ITEM 1. BUSINESS
GENERAL
Oregon Pacific Bancorp (“Bancorp”), an Oregon Corporation and financial holding company, became the holding company of Oregon Pacific Banking Co., dba Oregon Pacific Bank (the “Bank”) (collectively “the Company”) 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 a branch in both 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 Bancorp are overseen by a Board of Directors elected by the shareholders of Bancorp 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 Bancorp, the sole owner of the Bank. Currently the respective members of the Board of Directors of Bancorp 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 give exceptional personal service to customers by providing a high level of service with prompt, accurate, and friendly banking services and by supporting and participating in the activities of the communities served. 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.
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 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. 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 cost checking account and other products targeted to the senior market. The Bank also services customers living at Spruce Point, an assisted living facility in Florence, via its mobile branch.
Overdraft Protection. Overdraft Protection is a service that provides qualified customers with virtually automatic protection by establishing an overdraft privilege amount. Each checking account usually receives an Overdraft Protection amount of $300 or $500 based on the type of account and other parameters. Once established, customers are permitted to overdraw their checking account, up to their Overdraft Protection limit, with each item being charged the Bank’s regular overdraft fee. Customers repay the overdraft with their next deposit. Overdraft Protection is designed to protect customers from the embarrassment of having checks declined because of non-sufficient funds.
Investment Products. Through an arrangement with a registered securities broker-dealer, an investment and brokerage service department under the assumed name “Oregon Pacific Financial Services” offers a wide range of financial products and consulting services to consumers in Florence at 1365 Highway 101 and at its Roseburg branch. Mutual funds, traditional and Roth IRAs, corporate retirement accounts, tax deferred investments, and other retirement vehicles are available.
Trust and Asset Management Services. The Bank operates a full service trust department located in Florence at 1365 Highway 101 and in Coos Bay. Also a trust officer is available for appointments in Roseburg on a weekly basis. 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 in Florence; 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 commercial loans, including loans to professionals, real estate construction loans, and residential real estate financing, both for its own loan portfolio and for resale in the secondary market.
Mortgage Loans. The Bank originates conventional residential mortgage loans, mostly for sale in the secondary market. The Bank has mortgage loan representation in Florence, Roseburg, and Coos Bay. 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 Corporation (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 12 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.
Commercial Loans. The Bank offers customized loans to its commercial customers including operatingl 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.
Another 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, 2007, the Bank had 96 full-time equivalent employees, nearly unchanged from the prior year end. 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. There is no Internet access to the Bank’s filings with the Federal Reserve Bank prior to 2003 available.
SUPERVISION AND REGULATION
GENERAL
The Company is extensively regulated under federal and state law. These laws and regulations are primarily intended to protect depositors, not shareholders of Bancorp. 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.
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.
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 Bancorp 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.
BANK HOLDING COMPANY REGULATION - FEDERAL REGULATIONS
As a bank holding company, Bancorp 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.
Bancorp and its 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 Bancorp 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 reputable 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 Bancorp, or obtain control over the Company.
BANK HOLDING COMPANY REGULATION - STATE REGULATIONS
As corporations 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 Oregon Pacific Bank are insured by the Deposit Insurance Fund, as administered by the FDIC, to prescribed limits for each depositor. The FDIC has established a system for setting deposit insurance premiums based upon the risks a particular bank poses to the insurance fund. The FDIC has established a risk-based system assessment system to determine the deposit insurance assessment to be paid by insured depository institutions based upon capital levels and supervisory ratings assigned by the Bank’s primary federal regulator, and other risk measures. The Bank’s had no insurance expense for 2007 after a one-time credit from the FDIC to offset assessments in 2007. In addition, all federally insured institutions are required to pay assessments to the FDIC at an annual rate of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments cannot be offset with any one time credits and are expected to continue until the Financing Corporation bonds mature by 2019. The Bank’s assessment for 2007 was $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.
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 a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are given a 100% conversion factor. Transaction-related contingencies such as bid bonds, other standby letters of credit and undrawn commitments, including commercial credit lines with an initial maturity of more than one year, have a 50% conversion factor. Short-term, self-liquidating trade contingencies are converted at 20%, and short-term commitments have a 0% factor.
The Federal Reserve also employs a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a state member bank may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 4% for banks not having a composite rating of one under the uniform rating system of banks. However, for all but the most highly rated state member banks, and for banks seeking to expand, the Federal Reserve expects an additional cushion of at least 1% to 2%.
The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to one of five capital categories, depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be "undercapitalized" depending on the category to which they are assigned are subject to certain mandatory supervisory corrective actions.
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 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.
-Management Assessment of Internal Controls. The Act requires management to assess the effectiveness of the internal control structure and procedures for financial reporting. It further requires independent attestation of that
assessment by auditors. As a non-accelerated filer, the Company will not have to comply with the rules requiring independent attestation until 2008.
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.
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 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 were 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.
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 1A.
ITEM 1A. RISK FACTORS
Factors That May Affect Future Results of Operations
The Company’s operations and financial results are subject to various uncertainties, such as general economic conditions, changes in market interest rates, intense competition, growth and management, government regulation, and credit risk. In addition to the other information contained in this report, the following risks may affect the Company. If any of these risks occurs, its business, financial condition or operating results could be adversely affected.
1. Growth and Management. The Company’s financial performance and profitability will depend on its ability to manage recent and possible future growth. Although management believes that it can properly manage the growth of the Company’s operations and assets, there can be no assurance that unforeseen issues relating to such growth will not have adverse affects. In addition, any future acquisitions and continued growth may present operating and other problems that could have an adverse effect on the Company’s business, financial condition and results of operations. Also the unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the business. Accordingly, there can be no assurance that management will be able to execute its growth strategy or maintain the current level of profitability.
2. Interest Rate Risk and Variations in Market Interest Rates. The Bank’s income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets such as loans and investment securities and the interest rates paid on interest-bearing liabilities such as deposits and borrowing. These rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and the policies of various governmental and regulatory agencies. Fluctuations in interest rates may also affect the demand by customers for the Company’s products and services. Significant fluctuations in interest rates could have a material adverse effect on the Company’s business, financial condition, results of operations, or liquidity.
3. Geographic Factors. Economic conditions in the communities the Bank serves could adversely affect its operations. As a result of the community bank focus, results depend largely upon economic and business conditions in the Bank’s service areas. Deterioration in economic and business conditions in the market areas served could have a material adverse impact on the quality of the Bank’s loan portfolio, and the demand for its products and services, which in turn may have a material adverse effect on results of operations. Also, a stall in the national economy and the deflationary pressures in the global economy might further exacerbate local economic conditions. The extent of the future impact of these events on economic and business conditions cannot be predicted.
4. Regulation. The Company and Bank are subject to government regulation that could limit or restrict its activities, which in turn could adversely impact operations. The financial services industry is regulated extensively. Federal and state regulation is designed primarily to protect the deposit insurance funds and consumers, and not to benefit shareholders. These regulations can sometimes impose significant limitations on the Company’s operations. In addition, these regulations are constantly evolving and may change significantly over time. Significant new laws or changes in existing laws or repeal of existing laws may cause the Company’s results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions.
5. Competition. Competition may adversely affect Company performance. The financial services business in the Bank’s market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. The Bank faces competition both in attracting deposits and in making loans. The Bank competes for loans principally through the interest rates and loan fees the Bank charges and the efficiency and quality of services it provides. Increasing levels of competition
in the banking and financial services businesses may reduce market share or cause the prices charged for services to fall. Results may differ in future periods depending upon the nature or level of competition.
6. Credit Risk. If a significant number of borrowers, guarantors and related parties fail to perform as required by the terms of their loans, the Bank will sustain losses. A significant source of risk arises from the possibility that losses will be sustained if a significant number of borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. The Bank has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect results of operations.
7. Collateral Risk. The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for the loan portfolio were to decline materially, a significant part of the Bank’s loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, the Bank may not be able to realize the amount of collateral anticipated at the time of originating the loan, which could have a material adverse effect on the provision for loan losses and operating results and financial condition.
8. Internal Accounting Controls. Management believes the internal control system as currently documented and functioning is adequate to provide reasonable assurance over financial reporting. Nevertheless, because of the inherent limitation in administering a cost effective control system, misstatements due to error or fraud may occur and not be detected. Breakdowns in internal controls and procedures could occur in the future, and any such breakdowns could have an adverse effect on the Company. See "Item 9A - Controls and Procedures" for additional information.
9. Technology. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Future success will depend, in part, upon the Bank’s ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for conveniences, as well as to create additional efficiencies in operations. Many of the Bank’s competitors have substantially greater resources to invest in technological improvements. The Bank may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.
The computer systems and network infrastructure the Bank uses could be vulnerable to unforeseen problems. The Bank’s operations are dependent upon its ability to protect the computer equipment against damage from fire, power loss, telecommunications failure, or a similar catastrophic event. Any damage or failure that causes an interruption in operations could have an adverse effect on the Company’s financial condition and results of operations. In addition, operations are dependent upon the Bank’s ability to protect the computer systems and network infrastructure against damage from physical break-ins, security breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through the computer systems and network infrastructure, which may result in significant liability to the Company and deter potential customers. Although the Bank, with the help of third-party service providers, intends to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful.
Additional risks and uncertainties not currently known or that management currently deems to be immaterial also may materially and adversely affect the Company’s business operations. Any of these risks could materially and adversely affect the Company’s business, financial condition or results of operations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s office is located in the main branch of the Bank. The Financial Services building is west of the main office and houses the loan center, trust and asset management and the brokerage divisions. The lease for Florence’s Safeway branch includes multiple renewal options. Land next to the Coos Bay property on which the customer parking lot is located is leased. The Bank intends to purchase the land at the end of the lease in 2012 for $360,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of the date of filing of this Form 10-K the Company was not a party to any material legal proceedings. Further, management is not aware of any threatened or pending lawsuits or other proceedings against the Company which, if determined adversely, would have a material effect on the business or financial position of the Bank or Bancorp. The Company 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.
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 2007.
PART II
ITEM 5.
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 February 19, 2008, the stock was held of record by approximately 443 shareholders which does not include beneficial owners whose shares are held in record names of brokers.
The following table sets forth the high and low sales information for the Company’s stock for each calendar quarter of 2006 and 2007 and through February 29, 2008. The information was obtained from McAdams, Wright and Ragen, Inc. or Wedbush Morgan Securities, Inc. and reflects inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.
Bancorp paid cash dividends of $0.29 and $0.26 per share for the years 2007 and 2006, 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 July 2007, Bancorp approved a stock repurchase plan to repurchase up to $500,000 of stock. As of December 31, 2007, the Company had repurchased 6,450 shares of stock under this plan, at a total cost of $62,740 and an average price of $9.73 per share. The Company did not repurchase any stock in 2006.
In August 2004, the Board of Directors approved the Bancorp Amended Dividend Reinvestment Plan that permits the direct purchase of additional shares of Bancorp Common Stock for cash in addition to the automatic reinvestment of cash dividends. There were no shares sold in 2007. During 2006, 83 shares were sold at an average price of $12.16 per share as part of the Plan.
Stock Performance Graph
The graph presented below compares the cumulative total stockholder return on Oregon Pacific Bancorp’s common stock to the cumulative total return of the NASDAQ Composite and the Russell 2000 Index for the five plus years, which commenced January 1, 2002 and ended February 28, 2007. The cumulative total stockholder return assumes the investment of $100 in Oregon Pacific Bancorp’s common stock and in each index on December 31, 2001 and assumes reinvestment of dividends.
Oregon Pacific Bancorp
Comparison of Five-Year Cumulative Total Stockholder Return
ITEM 6.
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 Bank, 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.
___________________
(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; federal minimum capital requirements are 4%.
(4)
Total capital divided by risk-weighted assets; federal minimum capital requirements are 8%.
(5)
Tier I capital divided by average total assets.
ITEM 7.
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, 2007, consolidated net income was $1,845,000, representing a decrease of 7.09% from net income of $1,986,000 earned during the year ended December 31, 2006. Net income for 2006 was up 6.47% from net income of $1,865,000 earned during the year ended December 31, 2005. Diluted earnings per share were $0.84, $0.91, and $0.86 for the years ended December 31, 2007, 2006, and 2005, respectively. Return on average assets was 1.20% for the year ended December 31, 2007, and 1.27% for both years ended December 31, 2006 and 2005. Return on average equity was 14.58% for the year ended December 31, 2007, compared with 18.03% for the year ended December 31, 2006, and 21.62% for the year ended December 31, 2005. The decrease in earnings for the year ended December 31, 2007 can be primarily attributed to increased rates for customer deposits and increased loan loss provision, partially offset by lower taxes.
Company assets grew from $151.31 million to $152.60 million, or 0.86% from year-end 2006 to 2007, and 0.57% from December 31, 2005 to December 31, 2006 from $150.44 million. Most of the growth was an increase in interest-bearing deposits in banks which grew $2.22 million to $5.21 million from $2.99 million. Stockholders’ equity increased in 2007 while the Company paid 34.61% of income as cash dividends to stockholders. While the growth in equity has lowered the return on average equity over the past three years, management believes the current level of equity will allow for future growth opportunities.
Return on average daily assets and equity and certain other ratios for the periods indicated are presented below:
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 the 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.
The allowance for loan losses is established to provide for probable loan losses based on evaluating known and inherent risks in the loan portfolio. 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, 2007, approximately 88% of the Bank’s loan portfolio is secured by real estate and a significant decline in real estate values in Oregon would cause management to increase the allowance for loan losses.
The Company estimates the value of its mortgage servicing rights (“MSR”) on a quarterly basis using a discounted cash flow model. The Bank stratifies its MSR's based on the contractual maturity of the mortgage. The model estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, servicing income, expected prepayments speeds, discount rate, and loan maturity. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSR's portfolio. Comparison of the carrying value is made to recent industry sales to ensure carrying value is not more than a potential sales price.
Effective January 1, 2006, the Bank adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation. SFAS No. 123R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. This involves assumptions calculated using management’s best estimates at the time of the grant, which impacts the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. Additional information is included in Note 1 of the “Notes to Consolidated Financial Statements.”
Recent Accounting Pronouncements
Recently issued accounting pronouncements that could potentially impact the Bank are included in Note 1 of the “Notes to Financial Statements” (Item 8).
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin
Net interest income, before the provision for loan loss, for the year ended December 31, 2007 was $8.24 million, a decrease of 2.62% compared to net interest income of $8.46 million in 2006, and an increase of 7.06% compared to net interest income of $7.69 million in 2005. The overall tax-equivalent earning asset yield was 8.57% in 2007 compared to 8.17% in 2006 and 7.08% in 2005. For the same years, rates on interest-bearing liabilities were 3.54%, 3.04%, and 2.20%, respectively. The increasing rates were primarily due to outside economic factors creating pressure on interest yields and rates.
Total interest-earning assets averaged $140.31 million for the year ended December 31, 2007, compared to $145.43 million for the corresponding period in 2006. The decrease was due to real estate development loans coming to completion or lots being sold. By year end, loan balances had grown slightly over the prior year-end.
Interest-bearing liabilities averaged $103.69 million for the year ended December 31, 2007 compared to $107.69 million for the same period in 2006. With slower loan growth the Bank didn’t attempt to match the soaring deposit rates, especially of certificates of deposits for otherwise non-customers, which competition had created.
Loans, which generally carry a higher yield than investment securities and other earning assets, comprised 87.97% of average earning assets during 2007, compared to 86.30% in 2006 and 85.91% in 2005. During the same periods, average yields on loans were 9.03% in 2007, 8.66% in 2006, and 7.47% in 2005. Investment securities plus interest-bearing balances at banks comprised 12.03% of average earning assets in 2007, which was down from 13.70% in 2006 and 14.09% in 2005. Tax equivalent interest yields on investment securities have ranged from 5.34% in 2007 to 5.21% in 2006 and 5.25% in 2005.
Interest cost, as a percentage of earning assets, increased to 2.61% in 2007, compared to 2.25% in 2006 and 1.66% in 2005. 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.
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:
(1)
Includes nonaccrual loans and mortgage loans held for sale.
(2)
Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
(3)
excludes one-time interest repayment of $377,000 for a loan charged off in 1998 and recovered in 2005.
(4)
Interest income on loans includes loan fees of $1,065,000, $1,158,000, and $1,157,000, for 2007, 2006, and 2005, respectively.
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 the Company’s net interest income 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:
(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 probable incurred 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 an assessment of individual problem loans. The Bank applies a systematic process for determining the adequacy of the allowance for loan losses that included an internal loan review function until late fourth quarter 2005 (the loan review function was outsourced in January 2006) and a monthly analysis of the adequacy of the allowance. Management believes the reserve for loan losses is adequate to absorb potential losses on identified problem loans as well as inherent losses at historical and expected levels.
The recorded values of loans actually removed from the balance sheets are referred to as charge-offs and, after netting out recoveries on previously charged-off assets, become net charge-offs. The Bank’s policy is to charge off loans when, in management’s opinion, the loan or a portion thereof is deemed uncollectible, although concerted efforts are made to maximize recovery after the charge-off. When a charge to the loan loss provision is recorded, the amount is based on
past charge-off experience, a careful analysis of the current portfolio, and an evaluation of economic trends in the market area. Management will continue to closely monitor the loan quality of new and existing relationships through stringent review and evaluation.
For the year ended December 31, 2007 the Bank charged $120,000 to its provision for loan losses compared to $26,000 and $215,000 in 2006 and 2005. The increased provision in 2007 was due to changing economic conditions and high concentrations of commercial real estate construction loans while the large allowance provision in 2005 was due to loan growth. The provision for 2006 was lower than 2005 due to the lack of charge-offs and lower loan growth.
For the year ended December 31, 2007, loan charge-offs exceeded recoveries by $16,000 as compared to $23,000 in 2006. All net charge-offs incurred by the Bank were small in amount and generally were concentrated in the installment loan category.
Noninterest Income
Total noninterest income has remained fairly flat over the two-year period from 2005 to 2007 with a slight decrease of 2.57%. Noninterest income was $2.72 million in 2007, $2.74 million in 2006 and $2.79 million in 2005. 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 2007 is derived from services charges. Over the past three years service charges have decreased fairly significantly to $920,000 in 2007, from $972,000 in 2006, and $1.00 million in 2005. The decrease in 2007 reflects changes to the Overdraft Protection service put into place in September of 2004 while other deposit charges have remained fairly flat since the Bank offers many demand deposit accounts with no related fees. Trust fee income increased to $705,000 in 2007, from $683,000 in 2006, and $610,000 in 2005 which reflects the growth in assets under management and the continuing acceptance of the Bank’s trust services within its market areas. Other significant noninterest income comes from the real estate mortgage department. Most loans are sold in the secondary market with loan servicing retained on many. Such income varied from $439,000 in 2007, to $503,000 in 2006, and $655,000 in 2005. The decreases in mortgage loan sales are largely a product of the mortgage rate environment that hit forty-year lows in 2003 and created a buying or refinancing frenzy until such activity came to an abrupt halt in late 2006. Investments sales commissions showed the most significant growth in 2006 following the asset purchase of the local LPL Investments office on January 3, 2006, with income rising from $135,000 in 2005 to $413,000 in 2006. Assets managed have continued to grow resulting in an increase of commissions to $432,000 in 2007 for a growth of 4.73%. “Other income” included an insurance reimbursement received and recognized in 2005 for a litigation settlement initially paid and expensed in 2004.
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, 2007, noninterest expenses crept up as measured by the efficiency ratio of 74.49% compared to 72.25% and 71.48% for the years 2006 and 2005, respectively. This is primarily due to the lack of growth in revenues in the depressed rural Oregon communities we serve as expenses have remained fairly flat.
Total noninterest expense increased to $8.16 million in 2007 compared to $8.09 million for year ended December 31, 2006 and $7.50 million for year ended December 31, 2005.
Salary and benefit expense, which includes commissions and the employer-paid portion of payroll taxes, was $4.83 million in 2007, $4.90 million in 2006, and $4.56 million in 2005. For the years ended December 31, 2007, Oregon Pacific Bank had an average of 92 full-time equivalent employees which compares to average of 95 for 2006 and 89 for 2005. The decrease in 2007 expense represents the decreased headcount offset by cost of living raises. As a result of the achievement of company financial and operational goals, 2006 included increased incentive compensation expense.
Occupancy expense consists of depreciation of premises and equipment, maintenance and repair expenses, utilities, and related expenses. This expense category was $861,000 in 2007, a decrease of $44,000 from $906,000 in 2006, which was an increase of $21,000 over $885,000 in 2005. Several departments in Florence moved into newly constructed facilities in April 2007 from leased facilities in 2006 and 2005.
Outside services expense consists of telecommunication expense, directors’ fees, loan review fees, correspondent bank charges, and fees for data processing and the internet, accountants’ fees, legal services, Regulators’ examinations and
other miscellaneous outside services. Outside services expense increased from $672,000 in 2005 to $709,000 in 2006, an increase of $32,000 all of which reflects the loan review function now outsourced. A further increase in 2007 to $818,000 reflected increased data processing costs.
Income Taxes
The provision for income taxes was $831,000 in 2007, $1.09 million in 2006, and $910,000 in 2005. The provision for 2007 was reduced by $104,000 for a true-up of 2006 and amended taxes for 2004 and 2005 to correct interest on tax-exempt loans. The provision resulted in effective combined federal and state tax rates of 31% in 2007, 36% in 2006, and 33% in 2005. The effective tax rates differ from combined estimated statutory rates of 40% principally due to the effects of nontaxable interest income which is recognized as income for book, but not for tax purposes. In 2005 the Company recognized a $48,000 income tax benefit as a result of a corporate tax “kicker” credit from the State of Oregon.
FINANCIAL CONDITION
Total assets increased just 0.86% to $152.6 million at December 31, 2007 compared to $151.31 million at December 31, 2006. The increase in total assets was driven by a small growth in loans. Growth in total assets was primarily funded by a 12.36% increase in equity. While total deposits increased by just 0.32%, certificates of deposit grew by 13.14% as depositors searched for increased return. The growth in premises and equipment reflects the construction of the new Financial Center next to the main office in Florence. The decrease in other assets reflects a $1.22 million receivable for the sale of the guaranteed portion of a Small Business Administration loan sold in late December 2006.
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:
(1)
Includes loans held-for-sale.
(2)
Includes cash and due from banks (non-interest bearing), fixed assets, and accrued interest receivable.
(3)
Includes accrued interest payable and other liabilities.
Investments
A year-to-year comparison shows that Oregon Pacific Bank’s investment portfolio at December 31, 2007 totaled $9.81 million, compared to $11.32 million at December 31, 2006, and $12.67 million at December 31, 2005. This represents a decrease of 13.38% and between 2006 and 2007 and 10.63% between 2005 and 2006. Increases or decreases in the investment portfolio are primarily a function of loan demand and changes in Oregon Pacific Bank’s deposit structure.
The Bank identifies its investment securities as available-for-sale. Available-for-sale securities are those that management may sell if liquidity requirements dictate or if alternative investment opportunities arise. The mix of available-for-sale investment securities is determined by management, based on the Bank’s asset-liability policy, management’s assessment of the relative liquidity of the Bank, and other factors.
At December 31, 2007, Oregon Pacific Bank’s investment portfolio had total net unrealized gains, net of taxes, of approximately $46,000. This compares to unrealized gains of approximately $5,000 at December 31, 2006, and $28,000 at December 31, 2005. 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 or bank certificates of deposit. The Bank invests in these instruments to provide for additional earnings on excess available cash balances. Because of their liquid nature, balances at the FHLB 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 $5.21 million at December 31, 2007, compared to $2.99 million at December 31, 2006, and $5.92 million at December 31, 2005.
The following table provides the carrying value of Oregon Pacific Bank’s portfolio of investment securities as of December 31, 2007, 2006, and 2005, respectively:
Investment securities at the dates indicated consisted of the following:
(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 except for those which are issued by quasi-governmental agencies.
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 Bank, including the indebtedness of any guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank.
Bank officers are charged with loan origination in compliance with underwriting standards overseen by the loan administration function and in conformity with established loan policies. Periodically, the Board of Directors determines the lending authority of the President and other lending officers. Such delegated authority may include authority related to loans, letters of credit, overdrafts, uncollected funds, and such other authority as determined by the Board or the President within the President’s delegated authority.
The President or Chief Credit Officer has authority to approve loans up to a lending limit set by the Board of Directors. All loans above that lending limit and up to a certain limit are reviewed for approval by the executive loan committee, which currently includes the President, the Chief Credit Officer, and four senior loan officers. All loans above the lending limit up to Oregon Pacific Bank’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 Bank’s unsecured legal lending limit was $2,839,000 at December 31, 2007.
Net outstanding loans, excluding loans held-for-sale, totaled $121.75 million at December 31, 2007, representing an increase of $680,000, or 0.56% compared to $121.07 million as of December 31, 2006. Loan commitments decreased to $23.21 million as of December 31, 2007, representing a decrease of $1.66 million from year-end 2006. Net outstanding loans, excluding loans held-for-sale, were $117.99 million at December 31, 2005.
Oregon Pacific Bank’s net loan portfolio, excluding loans held for sale, at December 31, 2007, includes loans secured by real estate (88.57% of total), commercial loans (10.56% of total), and consumer loans and overdraft accounts (2.15% 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 Bank’s loan portfolio by collateral at the dates indicated:
The following table shows the loan maturities at the dates indicated:
Allowance for Loan Losses
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 for loan losses is maintained at an appropriate level believed adequate to absorb probable losses incurred in the loan portfolio. The allowance is intended to cover only those losses that both are probable and estimable. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, groups of homogeneous loans, assessments of the impact of current and anticipated economic conditions on the portfolio and historical loss experience. When determining the level of the allowance, management ensures that the overall allowance appropriately reflects a margin for the imprecision inherent in estimating expected credit losses.
The quality of the loan portfolio is reviewed on an on-going basis. A combination of detailed credit assessments by credit officers, historic loss trends, and economic and business environment factors are analyzed when determining the allowance for loan losses. Provisions for loan losses are based on current loans outstanding, inherent risk, mix of loans and expected losses. A detailed loan loss evaluation is performed quarterly on individual loans with the highest risk. Management follows the progress of the economy and how it might affect borrowers in both the near and the intermediate term. A formalized and disciplined independent loan review program is established to evaluate loan administration, credit quality and compliance with corporate loan standards. This program includes reviews of new loans and regular reviews of problem loan reports, delinquencies and charge-offs.
The change in the allowance is due primarily to the softening of the real estate market and the Bank’s concentrations in Construction and Land Development loans, an increase in past due rates, and the amount of loans on non-accrual at December 31, 2007. The Company believes that the allowance for credit losses appropriately covers probable and estimable losses in the portfolio based upon the information available. This assessment is based on loan growth, concentrations within the portfolio, detailed review of individual loans and groups of homogenous loans, historical loan-losses, and economic trends. The adequacy of the allowance cannot be determined with absolute precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examinations of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant it.
The following table shows Oregon Pacific Bank’s loan loss experience for the periods indicated:
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 2003, Oregon Pacific Bank’s ratio of the allowance for loan losses to total loans has ranged from 1.47% to 1.58%. 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 probable 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, 2003 through December 31, 2007, nonperforming loans to total loans have ranged from a low of 0.00% in 2003 to a high of 1.37% in 2007. The Bank’s historical ratio of net charge-offs (recoveries) to average outstanding loans illustrates its recent favorable loan charge-off and recovery experience. For the years ended December 31, 2003, 2005, 2006 and 2007, net charge-offs ranged from 0.00% to 0.03% 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.
During the year ended December 31, 2007, Oregon Pacific Bank recognized $20,000 in loan losses and $4,000 in recoveries. Charge-offs recorded in 2007 were consistent with the Bank’s historical loss experience.
The following table presents information with respect to nonperforming loans and other assets:
Oregon Pacific Bank 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 $1.71 million of loans on nonaccrual status at December 31, 2007, compared to $215,000 and $356,000 at December 31, 2006 and 2005, respectively.
At December 31, 2007, 2006, and 2005, the Bank had no amount in the other real estate owned (“OREO”) category, which represents real assets held through loan foreclosure or recovery activities.
Deposits
At December 31, 2007, total deposits were $120.99 million, an increase of 0.32% or $382,000 over December 31, 2006. Total deposits in 2006 decreased by 0.01% from 2005. Noninterest bearing demand deposit accounts continue to be a significant portion of Oregon Pacific Bank’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 2007 averaged 27.52% of total deposits, up from 27.10% in 2006, and 25.99% in 2005.
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:
Interest-bearing deposits consist of money market, savings, and time certificate accounts as well as interest-bearing checking or the Bank’s “Ultimate” 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, 2007, total interest-bearing deposit accounts were $88.27 million, a decrease of $402,000, or 0.46%, from December 31, 2006. Interest-bearing deposit accounts decreased $3.99 million, or 4.36%, from December 31, 2005 to 2006. The Bank has been facing strong competition for both deposit dollars and deposit rates.
Certificates of deposit are another interest-bearing deposit with a stated maturity typically at higher interest rates. At December 31, 2007, time certificates of deposit in excess of $100,000 totaled $18.04 million, or 14.91% of total outstanding deposits, compared to $16.54 million, or 13.72%, of total outstanding deposits at December 31, 2006, and $15.71 million, or 12.95%, of total outstanding deposits at December 31, 2005.
The following table sets forth, by time remaining to maturity, all time certificates of deposit accounts outstanding at December 31, 2007:
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, 2007:
Other Borrowings
The following table sets forth certain information with respect to the Bank’s Federal Home Loan Bank of Seattle (“FHLB”) borrowings:
In addition to FHLB borrowings, the Bank owes $215,000 payable over the next two years from the asset acquisition in January 2006.
Trust Preferred Securities
In December 2003, Bancorp issued $4.12 million of unsecured junior subordinated deferrable interest debentures to its wholly-owned subsidiary, Oregon Pacific Statutory Trust I (“Trust”), which has since been deconsolidated in accordance with FASB Interpretation (“FIN”) No. 46R. Interest payments on the subordinated debentures are intended to pass through the Trust to the beneficial owners of the Trust, in the form of dividend payments on trust preferred securities. The subordinated debentures and trust preferred securities have identical interest rates, terms and conditions - variable interest at 90 day LIBOR plus 2.85% with 30 year maturities. Trust Preferred Securities for holding companies are considered Tier II capital for regulatory purposes with a limit of 50% of Tier I capital.
In accordance with FIN 46R, Bancorp deconsolidated the Trust as of March 31, 2004. As a result, $4.12 million of junior subordinated debentures are reflected on the consolidated balance sheet under the caption “Junior Subordinated Debentures.” The $124,000 investment in the Trust is recognized, which is included under the caption “other Assets” in the consolidated balance sheet.
Stockholders’ Equity
Consolidated stockholders’ equity at December 31, 2007 was $13.37 million, an increase of $1.47 million from December 31, 2006. 2007 equity was increased by earnings of $1.85 million for the year less cash dividends paid to shareholders of $458,000. At year-end 2007, net unrealized gains on investment securities available-for-sale were $46,000, up $41,000 from year-end 2006. In 2007, 6,450 shares of stock were repurchased at a cost of $62,740 and an average price of $9.73 per share.
Liquidity and Cash Flow
Oregon Pacific Bank has adopted policies to maintain a relatively liquid position to enable it to respond to changes in the financial environment and ensure sufficient funds are available to meet customers’ needs for borrowing and deposit
withdrawals. Generally, the Bank’s major sources of liquidity are customer deposits, sales and maturities of investment securities, the use of federal funds markets, and net cash provided by operating activities. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions, and other factors, are not. Liquid asset balances include cash, amounts due from other banks including the FHLB, securities available-for-sale, and loans held-for-sale. At December 31, 2007, these liquid assets totaled $18.76 million or 12.29% of total assets as compared to $17.91 million or 11.84% of total assets at December 31, 2006. Other sources of liquidity are the ability to borrow from the Federal Home Loan Bank of Seattle and other correspondent banks, national deposits, brokered deposits, and the sale of the guaranteed portion of Small Business Administration loans.
The analysis of liquidity also includes a review of the changes that appear in the statements of cash flows for the year ended December 31, 2007. The statement of cash flows includes operating, investing and financing categories. Operating activities include net income of $1.85 million, which is adjusted for non-cash items and increases or decreases in cash due to changes in certain assets and liabilities. Investing activities consist primarily of both proceeds from and purchases of securities and the impact of the net growth in loans. Financing activities present the cash flows associated with deposit accounts, and reflect dividends paid to shareholders.
At December 31, 2007, the Bank had outstanding commitments to make loans of $23.21 million. Nearly all of these commitments represented unused portions of credit lines available to business and mortgage loan customers. Many of these outstanding commitments to extend credit will not be fully drawn upon and, accordingly, the aggregate commitments do not necessarily represent future cash requirements. Management believes that the Bank’s sources of liquidity are more than adequate to meet likely calls on outstanding commitments, although there can be no assurance in this regard.
Capital
The Federal Reserve Board and Federal Deposit Insurance Corporation have established minimum requirements for capital adequacy for financial institutions that they oversee. The requirements address both risk-based capital and leveraged capital. The regulatory agencies may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk.
The Bank was in compliance with the regulatory requirements for well-capitalized institutions at December 31, 2007 and December 31, 2006. The following reflects the Bank’s various capital ratios compared to regulatory minimums for capital adequacy purposes:
In December 2003 the Company issued $4,000,000 in trust preferred capital securities through a wholly-owned subsidiary organization that was formed for that purpose. The Company then invested the net proceeds of the security sales in the Bank as additional paid-in capital to support the Bank’s future growth. All of the $4 million of capital invested by the Company in the Bank is treated as Tier 1 capital of the Bank.
The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. The Company manages capital to maintain adequate capital ratios and levels in accordance with external regulations and capital guidelines established by the Board of Directors.
Off-Balance Sheet Arrangements
In the normal course of business, the Bank utilizes financial instruments with off-balance sheet risk to meet the financing needs of its customers including loan commitments to extend credit, checking lines of credit, commercial letters of credit, and standby letters of credit.
The table below sets forth the distribution of the Bank’s contingent liabilities by off-balance sheet type:
Contractual Obligations
The Company’s contractual obligations include notes to the Federal Home Loan Bank, Trust Preferred Securities, operating leases, and deferred compensation plans. Detailed below is a schedule of contractual obligations by maturity and/or payment due date:
(1) The Company has the right to redeem trust preferred securities on or after December 17, 2008
(2) Amount includes a mandatory purchase option for leased property
(3) Amount includes deferred compensation
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset-Liability Management and Interest Rate Sensitivity
Oregon Pacific Bank’s results of operations depend substantially on its net interest income. Interest income and interest expense are affected by general economic conditions and by competition in the marketplace. The Bank’s interest and pricing strategies are driven by its asset-liability management analysis and by local market conditions.
The Bank seeks to manage its assets and liabilities to generate a stable level of earnings in response to changing interest rates and to manage its interest rate risk. Asset/liability management involves managing the relationship between interest rate sensitive assets and interest rate sensitive liabilities. If assets and liabilities do not mature or reprice simultaneously, and in equal amounts, the potential for exposure to interest rate risk exists, and an interest rate “gap” is said to be present. Asset and liability management strategies have resulted in a negative 0-3 month “gap” of 5.7% and a negative 4-12 month “gap” of 1.1% as of December 31, 2007 as shown in the table below.
Rising and falling interest rate environments can have various effects on a bank’s net interest income, depending on the interest rate gap, the relative changes in interest rates that occur when assets and liabilities are repriced, unscheduled repayments of loans, early withdrawals of deposits, and other factors. The Bank does not use derivatives including forward and futures contracts, options, or swaps to manage its market and interest rate risks.
Impact of Inflation and Changing Prices
The majority of a financial institution’s assets and liabilities are monetary in nature. Changes in interest rates affect the financial condition of a financial institution to a greater degree than inflation. Although interest rates are determined in large measure by changes in the general level of inflation, they do not change at the same rate or in the same magnitude, but rather react in correlation to changes in expected rate of inflation and to changes in monetary and fiscal policy. The Company’s ability to react to changes in interest rates has a significant impact on financial results. As discussed previously, management attempts to control interest rate sensitivity in order to protect against wide interest rate fluctuations.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Oregon Pacific Bancorp and Subsidiaries
We have audited the accompanying consolidated balance sheets of Oregon Pacific Bancorp and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of Oregon Pacific Bancorp’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oregon Pacific Bancorp and Subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
Portland, Oregon
March 28,
OREGON PACIFIC BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements
OREGON PACIFIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The accompanying notes are an integral part of these financial statements
OREGON PACIFIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The accompanying notes are an integral part of these financial statements
OREGON PACIFIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these financial statements
OREGON PACIFIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements
OREGON PACIFIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Oregon Pacific Bancorp (Bancorp or the Company) was incorporated on January 1, 2003, and became the holding company of Oregon Pacific Banking Co. (the Bank) effective January 1, 2003. The Bank is a state-chartered institution authorized to provide banking services by the State of Oregon from its headquarters in Florence, Oregon. Full-service banking products are offered to the Bank’s customers who live primarily in Lane, Douglas, and Coos counties and on the central Oregon coast. In December 2002, Bancorp formed Oregon Pacific Statutory Trust I (the Trust), a wholly-owned Connecticut statutory business trust, for purposes of issuing guaranteed undivided beneficial interests in Junior Subordinated Deferrable Interest Debentures (Trust Preferred Securities). The Bank and Bancorp are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
All significant intercompany accounts and transactions between Bancorp and its subsidiaries have been eliminated in the preparation of the consolidated financial statements.
Management’s estimates and assumptions - In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets, and revenues and expenses for the reporting period. Estimates and assumptions made by management primarily involve the valuation of the allowance for loan losses, other real estate owned, and mortgage servicing assets. Actual results could differ significantly from those estimates.
Cash and cash equivalents - Cash and cash equivalents normally include cash on hand, amounts due from banks, and federal funds sold. Cash and due from banks include amounts the Bank is required to maintain to meet certain average reserve and compensating balance requirements of the Federal Reserve Bank. As of December 31, 2007 and 2006, the Bank had no reserve requirements to be maintained at the Federal Reserve Bank and total clearing balance requirements at both December 31, 2007 and 2006 were $100,000.
Investment securities - The Bank is required, under generally accepted accounting principles, to specifically identify its investment securities as “trading,” “available-for-sale,” or “held-to-maturity.” Accordingly, management has determined that all investment securities held at December 31, 2007 and 2006, are available-for-sale.
Available-for-sale securities consist of bonds, notes, debentures, and certain equity securities. Securities classified as available-for-sale may be sold in response to such factors as (1) changes in market interest rates and related changes in the security’s prepayment risk, (2) needs for liquidity, (3) changes in the availability of and the yield on alternative instruments, and (4) changes in funding sources and terms. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of equity until realized. Fair values for investment securities are based on quoted market prices.
Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary, result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or call date.
As a member of the Federal Home Loan Bank System, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank. The “restricted equity securities” investment is carried at cost. At December 31, 2007 and 2006, Federal Home Loan Bank stock totaled $1,024,000 and $1,023,000, respectively.
Loans held-for-sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance established by charges to income. All loans are sold without recourse.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
-
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Loan servicing - The Bank sells mortgage loans primarily on a servicing-retained basis. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated servicing revenues. Impairment of the mortgage servicing asset is based on the fair value of those rights. Fair values are estimated using discounted cash flows based on current market interest rates and prepayment rates. Loan servicing income is recorded when earned.
Loans, net of allowance for loan losses and unearned loan fee income - Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and unearned loan fee income. Interest on loans is calculated by the simple-interest method on daily balances of the principal amount outstanding. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the life of the related loan.
The Bank does not accrue interest on loans for which payment in full of principal and interest is not expected, or which payment of principal or interest has been in default 90 days or more, unless the loan is well-secured and in the process of collection. Nonaccrual loans are considered impaired loans. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price, or the fair value of collateral if the loan is collateral dependent. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received or when the loan is removed from nonaccrual status. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for evaluation of impairment.
The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes that the collectibility of principal 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. Various regulatory agencies, as a regular part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations.
Premises and equipment - Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets, which range from 2 to 30 years.
Intangible assets - Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and also reviewed for impairment. Intangible assets are comprised of customer lists and a non-compete agreement acquired in the acquisition of the assets of Coast Investment Advisors, Inc., the local Florence branch of LPL Financial Services, Inc. Amortization of customer lists is included in other non-interest expense in the consolidated statement of income. The amortization of the non-compete agreement will begin at the end of a three-year employment contract.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, management reviews long-lived and intangible assets any time that a change in circumstance indicates that the carrying amount of these assets may not be recoverable. Recoverability of these assets is determined by comparing the carrying value of the asset to the forecasted undiscounted cash flows of the operation associated with the asset. There were no impairments at December 31, 2007 that required a write-down of the asset.
Other real estate owned - Real estate acquired by the Bank in satisfaction of debt is carried at the lower of cost or estimated net realizable value. When property is acquired, any excess of the loan balance over its estimated net
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
-
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
realizable value is charged to the allowance for loan losses. Subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in noninterest income and expense.
Income taxes - Deferred tax assets and liabilities are determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company also recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2007 and 2006, the Company recognized no interest and penalties in income tax expense. The Company files consolidated income tax returns in the U.S. federal jurisdiction and in Oregon. The Company is no longer subject to U.S. federal and Oregon income tax examinations by tax authorities for years before 2004.
Comprehensive income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on securities available-for-sale, which are also recognized as a separate component of stockholders’ equity.
Earnings per share - Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under the Bank’s stock option plans.
Off-balance sheet financial instruments - The Bank holds no derivative financial instruments. However, in the ordinary course of business, the Bank enters into off-balance sheet financial instruments consisting of commitments to extend credit as well as commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.
Fair value of financial instruments - The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein:
Cash and cash equivalents - The carrying amounts of cash and short-term instruments approximate their fair value.
Available-for-sale securities - Fair values for available-for-sale investment securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Restricted equity securities - The carrying values of restricted equity securities approximate fair values.
Loans receivable - For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.Loans held-for-sale - Fair value represents the anticipated proceeds from sale of the loans.Deposit liabilities - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts, and certificates of deposit (CDs) approximate their fair values at the reporting date. Fair
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
-
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.Federal Home Loan Bank borrowings - The fair values of the Bank’s borrowings from the Federal Home Loan Bank are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar borrowing arrangements.Accrued interest - The carrying amounts of accrued interest receivable and payable approximate their fair values.
Off-balance sheet instruments - The Bank’s off-balance sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.
Advertising - Advertising costs are charged to expense during the year in which they are incurred.
Stock-based compensation - The Company maintains a stock incentive plan. This plan, which is described more fully in Note 14, was presented to and approved by the Company’s shareholders in 2003. On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R) Share-Based Payment (“SFAS 123(R)”).
Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations, as permitted by SFAS 123, Accounting for Stock-Based Compensation. In accordance with APB 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.
The Company adopted SFAS 123(R) using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2007 and 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model based on the following assumptions. Expected volatility is based on the historical volatility of the price of the Company’s stock for a period consistent with the expected life of the options. The Company uses historical data to estimate option exercise and employee termination rates within the valuation model. The expected term of options represents the period of time that stock options are expected to be outstanding and is estimated based on historical exercise and forfeiture activity. Expected dividends are estimated based on the Company’s recent historical practice of paying dividends. The risk-free rate of return for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of the grant.
Recently issued accounting pronouncements - In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The Statement provides enhanced guidance for measuring assets and liabilities using fair value and applies whenever other standards require or permit assets or liabilities to be measured at fair value. Statement No. 157 also requires expanded disclosure of items that are measured at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will not have a significant impact on the Company’s consolidated financial condition or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
-
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is will not have a significant impact on the Company’s consolidated financial condition or results of operations.
In December 2007, FASB issued SFAS No. 141 (revised), Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Accordingly, the Company will apply SFAS 141(R) to business combinations occurring on or after January 1, 2009.
Reclassifications - Certain reclassifications have been made to the 2006 and 2005 financial statements to conform to current year presentations.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale securities are as follows:
The investment securities shown above currently have fair values less than amortized costs and, therefore, contain unrealized losses. The Bank has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company or industry-specific event. There are three investment securities with unrealized losses. The Bank anticipates full recovery of amortized costs with respect to these securities, at maturity or sooner in the event of a more favorable market interest rate environment.
The amortized cost and estimated fair value of available-for-sale securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2
-
INVESTMENT SECURITIES - (continued)
At December 31, 2007 and 2006, investment securities with an amortized cost of $7,469,056 and $8,354,383 and market values of $7,528,429 and $8,354,717, respectively, were pledged to secure deposits of public funds and for other purposes as required or permitted by law.
The Bank, as a member of the Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) systems, is required to maintain investments in restricted equity securities of the FHLB and FRB. FHLB and FRB stocks are not actively traded but are redeemable at their current book values of $1,023,550 and $1,023,100 at December 31, 2007 and 2006, respectively.
NOTE
-
LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio is summarized as follows:
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3
-
LOANS AND ALLOWANCE FOR LOAN LOSSES- (continued)
The following is an analysis of the changes in the allowance for loan losses:
A substantial portion of the Bank’s loans are collateralized by real estate in the geographic areas it serves and, accordingly, the ultimate collectibility of a substantial portion of the Bank’s loan portfolio is susceptible to changes in the local market conditions.
In the normal course of business, the Bank participates portions of loans to third parties in order to extend the Bank’s lending capability or to mitigate risk. At December 31, 2007 and 2006, the portion of these loans participated to third parties (which are not included in the accompanying consolidated financial statements) totaled $2,434,864 and $3,287,466, respectively.
Impaired loans having recorded investments of $1,706,876 and $215,471 at December 31, 2007 and 2006, respectively, have been recognized. The average recorded investment in impaired loans during 2007 and 2006 was $580,399 and $197,040, respectively. The total allowance for loan losses allocated to these loans was $91,628 and $107,735 at December 31, 2007 and 2006, respectively. Interest income recognized for cash payments received on impaired loans in 2007, 2006, and 2005, was not material to the consolidated financial statements. In addition, no loans past due 90 days or more were still accruing interest at December 31, 2007 and 2006.
NOTE
-
LOAN SERVICING
The balance of the Bank’s recorded investment in mortgage servicing assets (MSA) is as follows:
Loans serviced for the Federal Home Loan Mortgage Corporation are not included in the accompanying consolidated balance sheets. The unpaid principal balances of serviced loans at December 31, 2007 and 2006 were $89,959,644 and $94,474,592, respectively.
Amortization expense totaled $130,728, $126,039, and $193,247 for the years ended December 31, 2007, 2006, and 2005, respectively.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
The Bank completed its financial center on the campus of the main branch in Florence in late spring 2007. Interest capitalized in 2007 and 2006 was $22,142 and $13,489, respectively.
Depreciation expense for the years ended December 31, 2007, 2006, and 2005, was $560,161, $488,501, and $473,216, respectively.
NOTE
-
INTANGIBLE ASSETS
The following table summarizes the changes in the Bank’s intangible assets for the year ended December 31, 2007.
Acquired intangible assets are related to the acquisition of the assets of the local LPL Financial, Inc. brokerage in Florence, Oregon.
NOTE
-
TIME CERTIFICATES
Time certificates of deposit of $100,000 and over aggregated $18,038,790 and $15,583,499 at December 31, 2007 and 2006, respectively.
At December 31, 2007, the scheduled maturities for all time deposits are as follows:
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7
-
TIME CERTIFICATES - (continued)
NOTE
-
SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK BORROWINGS
The Bank is a member of and has entered into credit arrangements with the FHLB. The Bank participates in the Cash Management Advance program and also has fixed and adjustable rate promissory notes with the FHLB. Borrowings under the credit arrangements are collateralized by mortgage loans or other instruments which may be pledged. Borrowings available to the Bank under all FHLB credit arrangements are limited to the lesser of 20% of the Bank’s total assets or collateral availability.
The Cash Management Advance program advances are due on demand, or if no demand is made, in one year. No borrowings were outstanding under the Cash Management Advance program at December 31, 2007 and 2006.
FHLB promissory notes outstanding at December 31, 2007 and 2006 were $10,502,806 and $11,157,806, respectively. These notes may be prepaid in whole or in part, with payment of a prepayment fee.
A promissory note in the amount of $214,666 was outstanding at December 31, 2007 resulting from the January 2006 purchase of the assets of the local LPL brokerage office for $322,000 less a $107,334 principal payment made in January 2007.
The following summarizes the Bank’s outstanding obligation and repayment terms to the FHLB as of December 31, 2007:
FHLB advances are collateralized as provided for in the advance, pledge and security agreements with the FHLB, by certain qualifying loans in the amount of $12.7 million and $13.4 million at December 31, 2007 and 2006, respectively. At December 31, 2007 the Company had additional borrowing capacity available of $15.9 million at the FHLB.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
INCOME TAXES
The provision for income taxes consists of the following:
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) on January 1, 2007. The Company believes that its income tax filing positions taken or expected to be taken in its tax returns would more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that would result in a material adverse impact on the Company's financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.
Deferred income taxes represent the tax effect of differences in timing between financial income and taxable income, principally related to the provision for loan losses, deferred compensation, mortgage servicing rights, and recognition of depreciation expense. Deferred income taxes, according to the timing differences which caused them, were as follows:
The provision for income taxes differs from the federal statutory rate of 34% due principally to the effect of tax exemptions for interest received on municipal investments.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
INCOME TAXES (continued)
The net deferred tax assets in the accompanying consolidated balance sheets include the following components:
Management believes, based upon the Bank’s historical performance, the net deferred tax assets will be realized in the normal course of operations and, accordingly, management has not reduced the net deferred tax assets by a valuation allowance.
Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve elements of credit and interest rate risk similar to the amounts recognized in the accompanying consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - (continued)
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most commercial letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis.
The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include cash, accounts receivable, premises and equipment, and income-producing commercial properties.
Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary.
A summary of the notional amounts of the Bank’s financial instruments with off-balance sheet risk at December 31, 2007, were as follows:
Additionally, the Bank sells real estate loans to the Federal Home Loan Mortgage Corporation (see Note 3). The Federal Home Loan Mortgage Corporation has the right to reject a loan that it has previously purchased and require the seller to repurchase the loan in the event of fraud or material misstatement of fact in the loan application.
NOTE
-
CONCENTRATIONS OF CREDIT RISK
All of the Bank’s loans, commitments, and commercial and standby letters of credit have been granted to customers in the Bank’s market area. Nearly all such customers are depositors of the Bank. Investments in state and municipal securities involve government entities throughout the United States. Concentrations of credit by type of loan are set forth in Note 3. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers as of December 31, 2007. The Bank’s loan policy does not allow the extension of credit to any single borrower or group of related borrowers in excess of the Bank’s legal lending limit, which is generally 15% of aggregate common stock and the allowance for loan losses.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying values of the Bank’s financial instruments:
While estimates of fair value are based on management’s judgment of the most appropriate factors, there is no assurance that were the Bank to have disposed of such items at December 31, 2007 and 2006, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2007 and 2006 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, nonfinancial instruments typically not recognized in the consolidated financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill, and similar items.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
COMMITMENTS AND CONTINGENCIES
Operating lease commitments - The Bank leases certain branch premises and equipment. Future minimum lease payments for all noncancellable operating leases are as follows:
Total rental expense was $109,583, $179,390, and $167,263 in 2007, 2006, and 2005, respectively.
Legal contingencies - In the ordinary course of business, the Bank is a party to various debtor-creditor legal actions, none of which individually or in the aggregate, are presently material to the Bank’s business, operations, or financial condition. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings.
Bancorp is not currently involved in any material litigation or legal proceeding, and is not aware of any potential material litigation or proceeding threatened against it.
NOTE
-
STOCK-BASED COMPENSATION
Bancorp has a stock incentive plan which was approved by its stockholders during 2003. The plan provides that 214,035 shares of Bancorp’s common stock will be reserved for the granting of incentive stock options and non-statutory stock options to key employees. The purchase price of optioned shares is not to be less than the fair market value at the time the options are granted. In addition, the plan allows for the Board to grant stock appreciation rights or bonus rights, award bonus grants of stock, and award other types of stock-based incentives as may be allowable by law. For options granted in January 2006 vest 50% annually over two years. Options granted in March 2006 vest in five equal annual installments on the anniversary of the grant beginning March 17, 2008. All have a two-year exercise period. Vesting is immediate if there is a change of control, at retirement at age 60 or later, or upon death if 50 percent had been exercisable.
As of December 31, 2007, the Company had 6,204 nonvested options outstanding and there was $13,200 of total unrecognized compensation cost related to these nonvested options. This cost is expected to be recognized on a straight-line basis, over the weighted-average vesting period of 3.9 years, through December 31, 2011. A summary of option activity under the plan as of December 31, 2007, and changes during the year then ended is presented below:
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK-BASED COMPENSATION - (continued)
The weighted-average grant-date fair value of options granted during the years 2006 and 2005 was $1.91 and $1.36, respectively. No options were granted in 2007. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006, and 2005 was $69,015, $50,315 and $7,690, respectively.
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for December 31:
No options were granted in 2007.
NOTE
-
PROFIT SHARING, DEFERRED COMPENSATION, AND INCENTIVE PLANS
Effective January 1, 1998, the Bank adopted a Simple Retirement Plan which covers substantially all employees once minimum length of employment criteria has been met. Contributions to the plan totaled $90,935, $84,765, and $77,248 during 2007, 2006, and 2005, respectively.
The Bank has established a nonqualified deferred compensation and an incentive plan for a group of key management employees. The Bank may, but is not required to, award incentive compensation, which is credited to Incentive Contribution Accounts maintained for each of these participants. Participants are also allowed to elect to defer a portion of their compensation. For the years ended December 31, 2007, 2006, and 2005, the Bank recorded expenses of $279,336, $275,834, and $178,007, respectively, to fund the program.
In 2007 the Bank established a nonqualified Director Non-Employee Deferred Compensation Plan. Directors may elect to defer all or a portion of their directors’ fees and/or bonuses into a common stock account or interest-bearing account. Amounts deferred to the common stock account are credited with the number of whole shares of Common Stock that could be purchased at the weighted average of the last 1% of stock sales. At December 31, 2007, the Bank’s liability under the plan was $19,000.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
EARNINGS PER SHARE
The following table illustrates the computations of basic and diluted earnings per common share for the years ended December 31:
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are customers of and have had banking transactions with the Bank in the ordinary course of business, and the Bank expects to have such transactions in the future. All loans and commitments to loan included in such transactions were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and, in the opinion of the management of the Bank, do not involve more than the normal risk of collectibility or present any other unfavorable features. Transactions with directors, executive officers, principal stockholders, and companies with which they are associated as of December 31, 2007 and 2006, and for the years then ended were as follows:
NOTE
-
REGULATORY MATTERS
Bancorp and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of Bancorp’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (a defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2007, that Bancorp and the Bank meet all capital adequacy requirements to which they are subject.
As of the most recent notifications from their regulatory agencies, Bancorp and the Bank were categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, Bancorp and the Bank must maintain minimum total risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage capital ratios as set forth in the following table. There are no conditions or events since that notification that management believes may have changed Bancorp’s and the Bank’s category.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
REGULATORY MATTERS - (continued)
Bancorp’s and the Bank’s capital ratios are substantially equivalent. Actual capital amounts for the Bank are presented in the following table:
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
TRUST PREFERRED SECURITIES
At December 31, 2007, Bancorp had a wholly-owned trust (Trust) that was formed to issue trust preferred securities and related common securities of the Trust. As a result of adoption of FIN 46R, Bancorp deconsolidated the Trust as of January 1, 2004. The junior subordinated debentures were reflected as long-term debt in the consolidated balance sheets.
Oregon Pacific Statutory Trust 1 is a wholly-owned Connecticut statutory business trust subsidiary which issued $4,000,000 of guaranteed undivided beneficial interests in Bancorp’s floating rate Junior Subordinated Deferrable Interest Debentures (Trust Preferred Securities). These debentures qualify as Tier 1 capital under regulatory guidelines. All common securities of the Trust are owned by Bancorp. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by the Trust to purchase $4,124,000 of subordinated deferrable interest debentures of Bancorp. The debentures, which represent the sole asset of the Trust, possess the same terms as the Trust Preferred Securities and accrue interest at a rate of the three-month London Interbank Offered Rate (LIBOR) plus 2.85% per annum which changes quarterly. The rate throughout 2007 varied between 7.84% and 8.54% and in 2006 varied between 7.35% and 8.24%. The accrued interest on the debentures is paid to the Trust by Bancorp, and the Trust in turn distributes the interest income as dividends on the Trust Preferred Securities. Interest payments are deferrable at the discretion of Bancorp for the first five years. As of December 31, 2007, all interest payments to the Trust and all dividend payments by the Trust were current.
In conjunction with the issuance of the Trust Preferred Securities, Bancorp entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of (1) accrued and unpaid distributions required to be paid on the Trust Preferred Securities, (2) the redemption price with respect to any Trust Preferred Securities called for redemption by the Trust, and (3) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of the Trust. The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on December 17, 2033, or upon earlier redemption as provided in the indenture. Bancorp has the right to redeem the debentures purchased by the Trust in whole or in part, on or after December 17, 2008. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. For the years ended December 31, 2007, 2006, and 2005, Bancorp’s interest expense related to the Trust Preferred Securities amounted to $335,491, $322,053, and $248,963, respectively.
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Oregon Pacific Bancorp (parent company only) is presented as follows:
CONDENSED BALANCE SHEETS
CONDENSED STATEMENTS OF INCOME
OREGON PACIFIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
-
PARENT COMPANY FINANCIAL INFORMATION - (continued)
CONDENSED STATEMENTS OF CASH FLOWS
NOTE 21 - SUBSEQUENT EVENTS
On January 3, 2008, the Company announced a plan to deregister the Company’s common stock under the Securities Exchange Act of 1934, as amended, and, therefore, terminate its obligations to file reports with the Securities and Exchange Commission. A Special Meeting of shareholders was held on March 13, 2008 at which time the shareholders approved amendments to its Articles of Incorporation effecting a reverse stock split of 1 for 500, whereby shareholders owning less than 500 shares of Company common stock on the record date of January 4, 2008 receive cash at the pre-split rate of $13.00 per share. Shares then forward split at 500 shares for 1 share.
On January 15, 2008, the Bancorp Board of Directors authorized a cash dividend of $.08 per share payable on February 15, 2008, to stockholders of record on January 31, 2008.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A (T).
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports in compliance with the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s Management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c) promulgated under the Exchange Act. As of December 31, 2007, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
There have been no changes in the company’s internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Under the supervision and with the participation of management, the Company conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2007, utilizing the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2007 is effective.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. The Company's registered public accounting firm was not required to issue an attestation on its internal controls over financial reporting pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has a separately designated standing Audit Committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee is composed of directors who are independent from management and free from any relationship that, in the opinion of the directors, would interfere with their independent exercise of judgment. The Audit Committee is primarily concerned with the effectiveness of audits of the Company by its internal auditor and the independent auditors on accounting matters and internal controls; advising the Board on the scope of audits; reviewing the Company’s annual financial statements and the accounting
standards and principles followed; and appointment of independent auditors. The members of the Audit Committee are Richard L. Yecny (Chair), Patricia Benetti, Doug Feldkamp, Robert R. King, and Marteen L. Wick.
The Company’s Board of Directors has determined that Richard L. Yecny, a member of the Company’s Audit Committee, is an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Exchange Act and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act of 1934.
The Company has adopted a written code of ethics within the meaning of Item 406 of Regulation S-K that applies to its executive officers, including its Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. A copy of the code of ethics is available on the Company’s website, www.opbc.com.
Any additional information called for by this item is contained in the Company’s definitive proxy statement for the annual meeting of shareholders to be held on June 17, 2008, and is incorporated herein by reference.
During 2006 and 2007, directors received $900 per month each as compensation for serving as a director. Directors are also eligible for a discretionary annual performance bonus. On January 16, 2007, the Company adopted the 2006 Non-Employee Director Deferred Compensation Plan. The plan is designed to provide directors with the elective opportunity to defer up to 100% of their director fees. Under the plan $18,600 was deferred in 2007.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following Summary Compensation Table for 2007 sets forth certain information regarding the compensation paid in 2007 and 2006 to the Bank’s President and Chief Officer, James P. Clark; the Executive Vice president and Chief Financial Officer, Joanne Forsberg; the Executive Vice President and Chief Credit Officer, Ronald S. Green; and the Executive Vice President and Chief Operating Officer Don Mabry.
(1)
Salary amounts are presented in the year earned and may include amounts deferred under the nonqualified deferred compensation plan and the deferred Simple IRA plan.
(2)
Mr. Green’s amount represents a signing bonus.
(3)
The amounts in this column reflect the aggregate grant date fair value under FAS 123(R) of awards made during 2006. The assumptions used in calculating the amounts are discussed in Note 14 to our financial statements for the year ended December 31, 2007.
(4)
Amount earned under the non-equity incentive bonus on achievement of first target bonus level.
(5)
Represents the change in value of our deferred compensation plan other than amounts deferred by participant.
(6)
Amounts listed in this column are those that individually exceed $10,000. For 2007 amounts for Mr. Clark represent a Simple Plan match, club dues, usage of a company car, and life insurance premiums exceeding $50,000.
(7)
Effective January 1, 2007, Mr. Clark was promoted to President and Chief Executive Officer of Oregon Pacific Bank and Oregon Pacific Bancorp. In 2006 Mr. Clark served as Executive Vice President and Chief Credit Officer of the Bank.
(8)
Mr. Green was hired on July 17, 2007 as Executive Vice President and Chief Credit Officer.
Incentive stock options to the named executive officers were awarded under our 2003 Stock Incentive Plan which authorizes both stock options and other forms of stock-based compensation. No options were granted in 2007. Options granted in January 2006 vest 50% annually over two years. Options granted in March vest in five equal annual installments on the anniversary of the grant beginning March 17, 2008. Vesting is immediate if there is a change of control, at retirement at age 60 or later, or upon death if 50 percent had been exercisable. The 2003 Plan provides for an aggregate of 214,035 shares of the Company’s common stock to be granted to key employees or board members, of which 179,062 shares are available for awards. The Company has not granted any stock awards other than options.
The following table sets forth certain information regarding options outstanding to named executive officers at year-end:
(1) Options vest in five equal annual installments on each anniversary of the date of grant beginning 3/17/08 and each group has a two-year exercise period with the last installment expiring on 3/17/14.
(2) These stock options were previously awarded under the Bank’s 1994 Incentive Stock Option Plan with a five-year vesting period and an additional five-year exercise period.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of February 29, 2008 with respect to the beneficial ownership of the outstanding common stock by: (i) each of the directors and our executive officers; and (ii) our directors as a group.
(1) All shares are owned jointly with Ms. Benetti’s husband, Joe Benetti.
(2) All shares are owned individually.
(3) All shares are owned jointly with Dr. Brauer’s wife, Catherine Brauer.
(4) All shares are owned jointly with Mr. Clark’s spouse, Paige Clark.
(5) Includes 4,337 shares owned by Umpqua Dairy Products Company which Mr. Feldkamp has voting power.
(6) Includes 66,947 shares jointly owned with Mr. Grove’s spouse, Sharon Grove, 20,311 shares held solely by Mr. Grove’s Individual Retirement Account, and 13,793 stock options which are exercisable. It also includes 11,602 shares beneficially owned solely by Mr. Grove’s spouse, of which Mr. Grove disclaims beneficial ownership.
(7) Includes 96,029 shares held jointly with Mr. King’s wife, Kay King. Also includes 41,746 shares, 13,915 of those shares each owned by sisters Bonnie Dodson, Joanne Daily, and Marilyn Davis to which Mr. King has voting power. Also includes 784 shares of the R. Justin King Trust, 144 shares held by Kay King as custodian for Will Ryan Pennington, and 211 shares held by Kay King as custodian for Dana Pennington all of which Mr. King disclaims beneficial ownership.
(8) All shares are owned jointly with Mr. Thompson’s wife, Pamela Thompson.
(9) All shares are owned jointly with Ms. Wick’s husband, John Wick.
(10) All shares are held in an Individual Retirement Account.
(11) Includes 4,230 shares jointly owned with Ms. Forsberg’s spouse, David Forsberg, 2,410 shares held solely by Ms. Forsberg’s Individual Retirement Account, and 2,669 stock options which are exercisable within 60 days.
(12) Includes 1,000 shares held solely by Mr. Green’s Individual Retirement Account.
(13) Includes 37 shares owned individually, 2,331 shares held solely by Mr. Mabry’s Individual Retirement Account, and 2,730 stock options which are exercisable within 60 days.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the 2007 fiscal year, the Bank entered into banking-related transactions in the ordinary course of business with certain executive officers, directors and principal shareholders of the Company (including certain executive officers of the Bank), members of their immediate families and corporations or organizations with which they are affiliated. It is expected that similar transactions will be entered into in the future. Loans to such persons have been made on substantially the same terms, including the interest rate charged and collateral required, as those prevailing at the time for comparable transactions with persons not affiliated with the Company or the Bank. These loans have been, and are presently, subject to no more than the normal risk of collectibility and present no other unfavorable features. The amount of loans to directors, executive officers and principal shareholders of the Company (including certain executive officers of the Bank) and their associates as a group at December 31, 2007, was $3,442,302. As of the date of this filing, all of these loans were performing loans.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The Company paid Moss Adams LLP $97,048 in 2007 for professional services rendered in connection with the audit of the Company’s financial statements and for the review of the Company's annual report to the SEC on Form 10-K and the Company’s quarterly financial statements for the first three quarters of 2007 and other fees. Set forth below is certain information concerning aggregate fees billed for professional services rendered during fiscal year 2007 and 2006 by the Company's auditors for those respective years. The aggregate fees included in the Audit category were fees billed for the fiscal years for the audit of the Company's annual financial statements and the review of the Company's quarterly financial statements. The aggregate fees included in each of the other categories were fees billed in the fiscal years.
All Other Fees
The Company paid Moss Adams LLP $18,264 for all other services rendered to the Company and its subsidiaries during 2007. The Audit Committee considered whether the provision of these services by Moss Adams LLP is compatible with maintaining Moss Adams LLP's independence. (Moss Adams LLP performed no information systems design or implementation services for the Bank in 2007.)
The firm of Davis, McCulloch & Holloway PC was paid $11,821 and $12,102 for tax work in 2007 and 2006, respectively. Other fees paid to them for services rendered were $11,652 in 2007 and $10,189 for 2006 which includes verification that loan underwriting meets guidelines for mortgages sold to a third party.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits.
The following documents are filed as part of this Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets for the Years Ended December 31, 2007 and 2006
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2007, 2006, and
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2007, 2006, and
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006, and 2005
Notes to Consolidated Financial Statements
(Note: The per share earnings computation statement required by Item 601(b)(11) of Regulation S-K is contained in Note 15 of the consolidated financial statements contained in Part II, Item 8 of this Form 10-K, and is hereby incorporated herein by this reference.)
The following documents are either being filed with, or incorporated by reference into, this Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission.
3.1 Articles of Incorporation of Oregon Pacific Bancorp (incorporated herein by reference to Exhibit 3(i) to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003.)
3.2 Bylaws of Oregon Pacific Bancorp (incorporated herein by reference to Exhibit 3(ii) to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003.)
10.1 2003 Stock Incentive Plan (incorporated herein by reference to Exhibit 1 to Oregon Pacific Bancorp’s Form DEF14A filed with the Securities and Exchange Commission on March 23, 2003.)
10.2 Oregon Pacific Bank Deferred Compensation and Incentive Plan (incorporated herein by reference to Exhibit 10(ii) to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 30, 2004.
14. Code of Ethics (incorporated herein by reference to Exhibit 14 to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 30, 2004.)
21. List of Subsidiaries.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(d) or Rule 15d-14(d) and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports Filed on Form 8-K
Current Report on 8-K filed on February 9, 2007 containing Regulation F-D disclosure relating to the Company’s fourth quarter and fiscal year earnings release.
(c) Exhibits.
The exhibits to be filed with this Form 10-K are set forth under Item (a) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
/s/ Patricia Benetti
Patricia Benetti, Director
/s/ Lydia G. Brackney
Lydia G. Brackney, Director
/s/ A. J. Brauer
A. J. Brauer, Director
/s/ Douglas B. Feldkamp
Douglas B. Feldkamp, Director
/s/ Thomas K. Grove
Thomas K. Grove, Director
/s/ Jon Thompson
Jon Thompson, Director
/s/ Richard L. Yecny
Richard L. Yecny, Director
EXHIBIT INDEX