SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26556
OREGON TRAIL FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Oregon 91-1829481
- ------------------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer or organization
incorporation Identification Number)
2055 First Street, Baker City, Oregon 97814
- ------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 523-6327
---------------
Securities registered pursuant to Section 12(b)
of the Act: None
---------------
Securities registered pursuant to Section 12(g)
of the Act: Common Stock. Par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
As of February 10, 1999, there were issued and outstanding 3,421,592
shares of the Registrant's Common Stock. The Registrant's voting common stock
is traded and listed on the Nasdaq National Market under the symbol "OTFC".
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information
Item I. Financial Statements (Unaudited) Page
Consolidated Balance Sheets 2
as of December 31, 1999 and March 31, 1999
Consolidated Statements of Income; For the 3
Three and Nine Months Ended December 31,
1999 and 1998
Consolidated Statements of Shareholders' Equity
(For the Nine Months Ended December 31, 1999
and for the Year Ended March 31, 1999). 4
Consolidated Statements of Cash Flows (For the
Nine Months Ended December 31, 1999 and 1998) 5 - 6
Notes to Consolidated Financial Statements 7 - 10
Item II. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
Item III. Quantitative and Qualitative Disclosures
about Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 and MARCH 31, 1999
(UNAUDITED)
($ in thousands except share data)
December 31, March 31,
1999 1999
ASSETS ------------- ---------
Cash and due from banks (including
interest earning accounts of $5,705 and $4,520) $8,667 $6,276
Securities:
Available for sale, at fair value (amortized cost:
$124,287 and $98,527) 119,148 98,336
Held to maturity, at amortized cost (fair value:
$0 and $9,518) 0 9,338
Loans receivable, net of allowance for loan
losses of $1,351 and $1,228 217,350 185,747
Accrued interest receivable 2,188 2,012
Premises and equipment, net 9,291 7,825
Stock in Federal Home Loan Bank of Seattle, at cost 3,639 3,221
Real estate owned and other repossessed assets 14 37
Net deferred tax asset 1,306 0
Other assets 1,118 681
-------- --------
TOTAL ASSETS $362,721 $313,473
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Interest-bearing $105,984 $88,245
Noninterest-bearing 15,775 11,594
Time certificates 114,299 99,750
-------- --------
Total deposits 236,058 199,589
Advances from Federal Home Loan Bank of Seattle 70,675 50,250
Accrued expenses and other liabilities 1,975 2,399
Net deferred tax liability 0 455
Advances from borrowers for taxes and insurance 139 697
-------- --------
Total liabilities 308,847 253,390
SHAREHOLDERS' EQUITY
Preferred Stock - $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding 0 0
Common stock - $.01 par value; 8,000,000 shares
authorized December 31, 1999, 4,694,875 issued,
3,421,592 outstanding; March 31, 1999, 4,694,875
issued, 3,763,564 outstanding 38 42
Additional paid-in capital 33,227 38,357
Retained earnings (substantially restricted) 27,471 26,206
Unearned shares issued to the Employee Stock
Ownership Plan (2,549) (2,951)
Unearned shares issued to the Management Recognition
and Development Plan (1,146) (1,453)
Accumulated other comprehensive income loss (3,167) (118)
-------- --------
Total shareholders' equity 53,874 60,083
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $362,721 $313,473
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(2)
OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
($ in thousands except per share data)
3 Mos Ended 3 Mos Ended 9 Mos Ended 9 Mos Ended
31-Dec-99 31-Dec-98 31-Dec-99 31-Dec-98
INTEREST INCOME ----------- ----------- ----------- -----------
Interest and fees
on loans receivable $4,291 $3,589 $12,292 $19,449
Securities:
Mortgage-backed and
related securities 1,422 1,091 3,747 2,600
U.S. government and
government agencies 586 799 1,789 2,024
Federal Home Loan Bank
of Seattle dividends 61 61 179 176
--------- --------- --------- ---------
Total interest income 6,360 5,540 18,007 15,249
INTEREST EXPENSE:
Deposits 2,250 1,818 6,184 5,432
Federal Home Loan Bank
of Seattle advances 873 337 2,272 352
--------- --------- --------- ---------
Total interest expense 3,123 2,155 8,456 5,784
Net interest income 3,237 3,385 9,551 9,465
PROVISION FOR LOAN
LOSSES (12) 82 118 277
--------- --------- --------- ---------
Net interest income
after provision for
loan losses 3,249 3,303 9,433 9,188
NONINTEREST INCOME:
Service charges on
deposit accounts 290 185 817 530
Loan servicing fees 102 107 272 259
Other Income (expense) 14 9 182 (5)
--------- --------- --------- ---------
Total noninterest income 406 301 1,271 784
NONINTEREST EXPENSE:
Employee compensation
and benefits 1,563 1,252 4,452 3,370
Supplies, postage,
and telephone 227 129 636 390
Depreciation 173 128 483 357
Occupancy and equipment 176 110 462 336
FDIC insurance premium 32 29 91 90
Customer accounts 102 71 281 210
Advertising 124 107 371 316
Professional fees 53 72 147 192
Other 208 139 555 443
--------- --------- --------- ---------
Total noninterest
expense 2,658 2,037 7,478 5,704
Income before
income taxes 997 1,567 3,226 4,268
PROVISION FOR INCOME
TAXES 355 616 1,174 1,711
--------- --------- --------- ---------
NET INCOME $642 $951 $2,052 $2,557
========= ========= ========= =========
Basic Earnings
per share $0.18 $0.24 $0.57 $0.62
Diluted Earnings $0.18 $0.23 $0.54 $0.61
per share
Weighted average
common shares
outstanding:
Basic 3,486,408 3,930,501 3,593,967 4,149,459
Diluted 3,655,537 4,111,864 3,781,177 4,210,133
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(3)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND THE YEAR ENDED MARCH 31, 1999
(UNAUDITED)
($ in thousands except share data)
Unearned
Shares
Unearned Issued to
Shares Management Accumu-
Issued to Recogni- lated
Employee tion Other
Stock and Compre- Compre-
Additional Owner- Develop- hensive hensive
Common Stock Paid-In Retained ship ment Income Income
Shares Amount Capital Earnings Trust Plan (Loss) (Loss) Total
------ ------ ------- -------- ----- ---- ------ ------ -----
Balance, April 1,
1998 4,346,113 $47 $45,885 $23,968 $(3,488) $0 $889 $67,301
Net income 3,154 $3,154 3,154
Cash dividends
paid (916) (916)
Stock repurchased (488,883) (6) (9,355) (9,361)
Stock repurchased
and issued to
MRDP Trust (147,322) 1 1,641 (1,642) 0
Earned ESOP shares 53,656 186 537 723
Earned MRDP shares 189 189
Unrealized loss
on securities
available for
sale, net of tax (1,007) (1,007) (1,007)
------
Comprehensive
income $2,147
--------- --- ------- ------- ------- ------- ====== ------- -------
Balance, March
31, 1999 3,763,564 42 38,357 26,206 (2,951) (1,453) (118) 60,083
Net income 2,052 $2,052 2,052
Cash dividends
paid (787) (787)
Stock
repurchased (416,228) (4) (5,210) (5,214)
Earned ESOP
shares 40,242 80 402 482
Earned MRDP shares 34,014 307 307
Unrealized loss
on securities
available for
sale, net of tax (3,049) (3,049) (3,049)
------
Comprehensive loss ($997)
--------- --- ------- ------- ------- ------- ====== ------- -------
Balance,
December
31, 1999 3,421,592 $38 $33,227 $27,471 ($2,549) ($1,146) ($3,167) $53,874
========= === ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(4)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
($ in thousands)
31-Dec-99 31-Dec-98
CASH FLOWS FROM OPERATING ACTIVITIES --------- ---------
Net income $2,052 $2,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 483 357
Compensation expense related to ESOP 482 550
Compensation expense related to MRDP 307 95
Amortization of deferred loan fees, net (146) (208)
Provision for loan losses 118 277
Amortization (accretion) of premiums/discounts
on investments and loans purchased 143 (470)
Federal Home Loan Bank of Seattle dividends (179) (176)
Gain on sale of real estate owned (16) 0
Loss on sale of premises and equipment 9 0
Changes in assets and liabilities:
Accrued interest receivable (176) (136)
Other assets (305) 526
Accrued expenses and other liabilities (424) 240
--------- ---------
Net cash provided by operating activities 2,348 3,612
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (106,583) (64,223)
Loan principal repayments 84,346 43,436
Loans purchased (9,520) (4,653)
Purchase of stock in Federal Home Loan Bank
of Seattle (238) 0
Purchase of securities available for sale (32,865) (58,897)
Proceeds from maturity of securities available for
sale 5,004 25,200
Principal repayments of securities available for sale 11,396 5,834
Principal repayments of securities held to maturity 0 2,992
Proceeds from sales of real estate owned 124 313
Proceeds from sales of premises and equipment 212 148
Purchases of premises and equipment (2,169) (2,241)
--------- ---------
Net cash used in investing activities (50,293) (52,091)
--------- ---------
(5)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits, net of withdrawals $36,469 $5,595
Change in advances from borrowers for taxes and
insurance (558) (613)
Proceeds from Federal Home Loan Bank of Seattle
advances 411,558 83,050
Repayment of Federal Home Loan Bank of Seattle
advances (391,133) (42,550)
Payment of cash dividend (787) (677)
Stock repurchase (5,214) (7,702)
--------- ---------
Net cash provided by financing activities 50,335 37,103
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,391 (11,376)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,276 20,311
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $8,667 $8,935
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and other borrowings $8,042 $5,475
Income taxes 1,025 1,951
Noncash investing activities:
Transfer of loans to foreclosed real estate
and other repossessed assets 84 0
Unrealized gain (loss) on securities available
for sale, net of tax (3,049) (572)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(6)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair presentation
of Oregon Trail Financial Corp. and Subsidiary's (the "Company") financial
condition as of December 31, 1999 and March 31, 1999, and the results of its
operations for the three and nine months ended December 31, 1999 and 1998 and
of cash flows for the nine months ended December 31, 1999 and 1998. All
adjustments are of a normal recurring nature. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report to Shareholders filed as an exhibit to the Company's Form 10-K
for the year ended March 31, 1999. The results of operations for the three
and nine months ended December 31, 1999 are not necessarily indicative of the
results which may be expected for the entire fiscal year. Certain prior period
amounts have been reclassified to conform to the current period presentation.
2. REORGANIZATION
On October 3, 1997, Pioneer Bank, A Federal Savings Bank (the "Bank")
completed a mutual-to-stock conversion. The Company sold 4,694,875 shares of
common stock at $10 per share, 8% or 375,590 of which shares were purchased by
an Employee Stock Ownership Plan (the "ESOP"). Proceeds from the sale were
recorded as $46,949 of Common Stock at $.01 par value and $45,681,982 of Paid
in Capital. The Common Stock and Paid in Capital at December 31, 1999 are
partially offset by the unissued ESOP shares and unissued Management
Recognition and Development Plan ("MRDP") shares.
The Company purchased all of the stock of the Bank for one- half of the
net investable proceeds of the offering. The retained earnings of the Company
represent all prior earnings of the Bank as a mutual savings bank and all
earnings since the conversion.
The primary business of the Company is overseeing the operations of the
Bank. Accordingly, the information presented herein relates primarily to the
Bank.
3. COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be
reported in a financial statement that is displayed in equal prominence with
the other financial statements and to disclose as a part of shareholders'
equity accumulated other comprehensive income. Comprehensive income is
defined as the change in equity during a period from transactions and other
events from nonowner sources.
(7)
Comprehensive income is the total of net income and other comprehensive
income, which for the Company is comprised entirely of unrealized gains and
losses on securities available for sale.
4. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows for the year
ended March 31, 1999 and for nine months ended December 31, 1999:
December 31, 1999 March 31, 1999
(in thousands) (in thousands)
----------------- --------------
Balance, beginning of
period $ 1,228 $ 847
Charge-offs (26) (115)
Recoveries 31 13
Provision for loan losses 118 483
------- ------
Balance, end of period $ 1,351 $1,228
======= ======
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at December 31, 1999 consisted of 19 term advances varying in
length from six days to 45 months totaling $65.6 million and a variable rate
overnight advance amounting to $5.1 million from the Federal Home Loan Bank of
Seattle ("FHLB"). The advances are collateralized in aggregate as provided
for in the Advances Security and Deposit Agreement with the FHLB by certain
mortgages or deeds of trust, government agency securities and cash on deposit
with the FHLB. Scheduled maturities of advances from the FHLB were as follows
at December 31, 1999:
Due in less than one year:
- --------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- -----------------------------------------------------------
$58,175,000 4.50% - 5.87% 5.04%
Due within one to five years:
- -----------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- -----------------------------------------------------------
$12,500,000 4.93% - 5.29% 5.11%
(8)
6. SHAREHOLDERS' EQUITY
In May 1999, the Company received a non-objection response from the
Office of Thrift Supervision ("OTS") to a request to repurchase 5% of its
outstanding shares, or 210,299 shares. The Company completed the repurchase
under this program on July 29, 1999 at an average price of $13.03. The
repurchase resulted in a $2,103 reduction in common stock and a $2,740,000
reduction in paid-in-capital. Shares repurchased in this program have been
retired.
In September 1999, the Company received a non-objection response from the
OTS to a request to repurchase 5% of its outstanding shares, or 199,785
shares. The Company repurchased the shares under this program between
November 2 and 18, 1999 at an average price of $12.03. The repurchase
resulted in a $1,998 reduction in common stock and a $2,403,000 reduction in
paid-in-capital. Shares repurchased in this program have been retired. In
addition, the Company repurchased 6,142 shares by withholding for payroll
taxes from shares vesting under the MRDP. The shares were repurchased at
$11.18 per share.
7. EARNINGS PER SHARE
Shares held by the Company's ESOP that are committed for release are
considered common stock equivalents and are included in weighted average
shares outstanding (denominator) for the calculation of basic and diluted
Earnings Per Share ("EPS"). Diluted EPS is computed using the treasury stock
method, giving effect to potential additional common shares that were
outstanding during the period. Potential dilutive common shares include
shares awarded but not released under the Company's MRDP and stock options
granted under the Stock Option Plan. Following is a summary of the effect of
dilutive securities in weighted average number of shares (denominator) for the
basic and diluted EPS calculations. There are no resulting adjustments to net
earnings.
For the Three For the Nine
Months Ended Months Ended
December 31, December 31,
- -----------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------
Weighted average common
shares outstanding - basic 3,486,408 3,930,501 3,593,967 4,149,459
- -----------------------------------------------------------------------------
Effect of Dilutive Securities
on Number of Shares:
MRDP shares 119,858 136,113 138,134 45,536
- -----------------------------------------------------------------------------
Stock Options 49,271 45,250 49,076 15,138
- -----------------------------------------------------------------------------
Total Dilutive Securities 169,121 181,363 187,210 60,674
- -----------------------------------------------------------------------------
Weighted average common
shares outstanding - with
dilution 3,655,537 4,111,864 3,781,177 4,210,133
- -----------------------------------------------------------------------------
8. REGULATORY CAPITAL
The Company is not subject to separate regulatory capital requirements.
The following table illustrates the Bank's compliance with currently
applicable regulatory capital requirements at December 31, 1999 and March 31,
1999.
(9)
As of December 31, 1999:
Categorized as
"Well Capitalized"
Actual For Capital Under Prompt
(In Thousands) Adequacy Corrective
Purposes Action Provision
(In Thousands) (In Thousands)
------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
As of December
31, 1999:
Total Capital:
(To Risk Weighted
Assets) $ 53,901 29.0% $ 14,849 8.0% $ 18,562 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 52,550 28.3 N/A N/A 11,137 6.0
Tier I Capital:
(To Tangible
Assets) 52,550 14.4 14,616 4.0 18,271 5.0
Tangible Capital:
(To Tangible
Assets) 52,550 14.4 5,418 1.5 N/A N/A
As of March 31, 1999
Categorized as
"Well Capitalized"
Actual For Capital Under Prompt
(In Thousands) Adequacy Corrective
Purposes Action Provision
(In Thousands) (In Thousands)
------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31,
1999:
Total Capital:
(To Risk Weighted
Assets) $ 51,516 33.1% $ 12,455 8.0% $ 15,569 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 50,288 32.3 N/A N/A 9,342 6.0
Tier I Capital:
(To Tangible
Assets) 50,288 16.1 12,521 4.0 15,652 5.0
Tangible Capital:
(To Tangible
Assets) 50,288 16.1 4,695 1.5 N/A N/A
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective April 1, 1999, the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and disclosure
requirements for derivative instruments, including certain derivative
instruments embedded in other financial instruments, and for hedging
activities. The Company does not have any derivative instruments that meet
the scope of this statement. The statement also allows, on the date of
initial application, an entity to transfer any held to maturity securities
into the available for sale or trading categories. The Company transferred
all held to maturity securities with a book value and fair value of $9,338,000
and $9,518,000, respectively, to its available for sale portfolio. The
transfer was recorded as a direct increase to other comprehensive income of
$111,000 (net of income tax of $69,000).
(10)
ITEM II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking
statements". The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protection of such safe harbor with respect to all of such forward-looking
statements. These forward-looking statements, which are included in
Management's Discussion and Analysis, describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors that could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
General
The Company, an Oregon corporation, was organized on June 9, 1997 for the
purpose of becoming the holding company for Bank upon the Bank's conversion
from a federal mutual to a federal stock savings bank ("Conversion"). The
Conversion was completed on October 3, 1997. At December 31, 1999, the
Company had total assets of $362.7 million, total deposits of $236.1 million
and shareholders' equity of $53.9 million. The Company is currently not
engaged in any business activity other than holding the stock of the Bank.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Bank. All references to
the Company herein include the Bank where applicable.
The Bank was organized in 1901. It is regulated by the OTS and its deposits
are insured up to applicable limits under the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the FHLB of Seattle, conducting its business through
eight office facilities, with it's headquarters located in Baker City, Oregon.
The primary market areas of the Bank are the counties of Wallowa, Union,
Baker, Malheur, Harney and Grant in Eastern Oregon. On May 3, 1999 the
Company opened a branch in Vale, Oregon located in Malheur County to better
serve the customers in that county. The grand opening of the new permanent
facility in Vale was celebrated on October 15, 1999. On February 4, 2000, the
Company announced jointly with Western Bank, a division of Washington Mutual,
Inc., that it has entered into an agreement to purchase Western Bank's
Pendleton Branch. The transaction is subject to regulatory approval and if
approved will expand the Company's market to Umatilla County. Online banking
services including bill payment are available through the Bank's transactional
website www.pioneerbankfsb.com.
(11)
As a traditional, community-oriented savings bank, the Company focuses on
customer service within its principal market area. The Company's primary
market activity is attracting deposits from the general public and using those
and other available sources of funds to originate permanent residential one-
to-four family real estate loans within its market area and, to a lesser
extent, loans on commercial property and multi-family dwellings. At December
31, 1999, one to four family residential mortgage loans totaled $126.2
million, or 57.7% of total loans receivable. The Company began supplementing
its traditional lending activities in 1996 with the development of commercial
business loans, agricultural loans and the purchase of dealer-originated
automobile contracts. The Company has hired experienced commercial lending
officers familiar with its primary market area in an attempt to develop
commercial business and agricultural lending and to expand the purchase of
dealer-originated automobile contracts. As a result of these activities at
December 31, 1999 the Company had agricultural loans of $17.1 million,
commercial business loans of $15.4 million, commercial real estate loans of
$16.0 million, and automobile loans of $18.4 million (including $14.6 million
of purchased dealer-originated contracts).
Net interest income, which is the difference between interest and dividend
income on interest-earning assets, primarily loans and investment securities,
and interest expense on interest-bearing deposits and borrowings, is the major
source of income for the Company. Because the Company depends primarily on
net interest income for its earnings, the focus of management is to create and
implement strategies that will provide stable, positive spreads between the
yield on interest-earning assets and the cost of interest-bearing liabilities.
Such strategies include increasing the origination of commercial and
agricultural loans with rates that are adjustable based upon the Wall Street
Journal prime rate or the current five-year Treasury note yield. Commercial
(including both commercial real estate and commercial business) and
agricultural loans outstanding totaled $27.9 million and $12.2 million,
respectively, at March 31, 1999 and increased to $31.4 million and $17.1
million, respectively, at December 31, 1999. The Company has also increased
origination of shorter-term consumer loans, increasing auto loans from $11.8
million at March 31, 1999 to $18.4 million at December 31, 1999.
To a lesser degree, the net earnings of the Company rely on the level of its
non-interest income. The Company is pursuing strategies to improve its
service charge and fee income, and control its non-interest expense, which
includes employee compensation and benefits, occupancy and equipment expense,
deposit insurance premiums and miscellaneous other expenses, as well as
federal and state income tax expense.
YEAR 2000 READINESS
The Year 2000 issue exists because many computer systems and applications use
two-digit fields to designate a year. As the century date occurs, date-
sensitive systems may recognize the Year 2000 as 1900, or not at all. This
inability to recognize or properly treat the Year 2000 may cause systems to
fail to process financial and operational information correctly. The Company
established a committee in 1997 to address Year 2000 issues. The committee
consists of executive management and technical staff and reports to the Board
of Directors on a monthly basis. The committee has conducted a comprehensive
review of its computer systems and equipment to identify applications that
could be affected by Year 2000 issues and has implemented a plan designed to
ensure that all software used in connection with the Company's business will
function correctly with dates past 1999.
(12)
In conducting its review, the committee used the OTS Year 2000 checklist and
the Federal Financial Institutions Examination Council ("FFIEC") guidelines
for Year 2000 project management.
The final phase of the project was completed in September 1999 with total
costs of approximately $375,000, which was very close to the Bank's initial
estimate. The replacement equipment and software was capitalized and
depreciated in accordance with the Company's normal accounting policies.
The Company experienced no known material Year 2000 issues as a result of the
century date change. All computers, computer software and equipment utilizing
embedded microprocessors functioned as expected. Ongoing monitoring efforts
will continue to ensure that all systems operate properly as other Year 2000
milestone dates are reached. While there can be no assurance that all Year
2000 issues have been addressed and corrected, the Company's management is
confident that systems will continue to operate normally with minimal
disruption of normal service levels.
Changes in Financial Condition
At December 31, 1999, the consolidated assets of the Company totaled $362.7
million, an increase of $49.2 million, or 15.7%, from $313.5 million at March
31, 1999. The primary reason for the increase was a $31.6 million increase in
net loans receivable and an $11.5 million increase in securities. The
increase in assets was funded by a $36.5 million increase in deposits and a
$20.4 million increase in FHLB borrowings.
Net loans receivable increased by $31.6 million, or 17.0%, to $217.4 million
at December 31, 1999 compared to $185.7 million at March 31, 1999. The
increase was primarily the result of continued new loan demand for all types
of loans exceeding loan repayments.
Nonperforming assets, consisting of non-accruing loans, real estate owned and
other repossessed assets, increased $219,000 from $175,000 at March 31, 1999
to $394,000 at December 31, 1999, primarily due to an increase of $242,000 in
nonaccrual loans from $138,000 at March 31, 1999 to $380,000 at December 31,
1999 partially offset by a decrease of $37,000 in Real Estate Owned from
$37,000 at March 31, 1999 to none at December 31, 1999. Nonperforming assets
were .11% of total assets at December 31, 1999 and .06% of total assets at
March 31, 1999. The allowance for loan losses was 356% of nonperforming loans
at December 31, 1999, compared to 890% at March 31, 1999.
Investment securities increased $11.5 million, from $107.7 million at March
31, 1999 to $119.1 million at December 31, 1999. The increase included the
purchase of $27.1 million of fixed rate government agency mortgage backed
securities, $4.5 million of government agency medium term notes and $1.3
million of AAA rated municipal bonds of several Oregon municipalities. These
increases were offset by $5.0 million of government agency medium term notes
that were either called or matured, $11.4 million of principal repayments on
government agency mortgage backed securities and a $4.9 million decrease in
market value. During the
(13)
nine month period $9.3 million of securities classified as held to maturity
were reclassified to available for sale as allowed under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.
Deposits increased $36.5 million, or 18.3%, from $199.6 million at March 31,
1999 to $236.1 million at December 31, 1999. The increase is attributable to
increases of $21.9 million in checking and savings deposits and $14.6 million
in certificates of deposit ("CD"). The Company conducted an aggressive
deposit campaign from March 15, 1999 to May 15, 1999. A feature of the
campaign was a special 20-month CD to lengthen the term of deposits past
January 1, 2000. Approximately $14.0 million was received in the 20 month CD
during the campaign. Other featured deposits were the money market checking
and the six-month CD. The Company gained many relationship accounts during
the campaign as customers also moved their checking account balances when
opening other types of accounts. Another campaign in the fall featuring a
six-month CD with maturity dates past January 1, 2000 attracted $7.7 million
in deposits. The new branch in Vale, which opened May 3, 1999, had $6.7
million in deposits at December 31, 1999. Advances from borrowers for taxes
and insurance decreased $558,000 from $697,000 at March 31, 1999 to $139,000
at December 31, 1999 due to the payment of annual property taxes in November.
The Company had $70.7 million in advances from the FHLB at December 31, 1999
compared to $50.3 million at March 31, 1999. The increased borrowings were
used to fund loan growth and investment purchases. The Company had net
deferred tax liabilities at March 31, 1999 of $455,000 compared to net
deferred tax assets of $1.3 million at December 31, 1999. The change of $1.8
million is attributable to the tax effect of the market valuation of
securities available for sale.
Total shareholders' equity decreased $6.2 million to $53.9 million at December
31, 1999 from $60.1 million at March 31, 1999. The decrease is primarily due
to the repurchase of 416,228 of outstanding shares from May through November
1999 at a total cost of $5.2 million. The repurchase reduced common stock by
$4,000 and paid in capital by $5.2 million. Shares repurchased during the nine
month period ended December 31, 1999 were retired. Cash dividends paid of
$787,000 also reduced shareholders' equity as did the $3.0 million charge to
accumulated other comprehensive income for the market valuation on securities
available for sale. These reductions to shareholders' equity were partially
offset by net income of $2.1 million.
Results of Operations
Comparison of Nine Months Ended December 31, 1999 and 1998
General. The decrease in net income of $505,000 was primarily due to an
increase in non-interest expense partially offset by increased non-interest
income and increased net interest income. Non-interest income increased
$487,000, or 62.1%, comparing the nine-month period ended December 31, 1999 to
the same period in the prior year. Net interest income increased $86,000, or
.9% while interest income increased $2.8 million, or 18.1%, and interest
expense increased $2.7 million, or 46.2%. The provision for loan losses
decreased $159,000, or 57.4%. Non-interest expense increased $1.8 million, or
31.1%, and income taxes decreased $537,000, or 31.4%. This resulted in net
income decreasing by $505,000, or 19.7%, for the nine months ended December
31, 1999 compared to the same period in 1998.
(14)
Interest Income. The increase of $2.8 million in interest income was
generated by an additional $67.3 million in average interest earning assets
for the nine months ended December 31, 1999 compared to the same period in
1998. The increase in average interest earning assets was primarily due to
increases in the average loan portfolio of $40.2 million and the average
investment portfolio of $30.3 million.
The average yield on interest earning assets decreased from 7.84% for the nine
months ending December 31, 1998 to 7.36% for the same period in 1999. The
decrease in the average yield was primarily due to the $30.3 million increase
in the average balance of investments, comprised of medium term government
agency notes and fixed rate government agency mortgage backed securities
yielding at a lower rate. The increase in the average balance also included
the purchase of $9.9 million of AAA rated municipal bonds of Oregon
municipalities. The yield on these bonds is typically much lower before taxes
due to the tax benefits derived from holding the bonds. When these tax
benefits are considered the "tax equivalent" yield is typically comparable to
or better than U.S. Government agency medium term notes. In addition, there
was a significant amount of mortgage refinance activity during the time
between the nine months ended December 1998 and the nine months ended December
1999.
Interest Expense. Interest expense on savings deposits increased $752,000 for
the nine months ended December 31, 1999 compared to the same period of 1998.
Average deposits increased by $31.8 million for the same period. The average
interest cost of deposits declined nine basis points from 3.81% for the nine
months ended December 31, 1998 to 3.72% for the same period in 1999. The cost
of deposits declined primarily due to an increased balance of lower costing
core deposits in the deposit mix. The average cost of all funds including
FHLB borrowings increased by 17 basis points from 3.87% for the nine months
ended December 31, 1998 to 4.04% for the same period in 1999. The reason for
the increase was a $48.5 million increase in the average balance of FHLB
borrowings. The average cost of FHLB borrowings for the nine-month period
ending December 31, 1999 was 5.23%. The increased borrowings were used to
fund increases in average interest earning assets.
Provisions for Loan Losses. The provision for loan losses was $118,000 and
net recoveries amounted to $5,000 during the nine months ended December 31,
1999 compared to a provision for loan losses of $277,000 and net charge offs
of $52,000 for the nine-month period ended December 31, 1998. The allowance
for loan losses totaled $1.4 million, or .62% of total loans at December 31,
1999 compared to $1.2 million, or .66% of total loans at March 31, 1999. The
provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to levels considered by management as adequate to
provide for known and inherent risks in the loan portfolio, including
management's continuing analysis of factors underlying the quality of the loan
portfolio. These factors include changes in portfolio size and composition,
actual loan loss experience, current and anticipated economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans. Considering the aforementioned
factors, management deemed the allowance for loan losses adequate at December
31, 1999.
Non-Interest Income. Non-interest income increased $487,000, or 62.1%, for
the nine months ended December 31, 1999 to $1.3 million compared to $784,000
for the same period
(15)
in 1999. The primary reason for the increase was a $287,000, or 54.2%,
increase in income from deposit accounts due to increased numbers of core
deposits, as well as an improved fee schedule. Also contributing to the
increase was a $173,000 gain on sale of investment real estate.
Non-Interest Expense. Non-interest expense increased $1.8 million, or 31.1%,
to $7.5 million for the nine months ended December 31, 1999, from $5.7 million
for the comparable period in 1998. The increase is primarily attributable to
an increase in employee compensation and benefits expense of $1.1 million.
The Company's MRDP began on October 8, 1998 and, accordingly, $307,000 of
non-cash compensation expense related to the plan was included in the nine
months ended December 31, 1999 compared to only $94,000 for the nine months
ended December 31, 1998. The remaining increase was due to staff additions
including staffing for the new Vale branch, salary increases and an increase
in the cost of employee benefits that includes health insurance. Staff
additions were primarily to facilitate current and planned expansion. The
remaining $692,000 of increased non-interest expense included a $126,000
increase in occupancy and equipment expense due to the addition of one branch
and the purchase of software upgrades for personal computers that are expensed
as purchased. Similarly, depreciation expense increased $126,000 due to the
addition of technological upgrades and the completion of the new Burns branch
in October 1998 and the Vale branch in October 1999. Expenses related to
customer accounts increased $71,000 due to the growth in core deposit
accounts. Other expense increased $112,000 primarily due to employee moving
expenses. Supplies, postage and telephone expenses increased $246,000 due to
forms purchased in the first quarter related to the new centralized proof
process, the addition of upgraded phone lines to outlying branches and
additional postage for statement mailings to an increased number of accounts
and additional courier service related to centralization of the proof process.
Income Taxes. The provision for income taxes decreased $537,000 for the nine
months ended December 31, 1999 compared with the same period in 1998. The
decrease was attributable to a lower level of net income before taxes as well
as interest income earned on municipal bonds, which is not entirely included
in federal taxable income.
Comparison of Three Months Ended December 31, 1999 and 1998
General. The decrease in net income of $309,000 was primarily due to an
increase in non-interest expense partially offset by increased non-interest
income. Net interest income decreased $148,000, or 4.4%, comparing the three-
month period ended December 31, 1999 to the same period in 1998. Interest
income increased $820,000 while interest expense increased $968,000. Non-
interest income increased $105,000 while the provision for loan losses
decreased $94,000. Non-interest expense increased $621,000, and income taxes
decreased $261,000. This resulted in net income decreasing by $309,000, or
32.5% for the three months ended December 31, 1999 compared to the same period
in 1998.
Interest Income. The increase of $820,000 in interest income was generated by
an additional $62.7 million in average interest earning assets for the three
months ended December 31, 1999 compared to the same period in 1998. The
increase in average interest earning assets was
(16)
primarily due to increases in the average loan portfolio of $42.5 million and
the average investment portfolio of $23.8 million.
The average yield on interest earning assets decreased from 7.90% for the
three months ending December 31, 1998 to 7.42% for the same period in 1999.
The decrease in the average yield was primarily due to the $23.8 million
increase in the average balance of investments, mostly medium term government
agency notes and fixed rate government agency mortgage backed securities
yielding at a lower rate. The increase in the average balance included the
purchase of $10.1 million of AAA rated municipal bonds of Oregon
municipalities. The yield on these bonds is typically much lower before taxes
due to the tax benefits derived from holding the bonds. When these tax
benefits are considered the "tax equivalent" yield is typically comparable to
or better than US Government agency medium term notes. In addition, there was
a significant amount of mortgage refinance activity in the time period between
the two quarters. Mortgage loans and higher yielding consumer loans were
refinanced at lower rates.
Interest Expense. Interest expense on savings deposits increased by $432,000
for the three months ended December 31, 1999 compared to the same period of
1998. Average deposits increased by $41.4 million for the same period. The
average interest paid on deposits increased eight basis points from 3.73% for
the three months ended December 31, 1998 to 3.81% for the same period in1999.
The average cost of deposits increased primarily due to an increase in the
rates paid on CD's. The cost of all funds including FHLB borrowings increased
by 28 basis points from 3.89% for the quarter ended December 31, 1998 to 4.17%
for the same period in 1999. The reason for the increase was a $36.6 million
increase in the average balance of FHLB borrowings which are at a higher cost
than deposits. The average cost of borrowings for the quarter ended December
31, 1999 was 5.47%.
Provision for Loan Losses. The provision for loan losses was credited for
$12,000 and net charge offs amounted to $7,000 during the three months ended
December 31, 1999 compared to a provision for loan losses of $82,000 and net
charge-offs of $21,000 for the three-month period ended December 31, 1998.
The provision was reduced for the quarter due to a decrease in classified
assets. At December 31, 1999, the allowance for loan losses was equal to 356%
of non-performing loans compared to 890% at March 31, 1999. The decrease in
the coverage ratio at December 31, 1999 was the result of an increase in non-
performing loans from $138,000 at March 31, 1999 to $380,000 at December 31,
1999. The provisions for loan losses are charges to earnings to bring the
total allowance for loan losses to levels considered by management as adequate
to provide for known and inherent risks in the loan portfolio, including
management's continuing analysis of factors underlying the quality of the loan
portfolio. These factors include changes in portfolio size and composition,
actual loan loss experience, current and anticipated economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans. The allowance for loan losses
totaled $1.4 million, or .62% of total loans at December 31, 1999 compared to
$1.2 million, or .66% of total loans at March 31, 1999. Management deemed the
allowance adequate at December 31, 1999.
Non-Interest Income. Non-interest income increased $105,000, or 34.9%, to
$406,000 for the three months ended December 31, 1999 from $301,000 for the
same period in the prior
(17)
year. The increase was due to income from deposit accounts which was up
$105,000 due to strong growth in core deposits as well as an improved fee
schedule.
Non-Interest Expense. Non-interest expense increased $621,000, or 30.5% to
$2.7 million for the three months ended December 31, 1999, from $2.0 million
for the comparable period in 1998. The increase is primarily attributable to
an increase in employee compensation and benefits of $311,000. The increase
was due to staff additions, salary increases and an increase in the cost of
employee benefits that includes health insurance. Staff additions were
primarily related to the new Vale branch and planned expansion. The remaining
$310,000 of increased non-interest expense included a $66,000 increase in
occupancy and equipment expense due to a branch addition and the purchase of
personal computer software and upgrades. Customer account expense increased
$31,000 due to the increase in core deposit accounts and loan growth.
Supplies, postage and telephone expenses increased $98,000 due to the addition
of upgraded phone lines to outlying branches, an increase in transaction
volume requiring more paper supplies, additional postage for statement
mailings to an increased number of accounts and the addition of courier
service to facilitate centralized proof. Other expense increased $69,000
primarily due to employee moving expenses and increased travel expense.
Finally, depreciation increased $45,000 due to building additions and
technological upgrades.
Income Taxes. The provision for income taxes decreased $261,000 for the three
months ended December 31, 1999 compared with the same period in 1998. The
decrease was attributable to a lower level of net income before taxes as well
as interest income earned on municipal bonds, which is not entirely included
in federal taxable income.
Item No. III
Quantitative and Qualitative Disclosures about Market Risk
During the quarter ended December 31, 1999, there was no material change in
the market risk disclosures included in the Company's Form 10-K for the year
ended March 31, 1999.
(18)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Bank is involved in various claims and legal actions arising in
the normal course of business. Management believes that these
proceedings will not result in a material loss to the Bank.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Jerry F. Aldape**
10(b) Severance Agreement with Nadine J. Johnson**
10(c) Severance Agreement with William H. Winegar**
10(d) Employment Agreement with Zane Lockwood****
10(e) Severance Agreement with Thomas F. Bennett****
10(f) Severance Agreement with Jerry Kincaid****
10(g) Employee Severance Compensation Plan**
10(h) Pioneer Bank, a Federal Savings Bank Employee Stock
Ownership Plan**
10(i) Pioneer Bank, a Federal Savings Bank 401(k) Plan*
10(j) Pioneer Bank Director Emeritus Plan***
10(k) 1998 Stock Option Plan***
10(l) 1998 Management Recognition and Development Plan***
21 Subsidiaries of the Registrant****
27 Financial Data Schedule
- --------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (333-30051), as amended.
** Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1997.
*** Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders.
**** Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1998.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended
September 30, 1999.
(19)
SIGNATURES
Pursuant to requirements 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.
OREGON TRAIL FINANCIAL CORP.
Date: February 14, 2000 By: /s/ Zane F. Lockwood
-------------------------------------
Zane F. Lockwood, Acting President
and Chief Executive Officer
Date: February 14, 2000 By: /s/ Nadine J. Johnson
-------------------------------------
Nadine J. Johnson, Chief Financial
Officer
(20)