET DATA
Investment securities $16,444,519 $17,844,388 $14,744,887 $22,499,503 $23,360,141
Loans, net $108,707,038 $82,722,328 $70,988,652 $52,843,530 $41,497,012
Total assets $138,248,887 $120,676,292 $107,019,888 $86,586,515 $71,555,503
Total deposits $111,060,721 $97,464,404 $88,515,051 $72,316,796 $57,502,291
Stockholders' equity $8,892,297 $8,635,558 $7,892,922 $7,111,315 $7,715,651
SELECTED RATIOS
Return on average assets 0.81% 0.87% 0.88% 1.14% 1.22%
Return on average equity 12.09% 11.65% 10.86% 11.95% 11.59%
Total loans to deposits 97.88% 84.87% 80.20% 73.07% 72.17%
Net interest margin 5.44% 5.38% 5.60% 5.62% 5.80%
Efficiency ratio (1) 86.22% 81.25% 80.09% 78.22% 74.18%
ASSET QUALITY RATIOS Reserve for loans losses to:
Ending total loans 1.47% 1.49% 1.51% 1.58% 2.35%
Nonperforming assets (2) 1451.33% 13160.00% 662.71% 207.49% 195.20%
Non-performing assets to ending total assets 0.08% 0.01% 0.17% 0.50% 0.73%
Net loan charge-offs to average loans -0.69% 0.03% 0.01% 0.25% 0.08%
CAPITAL RATIOS (BANK)
Average stockholders' equity
to average assets 9.53% 7.44% 8.08% 9.57% 10.51%
Tier I capital ratio (3) 10.5% 12.6% 9.1% 11.0% 16.3%
Total risk-based capital ratio (4) 11.8% 13.9% 10.4% 12.3% 17.6%
Leverage ratio (5) 8.9% 10.2% 7.2% 8.7% 10.6%
17
- -------------------
(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 continue to grow its earning assets and
return on equity while keeping its asset quality high. The key to this is to
emphasize personalized, 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, 2004, consolidated net income was
$1,067,000, representing an increase of 10.90% from net income of $962,000
earned during the year ended December 31, 2003. Net income for 2003 was up
17.03% from net income of $822,000 earned during the year ended December 31,
2002. Diluted earnings per share were $0.49, $0.45, and $0.39 for the years
ended December 31, 2004, 2003, and 2002, respectively. Return on average assets
was 0.81% for the year ended December 31, 2004, compared with 0.87% for the year
ended December 31, 2003, and 0.88% in 2002. Return on average equity was 12.09%
for the year ended December 31, 2004, compared with 11.65% for the year ended
December 31, 2003, and 10.86% for the year ended December 31, 2002. The increase
in earnings for the year ended December 31, 2004, can be attributed primarily to
the continued realization of returns from the de novo branches in Roseburg and
Coos Bay. The return on average assets has declined due to the new facilities
built for the new branches.
18
Company assets grew from $120.68 million to $138.25 million, or 14.56% from
year-end 2003 to 2004, and 12.76% from December 31, 2002 to December 31, 2003
from $107.02 million. Most of the growth was an increase in commercial loans in
the new market areas, as net loans grew from $82.72 million to $108.71 million,
an increase of 31.41% from year-end 2003 to 2004, and from $70.99 million, an
increase of 16.52% the year before. The net growth in earning assets in 2004 was
funded by a growth in customer deposits and funds borrowed from the Federal Home
Loan Bank. Stockholders' equity increased in 2004 while the Company paid 38.85%
in dividends and also repurchased stock.
While 2004 was a year of realizing profitability from the branches
originally opened in 2002, we are optimistic that further improvement can be
achieved in 2005 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,
-----------------------------------------------
2004 2003 2002 2001 2000
-------- -------- ------- ------- -------
(Dollars in Thousands)
Net income $ 1,067 $ 962 $ 822 $ 895 $ 874
Average assets 132,304 115,327 93,607 78,174 71,763
RETURN ON AVERAGE ASSETS 0.81% 0.83% 0.88% 1.14% 1.22%
Net income $ 1,067 $ 962 $ 822 $ 895 $ 874
Average equity 8,823 8,578 7,568 7,485 7,542
RETURN ON AVERAGE EQUITY 12.09% 11.21% 10.86% 11.95% 11.59%
Average equity $ 8,823 $ 8,578 $ 7,568 $ 7,485 $ 7,542
Average assets 132,304 115,327 93,607 78,174 71,763
AVERAGE EQUITY TO ASSET RATIO 6.67% 7.44% 8.08% 9.57% 10.51%
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.
19
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, 2004,
approximately 87% 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
2004, 2003, and 2002 grants for stock-based compensation plans been determined
consistent with SFAS No. 123, its net income and earnings per common share for
December 31, 2004, 2003, and 2002 would approximate the pro forma amounts below
(in thousands, except per share data).
2004 2003 2002
--------- ---------- ----------
Net income (in thousand's):
As reported $1,067 $962 $822
Pro forma $1,067 $962 $821
Basic earnings per common share:
As reported $0.49 $0.45 $0.39
Pro forma $0.49 $0.45 $0.39
Diluted earnings per common share:
As reported $0.49 $0.45 $0.39
Pro forma $0.49 $0.45 $0.39
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, 2004, 2003, and 2002:
2004 2003 2002
------------ ------------ ------------
Dividend yield 2.65% 3.06% 0.05%
Expected life 7.5 years 7.5 years 7 years
Expected volatility 14.39% 19.72% 0.01%
Risk-free rate 3.93% 3.75% 4.84 - 5.04%
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts.
20
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin
Net interest income, before the provision for loan loss, for the year ended
December 31, 2004 was $6.51 million, an increase of 16.23% compared to net
interest income of $5.60 million in 2003, and an increase of 18.14% compared to
net interest income of $4.74 million in 2002. The overall tax-equivalent earning
asset yield was 6.68% in 2004 compared to 6.78% in 2003 and 7.53% in 2002. For
the same years, rates on interest-bearing liabilities were 1.56%, 1.84%, and
2.55%, respectively. The declining rates were primarily due to outside economic
factors creating pressure on interest yields and rates.
Total interest-earning assets averaged $122.00 million for the year ended
December 31, 2004, compared to $108.09 million for the corresponding period in
2003. 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 $95.30 million for the year ended
December 31, 2004 compared to $84.55 million for the same period in 2003. The
increase was due to the Bank's deposit growth primarily from the new branches,
but also from funds borrowed from the FHLB and the Company's Trust Preferred
Securities.
Loans, which generally carry a higher yield than investment securities and
other earning assets, comprised 80.71% of average earning assets during 2004,
compared to 77.37% in 2003 and 74.14% in 2002. During the same periods, average
yields on loans were 7.27% in 2004, 7.61% in 2003, and 8.31% in 2002. Investment
securities comprised 12.00% of average earning assets in 2004, which was down
from 17.00% in 2003 and 19.77% in 2002. Tax equivalent interest yields on
investment securities have ranged from 6.05% in 2004 to 4.89% in 2003 and 6.44%
in 2002.
Interest cost, as a percentage of earning assets, decreased to 1.22% in
2004, compared to 1.44% in 2003 and 1.93% in 2002. 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.
21
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, 2004 YEAR ENDED DECEMBER 31, 2003 YEAR ENDED DECEMBER 31, 2002
------------------------------ ------------------------------ -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELDS OR AVERAGE INCOME OR YIELDS OR AVERAGE INCOME OR YIELDS OR
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES
-------- --------- ---------- -------- --------- ---------- --------- --------- ----------
(dollars in thousands)
Interest-earning assets:
Loans (1) $ 98,475 $ 7,159 7.27% $ 83,634 $ 6,367 7.61% $ 65,386 $ 5,436 8.31%
Investment securities
Taxable securities 8,399 422 5.02% 10,458 386 3.69% 9,165 541 5.90%
Nontaxable securities (2) 6,748 464 6.87% 7,128 512 7.18% 8,269 582 7.04%
Interest-earning balances due
from banks 8,889 106 1.19% 6,080 63 1.04% 5,367 84 1.57%
-------- --------- -------- --------- -------- ---------
Total interest-earning
assets 122,511 8,151 6.65% 107,300 7,328 6.83% 88,187 6,643 7.53%
--------- ---------- --------- ---------- --------- ----------
Cash and due from banks 5,063 3,871 2,820
Premises and equipment, net 5,217 3,441 2,332
Other real estate 103 27 44
Loan loss allowance (1,555) (1,245) (1,002)
Other assets 2,766 2,042 1,226
-------- -------- --------
Total assets $134,105 $115,436 $ 93,607
======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts $ 60,092 $ 467 0.78% $ 54,546 $ 658 1.21% $ 38,104 $ 670 1.76%
Time deposit and IRA accounts 20,851 450 2.16% 21,287 539 2.53% 20,489 689 3.36%
Borrowed funds 14,354 567 3.95% 8,719 357 4.09% 8,205 347 4.23%
-------- --------- -------- --------- -------- ---------
Total interest-bearing
liabilities 95,297 1,484 1.56% 84,552 1,554 1.84% 66,798 1,706 2.55%
--------- ---------- --------- ---------- --------- ----------
Noninterest-bearing
deposits 27,716 20,652 17,769
Other liabilities 2,200 1,654 1,472
-------- -------- --------
Total liabilities 125,213 106,858 86,039
Shareholders' equity 8,892 8,578 7,568
-------- -------- --------
Total liabilities and share-
holders' equity $134,105 $115,436 $ 93,607
======== ======== ========
Net interest income $ 6,667 $ 5,774 $ 4,937
========= ========= =========
Net interest spread 5.10% 4.99% 4.98%
=========== =========== ===========
Net interest expense to average
earning assets 1.21% 1.45% 1.93%
=========== =========== ===========
Net interest margin 5.44% 5.38% 5.60%
=========== =========== ===========
- ----------
(1) Includes mortgage loans held for sale.
(2) Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
22
Analysis of Changes in Interest Differential.
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.
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:
2004 OVER 2003 2003 OVER 2002 2002 OVER 2001
------------------------------------------- --------------------
NET NET NET
(dollars in thousands) VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
--------------------- --------------------- --------------------
Interest-earning assets:
Loans $1,130 $(338) $792 $1,517 $(586) $931 $(125) $487 $362
Investment securities
Taxable securities (76) 112 36 76 (231) (155) (149) 44 (105)
Nontaxable securities (1) (27) (21) (48) (80) 11 (70) 89 (15) 74
Interest-earning balances
due from banks 29 14 43 11 (32) (21) (51) 32 (19)
--------------------- --------------------- --------------------
Total 1,056 (233) 823 1,524 (839) 685 (236) 548 312
--------------------- --------------------- --------------------
Interest-bearing liabilities:
Interest-bearing checking 67 (258) (191) 289 (301) (12) (34) 134 100
and savings accounts
Time deposits (11) (78) (89) 27 (177) (150) (75) 60 (15)
Borrowed funds 231 (21) 210 22 (12) 10 (79) 44 (35)
--------------------- --------------------- --------------------
Total 287 (357) (70) 338 (490) (152) (188) 238 50
--------------------- --------------------- --------------------
Net increase (decrease) in
net interest income $769 $123 $893 $1,187 $(349) $837 $(48) $310 $262
- --------------
(1) Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
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.
23
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, 2004 Oregon Pacific Banking Co. reduced
its provision for loan losses by $355,000, compared to charges of $170,000 and
$280,000, in 2003 and 2002, respectively. The decreased allowance provision in
2004 reflects a large loan recovery.
For the year ended December 31, 2004, loan recoveries exceeded charge-offs
by $679,000 as compared to 2003, when loan charge-offs exceeded recoveries by
$27,000. 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
Total noninterest income over the three-year period from 2002 to 2004 has
remained fairly constant although the components of the income have shifted
significantly. Noninterest income increased from $2.06 million in 2002 to $2.45
million in 2003, and then decreased slightly to $2.41 million in 2004.
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 piece of noninterest income in
2004 is derived from services charges. Over the past three years service charges
have grown significantly to $809,000 in 2004, from $494,000 in 2003, and
$384,000 in 2002. The growth in 2004 and the last quarter of 2003 reflects the
new Overdraft Protection service put into place in September of 2003 as well as
from the growth in the number of customer accounts, while other charges have
remained fairly flat since the Bank offers many demand deposit accounts with no
related fees. Other significant noninterest income comes from the real estate
mortgage department. Most loans are sold in the secondary market with loan
servicing retained. Such income varied from $746,000 in 2004, to $1.27 million
in 2003, and $1.03 million in 2002. The changes in mortgage loan sales are
largely a product of the mortgage rate environment that hit forty-year lows in
2003. Trust fee income increased to $539,000 in 2004, from $442,000 in 2003, and
$373,000 in 2002 which reflects the growth in assets under management and the
continuing acceptance of the Bank's trust services within its market areas.
24
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, 2004,
the efficiency declined as measured by the efficiency ratio to 86.22% compared
to 81.25% for the corresponding period of 2003. This is primarily due to
increased headcount and occupancy costs as the Bank opened the Roseburg and Coos
Bay branches in January and June 2002, respectively. Sutherlin never reached the
efficiency originally hoped and was closed at the end of the year. Other cost
cutting measures were instituted in fourth quarter 2004 that led the Company to
its most profitable quarter ever.
Total noninterest expense was $7.69 million for the year ended December 31,
2004, an increase from $6.54 million for the year ended December 31, 2003, and
$5.45 million for the year ended December 31, 2002.
Salary and benefit expense, which includes commissions and the
employer-paid portion of payroll taxes, was $4.66 million in 2004, $4.19 million
in 2003, and $3.45 million in 2002. As of December 31, 2004, Oregon Pacific
Banking Co. had 88 full-time equivalent employees, although the average for the
year was 98, which compares to 93 as of December 31, 2003 and 88 as of December
31, 2002. The increased average headcount and increased health insurance costs
contributed to the overall increase.
Occupancy expense consists of depreciation of premises and equipment,
maintenance and repair expenses, utilities, and related expenses. The Bank's net
occupancy expense grew by 32.83% in 2004 as the new branch offices opened; the
increase primarily represents the depreciation expense of the new buildings.
This expense category was $834,000 in 2004, an increase of $206,000 over
$628,000 in 2003, which was an increase of $98,000 over $530,000 in 2002.
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 shrunk from $622,000 in 2003 to $588,000 in 2004, a
decrease of $34,000 from the prior year reflecting cost controls put in place in
2004.
Income Taxes
The provision for income taxes was $517,000 in 2004, $377,000 in 2003, and
$252,000 in 2002. The provision resulted in effective combined federal and state
tax rates of 33% in 2004, 28% in 2003, and 23% in 2002. 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.
25
FINANCIAL CONDITION
Total assets increased 14.56% to $138.25 million at December 31, 2004
compared to $120.68 million at December 31, 2003. The increase in total assets
was driven by continued growth in loans. Growth in total assets was primarily
funded by a 13.95% growth in deposits, funds borrowed from the Federal Home Loan
Bank in Seattle, and the use of excess liquidity.
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 thousands) ----------------------------- 12/31/03 TO 12/31/02 TO
2004 2003 2002 12/31/04 12/31/03
-------- -------- -------- ------------------ -------------------
ASSETS
Loans, net of allowance for
loan losses and unearned
income $109,723 $ 86,780 $ 76,316 $ 22,943 26.44 % $ 10,464 13.71 %
Investments 16,445 17,844 14,745 (1,400) (7.84) 3,100 21.02
Interest-bearing deposits
in banks 874 4,764 8,079 (3,890) (81.66) (3,314) (41.03)
Other assets(1) 11,207 11,288 7,880 (80) (0.71) 3,407 43.24
-------- -------- -------- -------- -------- -------- ---------
Total assets $138,249 $120,676 $107,020 $ 17,573 14.56 % $ 13,656 12.76 %
======== ======== ======== ======== ======== ======== =========
LIABILITIES AND EQUITY
Noninterest-bearing
deposits $ 26,591 $ 21,990 $ 18,512 $ 4,601 20.92 % $ 3,478 18.79 %
Interest-bearing deposits 84,470 75,474 70,003 8,995 11.92 5,471 7.82
-------- -------- -------- -------- -------- -------- ---------
Total deposits 111,061 97,464 88,515 13,596 13.95 8,949 10.11
Other liabilities(2) 18,296 14,576 10,612 3,720 25.52 3,964 37.36
-------- -------- -------- -------- -------- -------- ---------
Total liabilities 129,357 112,041 99,127 17,316 15.45 12,914 13.03
Total equity 8,892 8,636 7,893 257 2.97 743 9.41
-------- -------- -------- -------- -------- -------- ---------
Total liabilities and
equity $138,249 $120,676 $107,020 $ 17,573 14.56 % $ 13,656 12.76 %
======== ======== ======== ======== ======== ======== =========
- ----------
(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, 2004, totaled $16.44 million, compared to
$17.84 million at December 31, 2003, and $14.75 million at December 31, 2002.
This represents a decrease of 7.84% between 2003 and 2004 and an increase of
21.02% between 2002 and 2003. Increases or decreases in the investment portfolio
are primarily a function of loan demand and changes in Oregon Pacific Banking
Co.'s deposit structure.
26
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, 2004, Oregon Pacific Banking Co.'s investment portfolio had
total net unrealized gains, net of taxes, of approximately $211,000. This
compares to unrealized gains of approximately $410,000 at December 31, 2003, and
$488,000 at December 31, 2002. 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 $874,000 at December 31, 2004, compared to $4.76 million at December 31,
2003, and $8.08 million at December 31, 2002. The balance on the last day of the
month is influenced by the day of the week, as happened in 2004 when the year
ended on a Friday. Balances the following week averaged $3.25 million.
The following table provides the carrying value of Oregon Pacific Banking
Co.'s portfolio of investment securities as of December 31, 2004, 2003, and
2002, respectively:
DECEMBER 31,
---------------------------
(dollars in thousands) 2004 2003 2002
------- ------- -------
Investments available-for-sale:
U.S. Treasury and agencies $ 5,983 $ 5,209 $ 2,758
State and political subdivisions 7,784 7,177 7,787
Corporate debt securities 1,658 3,990 2,680
Mortgage backed securities - 469 688
------- ------- -------
15,425 16,845 13,913
Restricted equity securities 1,020 999 832
------- ------- -------
Total investment securities $16,445 $17,844 $14,745
======= ======= =======
27
Investment securities at the dates indicated consisted of the following:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------- ------------------------- -------------------------
2004 2003 2002
------------------------- ------------------------- -------------------------
(dollars in thousands) WEIGHTED WEIGHTED WEIGHTED
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 5,000 4,984 3.77% 3,927 3,948 4.53% 1,291 1,360 5.52%
Due after five but within ten years 999 999 5.26% 1,000 1,000 4.38% - - -
----------------- ----------------- -----------------
Total U.S. Treasury and agencies 5,999 5,983 4.01% 5,177 5,209 4.60% 2,683 2,758 4.78%
----------------- ----------------- -----------------
State and political subdivisions:
Due within one year 575 585 6.95% 1,081 1,111 7.64% 1,033 1,068 7.84%
Due after one but within five years 4,872 5,100 6.79% 4,061 4,335 6.95% 4,939 5,328 7.37%
Due after five but within ten years 1,932 1,995 6.11% 1,321 1,434 7.33% 1,268 1,391 7.78%
Due after ten years - - 270 297 8.01% - - -
----------------- ----------------- -----------------
Total state and political subdivisions
(1) 7,379 7,680 6.62% 6,733 7,177 7.18% 7,240 7,787 7.51%
----------------- ----------------- -----------------
Corporate debt securities:
Due within one year $250 $252 6.62% 1,088 1,112 5.47% - - -
Due after one but within five years 1,446 1,510 6.32% 2,713 2,878 5.43% 2,514 2,680 6.39%
----------------- ----------------- -----------------
Total corporate notes 1,696 1,762 6.37% 3,801 3,990 5.44% 2,514 2,680 6.39%
----------------- ----------------- -----------------
Mortgage backed securities - - 451 469 3.82% 663 688 5.83%
Restricted equity securities 1,020 1,020 999 999 832 832
----------------- ----------------- -----------------
Total investment securities $16,094 $16,445 4.45% $17,161 $17,844 5.82% $13,932 $14,745 6.65%
================= ================= =================
- --------------
(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.
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.
28
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 or Chief Operating Officer 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, the Chief
Operating Officer and four senior loan 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
four members of the Board of Directors. Oregon Pacific Banking Co.'s unsecured
legal lending limit was $1,890,000 at December 31, 2004.
Net outstanding loans, excluding loans held-for-sale, totaled $108.71
million at December 31, 2004, representing an increase of $25.98 million, or
31.41% compared to $82.72 million as of December 31, 2003. Loan commitments
increased to $20.95 million as of December 31, 2004, representing an increase of
$13.21 million from year-end 2003. Net outstanding loans, excluding loans
held-for-sale, were $70.99 million at December 31, 2002.
Oregon Pacific Banking Co.'s net loan portfolio, excluding loans held for
sale, at December 31, 2004, includes loans secured by real estate (87.24% of
total), commercial loans (10.86% of total), and consumer loans and overdraft
accounts (2.93% 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.
This table presents the composition of Oregon Pacific Banking Co.'s loan
portfolio by collateral at the dates indicated:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ---------------------------------------
(dollars in thousands) $ % $ % $ %
--------- ------- ----------- ------- ---------- -------
Real estate $95,724 87.24 % $72,014 82.98 % $61,319 80.35 %
Commercial 11,916 10.86 8,538 9.84 7,169 9.39
Installment 2,602 2.37 3,223 3.71 3,371 4.42
Other 614 0.56 697 0.80 763 1.00
Loans held-for-sale 1,016 0.93 4,058 4.68 5,328 6.98
--------- ------- ----------- ------- ---------- -------
Total 111,872 101.96 88,530 102.02 77,950 102.14
Less allowance for loan losses (1,640) (1.49) (1,316) (1.52) (1,173) (1.54)
Less deferred loan fees (509) (0.46) (434) (0.50) (461) (0.60)
--------- ------- ----------- ------- ---------- -------
Loans receivable, net $109,723 100.00 % $86,780 100.00 % $76,316 100.00 %
========= ======= =========== ======= ========== =======
29
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, 2004 DECEMBER 31, 2003
----------------------------------------- --------------------------------------
DUE AFTER DUE DUE AFTER DUE
DUE IN ONE YEAR AFTER DUE IN ONE YEAR AFTER
ONE YEAR THROUGH FIVE TOTAL ONE YEAR THROUGH FIVE TOTAL
(dollars in thousands) OR LESS FIVE YEARS YEARS LOANS OR LESS FIVE YEARS YEARS LOANS
--------- ---------- ---------- --------- --------- ---------- -------- --------
LOAN CATEGORY
Real estate - mortgage
(includes loans held-for-sale) $1,504 $7,748 $17,660 $26,912 $641 $5,294 $15,366 $21,301
Real estate - construction 6,067 2,538 1,836 10,441 2,180 1,220 - 3,400
Real estate - other 3,650 3,374 52,363 59,387 9,488 6,331 35,552 51,371
Installment 699 1,528 375 2,602 669 2,258 296 3,223
Commercial 5,600 4,980 1,336 11,916 3,826 3,268 1,444 8,538
Other 122 492 - 614 477 220 - 697
--------- ---------- ---------- --------- --------- ---------- -------- --------
Total loans by maturity $17,642 $20,660 $73,570 $111,872 $17,281 $18,591 $52,658 $88,530
========= ========== ========== ========= ========= ========== ======== ========
Loans with fixed interest rates $9,785 $16,019
Loans with variable interest rates 102,087 72,511
--------- --------
$111,872 $88,530
========= ========
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.
30
The following table shows Oregon Pacific Banking Co.'s loan loss experience
for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002 2001 2000
-------- ------- ------- ------- -------
(dollars in thousands)
Loans and loans held-for-sale at year-end. $111,872 $88,530 $77,489 $56,930 $43,311
========= ======== ======= ======= =======
Average loans and loans held-for-sale $ 98,475 $83,634 $65,386 $47,541 $42,410
========= ======== ======= ======= =======
Allowance for loan losses, beginning
of year $ 1,316 $ 1,173 $ 902 $ 1,018 $ 998
-------- ------- ------- ------- -------
Loans charged off:
Commercial and other (31) (31) (6) (148) (26)
Real estate - - - - (9)
Installment & open end (10) (3) (6) (12) (9)
--------- -------- -------- -------- --------
Total loans charged off (41) (34) (12) (160) (44)
--------- -------- -------- -------- --------
Recoveries:
Commercial and other 720 - - 38 1
Real estate - - - - -
Installment - 7 3 3 8
--------- -------- -------- -------- --------
Total recoveries 720 7 3 41 9
--------- -------- -------- -------- --------
Net recoveries (charge-offs) 679 (27) (9) (119) (35)
(Reduction of) provision for loan losses (355) 170 280 3 55
--------- -------- -------- -------- --------
Allowance for loan losses, at year-end $ 1,640 $ 1,316 $ 1,173 $ 902 $ 1,018
========= ======== ======== ======== ========
Ratio of net loans charged off (recovered)
to average loans outstanding -0.69 % 0.03 % 0.01 % 0.25 % 0.08 %
Ratio of allowance for loan losses to loans
at year-end 1.47 % 1.49 % 1.51 % 1.58 % 2.35 %
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 2000, Oregon Pacific Banking Co.'s ratio of the allowance for loan losses
to total loans has ranged from 1.47% 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, 2000 through December 31, 2004, nonperforming loans to total loans have
ranged from a low of 0.00% in 2003 to a high of 1.12%. 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, 2000 and 2003, net charge-offs ranged from 0.01% to 0.25% of
average loans while 2004 experienced a net recovery of 0.69%. 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.
31
During the year ended December 31, 2004, Oregon Pacific Banking Co.
recognized $41,000 in loan losses and $720,000 in recoveries. Charge-offs
recorded in 2004 were consistent with the Bank's historical loss experience.
The following table presents information with respect to nonperforming
loans and other assets:
DECEMBER 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- --------- --------- ---------
(dollars in thousands)
Nonperforming loans:
Loans past due 90 days or more $ - $ - $ - $ - $ -
Nonaccrual loans 113 - 60 350 485
Restructured loans - - - - -
-------- --------- --------- --------- ---------
113 - 60 350 485
Other real estate owned - 10 117 85 37
-------- --------- --------- --------- ---------
$ 113 $ 10 $ 177 $ 435 $ 522
======== ========= ========= ========= =========
Allowance for loan losses $ 1,640 $ 1,316 $ 1,173 $ 902 $ 1,018
Ratio of total nonperforming assets to
total assets 0.09% 0.01% 0.17% 0.50% 0.73%
Ratio of total nonperforming loans to
total loans 0.10% 0.00% 0.08% 0.61% 1.12%
Ratio of allowance for loan losses to
total nonperforming assets 1451.33% 13160.00% 662.71% 207.49% 195.20%
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
$113,000 of loans on nonaccrual status at December 31, 2004, compared to no
loans at December 31, 2003 and $60,000 at the end of 2002.
At December 31, 2004, the Bank had no amount in the other real estate owned
("OREO") category, which represents assets held through loan foreclosure or
recovery activities. There was $10,000 in OREO at December 31, 2003, and
$177,000 in 2002.
Deposits
At December 31, 2004, total deposits were $111.06 million, an increase of
$13.60 million or 13.95%, from total deposits of $97.46 million at December 31,
2003. Total deposits in 2003 increased by 10.11% from 2002. The increase in
deposit accounts in 2004 has primarily been in business noninterest-bearing
checking accounts and was largely a result of business deposits following new
loans. The large growth in Bank deposits was the result of the new full service
banking facilities opening 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 2004 averaged
25.51% of total deposits, up from 21.40 % in 2003, and 23.27% in 2002.
32
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, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- ------- -------- -------- -------- --------
(dollars in thousands)
Interest-bearing checking and
savings accounts $60,092 0.78 % $54,546 1.21 % $38,104 1.76 %
Time deposits 20,851 2.16 21,287 2.53 20,489 3.36
--------- ------- -------- -------- -------- --------
Total interest-bearing
deposits 80,943 1.48 75,833 1.58 58,593 2.32
------- -------- --------
Total noninterest-bearing
deposits 27,716 20,652 17,769
--------- -------- --------
Total interest and non-
interest-bearing
deposits $108,659 0.84 % $96,485 1.24 % $76,362 1.78 %
========= ======== ========
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, 2004, total
interest-bearing deposit accounts were $84.47 million, an increase of $9.00
million, or 11.92%, from December 31, 2003. Interest-bearing demand accounts
increased $5.47 million, or 7.81%, from December 31, 2002 to 2003. 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, 2004, time
certificates of deposit in excess of $100,000 totaled $10.07 million, or 9.07%
of total outstanding deposits, compared to $7.10 million, or 7.29%, of total
outstanding deposits at December 31, 2003, and $7.63 million, or 8.62%, of total
outstanding deposits at December 31, 2002.
33
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at December 31, 2004:
2005 $ 17,388
2006 1,372
2007 1,343
2008 954
2009 1,860
---------
$ 22,917
=========
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, 2004:
(dollars in thousands)
Dues in less than 3 months $ 3,277
Dues in more than 3 and less than 6 months 1,945
Due in more than 6 and less than 12 months 2,204
Due in more than 12 months 2,646
---------
$ 10,072
=========
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) 2004 2003 2002
-------- -------- --------
Amount outstanding at year-end $11,868 $7,923 $8,853
Weighted average interest rate at year-end 3.96% 3.87% 4.03%
Maximum amount outstanding at any month-end
during the year $11,891 $8,815 $9,340
Daily average amount outstanding during the year $10,230 $8,501 $8,161
Weighted average interest rate during the period 3.81% 4.03% 4.23%
Stockholders' Equity
Consolidated stockholders' equity at December 31, 2004 was $8.89 million,
an increase of $257,000 from December 31, 2003. 2004 equity was increased by
earnings of $1.07 million for the year less cash dividends paid to shareholders
of $266,000. At year-end 2004, net unrealized gains on investment securities
available-for-sale were $211,000 down about half from year-end 2003. In
September 2004, 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. Up to $500,000 of
repurchases were authorized. As of December 31, 2004, the Company had
repurchased 46,275 shares of stock under this plan, at a total cost of $345,000
and an average price of $7.45 per share. The Company records the repurchased
s