SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22953
OREGON TRAIL FINANCIAL CORP., INC.
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(Exact name of registrant as specified in its charter)
Oregon 91-1829481
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
2055 First Street, Baker City, Oregon 97814
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 523-6327
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Securities registered pursuant to Section 12(b)
of the Act: None
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Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value $.01 per share
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(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 reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. YES X NO
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As of June 21, 2001, there were issued and outstanding 3,339,719 shares
of the Registrant's Common Stock. The Registrant's voting stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"OTFC." The aggregate market value of the voting stock held by nonaffiliates
of the Registrant, based on the closing sales price of the Registrant's common
stock as quoted on the Nasdaq National Market on June 21, 2001 of $14.65, was
$46,326,230.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Definitive Proxy Statement for the 2001
Annual Meeting of Shareholders (Part III).
OREGON TRAIL FINANCIAL CORP.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I.................................................................. 1
Item 1. Business................................................... 1
General.......................................................... 1
Market Area...................................................... 1
Lending Activities............................................... 1
Investment Activities............................................ 17
Deposit Activities and Other Sources of Funds.................... 19
Potential Adverse Impact of Changes in Interest Rates............ 22
Regulation....................................................... 23
Taxation......................................................... 29
Competition...................................................... 30
Subsidiary Activities............................................ 30
Personnel........................................................ 31
Item 2. Properties................................................. 32
Item 3. Legal Proceedings.......................................... 33
Item 4. Submission of Matters to a Vote of Security Holders........ 33
PART II................................................................. 33
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters.............................................. 33
Item 6. Selected Financial Data ................................... 34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 37
Forward-Looking Statements....................................... 37
General.......................................................... 37
Comparison of Financial Condition at March 31, 2001 and 2000..... 37
Comparison of Operating Results for Years Ended March 31, 2001
and 2000....................................................... 38
Comparison of Operating Results for Years Ended March 31, 2000
and 1999....................................................... 39
Average Balances, Interest and Average Yields/Cost............... 40
Rate/Volume Analysis............................................. 42
Market Risk and Asset and Liability Management................... 42
Liquidity and Capital Resources.................................. 44
Effect of Inflation and Changing Prices.......................... 45
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk............................................................. 45
Item 8. Financial Statements and Supplementary Data................ 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 77
PART III................................................................ 77
Item 10. Directors and Executive Officers of the Registrant........ 77
Item 11. Executive Compensation.................................... 77
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................................... 77
Item 13. Certain Relationships and Related Transactions............ 77
PART IV................................................................. 78
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K......................................................... 78
PART I
Item 1. Business
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General
Oregon Trail Financial Corp. ("Company"), an Oregon corporation, was
organized on June 9, 1997 for the purpose of becoming the holding company for
Pioneer Bank, A Federal Savings Bank ("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 March 31, 2001, the Company
had total assets of $388.9 million, total deposits of $253.8 million and
shareholders' equity of $57.8 million. All references to the Company herein
include the Bank where applicable.
The Bank was organized in 1901. The Bank is regulated by the Office of
Thrift Supervision ("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 also is a member of the
Federal Home Loan Bank ("FHLB") System.
The Bank is a community oriented financial institution whose principal
business is attracting retail deposits from the general public and using these
funds to originate one- to- four family residential mortgage loans and
consumer loans within its primary market area. The Bank also actively
originates home equity and second mortgage loans. Beginning in 1996, the Bank
began supplementing its traditional lending activities with commercial
business loans, agricultural loans, and the purchase of dealer-originated
automobile contracts.
In addition to its lending activities, the Bank invests excess liquidity
in short to long term U.S. Government and government agency securities and
mortgage-backed and related securities issued by U.S. Government agencies.
Investment securities and mortgage-backed and related securities constituted
24.9% of total assets at March 31, 2001. See "-- Investment Activities."
Market Area
The Bank's primary market area encompasses those regions surrounding its
offices in Baker, Grant, Harney, Malheur, Union, Wallowa, Wheeler and Umatilla
Counties in Oregon and Payette and Washington Counties in Idaho. The Bank's
home office is located in Baker City, Oregon with branches in Ontario, John
Day, Burns, Enterprise, La Grande, Island City, Vale, and Pendleton.
The principal industries of the market area are agriculture and timber
products. The Bank's market area is largely rural, with most of the farms and
ranches being relatively small and family owned. The local economies are also
dependent on retail trade with lumber, recreation and tourism providing
substantial contributions. Major employers in the market area include
Confederated Tribes of the Umatilla Indians, Eastern Oregon Correctional
Institute, Fleetwood Homes, St. Anthony's Hospital, U.S. Forest Service,
Bureau of Land Management, Snake River Correctional Institute, Oregon
Department of Transportation, Boise Cascade, Ore-Ida, Grande Ronde Hospital,
Holy Rosary Hospital, Powder River Correctional Facility, Treasure Valley
Community College, Eastern Oregon University, local school districts and local
government.
Lending Activities
General. The Bank's loan portfolio totaled $250.9 million at March 31,
2001, representing 64.5% of total assets at that date. The Bank concentrates
its lending activities within its primary market area. Historically, the
Bank's primary lending activity has been the origination of one- to- four
family residential mortgage loans. To a lesser extent, the Bank makes
mortgage loans for the purpose of constructing primarily single-family
residences.
1
As a result of management's desire to diversify its lending portfolio and
satisfy local demand for credit, the Bank has significantly increased its
origination of agricultural, indirect dealer and commercial business loans
since July 1996. Commercial business and agricultural loans primarily include
operating lines of credit and term loans for fixed asset acquisitions.
The Bank has also been active in the origination of consumer loans, which
primarily consist of automobile loans and home equity loans, secured and
unsecured and, to a lesser extent, credit card loans, home improvement loans,
mobile home loans and loans secured by savings deposits. More recently, the
Bank has expanded its purchase of dealer-originated contracts to include those
secured by automobiles, motorcycles, all terrain and recreational vehicles,
including travel trailers. During the fiscal year ended March 31, 2001, the
Bank purchased $879,000 of dealer originated contracts secured by recreational
vehicles, campers, boats, snowmobiles, and all-terrain-vehicles.
2
Loan Portfolio Analysis. The following table sets forth the composition of the Bank's loan portfolio
(excluding loans held-for-sale) at the dates indicated. The Bank had no concentration of loans exceeding 10%
of total gross loans other than as presented below.
At March 31,
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2001 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage Loans:
One-to-four-
family...... $137,354 53.97% $127,589 57.13% $109,089 58.00% $100,740 64.65% $101,792 71.99%
Multi-family. 2,459 0.97 2,989 1.34 2,810 1.49 1,194 0.77 1,844 1.30
Commercial... 18,235 7.17 14,808 6.63 13,703 7.29 7,906 5.07 4,768 3.37
Agricultural. 3,548 1.39 2,420 1.08 2,240 1.19 725 0.47 -- --
Construction. 1,399 0.55 3,648 1.63 2,825 1.50 1,616 1.04 853 0.60
Land......... 124 0.05 158 0.07 330 0.17 297 0.19 223 0.16
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total
mortgage
loans....... 163,119 64.10 151,612 67.88 130,997 69.64 112,478 72.18 109,480 77.42
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
Home equity and
second
mortgage..... 15,890 6.24 14,983 6.71 16,262 8.65 19,231 12.34 17,514 12.39
Credit card... 1,093 0.43 1,026 0.46 949 0.50 854 0.55 844 0.60
Automobile(1). 26,501 10.41 21,547 9.65 11,843 6.30 5,719 3.67 2,064 1.46
Loans secured
by deposit
accounts..... 528 0.21 452 0.20 416 0.22 648 0.42 731 0.52
Unsecured..... 4,909 1.93 3,414 1.53 2,836 1.50 2,047 1.31 1,611 1.14
Other......... 3,992 1.57 3,190 1.43 2,985 1.59 4,623 2.97 2,627 1.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total con-
sumer loans. 52,913 20.79 44,612 19.98 35,291 18.76 33,122 21.26 25,391 17.96
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial
business
loans....... 22,396 8.80 13,853 6.20 12,031 6.40 5,968 3.83 4,066 2.88
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Agricultural
loans ....... 16,054 6.31 13,275 5.94 9,781 5.20 4,254 3.19 2,466 1.74
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.. 254,482 100.00% 223,352 100.00% 188,100 100.00% 155,822 100.00% 141,403 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed
portion of
loans in
process...... -- -- -- 102 769
Net deferred
loan fees.... 1,487 1,365 1,125 1,035 1,028
Allowance for
loan losses.. 2,098 1,396 1,228 847 725
-------- -------- -------- -------- --------
Total loans
receivable,
net.......... $250,897 $220,591 $185,747 $153,838 $138,881
======== ======== ======== ======== ========
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(1) Includes dealer-originated automobile contracts of $13.6 million, $17.4 million, and $9.3 million at
March 31, 2001, 2000 and 1999, respectively.
3
One- to- Four Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by
first mortgages on existing one- to- four family residences located in its
primary market area. At March 31, 2001, $137.4 million, or 54.0%, of the
Bank's total loan portfolio, consisted of such loans, with an average loan
balance of $63,000.
Generally, the Bank's fixed-rate one- to- four family mortgage loans have
maturities of 15 to 30 years and are fully amortizing with monthly payments
sufficient to repay the total amount of the loan with interest by the end of
the loan term. Generally, they are originated under terms, conditions and
documentation which permit them to be sold to private investors. The Bank's
fixed-rate loans customarily include "due on sale" clauses, which give the
Bank the right to declare a loan immediately due and payable in the event the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.
At March 31, 2001, $109.2 million, or 42.9%, of the total loans before
net items were fixed rate one- to- four family loans and $28.2 million, or
11.1%, were adjustable rate mortgage loans ("ARM loans"). The Bank currently
offers an ARM product for its portfolio which adjusts on the anniversary date
of the origination based on the one year Treasury constant maturity index.
The Bank's ARMs are typically based on a 30-year amortization schedule. The
Bank offers discounted ARM loans where the initial interest rate is up to 2.00
percentage points below the prevailing interest rate. The Bank, however,
qualifies the borrowers on its ARM loans based on the fully indexed rate. The
Bank's current ARM loans do not provide for negative amortization and
generally provide for annual and lifetime interest rate adjustment limits of
2.0% and 6.0%, respectively.
At March 31, 2001, $16.1 million, or 57.1% of the Bank's total ARM loans
had interest rates that adjusted annually based on the Eleventh District Cost
of Funds Index ("COFI"). The COFI is a lagging index which, together with the
periodic and overall interest rate caps, may cause the yield on such loans to
adjust more slowly than the cost of interest-bearing liabilities especially in
a rapidly rising rate environment. In November 1995, the Bank discontinued
using the COFI index and began using the one year Treasury constant maturity
index.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
due to changed rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
In addition, although ARM loans allow the Bank to increase the sensitivity of
its asset base to changes in the interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations, the Bank has no assurance that
yields on ARM loans will be sufficient to offset increases in the Bank's cost
of funds. The Bank believes these risks, which have not had a material
adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in portfolio during a rising interest
rate environment.
The Bank requires title insurance insuring the status of its lien on all
loans where real estate is the primary source of security. The Bank also
requires the maintenance of fire and casualty insurance (and, if appropriate,
flood insurance).
The Bank's one- to- four family residential mortgage loans typically do
not exceed 80% of the lower of cost or appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Bank's Board of
Directors, the Bank can lend up to 97% of the lower of cost or appraised value
of the property securing a one- to- four family residential loan; however, the
Bank obtains private mortgage insurance on the portion of the principal amount
that exceeds 80% of the appraised value of the security property.
4
Agricultural Lending. Agriculture is a major industry in the Bank's
market area. Subject to market conditions, the Bank intends to continue to
emphasize agricultural loans. In 1996, the Bank began originating a
significant number of loans to finance agricultural needs. This includes
collateral secured agricultural loans for the purchase of farmland and
equipment. At March 31, 2001, agricultural loans amounted to $19.6 million,
or 7.7%, of the total loan portfolio; $3.5 million of these loans were secured
by real estate. The Bank has sought to limit its agricultural lending to
borrowers with a strong capital base, sufficient management depth, proven
ability to operate through agricultural business cycles, reliable cash flow
and a willingness to provide the Bank with the necessary financial reporting.
Agricultural operating loans are made to finance farm operating expenses
over the course of a growing season with such loans being typically made in
amounts of $500,000 or less. However, the Bank's largest agricultural
operating loan had an original commitment of $2.2 million (with $126,000
outstanding at March 31, 2001) which was provided to finance a farming
operation that grows mint, grain, and potatoes. This loan was performing in
accordance with its terms at March 31, 2001. Agricultural operating loans
generally are made as a percentage of the borrower's anticipated income to
support budgeted operating expenses. These loans generally are secured by a
blanket lien on all crops, livestock, equipment, accounts and products and
proceeds thereof. The variables that effect income during the year are yields
and market prices. Consideration is given to projected yields and commodity
prices. The interest rate is normally adjusted monthly based on the prime
rate as published in The Wall Street Journal, plus a negotiated margin of up
to 2%. Because such loans are made to finance annual operations and expenses,
they are written on a one-year review and renewable basis. The renewal is
dependent upon prior year's performance and the forthcoming year's projections
as well as overall financial strength of the borrower. The Bank carefully
monitors these loans and prepares monthly variance reports on income and
expenses. To meet the seasonal operating needs, borrowers may qualify for
single payment notes, revolving lines of credit and/or non-revolving lines of
credit.
In underwriting agricultural operating loans, the Bank considers the cash
flow of the borrower based upon the expected income stream as well as the
value of collateral used to secure the loan. Collateral generally consists of
cattle or cash crops produced by the farm, such as grains, grass seed, peas,
sugar beets, mint, onions, potatoes, corn and alfalfa. In addition to
considering cash flow and obtaining a blanket security interest in the farm's
cash crop, the Bank may also collateralize an operating loan with the
equipment, breeding stock, real estate, and federal agricultural program
payments to the borrower.
The Bank also originates loans to finance the purchase of farm equipment
and will continue to pursue this type of lending in the future. Loans to
purchase farm equipment are made for terms of up to seven years. In funding
this need, the Bank uses both fixed and adjustable rate notes, depending on
the maturity requested.
Agricultural real estate loans primarily are secured by first liens on
farmland and improvements thereon located in the Bank's market area, to
service the needs of the Bank's existing customers. The largest such loan
totalled $917,000 at March 31, 2001. Loans are generally written in amounts
up to 50% to 75% of the tax assessed or appraised value of the property at
terms ranging from 10 to 20 years. Such loans have interest rates that
generally adjust at least every five years based upon the current five year
Treasury Constant or the Wall Street Journal prime, plus a negotiated margin.
In originating an agricultural real estate loan, the Bank considers the debt
service coverage of the borrower's cash flow, the appraised value of the
underlying property, the experience and knowledge of the borrower, and the
borrower's past performance with the Bank and/or market area.
Payments on an agricultural real estate loan depend, to a large degree,
on the results of operation of the related entity. The repayment is also
subject to both economic and weather conditions as well as market prices for
agricultural products, which can be highly volatile at times. Such loans are
not made to start up businesses but are generally reserved for profitable
operators with substantial equity and proven history. At March 31, 2001,
agricultural real estate loans totalled $3.5 million, or 1.4%, of the loan
portfolio.
5
Among the greatest and more common risks to agricultural lending can be
weather conditions and disease. This risk can be mitigated through
multi-peril crop insurance. Water reservoir supplies in the Bank's market
area are down 30% to 70% compared to historical averages. The lack of water
has the potential to decrease yields and increase energy costs for the Bank's
borrowers. Commodity prices also present a risk which may be reduced by the
use of set price contracts. Required beginning and projected operating
margins provide for reasonable reserves to offset unexpected yield and price
deficiencies.
In addition to the above mentioned risks, the Bank also considers
management succession, life insurance and business continuation plans.
Construction Lending. The Bank also offers construction loans to
qualified borrowers for construction of single-family residences in the Bank's
primary market area. Typically, the Bank limits its construction lending to a
local builder for the construction of a single-family dwelling where a
permanent purchase commitment has been obtained or individuals are building
their primary residences. On a limited basis, the Bank lends to contractors
for housing construction where the house is not presold. The ability of a
developer to sell developed lots or completed dwelling units will depend on,
among other things, demand, pricing, availability of comparable properties and
economic conditions. Construction loans generally have a six-month term with
only interest being paid during the term of the loan, and convert at the end
of six months to permanent financing and are underwritten in accordance with
the same standards as the Bank's mortgages on existing properties.
Construction loans generally have a maximum loan-to-value ratio of 80%.
Borrowers must satisfy all credit requirements which would apply to the Bank's
permanent mortgage loan financing for the subject property.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon 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.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of construction costs proves to be inaccurate,
the borrower may be required to fund the cost overruns or the Bank may advance
funds beyond the amount originally committed to permit completion of the
development. The Bank has sought to minimize this risk by limiting
construction lending to qualified borrowers in the Bank's market area and by
limiting the aggregate amount of outstanding construction loans. At March 31,
2001, construction loans amounted to $1.4 million, or 0.6%, of the loan
portfolio.
Multi-Family and Commercial Real Estate Lending. The multi-family
residential loan portfolio consists primarily of loans secured by apartment
buildings and the commercial real estate loan portfolio includes loans to
finance the construction or acquisition of small office buildings, retail
stores and car dealerships. The largest such loan totalled $441,000 at March
31, 2001. At March 31, 2001, the Bank had $2.5 million of multi-family
residential and $18.2 million of commercial real estate loans, all of which
amounted to 1.0% and 7.2%, respectively, of the total loan portfolio at such
date. Multi-family and commercial real estate loans are generally
underwritten with loan-to-value ratios of up to 75% of the lesser of the
appraised value or the purchase price of the property. Such loans generally
are granted on 15 to 20 year terms on an adjustable rate with established
floors. On fixed rate loans, terms generally do not exceed ten years.
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential
property lending. Multi-family residential and commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly impacted by supply and demand conditions in the market for
office, retail and residential space, and, as such, may be subject to a
greater extent to adverse conditions in the economy generally. To minimize
risk, the Bank generally obtains personal guarantees and annual financial
statements of the principals of the partnership or corporation. The Bank
reviews all significant commercial real estate loans on an annual basis to
ensure that the loan meets current underwriting standards. In addition, the
Bank underwrites commercial real estate loans at a rate of interest
significantly above that carried on
6
the loan at the time of origination to evaluate the borrower's ability to meet
principal and interest payments on the loan in the event of upward adjustments
to the interest rate on the loan.
Consumer and Other Lending. The Bank originates a variety of consumer
loans. Such loans generally have shorter terms to maturity and higher
interest rates than mortgage loans. At March 31, 2001, the Bank's consumer
loans totaled approximately $52.9 million, or 20.8%, of the Bank's total
loans. The Bank's consumer loans consist primarily of home improvement and
equity loans, automobile loans, boat and recreational vehicle loans, unsecured
loans, credit card loans and deposit account loans.
In recent periods, the Bank has emphasized the origination of consumer
loans, and, in particular, automobile loans due to their shorter terms and
higher yields than residential mortgage loans. The Bank anticipates that it
will continue to be an active originator of automobile and other consumer
loans. Factors that may affect the ability of the Bank to increase its
originations in this area include the demand for such loans, interest rates
and the state of the local and national economy.
The Bank offers open-ended "preferred" lines of credit on either a
secured or unsecured basis. Secured lines of credit are generally secured by
a second mortgage on the borrower's primary residence. Secured lines of
credit have an interest rate that is one to two percentage points above the
prime lending rate, as published in The Wall Street Journal, while the rate on
unsecured lines is two to three percentage points above this prime lending
rate. In both cases, the rate adjusts monthly. The majority of the approved
lines of credit at March 31, 2001 were equal to or less than $25,000. The
Bank requires repayment of at least 2% of the unpaid principal balance
monthly. At March 31, 2001, approved lines of credit totaled $17.9 million,
of which $8.1 million was outstanding.
The Bank offers closed-end, fixed-rate home equity loans that are made on
the security of primary residences. Loans normally do not exceed 80% of the
appraised or tax assessed value of the residence, less the outstanding
principal of the first mortgage, and have terms of up to 15 years requiring
monthly payments of principal and interest. At March 31, 2001, fixed rate
home equity loans and second mortgage loans amounted to $11.3 million, or
4.5%, of total loans.
At March 31, 2001, the Bank's automobile loan portfolio amounted to $26.5
million, or 50.1%, of consumer loans and 10.4% of total loans at such date.
Since January 1997, a substantial portion of the Bank's automobile loans have
been originated indirectly by a network of approximately 28 automobile
dealers, most located in the Bank's market area and adjacent markets in Oregon
and Idaho. Indirect automobile loans accounted for approximately 13.1% of the
Bank's total consumer loan originations during the year ended March 31, 2001.
The applications for such loans are taken by employees of the dealer, the
loans are written on the dealer's contract pursuant to the Bank's underwriting
standards using the dealer's loan documents with terms substantially similar
to the Bank's. All indirect loans must be approved by specific loan officers
of the Bank who have experience with this type of lending. In addition to
indirect automobile lending, the Bank also originates automobile loans
directly.
The maximum term for the Bank's automobile loans is 72 months with the
amount financed based upon a percent of purchase price. The Bank generally
requires all borrowers to maintain automobile insurance, including collision,
fire and theft, with a maximum allowable deductible and with the Bank listed
as loss payee.
At March 31, 2001, unsecured consumer loans amounted to $4.9 million, or
1.9%, of total loans. These loans are made for a maximum of 36 months or less
with fixed rates of interest and are offered primarily to existing customers
of the Bank.
Since December 1992, the Bank has offered credit card loans through its
participation as a VISA card issuer. The Bank does not actively solicit
credit card business beyond its customer base and market area and has not
engaged in mailing of pre-approved credit cards. The rate currently charged
by the Bank on its credit card loans is the prime rate, as published in The
Wall Street Journal, plus 7%, and the Bank is permitted to change the interest
rate quarterly. Processing of bills and payments is contracted to an outside
servicer. At March 31, 2001, the Bank had a commitment
7
to fund an aggregate of $6.7 million of credit card loans, which represented
the aggregate credit limit on credit cards, and had $1.1 million of credit
card loans outstanding, representing 0.4% of its total loan portfolio. The
Bank intends to continue credit card lending and estimates that at current
levels of credit card loans, it makes a small monthly profit net of service
expenses and write-offs.
Consumer loans potentially have a greater risk than do residential
mortgage loans, particularly in the case of loans that are unsecured or
secured by rapidly depreciating assets such as automobiles and other vehicles.
In such cases, any repossessed collateral for a defaulted consumer loan may
not provide an adequate source of repayment of the outstanding loan balance as
a result of the greater likelihood of damage, loss or depreciation. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans. At
March 31, 2001, the Bank had $10,000 in consumer loans accounted for on a
nonaccrual basis.
Commercial Business Lending. The Bank originates commercial business
loans to small and medium sized businesses in its primary market area.
Commercial business loans are generally made to finance fixed asset
acquisitions, and for short-term working capital. Such loans are generally
secured by equipment, accounts receivable and inventory, although commercial
business loans are sometimes granted on an unsecured basis. Generally, loans
to finance short-term working capital are made for one year or less with
interest rates adjusted monthly at a rate equal to the prime rate, as
published in The Wall Street Journal, plus a margin of up to 3%. Loans to
finance the purchase of equipment are made for terms generally seven years or
less at either a fixed or adjustable rate. At March 31, 2001, the commercial
business loans amounted to $22.4 million, or 8.8%, of the total loan
portfolio.
At March 31, 2001, the largest outstanding commercial business loan was a
$1.2 million operating line of credit to a manufacturing company with a
balance of $1.0 million. Such loan was performing according to its terms at
March 31, 2001.
The Bank is an approved Small Business Administration ("SBA") lender and
at March 31, 2001, had three SBA loans that totalled $412,000. The Bank also
entered into an agreement with the Oregon Economic Development Department in
October 1999 to provide loan guarantees on small business loans. As of March
31, 2001, no loans had been made under this program. The Bank intends to
continue to originate loans to local businesses within its primary market area
using these programs.
The Bank generally underwrites its commercial business loans on the basis
of the borrower's cash flow and ability to service the debt from earnings
rather than on the basis of underlying collateral value. The Bank seeks to
structure such loans to have more than one source of repayment. The borrower
is required to provide the Bank with sufficient information to allow the Bank
to make its lending determination. In most instances, this information
consists of at least three years of financial statements, tax returns, a
statement of projected cash flows, current financial information on any
guarantor and any additional information on the collateral. Generally, for
loans with maturities exceeding two years and balances exceeding $250,000, the
Bank requires that borrowers and guarantors provide updated financial
information at least annually.
The Bank's commercial business loans may be structured as term loans or
as lines of credit. Commercial business term loans are generally made to
finance the purchase of fixed assets and have maturities of seven years or
less. Commercial business lines of credit are typically made for the purpose
of providing working capital and are usually approved with a term of between
six months and one year.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often
dependent on successful operation of the business involved, repayment of such
loans
8
may be subject to adverse conditions in the economy. The Bank seeks to
minimize these risks through its underwriting guidelines, which require that
the loan be supported by adequate cash flow of the borrower, profitability of
the business, collateral, and personal guarantees of the individuals in the
business. In addition, the Bank limits this type of lending to its market
area and to borrowers with which it has prior experience or who are otherwise
well known to the Bank.
Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 2001, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as becoming due within one year. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance
for loan losses.
After After
One Year 3 Years
Within Through Through Over
One Year 3 Years 5 Years Five Years Total
-------- ------- ------- ---------- -----
(Dollars in thousands)
Mortgage loans:
One- to- four family....... $ 27 $ 554 $ 1,058 $135,715 $137,354
Multi-family............... -- 389 50 2,020 2,459
Commercial................. 1,427 474 1,199 15,135 18,235
Agricultural............... -- 34 51 3,463 3,548
Construction............... -- -- -- 1,399 1,399
Land....................... -- 21 43 60 124
Consumer loans:
Home equity and second
mortgage.................. 134 939 988 13,829 15,890
Automobile................. 171 4,166 15,384 6,780 26,501
Credit card................ 24 74 109 886 1,093
Loans secured by deposit
accounts.................. 360 139 15 14 528
Unsecured.................. 508 184 342 3,875 4,909
Other...................... 35 381 931 2,645 3,992
Commercial business loans... 7,864 2,869 3,998 7,665 22,396
Agricultural loans ......... 10,078 1,540 2,561 1,875 16,054
------- ------- ------- -------- --------
Total.................. $20,628 $11,764 $26,729 $195,361 $254,482
======= ======= ======= ======== ========
The following table sets forth the dollar amount of all loans due after
March 31, 2002, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Mortgage loans:
One- to- four family......... $109,767 $27,560
Multi-family................. 614 1,845
Commercial................... 4,521 12,287
Agricultural................. 34 3,514
(table continues on following page)
9
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Construction................. 778 621
Land......................... 124 --
Consumer loans:
Home equity and second
mortgage................... 3,697 12,059
Automobile.................. 26,330 --
Credit card................. -- 1,069
Loans secured by deposit
accounts................... 168 --
Unsecured .................. 22 4,379
Other....................... 3,926 31
Commercial business loans.... 8,376 6,156
Agricultural loans .......... 3,627 2,349
-------- -------
Total.................... $161,984 $71,870
======== =======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due on sale
clauses on loans generally give the Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates. Furthermore, management believes that a significant number of the
Bank's residential mortgage loans are outstanding for a period less than their
contractual terms because of the transitory nature of many of the borrowers
who reside in its primary market area.
Loan Solicitation and Processing. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. The customary sources of loan originations are realtors, walk-in
customers, referrals and existing customers. The Bank also advertises its
loan products by radio and newspaper. The Bank does not employ commissioned
loan originators.
Mortgage loan applications are initiated, underwritten and preliminarily
approved by loan officers before they are recommended for final review and
approval. Individual lending limits and credit approval limits are established
for branch and loan center personnel up to $200,000. Commercial lenders' and
administrative credit approval limits are established up to $750,000 depending
on position and lending knowledge. Loans to borrowers with an aggregate
borrowing relationship over $750,000 and up to $1.5 million requires approval
of either the President or Executive Vice President. Loans to borrowers with
an aggregate borrowing relationship in excess of $1.5 million and up to $2.5
million require the approval of the President and Executive Vice President.
Loans to borrowers with an aggregate borrowing relationship exceeding $2.5
million require approval by the President, Executive Vice President and two
board members.
Loan Originations, Sales and Purchases. Historically, the Bank's primary
lending activity has been the origination of one- to- four family residential
mortgage loans. In recent periods, the Bank has increased its origination of
consumer, commercial business and agricultural loans.
During the year ended March 31, 2001, the Bank did not sell a material
amount of its loans. At March 31, 2001, the Bank was not servicing any loans
for investors.
10
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended March 31,
----------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Loans originated:
Mortgage loans:
One- to- four family............... $ 22,301 $ 30,112 $ 38,178
Multi-family....................... -- 1,575 1,736
Commercial......................... 4,543 3,101 4,371
Construction....................... 1,092 6,697 6,713
Land............................... 11 26 155
Consumer............................ 14,170 13,293 11,611
Commercial business loans .......... 28,778 18,076 20,096
Agricultural loans.................. 32,888 28,519 25,800
------- -------- --------
Total loans originated .......... 103,783 101,399 108,660
Loans purchased:
Dealer-originated automobile
contracts......................... 14,499 14,533 7,338
Commercial real estate.............. 5,275 -- 366
------- -------- --------
Total loans purchased........... 19,774 14,533 7,693
Loan principal repayments............ 93,251 81,088 84,444
------- -------- --------
Net increase in loans receivable,
net................................ $30,306 $ 34,844 $ 31,909
======= ======== ========
Loan Commitments. The Bank issues commitments for loans and lines of
credit conditioned upon the occurrence of certain events. Such commitments
are made in writing on specified terms and conditions and are honored for up
to 30 days from approval, depending on the type of transaction. At March 31,
2001, the Bank had loan commitments of $36.5 million. See Note 17 of Notes to
Consolidated Financial Statements.
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modification, late
payments and for miscellaneous service related to its loans. Income from
these activities varies from period to period depending upon the volume and
type of loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a minimum
fee or as a percentage of the amount borrowed. In accordance with applicable
accounting procedures, loan origination fees and discount points in excess of
loan origination costs are deferred and recognized over the contractual
remaining lives of the related loans on a level yield basis. Discounts and
premiums on loans purchased are acreted and amortized in the same manner. The
Bank recognized $71,000, $107,000 and $248,000 of deferred loan fees during
the years ended March 31, 2001, 2000 and 1999, respectively, in connection
with loan refinancings, payoffs, sales and ongoing amortization of outstanding
loans.
Nonperforming Assets and Delinquencies. Generally, the borrowers are
allowed to pay up to the 15th day following the due date before the Bank
initiates collection procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the deficiency by contacting the
borrower and seeking the payment. Contacts are generally made 16 days after
the due date. In most cases, delinquencies are cured promptly. If a
delinquency continues, additional contact is made. The Bank prefers to work
with borrowers to resolve such problems, however, after the 90th day of
delinquency, foreclosure or other action is taken in an effort to minimize any
potential loss to the Bank.
11
When loans are contractually 90 days or more delinquent, they are placed
on nonaccrual status. Payments to such nonaccrual loans are applied to
principal when collection of the loan principal is doubtful. Loans are
reinstated to accrual status when current and collectibility of principal and
interest is no longer doubtful.
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans at the dates indicated.
At March 31,
---------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Mortgage loans:
One- to- four family..... $ -- $ 131 $ 133 $ 258 $ 167
Nonresidential property.. 45 -- -- -- --
Consumer loans........... 10 24 5 17 23
----- ----- ----- ----- -----
Total................ 55 155 138 275 190
Total of nonaccrual loans . 55 155 138 275 190
Foreclosed real estate..... 41 -- 37 -- --
Other repossessed assets... 22 8 -- 313 10
----- ----- ----- ----- -----
Total nonperforming
assets................ $ 118 $ 163 $ 175 $ 588 $ 200
===== ===== ===== ===== =====
Nonaccrual loans
as a percentage of
loans receivable, net..... 0.02% 0.07% 0.07% 0.18% 0.14%
Nonaccrual loans
as a percentage of
total assets.............. 0.01% 0.04% 0.04% 0.10% 0.09%
Nonperforming assets
as a percentage of
total assets.............. 0.03% 0.04% 0.06% 0.22% 0.10%
Loans receivable, net......$250,897 $220,591 $185,747 $153,838 $138,881
Total assets...............$388,881 $370,612 $313,473 $263,224 $204,213
An additional $3,000 of interest income would have been recorded for the
year ended March 31, 2001, had nonaccruing loans been current in accordance
with their original terms.
Real Estate Acquired in Settlement of Loans. See Note 1 of Notes to
Consolidated Financial Statements regarding the Bank's accounting for
foreclosed real estate. At March 31, 2001, the Bank had foreclosed real
estate consisting of one home for $41,000.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are four classifications for problem
assets: substandard, other loans especially mentioned, doubtful and loss.
Substandard assets have one or more defined weaknesses and are characterized
by the distinct possibility that the insured institution will sustain some
loss if the deficiencies are not
12
corrected. Other loans especially mentioned have potential weaknesses that
deserve management's close attention. Loans in this classification have a
plan that is approved by the borrower and the Bank that will return the credit
to a pass classification. Loans in this category are not adversely classified
and do not expose the Bank to sufficient risk to warrant adverse
classification. Doubtful assets have the weaknesses of substandard assets
with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset classified as loss. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard
or doubtful can be included in determining an institution's regulatory
capital, while specific valuation allowances for loan losses generally do not
qualify as regulatory capital. Assets that do not currently expose the
insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated "watch" and
monitored by the Bank.
The aggregate amounts of the Bank's classified and watch assets, and of
the Bank's general and specific loss allowances at the dates indicated, were
as follows:
At March 31,
---------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Loss................................ $ -- $ -- $ 10
Doubtful............................ -- -- 7
Substandard assets.................. 1,154 1,656 671
Other loans especially mentioned.... 1,607 -- --
Watch............................... 9,426 8,545 8,438
General loss allowances............. 2,098 1,396 1,218
Specific loss allowances............ -- -- 10
At March 31, 2001, substandard assets consisted of five one- to- four
family mortgage loans of $359,000, seven consumer/dealer loans of $55,000 and
13 commercial/agricultural loans (six borrowers) of $740,000.
At March 31, 2001, other loans especially mentioned consisted of 12
commercial/agricultural loans (four borrowers) of $1.6 million.
At March 31, 2001, watch assets consisted of seven one- to- four family
mortgage loans of $333,000, 13 consumer/dealer loans of $134,000 and 53
commercial/agricultural loans (29 borrowers) of $9.0 million.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses
by charging provisions for loan losses against the Bank's income.
Allowances for losses on specific problem loans and real estate owned are
charged to earnings when it is determined that the value of these loans and
properties, in the judgement of management, is impaired. In addition to
specific reserves, the Bank also maintains general provisions for loan losses
based on the evaluation of known and
13
inherent risks in the loan portfolio, including management's continuing
analysis of the factors and trends underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, 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
ultimate recovery of such loans is susceptible to future market factors beyond
the Bank's control, which may result in losses or recoveries differing
significantly from those provided in the consolidated financial statement. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's valuation allowance on
loans and real estate owned. Generally, a provision for losses is charged
against income quarterly to maintain the allowance for loan losses.
At March 31, 2001, the Bank had an allowance for loan losses of $2.1
million, which management believes is adequate to absorb losses inherent in
the portfolio. Although management is confident that the basis for making the
allowance is sound, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance
for loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate as
a result of the factors discussed above. Any material increase in the
allowance for loan losses may adversely affect the Bank's financial condition
and results of operations.
14
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
Nine Months
Ended
Year Ended March 31, March 31,
-------------------------------- ---------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning
of period.................. $1,396 $1,228 $ 847 $ 725 $ 541
------ ------ ------ ------ ------
Provision for loan losses... 794 178 483 138 216
Recoveries:
Mortgage loans:
One- to- four family...... 1 23 -- 4 --
Consumer loans:
Credit card............... 5 7 9 4 4
Other..................... 13 2 4 25 3
------ ------ ------ ------ ------
Total recoveries......... 19 32 13 33 7
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to- four family...... -- -- 4 5 5
Consumer loans:
Credit card............... 99 37 82 36 26
Automobile................ 11 1 15 8 --
Unsecured................. 1 -- -- -- --
Other..................... -- 4 14 -- 8
------ ------ ------ ------ ------
Total charge-offs........ 111 42 115 49 39
------ ------ ------ ------ ------
Net charge-offs.......... 92 10 102 16 (32)
------ ------ ------ ------ ------
Allowance at end of
period................ $2,098 $1,396 $1,228 $ 847 $ 725
====== ====== ====== ====== ======
Allowance for loan losses
as a percentage of total
loans outstanding at the
end of the period.......... 0.82% 0.63% 0.66% 0.55% 0.52%
Net charge-offs as a
percentage of average
loans outstanding
during the period.......... 0.04% --% 0.06% 0.01% 0.03%
Allowance for loan losses
as a percentage of non-
performing loans at end
of period.................. 3814.55% 900.65% 889.86% 308.07% 381.58%
15
The following table sets forth the breakdown of the allowance for loan losses by loan category at the
dates indicated. Management feels that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any other category.
At March 31,
-----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ----------------- --------------
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
One- to- four family...$ 352 54.82% $ 338 24.21% $ 381 31.03% $329 66.65% $357 74.05%
Non-mortgage loans...... 625 20.04 355 25.43 265 21.58 236 20.29 173 16.84
Commercial business and
real estate............ 494 18.15 360 25.79 300 24.43 164 8.90 105 6.25
Agricultural loans...... 331 6.35 314 22.49 250 20.36 87 3.19 61 1.74
Credit cards........... 76 0.43 26 1.86 29 2.36 26 0.55 24 0.60
Loans secured by deposit
accounts.............. 5 0.21 3 0.22 3 0.24 5 0.42 5 0.52
Unallocated............ 215 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ---- ------ ---- ------
Total allowance
for loan losses...$2,098 100.00% $1,396 100.00% $1,228 100.00% $847 100.00% $725 100.00%
====== ====== ====== ====== ====== ====== ==== ====== ==== ======
16
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Seattle, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. The Bank is required to maintain an investment in FHLB
stock. The Bank is also required under federal regulations to maintain a
minimum amount of liquid assets. See "REGULATION" herein and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources" included in Item 7 of this Form 10-K.
Although the Bank generally purchases investment securities with excess
liquidity, during the years ended March 31, 2001 and March 31, 2000, the Bank
engaged in a leveraging strategy using funds borrowed from the Federal Home
Loan Bank to purchase investment securities. Total purchases amounted to
$17.0 million and $34.9 million in the years ended March 31, 2001 and 2000,
respectively, including $7.0 million in trust preferred securities and $10.0
million in collateralized mortgage obligations. Purchases were funded by
selling investment securities totaling $37.8 million for the year ended March
31, 2001. Purchases for the year ended March 31, 2000 were funded by
borrowing an additional $26.5 million. The Bank's investment securities
purchases have generally been limited to U.S. Government and government agency
securities with contractual maturities of between one and ten years and
mortgage-backed and related securities issued by the Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
Government National Mortgage Association ("GNMA") with maturities of up to 30
years. During the year ended March 31, 1999, the Bank began purchasing AAA
rated municipal bonds of various local Oregon governmental units with
maturities ranging from 10 to 19 years. Such municipal bonds totalled $10.1
million at March 31, 2001.
At March 31, 2001, the Bank held securities classified as available-
for-sale under SFAS 115. There were no trading securities at March 31, 2001.
See Note 2 of Notes to Consolidated Financial Statements. Trading of
investment securities is not part of the Bank's operating strategy.
The Bank's investment policies generally limit investments to U.S.
Government and government agency securities, municipal bonds, certificates of
deposits, marketable corporate debt obligations, mortgage-backed and related
securities and certain types of mutual funds. The Bank's investment policy
does not permit engaging directly in hedging activities or purchasing high
risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the
interest rate, yield, settlement date and maturity of the investment, the
Bank's liquidity position, and anticipated cash needs and sources (which in
turn include outstanding commitments, upcoming maturities, estimated deposits
and anticipated loan amortization and repayments). The effect that the
proposed investment would have on the Bank's credit and interest rate risk and
risk-based capital is also considered.
At March 31, 2001, the following individual investment (excluding U.S.
government bonds) had an aggregate book value in excess of 10% of the
Company's shareholders' equity at that date:
Type of Carrying Book Market
Issuer Security Amount Value Value
------ -------- ------ ----- -----
(In thousands)
Residential Funding Collateralized $9,454 $9,445 $9,454
2001-S1 A1 Mortgage Obligation
17
The following table sets forth the amortized cost and fair value of the Bank's debt and mortgage-backed
and related securities, by accounting classification and by type of security, at the dates indicated.
At March 31,
------------------------------------------------------------
2001 2000 1999
------------------- ------------------- --------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value(1) Total Value(1) Total Value(1) Total
------- ----- -------- ----- -------- -----
(Dollars in thousands)
Held to Maturity:
Mortgage-backed and related securities...... $ -- --% $ -- --% $ 9,338 8.67%
Total held to maturity securities............. -- -- -- -- 9,338 8.67
Available for Sale:
U.S. Government agency obligations............ 26,914 27.77 37,436 30.70 37,965 35.26
Mortgage-backed and related securities ....... 70,010 72.23 84,615 69.30 60,371 56.07
Other......................................... -- -- -- -- -- --
------- ------ -------- ------ -------- ------
Total available for sale securities......... 96,924 100.00 122,051 100.00 98,336 91.33
------- ------ -------- ------ -------- ------
Total......................................... $96,924 100.00% $122,051 100.00% $107,674 100.00%
======= ====== ======== ====== ======== ======
- --------------
(1) The market value of the Bank's investment portfolio amounted to $96.9 million, $122.1 million and
$107.8 million at March 31, 2001, 2000 and 1999, respectively. At March 31, 2001, the amortized cost
of the principal components of the Bank's investment securities portfolio was as follows: U.S.
Government securities, $26.9 million; mortgage-backed and related securities, $68.7 million.
The following table sets forth the maturities and weighted average yields of the debt and
mortgage-backed and related securities in the Bank's investment securities portfolio at March 31, 2001.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollars in thousands)
Available for Sale:
U.S. Government agency
obligations................ $ -- --% $ -- --% $ 5,272 6.76% $21,642 6.18% $ 26,914
Mortgage-backed
and related securities...... -- -- 89 6.53 54 9.44 69,864 7.15 70,010
----- ----- ------- ------- --------
Total available for
sale securities........ $ -- $ 89 $ 5,326 $91,506 $ 96,924
===== ===== ======= ======= ========
18
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market
conditions. Borrowings from the FHLB-Seattle may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. The Bank also has an overnight credit line with Key Bank amounting
to $15.0 million and a $50.0 million reverse repurchase credit line with
Merrill Lynch.
Deposit Accounts. A substantial number of the Bank's depositors reside
in Oregon. The Bank's deposit products include a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, statement savings accounts and term certificate accounts. Deposit
account terms vary with the principal differences being the minimum deposit to
open, early withdrawal penalties and the interest rate. The Bank reviews its
deposit mix and pricing weekly. The Bank does not utilize brokered deposits,
nor has it aggressively sought jumbo certificates of deposit. The Bank has
also begun to seek business checking accounts in connection with its community
banking activities.
The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank does not seek to pay the
highest interest rates on deposits but a competitive rate. The Bank
determines the rates paid based on a number of conditions, including rates
paid by competitors, rates on U.S. Treasury securities, rates offered on
various FHLB-Seattle lending programs, and the deposit growth rate the Bank is
seeking to achieve.
In the unlikely event the Bank is liquidated, depositors will be entitled
to full payment of their deposit accounts before any payments are made to the
Company as the sole stockholder of the Bank.
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at March 31, 2001.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands except minimum balance)
N/A N/A Non-interest-bearing $ 19,678 $ 10 7.75%
1.25 N/A NOW accounts 35,972 10 14.17
3.70 N/A Money market accounts 53,983 1,000 21.27
2.33 N/A Statement savings accounts 16,251 5 6.40
Certificates of Deposit
-----------------------
5.87 3 to 5 years Fixed-term, fixed-rate 16,881 1,000 6.65
5.11 91 day Fixed-term, fixed-rate 2,808 1,000 1.11
5.65 182 day Fixed-term, fixed-rate 10,450 1,000 4.12
6.44 1 year Fixed-term, variable-rate 59,280 1,000 23.36
5.90 2-1/2 year Fixed-term, variable-rate 7,457 1,000 2.94
6.13 5 year Fixed-term, variable-rate 3,582 1,000 1.41
4.25 18 month Fixed-term, adjustable- rate 1,406 5 0.55
(table continues on following page)
19
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands except minimum balance)
6.00 20 month Fixed-term, adjustable-rate 9,687 1,000 3.82
5.75 6 year Fixed-term, adjustable-rate 689 -- 0.27
5.90 Varies Various term, fixed-rate 2,418 1,000 0.95
6.46 Varies Jumbo certificates 13,235 96,000 5.23
-------- ------
TOTAL $253,777 100.00%
======== ======
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of March 31, 2001. Jumbo
certificates of deposit generally have principal amounts of $96,000 or more
and have negotiable interest rates.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Three months or less................. $ 4,804
Over three through six months........ 1,673
Over six through twelve months....... 4,654
Over twelve months................... 2,104
-------
Total............................ $13,235
=======
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank between the dates indicated.
At March 31,
------------------------------------------------------------------------------
2001 2000 1999
--------------------------- ---------------------------- ----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ------ ---------- ------ -----
(Dollars in thousands)
Non-interest-bearing.......$ 19,678 7.75% $ 4,717 $ 14,961 6.29% $ 3,367 $ 11,594 5.81%
NOW checking............... 35,972 14.17 (786) 36,758 15.46 82 36,676 18.38
Statement savings
accounts.................. 16,251 6.40 (3,174) 19,425 8.17 (1,658) 21,083 10.56
Money market deposit....... 53,983 21.27 3,881 50,102 21.07 19,616 30,486 15.27
Fixed-rate certificates
which mature:
Within 1 year............ 94,504 37.24 3,571 90,932 38.25 20,399 70,533 35.34
After 1 year, but
within 3 years.......... 25,368 10.00 6,757 18,611 7.83 (6,123) 24,734 12.39
After 3 years, but
within 5 years.......... 6,691 2.64 1,164 5,528 2.33 3,094 2,434 1.22
Certificates maturing
thereafter.............. 1,330 0.53 (88) 1,418 0.60 (631) 2,049 1.03
-------- ------ ------- -------- ------ ------- -------- ------
Total................. $253,777 100.00% $16,042 $237,735 100.00% $38,146 $199,589 100.00%
======== ====== ======= ======== ====== ======= ======== ======
20
Time Deposits by Rates. The following table sets forth the amount of
time deposits in the Bank categorized by rates at the dates indicated.
At March 31,
------------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
2.00 - 3.99%..................... $ -- $ -- $ --
4.00 - 4.99%..................... 9,933 10,028 42,960
5.00 - 5.99%..................... 38,223 81,566 49,460
6.00 - 6.99%..................... 62,822 23,702 6,490
7.00% and over................... 16,915 1,193 840
-------- -------- --------
Total............................ $127,893 $116,489 $ 99,750
======== ======== =======
Deposit Activity. The following table sets forth the deposit activity of
the Bank for the periods indicated.
Year Ended March 31,
------------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Beginning balance................ $237,735 $199,589 $192,735
-------- -------- --------
Net (withdrawals) deposits
before interest credited....... 5,752 29,645 (366)
Interest credited................ 10,290 8,501 7,221
-------- -------- --------
Net increase in deposits......... 16,042 38,146 6,855
-------- -------- --------
Ending balance................... $253,777 $237,735 $199,589
======== ======== ========
Borrowings. The Bank utilizes advances from the FHLB-Seattle to
supplement its supply of investable funds and to meet deposit withdrawal
requirements. The FHLB-Seattle functions as a central reserve bank providing
credit for savings associations and certain other member financial
institutions. As a member of the FHLB-Seattle, the Bank is required to own
capital stock in the FHLB-Seattle and is authorized to apply for advances on
the security of such stock and certain of its mortgage loans and other assets
(principally securities that are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs, all of which
have their own interest rate guidelines and range of maturities. Depending on
the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. The Bank is currently authorized to borrow from the FHLB
up to an amount equal to 30% of total assets. The Bank may increase the
amount of its FHLB advances if loan demand exceeds deposit growth.
During the year ended March 31, 2000, the Bank opened a $15 million
overnight line of credit with Key Bank and a $50 million reverse repurchase
agreement with Merrill Lynch. Prior to December 1997, the Bank also used
retail repurchase agreements due within one day as a source of funds, but
discontinued their use in December 1997. See Note 8 of Notes to Consolidated
Financial Statements.
21
The following table sets forth certain information regarding borrowings
by the Bank at the end of and during the periods indicated:
At or For the
Year Ended March 31,
------------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
FHLB advances............................$ 87,300 $ 70,750 $ 50,250
Approximate average borrowings outstanding
with respect to:
Securities sold under agreements
to repurchase......................... -- 67 --
FHLB advances.......................... 75,871 60,418 17,108
Approximate weighted average rate paid on:
Securities sold under agreements
to repurchase......................... --% 5.97% --%
FHLB advances............................ 6.34 5.37 5.03
Potential Adverse Impact of Changes in Interest Rates
The financial condition and results of operations of the Bank, and of
savings institutions in general, are significantly influenced by general
economic conditions, by the related monetary and fiscal policies of the
federal government, and by the regulations of the OTS, the FDIC and the Board
of Governors of the Federal Reserve System ("Federal Reserve"). Deposit flows
and the cost of funds are influenced by interest rates of competing
investments and general market rate conditions. Lending activities are
affected by the demand for mortgage financing and for consumer and other types
of loans, which in turn are affected by the interest rates at which such
financing may be offered and by other factors affecting the supply of housing
and the availability of funds.
The Bank's profitability is substantially dependent on its net interest
income, which is the difference between the interest income received from its
interest-earning assets and the interest expense incurred in connection with
its interest-bearing liabilities. When an institution's interest-bearing
liabilities exceed its interest-earning assets which mature within a given
period of time, material and prolonged increases in interest rates generally
would adversely affect net interest income, while material and prolonged
decreases in interest rates generally would have a favorable effect on net
interest income. Like most of the savings industry, the interest-earning
assets of the Bank have longer effective maturities than its deposits, which
largely mature or are subject to repricing within a shorter period of time.
As a result, a material and prolonged increase in interest rates generally
would adversely affect net interest income, while material and prolonged
decreases in interest rates generally would have a more favorable effect on
net interest income.
The mismatch between maturities and interest rate sensitivities of
balance sheet items results in interest rate risk. The extent of interest
rate risk to which the Bank is subject is monitored by management by modeling
the change in net portfolio value ("NPV") over a variety of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The calculation is intended to
illustrate the change in NPV that will occur in the event of an immediate
change in interest rates of at least 200 basis points with no effect given to
any steps which management might take to counter the effect of that interest
rate movement. At March 31, 2001, there was a $14.7 million, or 28.9%,
decrease in the Bank's NPV as a percent of the present value of assets,
assuming a 200 basis point increase in interest rates. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
22
CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability Management and
Interest Rate Risk" for a discussion of the NPV methods of analyzing interest
rate risk and for an illustration of the effect of an increase in interest
rates on the Bank's earnings.
Consequently, the Bank's net interest income could be adversely affected
during periods of rising interest rates. Further increases in market rates of
interest could have a material adverse effect on the Bank's net interest
income. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset and Liability Management and Interest Rate
Risk." Furthermore, there has been increased scrutiny by the regulatory
agencies as to financial institutions levels of interest rate risk and Pioneer
Bank has been examined by the OTS since it increased its review of this area,
with a "satisfactory" rating.
Changes in interest rates can affect the amount of loans originated by an
institution, as well as the value of its loans and other interest-earning
assets and the resultant ability to realize gains on the sale of such assets.
Changes in interest rates also can result in disintermediation, which is the
flow of funds away from savings banks into direct investments, such as U.S.
Government and corporate securities, and other investment vehicles which,
because of the absence of federal insurance premiums and reserve requirements,
generally can pay higher rates of return than savings associations.
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners Loan Act and, in certain respects, the Federal Deposit Insurance
Act, and the regulations issued by the OTS and the FDIC to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with
its depositors and borrowers is also regulated to a great extent, especially
in such matters as the ownership of deposit accounts and the form and content
of the Bank's mortgage documents. The Bank is required to file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Bank and
their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS has extensive authority over the operations of savings
associations. Among other functions, the OTS issues and enforces regulations
affecting federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2001 was $49,000.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to
23
ensure that the FHLBs carry out their housing finance mission, to ensure that
the FHLBs remain adequately capitalized and able to raise funds in the capital
markets, and to ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Seattle, is required to acquire and
hold shares of capital stock in the FHLB-Seattle in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings)
from the FHLB-Seattle. The Bank is in compliance with this requirement with an
investment in FHLB-Seattle stock of $4.7 million at March 31, 2001.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Seattle.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit
accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period.
The capital categories are: (i) well-capitalized, (ii) adequately capitalized,
or (iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. This amount is currently equal to about
1.96 basis points for each $100 in domestic deposits for both BIF and SAIF
members. These assessments, which are revised quarterly based upon the level
of BIF and SAIF deposits, will continue until the bonds mature in the year
2015.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank.
Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the OTS. Management of the Bank
does not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of specified liquid assets
equal to a monthly average of not less than a specified percentage of its net
withdrawable accounts deposit plus short-term borrowings. This liquidity
requirement is currently 4%, but may be changed from time to time by the OTS
to any amount within the range of 4% to 10%. Monetary penalties may be
24
imposed for failure to meet liquidity requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is "critically undercapitalized." OTS regulations
also require that a capital restoration plan be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company in an amount of up to the lesser of 5% of the institution's
assets or the amount which would bring the institution into compliance with
all capital standards. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including,
but not limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. The OTS also could take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
At March 31, 2001, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the agency may
require the Bank to submit to the agency an acceptable plan to achieve
compliance with the standard. Management is aware of no conditions relating
to these safety and soundness standards which would require submission of a
plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At March 31, 2001, the Bank met the test and its QTL percentage
was 83.5%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any
25
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Savings and Loan Holding Company Regulations."
Capital Requirements. Federally insured savings associations, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At March 31, 2001, the Bank
had tangible capital of $48.5 million, or 12.5% of adjusted total assets,
which is approximately $42.7 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date. At March 31, 2001, the Bank had
$107,000 in intangible assets.
The capital standards also require core capital equal to 4% of adjusted
total assets, depending on an institution's supervisory rating. Core capital
generally consists of tangible capital. At March 31, 2001, the Bank had core
capital equal to $48.5 million, or 12.5% of adjusted total assets, which is
$36.9 million above the minimum leverage ratio requirement of 3% as in effect
on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On March 31, 2001, the Bank had total risk-based capital of approximately
$50.6 million, including $48.5 million in core capital and $2.1 million in
qualifying supplementary capital, and risk-weighted assets of $227.5 million,
or total capital of 22.3% of risk-weighted assets. This amount was $32.4
million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS
may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
26
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on their operations
and profitability.
Limitations on Capital Distributions. The OTS imposes various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. The OTS also prohibits a savings association from declaring or paying
any dividends or from repurchasing any of its stock if, as a result of such
action, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
The Bank may make a capital distribution without OTS approval provided
that the Bank notify the OTS 30 days before it declares the capital
distribution and that the following requirements are met: (i) the Bank has a
regulatory rating in one of the two top examination categories, (ii) the Bank
is not of supervisory concern, and will remain adequately or well capitalized,
as defined in the OTS prompt corrective action regulations, following the
proposed distribution, and (iii) the distribution does not exceed the Bank's
net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If the Bank
does not meet these stated requirements, it must obtain the prior approval of
the OTS before declaring any proposed distributions.
In the event the Bank's capital falls below its regulatory requirements
or the OTS notifies it that it is in need of more than normal supervision, the
Bank's ability to make capital distributions will be restricted. In addition,
no distribution will be made if the Bank is notified by the OTS that a
proposed capital distribution would constitute an unsafe and unsound practice,
which would otherwise be permitted by the regulation.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March
31, 2001, the Bank's limit on loans to one borrower was $7.4 million. At
March 31, 2001, the Bank's largest aggregate loans to one borrower was $4.3
million, which was performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. Generally, transactions
between a savings association or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to
an affiliate, are restricted to a percentage of the association's capital.
Affiliates of the Bank include the Company and any company which is under
common control with the Bank. In addition, a savings association may not lend
to any affiliate engaged in activities not permissible for
27
a bank holding company or acquire the securities of most affiliates. The OTS
has the discretion to treat subsidiaries of savings associations as affiliates
on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Bank received a "satisfactory" rating as a
result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Savings and Loan Holding Company Regulations
The Company is a unitary savings and loan company subject to regulatory
oversight of the OTS. Accordingly, the Company is required to register and
file reports with the OTS and is subject to regulation and examination by the
OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to a serious risk to the subsidiary
savings association.
Acquisitions. Federal law and OTS regulations issued thereunder
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control
of any savings association not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary other than in
a supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the Bank and any other subsidiaries (other than
the Bank or any other SAIF insured savings association) would generally become
subject to additional restrictions. There generally are more restrictions on
the activities of a multiple savings and loan holding company than on those of
a unitary savings and loan holding company. Federal law provides that, among
other
28
things, no multiple savings and loan holding company or subsidiary thereof
which is not an insured association shall commence or continue for more than
two years after becoming a multiple savings and loan association holding
company or subsidiary thereof, any business activity other than: (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. If the Bank fails the qualified thrift
lender test, within one year the Company must register as, and will become
subject to, the significant activity restrictions applicable to bank holding
companies. See "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test" for information regarding the Bank's qualified thrift
lender test.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, the Bank's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
29
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately
one and one-half times the Excess Distribution would be includable in gross
income for federal income tax purposes, assuming a 34% corporate income tax
rate (exclusive of state and local taxes). See "Regulation" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Bank's federal income tax returns have not been audited
within the past five years.
State Taxation
The Bank is subject to an Oregon corporate excise tax at a statutory rate
of 6.6% of income. The Bank's state income tax returns have not been audited
during the past five years.
Competition
The Bank faces strong competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits
has historically come from commercial banks, credit unions, other thrifts
operating in its market area. As of March 31, 2001, there were 12 commercial
banks, credit unions, and other thrifts operating in the Bank's primary
market area. Particularly in times of high interest rates, the Bank has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The Bank's
competition for loans comes from commercial banks, thrift institutions, credit
unions and mortgage bankers. Such competition for deposits and the
origination of loans may limit the Bank's growth in the future.
Subsidiary Activities
The Bank has two subsidiaries, Pioneer Development Corporation ("PDC")
and Pioneer Bank Investment Corporation ("PBIC"). PDC's primary interest was
to purchase land sale contracts until March 31, 1998. Currently, its primary
interest is in servicing those contracts. PBIC's primary interest is to hold
the Bank's non-conforming assets. At March 31, 2001, the Bank's equity
investment in PDC and PBIC was $2.1 million and $178,000, respectively.
30
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
development projects. The Bank's investment in its subsidiaries did not
exceed these limits at March 31, 2001.
Personnel
As of March 31, 2001, the Bank had 122 full-time and two part-time
employees, none of whom is represented by a collective bargaining unit. The
Bank believes its relationship with its employees is good.
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
Name Age(1) Position
- ---- ------ --------
Berniel L. Maughan 58 President and Chief Executive Officer
Zane F. Lockwood 46 Executive Vice President
Jonathan McCreary 33 Chief Financial Officer
- ----------
(1) At March 31, 2001.
Berniel L. Maughan has served as President and Chief Executive Officer of
the Company and the Bank since May 25, 2000. Mr. Maughan previously served
with U.S. Bank, Utah being appointed President and Chief Executive Officer in
February 1997, serving the bank until January 1999. Prior to that, Mr.
Maughan served in the capacity of Senior Vice President and Regional Manager,
and Executive Vice President with U.S. Bank, Oregon from January 1996 to
February 1997. Prior to that, he served as Executive Vice President and
Manager of the Retail Division of West One Bank, Oregon from November 1993
through December 1995; and as Senior Vice President and Regional Manager, West
One Bank, Idaho from August 1986 through November 1993. Mr. Maughan has 32
years of experience in commercial and retail banking, and has been an active
member of numerous civic and community organizations.
Zane F. Lockwood has served as the Bank's Executive Vice President since
March of 1999 and Senior Vice President from March 1998 to March 1999. Prior
to that time, he served as Senior Commercial Lender after joining the Bank in
October 1997. Mr. Lockwood was employed by U.S. Bank for over 24 years in
various capacities before joining the Bank. During his last ten years with
U.S. Bank, he was a team leader in their Regional Business Loan Center located
in Pendleton, Oregon. In that position he supervised the commercial and
agricultural lending in Union, Baker, Wallowa, Grant and Malheur counties.
Mr. Lockwood was very involved in the communities he has resided in having
held numerous board memberships, including president of the La Grande/Union
County Chamber of Commerce.
Jonathan McCreary has served as Chief Financial Officer and Senior Vice
President of the Company and the Bank since July 17, 2000. Mr. McCreary
previously served with Metropolitan Mortgage & Securities Inc., since 1993,
and was Chief Investment Officer in 2000 when he left to join Oregon Trail
Financial Corp. Mr. McCreary has over ten years experience in financial
management, portfolio management and accounting. He is a Chartered Financial
Analyst, Certified Public Accountant, Certified Managerial Accountant, and
holds a Bachelors Degree in Finance and Accounting from Central Washington
University.
31
Item 2. Properties
- -------------------
The following table sets forth certain information regarding the Bank's
offices at March 31, 2001, all of which are owned.
Current Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
Corporate Office:
2055 First Street 1979 10,700 $ 765
Baker City, Oregon 97814
Branch Offices:
Baker City Branch (2) 2000 12,653 72,591
1990 Washington
Baker City, Oregon 97814
La Grande Branch 1975 6,758 51,608
1215 Adams Avenue
La Grande, Oregon 97850
Ontario Branch 1960 3,700 32,401
225 SW Fourth Avenue
Ontario, Oregon 97914
John Day Branch 1973 2,420 16,677
150 West Main Street
John Day, Oregon 97845
Burns Branch 1975 3,968 19,758
77 W. Adams Street
Burns, Oregon 97720
Enterprise Branch 1976 3,360 25,446
205 West Main Street
Enterprise, Oregon 97828
Island City Branch 1997 4,200 18,918
3106 Island Avenue
La Grande, Oregon 97850
Vale Branch 1999 3,512 9,963
150 Longfellow Street North
Vale, Oregon 97918
Pendleton Branch (1) 2000 3,748 5,650
1701 SW Court Avenue
Pendleton, Oregon 97801
- -------------
(1) The Pendleton Branch office was acquired on May 26, 2000.
(2) The Baker City branch and Centralized Lending Center relocated to their
new office on April 23, 2000.
32
The Bank uses the services of an in-house data processing system. At
March 31, 2001, the Bank had 15 proprietary automated teller machines, nine of
which were located in existing branches. At March 31, 2001, the net book
value of the Bank's office properties and the Bank's fixtures, furniture and
equipment was $10.1 million or 2.6% of total assets. See Note 6 of the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Bank's business. The Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Bank.
The Bank is a party to legal proceedings involving a dissident
shareholder. Stilwell Associates, L.P. has filed three separate suits or
proceedings against the Company and Directors Charles Henry Rouse and Edward
H. Elms. The suit against the Company seeks a ruling to require the
production of certain documents to the shareholder and for an award of
attorney fees. The suit against Mr. Rouse is aimed at removing him from the
Company's board of directors for allegedly failing to satisfy the Company's
board's residency requirements. The third action is a purported derivative
suit seeking to remove Mr. Elms from the Company's board of directors.
Pursuant to the Company's Articles of Incorporation and Bylaws and under
Oregon law, the Company is providing for defense costs for both directors in
these actions. The Company believes the likelihood of incurring any material
loss contingency in connection with these matters is remote; however,
continuing defense costs may adversely effect net income in proceeding
periods.
The Company has filed claims against Joseph Stilwell, Stilwell
Associates, L.P., Stilwell Value LLC and Stilwell Value Partners II, L.P. (the
"Stilwell Value Group") denying any basis for the removal of Mr. Elms and
asserts that the Stilwell Value Group has made false and misleading statements
under federal securities laws in their Schedule 13D filings with the
Securities and Exchange Commission. Additionally, the counterclaims assert
that the Company and Mr. Elms were libeled by the members of the Stilwell
Value Group in letter distributed by the Stilwell Value Group to the Company's
shareholders and in their SEC filings.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2001.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
- --------------------------------------------------------------------------
Oregon Trail Financial Corp. common stock is traded over-the-counter on
the Nasdaq National Market under the symbol "OTFC." Stockholders of record at
March 31, 2001 totaled 851. This total does not reflect the number of persons
or entities who hold stock in nominee or "street" name through various
brokerage firms. The following table shows the reported high and low sale
prices of the Company's common stock and declared dividends for each quarter
since the initial offering on October 3, 1997.
Sale Price
----------------- Dividends
Year High Low Declared
---- ---- --- --------
Fiscal 2001
First quarter 11 5/8 8 15/16 $0.08
Second quarter 12 1/8 10 9/16 0.08
Third quarter 14 3/8 11 1/4 0.08
Fourth quarter 14 3/8 13 5/16 0.08
33
Sale Price
----------------- Dividends
Year High Low Declared
---- ---- --- --------
Fiscal 2000
First Quarter 13 3/8 12 3/8 $0.06
Second Quarter 12 7/8 11 0.075
Third Quarter 12 1/8 9 7/8 0.08
Fourth Quarter 10 3/8 8 1/2 0.08
Fiscal 1999
First quarter 18 15 3/4 $0.05
Second quarter 16 11 0.05
Third quarter 14 1/8 11 0.06
Fourth quarter 13 1/4 12 1/16 0.06
Fiscal 1998
Initial offering price -- 10 --
Third quarter 17 3/8 15 1/2 --
Fourth quarter 18 1/2 16 $0.05
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth certain information concerning the
consolidated financial position and results of operations of the Company and
its subsidiary at and for the dates indicated. The consolidated data is
derived in part from, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and its subsidiaries contained in Item 8
of this Form 10-K.
At March 31,
-------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets................ $388,881 $370,612 $313,473 $263,224 $204,213
Loans receivable, net....... 250,897 220,591 185,747 153,838 138,881
Loans held for sale......... -- -- -- -- 428
Stock in FHLB............... 4,651 3,897 3,221 2,985 2,763
Investment securities
available for sale........ 26,914 37,436 37,965 37,225 15,907
Mortgage-backed and
related securities
available for sale........ 70,010 84,615 60,371 27,778 19,745
Mortgage-backed and
related securities
held to maturity.......... -- -- 9,338 12,805 15,302
Cash and cash equivalents... 10,581 9,261 6,276 20,311 4,976
Deposits.................... 253,777 237,735 199,589 192,734 179,158
Advances from FHLB.......... 73,125 76,750 50,250 -- 2,231
Total shareholders' equity.. 57,806 53,104 60,083 67,301 21,027
Shares outstanding
excluding unearned
restricted shares
held in ESOP.............. 3,326 3,317 3,764 4,346 N/A
34
Nine
Months
Year Ended March 31, March 31,
---------------------------------------- ---------
2001 2000 1999 1998 1997 1997
---- ---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
Interest income......... $28,279 $24,548 $20,582 $18,511 $16,082 $12,030
Interest expense........ 15,392 11,776 8,064 7,824 7,475 5,553
------- ------- ------- ------- ------- -------
Net interest income..... 12,887 12,772 12,518 10,687 8,607 6,477
Provision for loan
losses................ 794 178 483 138 226 216
------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses........... 12,093 12,594 12,035 10,549 8,381 6,261
Gains (losses) from sale
of securities.......... (957) -- -- -- (51) --
Noninterest income...... 2,155 1,602 1,098 1,046 828 661
Noninterest expense (1). 11,904 10,115 8,182 6,533 6,454 5,074
------- ------- ------- ------- ------- -------
Income before income
taxes................. 2,344 4,081 4,951 5,062 2,704 1,848
Provision for income
taxes................. 650 1,472 1,797 2,026 1,080 750
------- ------- ------- ------- ------- -------
Net income.............. $ 1,694 $ 2,609 $ 3,154 $ 3,036 $ 1,624 $ 1,098
======= ======= ======= ======= ======= =======
Basic earnings
per share (2)......... $ 0.51 $ 0.74 $ 0.78 $ 0.38 N/A N/A
Weighted average common
shares out-
standing (2).......... 3,331 3,547 4,065 4,326 N/A N/A
Diluted earnings
per share............. $ 0.50 $ 0.70 $ 0.76 $ 0.38 N/A N/A
Weighted average common
dilutive shares........ 3,367 3,724 4,160 4,326 N/A N/A
At March 31,
-------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
OTHER DATA:
Number of:
Real estate loans
outstanding............... 2,182 2,298 2,346 2,245 2,381
Deposit accounts............ 32,306 31,384 28,820 28,781 29,455
Full-service offices........ 9 8 7 7 7
35
At or
for
Nine
Months
At or For Year Ended March 31, March 31,
---------------------------------------- ---------
2001 2000 1999 1998 1997 1997
---- ---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL RATIOS
Performance Ratios: (3)
Return on average
assets (4)............ 0.44% 0.76% 1.14% 1.25% 0.80% 0.72%
Return on average
equity (5)............ 3.09 4.60 4.90 6.65 7.96 7.09
Interest rate
spread (6)............ 3.18 3.10 3.85 3.73 3.89 3.90
Net interest margin (7). 3.51 3.89 4.70 4.60 4.37 4.40
Average interest-
earning assets to
average interest-
bearing liabilities... 118.71 122.02 128.10 125.92 112.74 113.20
Noninterest expense as
a percent of average
total assets.......... 2.85 2.95 2.96 2.69 3.16 3.31
Efficiency ratio (8).... 79.14 70.37 60.09 55.68 68.77 71.09
Dividend payout
ratio (9)............. 64.00 42.14 28.95 13.16 N/A N/A
Asset Quality Ratios:
Nonaccrual and 90 days
or more past due loans
as a percent of
total loans, net...... 0.02 0.07 0.07 0.18 0.14 0.14
Nonperforming assets
as a percent of
total assets.......... 0.03 0.04 0.01 0.22 0.10 0.10
Allowance for losses
as a percent of gross
loans receivable...... 0.82 0.63 0.66 0.55 0.52 0.52
Allowance for losses
as a percent of non-
performing loans...... 3814.55 900.65 889.86 308.07 381.58 381.58
Net charge-offs to
average outstanding
loans................. 0.04 -- 0.06 0.01 0.02 0.03
Capital Ratios:
Total equity-to-assets
ratio................. 14.86 14.33 19.17 25.57 10.30 10.30
Average equity to
average assets (10)... 14.28 16.55 23.27 18.82 10.01 10.14
- -------------
(1) Includes FDIC SAIF assessment of $1.1 million during the nine months and
year ended March 31, 1997.
(2) Weighted average shares outstanding for fiscal year 1998 included shares
from conversion on October 3, 1997 to year end. Earnings per share
include only earnings from date of conversion to year end.
(3) Annualized, where appropriate for the nine months ended March 31, 1997.
(4) Net earnings divided by average total assets.
(5) Net earnings divided by average equity.
(6) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(7) Net interest income as a percentage of average interest-earning assets.
(8) Other expenses divided by the sum of net interest income and other
income. Efficiency ratio without FDIC SAIF assessment was 56.75% and
57.95% for the nine and twelve months ended March 31, 1997,
respectively.
(9) Dividends declared per share divided by net income per share.
(10) Average total equity divided by average total assets.
36
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
Management's Discussion and Analysis and other portions of the report
contain certain "forward-looking statements" of Financial Condition and
Results of Operations concerning the expected future operations of Oregon
Trail Financial Corp. (the "Company"). Management wishes 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
the Company of the protections of such safe harbor with respect to all
"forward-looking statements" contained in this Form 10-K. "Forward-looking
statements" are used to describe future plans and strategies, including
expectations of the Company's future financial results. Management's ability
to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, the ability of the Company to control costs and expenses,
competitive products and pricing, 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
Management's Discussion and Analysis of Financial Condition and Results
of Operations is intended to assist in understanding the financial condition
and results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto contained in this report.
The Company, an Oregon Corporation, became the unitary savings and loan
holding company of Pioneer Bank, a Federal Savings Bank (the "Bank") upon the
Bank's conversion from a federally chartered mutual to a federally chartered
stock savings bank (the "Conversion") on October 3, 1997. Accordingly, the
Company is primarily engaged in the business of planning, directing and
coordinating the business activities of the Bank, the deposits of which are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the
Savings Association Insurance Fund ("SAIF"). The Bank conducts business from
its main office in Baker City, Oregon and its nine branch offices located in
Eastern Oregon.
The Bank operates as a community oriented financial institution devoted
to serving the needs of its customers. The Bank's business consists generally
of attracting retail deposits from the general public and using those funds to
originate one-to-four family residential loans, consumer loans and commercial
loans in its market area. To a lesser extent the Bank also purchases loans in
or near its market area and utilizes wholesale funding from the Federal Home
Loan Bank of Seattle ("FHLB").
The Bank's results of operations depend primarily on its net interest
income, which is the difference between the income earned on its
interest-earning assets, such as loans and investments, and the cost of its
interest-bearing liabilities, consisting of deposits and FHLB borrowings. The
Bank's net income is also affected by, among other things, fee income,
provisions for loan losses, operating expenses and income tax provisions. The
Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and policies concerning monetary and fiscal
affairs, housing and financial institutions and the attendant actions of the
regulatory authorities.
Comparison of Financial Condition at March 31, 2001 and March 31, 2000
Total assets at March 31, 2001 increased $18.3 million to $388.9 million
compared to $370.6 at March 31, 2000. The growth in assets is primarily
attributable to a $30.3 million increase in net loans and a $12.3 million
increase
37
in other assets partially offset by a $25.1 million dollar decrease in
securities. The increases in loans and decrease in securities is a result of
executing the Company's strategic plan which required a substantial reduction
of interest rate risk as well as continued growth in commercial and consumer
lending. For the year, commercial loans, including commercial real estate,
grew 36% or $15.9 million while consumer loans grew 19% or $8.3 million,
accounting for a majority of total loan growth. The greater part of the
increase in assets was funded by a $16.0 million or 7% increase in deposits
partially offset by a $3.6 million decrease in borrowings. The 7% increase in
deposits was particularly strong given the increased competition for deposits,
less aggressive pricing methodology implemented throughout the year in
accordance with the strategic plan and dramatic increase in fee income derived
from the deposit base. Shareholders equity increased 9% or $4.7 million
primarily due to increases in retained earnings and accumulated other
comprehensive income.
Comparison of Operating Results for the Years Ended March 31, 2001 and 2000
General. Net income for the year ended March 31, 2001 was $1.7 million
or $0.51 per share , compared to net income of $2.6 million or $.74 per
share, for the year ended March 31, 2000. The reduction in net income is due
to restructuring charges taken in the second and third quarters of the year,
including a $303,000 reduction in force charge, a $500,000 boost to loss
reserves reflecting increasing commercial loans and a $954,000 loss on sale of
low yielding securities. Net of non-recurring restructuring charges and legal
expenses related to an activist shareholder, core earnings per share were $.29
and $.84 for the quarter and year ended March 31, 2001 respectively,
representing increases of 73% and 20% from reported earnings in periods a year
earlier. The substantial increases in core earnings per share are a result of
the successful execution of the Company's strategic plan which required the
development of sustainable earnings per share growth as its primary objective.
Related objectives included, but were not limited to, reduction of interest
rate sensitive assets, non-interest income growth, non-interest expense
control, core deposit growth and adjusting customer focus from best price to
best service.
Interest Income. Interest income for the year ended March 31, 2001 was
$28.3 million compared to $24.5 million for the year ended March 31, 2000, an
increase of $3.8 million, or 16%. The increase in interest income was a
result of an increase of $38.8 million in average balances of interest-earning
assets and a 0.23% increase in the average yield on those assets. The
increased yield on interest-earning assets was attributable to a higher
interest rate environment in 2001 versus 2000 as well as execution of the
strategic plan, which required the liquidation of low yielding securities and
loan pricing methodology changes which emphasize service over price. Average
loans receivable for the year ended March 31, 2001 increased by $36.7 million,
or 17.8%, when compared to the year ended March 31, 2000.
Interest Expense. Interest expense for the year ended March 31, 2001 was
$15.4 million compared to $11.8 million for the prior year, an increase of
$3.6 million, or 30.5%. The increase in interest expense was due to the $8.0
million growth in average interest-bearing liabilities and the increase in the
average cost of all interest-bearing liabilities from 4.37% to 4.72%. Average
interest bearing deposit balances increased $24.0 million to $233.7 million
while average borrowing balances increased $16.3 to $75.9 million for the year
ended March 31, 2001. The cost of average interest-bearing liabilities
increased 45 basis points for deposits and 98 basis points for borrowings,
reflecting market increases in interest rates as well as greater sensitivity
of the Bank's borrowings as compared to its deposits.
Provision for Loan Losses. The provision for loan losses represents
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. See Note 1 of Notes to Consolidated Financial Statements.
The provision for loan losses increased by $794,000 to $2.1 million at
March 31, 2001. In the year ended March 31, 2001, the company experienced a
27.4% increase in agricultural, commercial and consumer loans while total
loans grew at a rate of 13.9% from March 31, 2000 levels. Management deemed a
greater provision necessary due to
38
the higher percentage growth in the agricultural, commercial and consumer
loans, which are inherently riskier than one-to-four family mortgage loans.
Net charge-offs remained low for 2001 coming in at $92,000, or 0.04% of
average outstanding loans, compared to $10,000 or 0.00%, for the prior year.
The allowance for loan losses equaled 3815% of non-performing loans at March
31, 2001 compared to 901% of non-performing loans at March 31, 2000.
Management believes the allowance for loan losses is adequate at March 31,
2001.
Other Income. Other income increased by $553,000 to a level of $2.2
million as of March 31, 2001. This increase resulted primarily from a 58.8%
increase in core deposit fees. The increase in core deposit fees reflects the
successful addition of several new deposit products and services implemented
to increase fee income and cause the Bank's earnings to be less subject to
changes in interest rates.
Other Expenses. Other operating expenses increased by $1.8 million from
$10.1 million for the year ended March 31, 2000, to $11.9 million for the year
ended March 31, 2001. The increase in expenses was largely due to $1.3
million of restructuring charges which consisted of $957,000 in realized
losses on securities and $303,000 in reduction of force charges. Total
non-cash compensation expense related to stock based compensation and benefits
amounted to $874,000 for the year representing a 11.3% decrease from the
year-ended March 31, 2000 amount of $985,000. Depreciation expense increased
$209,000 due to additional buildings and other capital expenditures.
Income Taxes. The provision for income taxes was $650,000 for the year
ended March 31, 2001 compared to $1.5 million for the year ended March 31,
2000 decreasing the effective tax rate from 36.1% for the prior year to 27.7%
for the current year. The decrease in the effective tax rate was primarily
due to the addition of two qualified zone academy loans made to local school
districts which provide the Bank with tax credits, as well as a higher
percentage of municipal interest income.
Comparison of Operating Results for the Years Ended March 31, 2000 and 1999
Net Income. Net income was $2.6 million for the year ended March 31,
2000 compared to $3.2 million for the year ended March 31, 1999. The 18.8%
decrease resulted primarily from an increase in non-interest (other) expense
of $1.9 million partially offset by a $504,000 increase in noninterest income,
a $305,000 decrease in the loan loss provision, a $254,000 increase in net
interest income and a $325,000 decrease in the provision for income taxes.
Net Interest Income. Net interest income increased 2.4% to $12.8 million
for the year ended March 31, 2000 from $12.5 million for the year ended March
31, 1999. Interest income increased 18.9% to $24.5 million for the year ended
March 31, 2000 compared to $20.6 million for the same period ended March 31,
1999. The increase was primarily due to increases in earning assets, as loans
outstanding increased $34.9 million and investments increased $14.4 million.
Interest expense increased 45.7% from $8.1 million for the year ended March
31, 1999 to $11.8 million for the year ended March 31, 2000. The increase is
primarily due to an increase of $42.5 million in average outstanding FHLB
advances for the year ended March 31, 2000 compared to March 31, 1999 which
resulted in an increase of $2.4 million in interest expense related to the
advances. The average cost of FHLB advances increased from 5.03% for the year
ended March 31, 1999 to 5.37% for the year ended March 31, 2000, as a result
of the increase in short term interest rates. During the fiscal year ended
March 31, 2000, the Federal Reserve Open Market Committee increased the Fed
Funds rate five times, beginning in July 1999 and ending in March 2000 for a
total increase of 1.25%. Interest expense on deposits increased only $1.3
million year over year while the average balance of deposits increased $29.5
million. The average balance of lower costing core deposits consisting of
statement savings, checking and money market accounts increased $20.1 million
while the average balance of certificates of deposit increased only $9.4
million. Even with the rising short term interest rates, the average cost of
deposits increased only slightly from 4.00% for the year ended March 31, 1999
to 4.07% for the year ended March 31, 2000, primarily as a result of the
positive change in the deposit mix. The interest rate spread decreased to
3.10% for the year ended March 31, 2000 from 3.65% for the year ended March
31, 1999. The decrease is attributed to a 25 basis point decrease in the
yield on the Bank's loan portfolio and a 99 basis point decrease in the yield
on the investment securities portfolio, as well as a 38 basis point increase
in the cost of FHLB advances.
39
Provision for Loan Losses. The provision 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. See Note
1 of Notes to Consolidated Financial Statements.
The provision for loan losses was $178,000 for the year ended March 31,
2000 compared to $483,000 for the same period in 1999. In the year ended
March 31, 1999 management deemed a greater provision necessary due to a very
high percentage of growth in agricultural, commercial business and consumer
loans, which are inherently riskier than one-to-four family mortgage loans.
Although the same categories of loans experienced strong growth in the year
ended March 31, 2000, a larger base of more seasoned loans existed in those
categories at the beginning of the year, and accordingly, the growth was not
as significant to the total loan portfolio as in the prior year.
Other Income. Other income was $1.6 million for the year ended March 31,
2000, compared to $1.1 million for the year ended March 31, 1999. This 45.5%
increase resulted primarily from increased core deposit fees and fees related
to lending activities, as well as a $173,000 gain on the sale of land.
Other Expenses. Other expenses were $10.1 million for the year ended
March 31, 2000 compared to $8.2 million for the year ended March 31, 1999.
The increase from the prior year was primarily due to a $1.2 million increase
in compensation and benefits expense. Increases in this area were due to an
increase of $184,000 in non-cash expense related to the MRDP, partially offset
by an $111,000 decrease in non-cash expense related to the ESOP when compared
to the prior year. (See Note 1 and Note 12 of Notes to Consolidated Financial
Statements.) Total non-cash compensation expense related to stock based
compensation and benefits amounted to $985,000 for the year. Additional
increases in other expense related to increased compensation and benefits
expense of $1.1 million due to an increase in the number of employees and
regular salary increases as well as severance paid to the Chief Executive
Officer who resigned in January 2000. Depreciation expense increased $193,000
due to additional buildings and other capital expenditures. For the year
ended March 31, 2000 compared to the year ended March 31, 1999, other expense
changes included a $271,000 increase in supplies, postage and telephone
expense, primarily due to increased core deposit accounts, providing telephone
service to the new centralized lending center, supplies for an increased
number of employees, and a general increase in business activity associated
with loan and deposit growth. Occupancy and equipment maintenance expense
increased $159,000 due to the new branch building in Vale, the placement of
additional ATM's in new locations, and maintenance of technological upgrades,
as well as general increases in utilities and other expense levels. Customer
accounts expense for servicing deposit accounts increased $134,000 due to the
growth in deposit accounts.
Income Taxes. The provision for income taxes was $1.5 million for the
year ended March 31, 2000 compared to $1.8 million for the year ended March
31, 1999 decreasing the effective tax rate from 36.3% for the prior year to
36.1% for the current year. The decrease in the effective tax rate was due to
an increase of $290,000 of tax-exempt interest earned on Oregon municipal
bonds. In the prior year the effective tax rate was decreased to 36.3% due to
a $125,000 rebate received from the State of Oregon because the statutory rate
paid on taxable income for the year ended March 31, 1998 was reduced from 6.6%
to 3.3% by legislative action in the final quarter of the fiscal year ended
March 31, 1999.
Average Balances, Interest and Average Yields/Costs
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets
and interest expense on average interest-bearing liabilities and average
yields and costs. Such yields and costs for the periods indicated are derived
by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances for the years ended March 31, 2001, 2000 and
40
1999. For other years presented average balances are derived from monthly balances. Management does not
believe that the use of month-end balances instead of daily balances has caused any material inconsistencies
in the information presented.
Year Ended March 31,
------------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------ -------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- -------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1).... $242,662 $20,155 8.31% $206,006 $ 16,709 8.11% $168,226 $ 14,072 8.36%
Mortgage-backed securities... 77,413 5,496 7.10 76,393 5,208 6.82 55,786 3,819 6.85
Investment securities........ 34,164 2,201 6.44 37,573 2,379 6.33 31,475 2,304 7.32
FHLB stock................... 4,411 286 6.48 3,373 239 7.09 3,073 236 7.68
Federal funds sold and
overnight interest-
bearing deposits............ 8,847 141 1.59 5,402 13 0.24 7,607 151 1.99
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................... 367,497 28,279 7.70 382,747 24,548 7.47 266,167 20,582 7.73
-------- ------- -------- ------- -------- -------
Non-interest-earning assets.. 16,512 14,167 10,557
-------- -------- --------
Total assets............... $384,009 $342,914 $276,724
======== ======== ========
Interest-bearing liabilities
Passbook accounts............ $ 16,983 397 2.34 $ 19,986 472 2.36 $ 21,800 579 2.66
Money market accounts........ 53,852 2,213 4.11 44,500 1,922 4.32 24,412 889 3.64
NOW accounts................. 37,122 463 1.25 37,341 460 1.29 35,537 532 1.50
Certificates of deposit...... 125,756 7,502 5.97 107,912 5,672 5.26 98,533 5,203 5.28
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits................. 233,713 10,575 4.52 209,739 8,526 4.07 180,282 7,203 4.00
-------- ------- -------- ------- -------- -------
Securities sold under
agreements to repurchase.... -- -- NA 67 4 5.97 -- -- NA
FHLB advances................ 75,871 4,817 6.35 59,609 3,246 5.37 17,108 861 5.03
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............... 309,584 15,392 4.72 269,415 11,776 4.37 197,390 8,064 4.09
-------- ------- -------- ------- -------- -------
Non-interest-bearing
liabilities............... 19,607 16,755 14,938
-------- -------- --------
Total liabilities.......... 329,191 286,170 212,328
-------- -------- --------
Shareholders' equity......... 54,818 56,744 64,396
-------- -------- --------
Total liabilities and
shareholders' equity...... $384,009 $342,914 $276,724
======== ======== ========
Net interest income.......... $12,887 $12,772 $12,518
======= ======= =======
Interest rate spread......... 3.18% 3.10% 3.65%
Net interest margin.......... 3.51% 3.89% 4.70%
Ratio of average interest-
earning assets to average
interest-bearing
liabilities................. 118.71% 122.02% 134.84%
- ---------------
(1) Does not include interest on loans 90 days or more past due. Includes loans originated for sale.
41
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on net interest income of the Bank. Information is provided with respect to
(i) effects on interest income attributable to changes in rate (changes in
rate multiplied by prior volume); (ii) effects on interest income attributable
to changes in volume (changes in volume multiplied by prior rate); (iii) the
net change attributable to the combined impact of volume and rate; and (iv)
the total change (the sum of the prior columns).
Year Ended March 31, Year Ended March 31,
2001 Compared to Year 2000 Compared to Year
Ended March 31, 2000 Ended March 31, 1999
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------- ---------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In thousands)
Interest-earning assets:
Loans receivable (1)........... $ 412 $2,973 $ 61 $3,446 $ (421) $3,158 $ (96) $ 2,641
Mortgage-backed and related
securities................... 214 70 4 288 (17) 1,412 (6) 1,389
Investment securities.......... 41 (216) (3) (178) (312) 446 (62) 72
FHLB stock..................... (21) 74 (6) 47 (18) 23 (2) 3
Federal funds sold and
overnight interest-bearing
deposits. ................... 73 8 47 128 (133) (44) 38 (139)
------ ------ ----- ------ ------ ------ ----- ------
Total net change in income
on interest-earning
assets.................... 719 2,909 103 3,731 (901) 4,995 (128) 3,966
------ ------ ----- ------ ------ ------ ----- ------
Interest-bearing liabilities:
Passbook accounts.............. (4) (71) -- (75) (65) (48) 5 (108)
Money market accounts.......... (93) 404 (20) 291 144 731 131 1,006
NOW accounts................... (15) (3) 21 3 (75) 27 (4) (52)
Certificate accounts........... 766 939 125 1,830 (20) 495 (2) 473
Securities sold under
agreements to repurchase...... -- -- (4) (4) -- -- 4 4
FHLB advances.................. 584 873 114 1,571 65 2,138 186 2,389
------ ------ ----- ------ ------ ------ ----- ------
Total net change in expense on
interest-bearing liabilities. 1,238 2,142 236 3,616 49 3,343 320 3,712
------ ------ ----- ------ ------ ------ ----- ------
Net change in net interest
income........................ $ (519) $ 767 $(133) $ 115 $ 950 $1,652 $(448) $ 254
====== ====== ===== ====== ====== ====== ===== ======
- -----------
(1) Does not include interest on loans 90 days or more past due. Includes loans originated for sale.
Market Risk and Asset and Liability Management
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Bank manages other risks, such as credit quality and liquidity
risk, in the normal course of business, management considers interest rate
risk to be its most significant market risk that could potentially have the
largest material effect on the Bank's financial condition and results
42
of operations. Other types of market risks, such as foreign currency exchange
rate risk and commodity price risk, do not arise in the normal course of the
Bank's business activities.
The Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest
rates. The Bank has sought to reduce the exposure of its earnings to changes
in market interest rates by attempting to manage the mismatch between asset
and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest-rate sensitivity of the
Bank's interest-earning assets by originating for its portfolio an increasing
proportion of loans with interest rates subject to periodic adjustment to
market conditions (including commercial business, agricultural and consumer
loans). The Bank relies on retail deposits as its primary source of funds.
Management believes retail deposits and in particular core deposits (checking
and passbook savings accounts), compared to brokered deposits, reduce the
effects of interest rate risk. Management's efforts at lowering the Bank's
interest rate risk have proven successful. The Bank was examined by the OTS
and received a "satisfactory" rating.
The Bank's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling, which is performed for the Bank by the
FHLB. The modeling process is designed to capture the dynamics of balance
sheet, interest rate and spread movements and to quantify variations in net
interest income resulting from those movements under different rate
environments. The interest rate sensitivity analysis performed by the FHLB for
the Bank incorporates end of period rate, balance and maturity data compiled
by the Bank's management using various levels of aggregation of that data.
The following table is provided by the FHLB and sets forth the change in
the Bank's net portfolio value ("NPV") at March 31, 2001, based on FHLB
assumptions, that would occur in the event of an immediate change in interest
rates, with no effect given to any steps that management might take to
counteract that change. NPV is defined as the present value of expected net
cash flows from existing assets minus the present value of expected net cash
flows from existing liabilities plus the present values of net expected cash
inflows from existing off-balance sheet contracts.
Basis Points ("bp") Estimated Change in
Change in Interest Rates (1) Net Portfolio Value
- ---------------------------- -----------------------------------------
2001 2000
------------------ --------------------
(In Thousands)
400 bp $(31,472) (62.01)% $(39,594) (106.62)%
300 (22,992) (45.31) (30,150) (81.19)
200 (14,685) (28.94) (20,574) (55.40)
100 (6,675) (13.15) (10,515) (28.32)
0 -0- -0- -0- -0-
(100) 135 0.27 8,421 22.68
(200) 101 0.20 14,224 38.30
(300) 306 0.60 16,099 43.35
(400) 1,329 2.62 17,589 47.37
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2001 would reduce the
Bank's NPV by approximately $14.7 million, or 28.9% at that date. This
compares to a reduction in the Bank's NPV by approximately $20.6 million, or
55.4% at March 31, 2000.
Certain assumptions utilized by the FHLB in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. In
the event of a change in interest rates, expected rates of prepayments on
loans and early withdrawals from certificates could deviate significantly from
those assumed in calculating the table. The model
43
assumes a parallel change in rates, whereas actual market interest rates would
not necessarily react in a parallel manner. Further, call provisions of
certain securities, which shorten the actual term to maturity if exercised,
are not taken into account in the model.
The following table presents the Bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair value at March 31, 2001. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
One Year After
Average Within to Three 3 Years to Beyond Fair
Rate One Year Years 5 Years 5 Years Total Value
---- -------- ----- ------- ------- ----- -----
(Dollars in thousands)
Interest Sensitive
Assets:
Loans receivable......... 8.31% $111,873 $59,875 $39,074 $40,075 $250,897 $263,341
Mortgage-backed
securities............. 6.95 10,936 15,879 10,468 32,727 70,010 70,010
Tax free municipal bonds. 4.54 -- -- -- 10,086 10,086 10,086
Investments and other
interest-earning
assets................. 6.90 -- -- -- 16,828 16,828 16,828
FHLB stock............... 6.30 -- -- -- 4,651 4,651 4,651
Interest Sensitive
Liabilities:
NOW checking............. 1.25 10,792 12,842 6,293 6,045 35,972 35,972
Passbook savings......... 2.33 4,875 5,802 2,843 2,731 16,251 16,251
Money market deposits.... 3.45 43,186 10,365 415 17 53,983 53,983
Time certificates........ 6.12 94,502 25,365 8,026 -- 127,893 127,893
Off-balance Sheet Items:
Commitments to extend
credit................. 10.10 15,658 5,305 2.366 13,175 36,504 36,504
Liquidity and Capital Resources
The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans, maturing securities and FHLB
advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows, mortgage prepayments and maturing
securities, cash flows and anticipated maturities of mortgage-backed bonds and
agency securities are greatly influenced by general interest rates, economic
conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure
sufficient funds to fund loan originations and deposit withdrawals, to satisfy
other financial commitments and to take advantage of investment opportunities.
The Bank generally maintains sufficient cash and short-term investments to
meet short-term liquidity needs. At March 31, 2001 cash and cash equivalents
totaled $10.6 million or 2.7% of total assets. The Bank also maintained an
uncommitted credit facility with the FHLB which provided for immediately
available advances up to an aggregate amount of $116.7 million, under which
$73.1 million in advances were outstanding at March 31, 2001. In addition to
the FHLB credit facility, at March 31, 2001 the Bank had a $50.0 million
reverse repurchase line of credit available with Merrill Lynch and a $15.0
million overnight line of credit with Key Bank.
Office of Thrift Supervision regulations require savings institutions to
maintain an average balance of liquid assets (cash and eligible investments)
equal to at least 4.0% of the average daily balance of its net withdrawable
deposits and short-term borrowings. The Bank's liquidity ratio at March 31,
2001 was 10.13%.
The Bank's primary investing activity is the origination of one-to-four
family mortgage loans within its primary market area. During the years ended
March 31, 2001, 2000 and 1999 the Bank originated $22.3 million, $30.1
million,
44
and $38.8 million of such loans, respectively. At March 31, 2001, the Bank
had commitments to extend credit totaling $36.5 million. The Bank anticipates
that it will have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year
from March 31, 2001 totaled $95.9 million. Historically, the Bank has been
able to retain a significant amount of its deposits as they mature.
Office of Thrift Supervision regulations require the Bank to maintain
specific amounts of regulatory capital. As of March 31, 2001, the Bank
complied with all regulatory capital requirements as of that date with
tangible, core and total capital ratios of 12.5%, 12.5% and 22.3%,
respectively. See Note 15 of Notes of Consolidated Financial Statements.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the
change in the relative purchasing power of money over time due to inflation.
The primary impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained in the section captioned "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Market Risk and Asset and Liability Management" of this Form 10-K is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report......................................... 46
Consolidated Balance Sheets as of March 31, 2001 and 2000............ 47
Consolidated Statements of Income For the Years Ended
March 31, 2001, 2000 and 1999...................................... 49
Consolidated Statements of Shareholders' Equity For the
Years Ended March 31, 2001, 2000 and 1999.......................... 51
Consolidated Statements of Cash Flows For the Years Ended
March 31, 2001, 2000 and 1999...................................... 53
Notes to Consolidated Financial Statements........................... 55
45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Oregon Trail Financial Corp. and Subsidiary
Baker City, Oregon
We have audited the accompanying consolidated balance sheets of Oregon Trail
Financial Corp. and Subsidiary (the "Company) as of March 31, 2001 and 2000,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended March 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Oregon Trail Financial Corp. and
Subsidiary as of March 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/Deloitte & Touche LLP
May 18, 2001
46
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
(In thousands, except share data)
- ------------------------------------------------------------------------------
ASSETS 2001 2000
Cash and due from banks $ 1,955 $ 1,673
Interest-bearing deposits 8,626 7,588
--------- ---------
Total cash and cash equivalents 10,581 9,261
Securities:
Investment securities available for sale, at fair
value (amortized cost of $26,915 and $39,937) 26,914 37,436
Mortgage-backed and related securities available
for sale, at fair value (amortized cost of
$68,682 and $87,436) 70,010 84,615
Loans receivable, net of allowance for loan losses
of $2,098 and $1,396 250,897 220,591
Accrued interest receivable 2,372 2,452
Premises and equipment, net 10,136 9,902
Stock in Federal Home Loan Bank of Seattle, at cost 4,651 3,897
Real estate owned 63 -
Net deferred tax asset - 1,507
Other assets 13,257 951
--------- ---------
TOTAL ASSETS $ 388,881 $ 370,612
========= =========
(Continued)
47
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
(In thousands)
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
LIABILITIES:
Deposits:
Interest-bearing $ 106,206 $ 106,285
Noninterest-bearing 19,678 14,961
Time certificates 127,893 116,489
--------- ---------
Total deposits 253,777 237,735
Accrued expenses and other liabilities 3,684 2,333
Advances from Federal Home Loan Bank of Seattle 73,125 76,750
Net deferred tax liability 467 -
Advances from borrowers for taxes and insurance 22 690
--------- ---------
Total liabilities 331,075 317,508
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 8,000,000 shares
authorized; March 31, 2001, 4,694,875 issued,
3,325,757 outstanding; March 31, 2000, 4,694,875
issued, 3,317,006 outstanding 36 36
Additional paid-in capital 30,972 31,743
Retained earnings (substantially restricted) 28,374 27,759
Unearned shares issued to the Employee Stock
Ownership Plan (1,878) (2,415)
Unearned shares issued to the Management Recognition
and Development Plan (515) (740)
Accumulated other comprehensive income (loss) 817 (3,279)
--------- ---------
Total shareholders' equity 57,806 53,104
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 388,881 $ 370,612
========= =========
See notes to consolidated financial statements. (Concluded)
48
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(In thousands)
- ------------------------------------------------------------------------------
2001 2000 1999
INTEREST INCOME:
Interest and fees on loans receivable $ 20,155 $ 16,709 $ 14,072
Securities:
Mortgage-backed and related securities 5,496 5,208 3,819
U.S. government and government agencies
and other 2,342 2,392 2,455
Federal Home Loan Bank of Seattle dividends 286 239 236
-------- -------- --------
Total interest income 28,279 24,548 20,582
-------- -------- --------
INTEREST EXPENSE:
Deposits 10,575 8,526 7,203
Securities sold under agreements to repurchase - 4 -
Federal Home Loan Bank of Seattle advances 4,817 3,246 861
-------- -------- --------
Total interest expense 15,392 11,776 8,064
-------- -------- --------
Net interest income 12,887 12,772 12,518
PROVISION FOR LOAN LOSSES 794 178 483
-------- -------- --------
Net interest income after provision for
loan losses 12,093 12,594 12,035
-------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 1,728 1,088 757
Loan servicing fees 391 284 294
Other income 36 230 47
-------- -------- --------
Total noninterest income 2,155 1,602 1,098
-------- -------- --------
(Continued)
49
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(In thousands, except share data)
- ------------------------------------------------------------------------------
2001 2000 1999
NONINTEREST EXPENSES:
Employee compensation and benefits $ 6,601 $ 6,022 $ 4,862
Supplies, postage, and telephone 860 850 579
Depreciation 895 686 493
Occupancy and equipment 705 618 459
Customer accounts 550 426 292
Advertising 314 449 442
Professional fees 429 267 295
FDIC insurance premium 49 103 120
Realized loss on securities 957 - -
Other 544 694 640
----------- ---------- ----------
Total noninterest expenses 11,904 10,115 8,182
----------- ---------- ----------
Income before income taxes 2,344 4,081 4,951
PROVISION FOR INCOME TAXES 650 1,472 1,797
----------- ---------- ----------
NET INCOME $ 1,694 $ 2,609 $ 3,154
=========== ========== ==========
Basic earnings per share $ 0.51 $ 0.74 $ 0.78
Diluted earnings per share $ 0.50 $ 0.70 $ 0.76
Weighted average common shares outstanding:
Basic 3,331,002 3,546,873 4,065,423
Diluted 3,367,210 3,723,600 4,159,540
See notes to consolidated financial statements. (Concluded)
50
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(In thousands, except share data)
- -----------------------------------------------------------------------------------------------------------
Unearned
Unearned Shares
Shares Issued
Issued to Accumulated
to Manage- Other
Employee ment Compre- Compre-
Common Stock Additional Stock Develop- hensive hensive
---------------- Paid-in Retained Ownership 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) $ - $ 889 $67,301
Net income - - - 3,154 - - $ 3,154 - 3,154
Cash dividends paid - - - (916) - - - - (916)
Stock repurchased and
retired (488,883) (6) (9,355) - - - - - (9,361)
Stock repurchased and
issued to MRDP plan (147,322) 1 1,641 - - (1,642) - - -
Earned ESOP shares 53,656 - 186 - 537 - - - 723
Earned MRDP shares - - - - - 189 - - 189
Net unrealized loss on
securities available
for sale (net of
$654 of tax benefit) - - - - - - (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 - - - 2,609 - - $ 2,609 - 2,609
Cash dividends paid - - - (1,056) - - - - (1,056)
Stock repurchased
and retired (534,228) (6) (6,350) - - - - - (6,356)
Earned ESOP shares 53,656 - 76 - 536 - - - 612
New MRDP shares granted - - 71 - - (71) - - -
Earned MRDP shares 34,014 - - - - 373 - - 373
Forfeitures of MRDP shares - - (411) - - 411 - - -
Net unrealized loss on
securities available
for sale (net of $1,970
of tax benefit) - - - - - - (3,161) (3,161) (3,161)
Comprehensive loss - - - - - - $ (552) - -
--------- ----- ------- ------- ------- ------- ======= ------ ------
BALANCE, MARCH 31, 2000 3,317,006 36 31,743 27,759 (2,415) (740) (3,279) 53,104
51
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(In thousands, except share data)
- -----------------------------------------------------------------------------------------------------------
Unearned
Unearned Shares
Shares Issued to
Issued Management Accumulated
to Recognition Other
Employee and Compre- Compre-
Common Stock Additional Stock Develop- hensive hensive
---------------- Paid-in Retained Ownership ment Income Income
Shares Amount Capital Earnings Trust Plan (Loss) (Loss) Total
BALANCE, MARCH 31, 2000 3,317,006 $ 36 $31,743 $27,759 $(2,415) $ (740) - $(3,279) $53,104
Net income - - - 1,694 - - $ 1,694 - 1,694
Cash dividends paid - - - (1,079) - - - - (1,079)
Stock repurchased
and retired (76,308) (1) (945) - - - - - (946)
Earned ESOP shares 53,656 - 70 - 537 - - - 607
New MRDP shares granted - - 42 - - (42) - - -
Earned MRDP shares 25,811 - - - - 267 - - 267
Exercise of stock options 5,592 1 62 - - - - - 63
Net unrealized gain on
securities available
for sale of $5,584
(net of tax expense
of $3,319) less reclass-
ification adjustment for
net losses included in
net income of $1,488 (net
of tax benefit of $766) - - - - - - 4,096 4,096 4,096
-------
Comprehensive income - - - - - $ 5,790 - -
--------- ----- ------- -------- -------- ------- ======= ------ -------
BALANCE, MARCH 31, 2001 3,325,757 $ 36 $30,972 $28,374 $(1,878) $ (515) $ 817 $57,806
========= ===== ======= ======== ======== ======= ====== =======
See notes to consolidated financial statements.
52
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(In thousands)
- ------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,694 $ 2,609 $ 3,154
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 895 686 493
Compensation expense related to ESOP 607 612 723
Compensation expense related to MRDP 267 373 189
Amortization of deferred loan fees (71) (107) (248)
Provision for loan losses 794 178 483
Deferred income taxes (267) (264) (60)
Amortization and accretion of
premiums and discounts on invest-
ments and loans purchased 361 191 (319)
Federal Home Loan Bank of Seattle
dividends (286) (239) (236)
Gain on sale of real estate owned - (22) (11)
(Gain) loss on sale of premises
and equipment 5 (158) 4
Change in assets and liabilities:
Accrued interest receivable 80 (440) (336)
Other assets (12,678) (6) 30
Accrued expenses and other
liabilities 1,351 (66) 1,140
----------- ----------- -----------
Net cash provided by (used in)
operating activities (7,248) 3,347 5,006
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (103,783) (101,399) (108,660)
Loan principal repayments 92,291 80,661 84,090
Loans purchased (19,774) (14,533) (7,693)
Proceeds from maturity of securities
available for sale - 5,027 25,223
Principal repayments of securities
available for sale 10,808 13,362 8,916
Purchase of securities available
for sale (17,000) (37,989) (68,781)
Principal repayments of securities
held to maturity - - 3,533
Proceeds from sale of securities
available for sale 37,841 - -
Purchases of stock in Federal Home
Loan Bank of Seattle (468) (437) -
Purchase of premises and equipment (1,137) (2,990) (2,898)
Proceeds from sale of premises and
equipment 3 385 153
Proceeds from sale of real estate owned - 324 340
----------- ----------- -----------
Net cash used in investing activities (1,219) (57,589) (65,777)
----------- ----------- -----------
(Continued)
53
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(In thousands)
- ------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Increase in deposits, net of
withdrawals $ 16,042 $ 38,146 $ 6,855
Change in advances from borrowers
for taxes and insurance (668) (7) (92)
Proceeds from Federal Home Loan Bank
of Seattle advances 1,080,422 938,208 127,950
Repayment of Federal Home Loan Bank
of Seattle advances (1,084,047) (911,708) (77,700)
Payment of cash dividends (1,079) (1,056) (916)
Stock options exercised 63 - -
Stock repurchased and retired (946) (6,356) (9,361)
----------- ----------- -----------
Net cash provided by financing activities 9,787 57,227 46,736
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,320 2,985 (14,035)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 9,261 6,276 20,311
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,581 $ 9,261 $ 6,276
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits and other
borrowings $ 14,691 $ 11,229 $ 7,887
Income taxes 435 1,385 2,409
Noncash investing activities:
Transfer of loans to foreclosed
real estate 41 264 51
Unrealized gain (loss) on securities
available for sale, net of tax 4,096 (3,161) (1,007)
See notes to consolidated financial statements. (Concluded)
54
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
- ------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Oregon Trail Financial Corp. and its wholly-owned
subsidiary, Pioneer Bank, a Federal Savings Bank (the "Bank"),
collectively (the "Company"). Oregon Trail Financial Corp. became the
holding company of the Bank upon conversion of the Bank from a
federally-chartered mutual savings and loan association to a
federally-chartered capital stock savings and loan association on October
3, 1997. All intercompany accounts and transactions have been eliminated
in consolidation.
NATURE OF OPERATIONS - The Company is engaged in the business of
accepting savings and demand deposits and providing mortgage, consumer,
and commercial loans, and to a lesser extent, agricultural loans to its
customers in eastern Oregon.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make assumptions. These assumptions result
in estimates that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - The Company considers all cash on hand and
due from banks, all interest-bearing deposits held at domestic banks, and
investment securities with a maturity of three months or less at date of
acquisition to be cash equivalents.
SECURITIES - The Company accounts for securities in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Securities are classified as held to maturity where the Company has the
ability and positive intent to hold them to maturity. Securities held to
maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts to maturity. Securities bought and held
principally for the purpose of sale in the near term are classified as
trading securities and are carried at fair value. There were no trading
securities or held to maturity securities at March 31, 2001 and 2000.
Securities not classified as trading, or as held to maturity, are
classified as available for sale. Unrealized holding gains and losses on
securities available for sale are excluded from earnings and are reported
net of tax as a separate component of equity until realized. These
unrealized holding gains and losses net of tax are also included as a
component of comprehensive income. Unrealized losses on securities
resulting from an other than temporary decline in fair value are
recognized in earnings when incurred. Realized and unrealized gains and
losses are determined using the specific identification method.
FEDERAL HOME LOAN BANK STOCK - The Company's investment in Federal Home
Loan Bank of Seattle ("FHLB") stock is carried at cost, which
approximates its fair value. As a member of the FHLB system, the Company
is required to maintain a minimum level of investment in
55
FHLB stock based on specified percentages of its outstanding mortgages,
total assets or FHLB advances. The Company's minimum investment
requirement was approximately $3,656,000, and $3,387,000 at March 31,
2001 and 2000 respectively. The Company may request redemption at par
value of any stock in excess of the amount the Company is required to
hold. Stock redemptions are granted at the discretion of the FHLB.
LOANS RECEIVABLE - Loans are stated at unpaid principal less net deferred
loan origination fees. Interest income on loans is recognized based on
the principal and the stated interest rates and includes the amortization
of net deferred loan origination fees based on the level yield method
over the contractual life of the loans adjusted on a prospective basis
for prepayments and delinquencies. Net deferred loan origination fees on
loans held for sale are recognized in earnings when sold. Recognition of
interest income is discontinued and accrued interest is reversed when a
loan is placed on nonaccrual status. A loan is generally placed on
nonaccrual status when the loan becomes contractually past due more than
90 days. Delinquent interest on loans past due 90 days or more is charged
off or an allowance is established by a charge to income equal to all
interest previously accrued. Interest payments received on nonaccrual
loans are applied to principal if collection of principal is doubtful.
Loans are removed from nonaccrual status only when the loan is deemed
current and collectibility of principal and interest is no longer
doubtful.
LOANS HELD FOR SALE - To mitigate interest rate sensitivity, from time to
time certain fixed rate loans are identified as held for sale in the
secondary market. Accordingly, such loans are classified as held for sale
in the consolidated balance sheets and are carried at the lower of
aggregate cost or net realizable value. At March 31, 2001 and 2000, there
were no loans held for sale.
ALLOWANCE FOR LOAN LOSSES - Allowances for losses on specific problem
loans and real estate owned are charged to earnings when it is determined
that the value of these loans and properties, in the judgment of
management, is impaired. In addition to specific reserves, the Company
also maintains a general allowance for loan losses based on evaluating
known and inherent risks in the loan portfolio, including management's
continuing analysis of the factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of
the loan portfolio, 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
reserve is an estimate based upon factors and trends identified by
management at the time financial statements are prepared.
The Company accounts for impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures. These statements address the disclosure requirements and
allocations of the allowance for loan losses for certain impaired loans.
loan within the scope of these statements is considered impaired when,
based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual
terms of the loan agreement, including scheduled interest payments.
Smaller balance homogeneous loans, including single family residential
and consumer loans, are excluded from the scope of this statement.
When a loan has been identified as being impaired, the amount of the
impairment is measured by using discounted cash flows, except when it is
determined that the sole source of repayment for the loan is the
operation or liquidation of the underlying collateral. In such
56
case, impairment is measured at current fair value of the collateral,
reduced by estimated selling costs. When the measurement of the impaired
loan is less than the recorded investment in the loan (including accrued
interest, net deferred loan fees or costs, and premium or discount), loan
impairment is recognized by establishing or adjusting an allocation of
the allowance for loan losses. The Company generally considers these
loans on a nonaccrual status to be impaired. SFAS No. 114, as amended,
does not change the timing of charge-offs of loans to reflect the amount
ultimately expected to be collected. At March 31, 2001 and 2000,
respectively, the Company had no loans deemed to be impaired as defined
by SFAS No. 114.
REAL ESTATE OWNED - Real estate acquired through foreclosure is stated at
the lower of cost (principal balance of the former mortgage loan plus
costs of obtaining title and possession) or estimated fair value at the
time of foreclosure less estimated selling costs. Costs of development
and improvement of property are capitalized, and holding costs and market
adjustments are charged to expense as incurred.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is recognized on the straight-line
method over the estimated useful lives of the assets ranging from 3 to 40
years. Major renewals and betterments are capitalized and repairs are
expensed. Gains or losses from disposals of premises and equipment are
reflected in other noninterest expenses.
INCOME TAXES - The Company accounts for income taxes in accordance with
the provisions of SFAS No. 109, Accounting For Income Taxes, which
requires the use of the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
EMPLOYEE STOCK OWNERSHIP PLAN - The Company sponsors an Employee Stock
Ownership Plan ("ESOP"). The ESOP is accounted for in accordance with the
American Institute of Certified Public Accountants Statement of Position
93-6, Employer's Accounting for Employee Stock Ownership Plans.
Accordingly, the shares held by the ESOP are reported as unearned shares
issued to the employee stock ownership plan in the balance sheet. As
shares are committed to be released, compensation expense is recorded
equal to the then current market price of the shares, and the shares
become outstanding for earnings per share calculations. The Company is
allocating the shares ratably over a seven-year period beginning with the
first allocation on December 31, 1997.
MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN - The Company sponsors a
Management Recognition and Development Plan ("MRDP"). The MRDP is
accounted for in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The plan authorizes the grant of common stock shares to
certain officers and directors, which vest over a two to six year period
in equal installments. The Company recognizes compensation expense based
on the fair value of the common stock at the grant date. Granted MRDP
shares that have not yet vested are considered to be contingently
issuable shares and are only included in diluted earnings per share. When
the MRDP shares vest, they are included in basic earnings per share.
57
STOCK-BASED COMPENSATION - The Company accounts for stock compensation
using the intrinsic value method as prescribed in Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Under the intrinsic value based method,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of stock at grant date over the amount an
employee must pay to acquire the stock. Stock options granted by the
Company have no intrinsic value at the grant date and, under APB No. 25,
there is no compensation expense to be recorded.
SFAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The fair value approach measures compensation costs based on
factors such as the term of the option, the market price at grant date,
and the option exercise price, with expense recognized over the vesting
period. See Note 14 for the pro forma effect on net income and earnings
per share as if the fair value method had been used.
RECENTLY ISSUED/ADOPTED ACCOUNTING PRONOUNCEMENTS - In June 2000, the
Financial Accounting Standards Board issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. This
pronouncement adds to and amends certain reporting standards from the
guidance in SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, previously issued in June 1998 and adopted by the
Company effective April 1, 1999. The Company does not have any derivative
instruments that meet the scope of this statement.
2. SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of securities classified as available for sale at March 31, 2001
and 2000 are summarized as follows (in thousands):
58
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2001
Available for sale:
Investment securities:
U.S. government and government
agency obligations maturing
after five years through
ten years $ 5,169 $ 103 $ - $ 5,272
U.S. government and government
agency obligations
maturing after ten years 14,863 34 (115) 14,782
Trust Preferred maturing after
10 years 6,883 40 (63) 6,860
-------- -------- -------- --------
26,915 177 (178) 26,914
-------- -------- -------- --------
Mortgage-backed and related securities:
GNMA maturing after one year
through five years 89 - - 89
GNMA maturing after five years
through ten years 50 4 - 54
GNMA maturing after ten years 25,646 835 - 26,481
FHLMC maturing after ten years 15,309 155 (11) 15,453
FNMA maturing after ten years 18,143 356 (20) 18,479
CMO maturing after ten years 9,445 9 - 9,454
-------- -------- -------- --------
68,682 1,359 (31) 70,010
-------- -------- -------- --------
Total available for sale $ 95,597 $ 1,536 $ (209) $ 96,924
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2000
Available for sale:
U.S. government and government
agency obligations:
Maturing after one year through
five years $ 520 $ - $ (6) $ 514
Maturing after five years
through ten years 23,427 10 (1,235) 22,202
Maturing after ten years 15,990 - (1,270) 14,720
-------- -------- -------- --------
39,937 10 (2,511) 37,436
-------- -------- -------- --------
Mortgage-backed and related
securities:
GNMA maturing after one year
through five years 165 - (3) 162
GNMA maturing after five years
through ten years 67 3 - 70
GNMA maturing after ten years 41,461 426 (1,242) 40,645
FHLMC maturing after ten years 23,626 1 (1,084) 22,543
FNMA maturing after ten years 22,117 10 (932) 21,195
-------- -------- -------- --------
87,436 440 (3,261) 84,615
-------- -------- -------- --------
Total available for sale $127,373 $ 450 $ (5,772) $122,051
======== ======== ======== ========
Expected maturities of mortgage-backed and related securities will differ
from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
59
Investments and mortgage-backed and related securities totaling
$46,564,000 and $59,377,000 were pledged against public funds and other
deposits at March 31, 2001 and 2000, respectively.
3. LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
March 31,
-----------------------
2001 2000
Mortgage loans:
One-to-four family $ 137,354 $ 127,589
Multi-family 2,459 2,989
Commercial 18,235 14,808
Agricultural 3,548 2,420
Construction 1,399 3,648
Land 124 158
--------- ---------
Total mortgage loans 163,119 151,612
--------- ---------
Consumer loans:
Unsecured $ 4,909 $ 3,414
Home equity and second mortgage 15,890 14,983
Auto loans 26,501 21,547
Credit card 1,093 1,026
Loans secured by savings deposits 528 452
Other secured 3,992 3,190
--------- ---------
Total consumer loans 52,913 44,612
--------- ---------
Commercial loans:
Business 22,396 13,853
Agricultural 16,054 13,275
--------- ---------
Total commercial loans 38,450 27,128
--------- ---------
Total loans 254,482 223,352
Less:
Net deferred loan fees 1,487 1,365
Allowance for loan losses 2,098 1,396
--------- ---------
Total loans receivable, net $ 250,897 $ 220,591
========= =========
The weighted average interest rate on loans at March 31, 2001 and 2000
was 8.26% and 8.03%, respectively.
60
Allowance for loan loss activity is summarized as follows for the years
ended March 31, 2001, 2000, and 1999 (in thousands):
2001 2000 1999
Balance, beginning of year $ 1,396 $ 1,228 $ 847
Provision for loan losses 794 178 483
Charge-offs (111) (42) (115)
Recoveries 19 32 13
-------- -------- --------
$ 2,098 $ 1,396 $ 1,228
======== ======== ========
At March 31, 2001 and 2000, the Company's recorded investment in loans
for which an impairment has been recognized under the guidance of SFAS
No. 114 and SFAS No. 118 was $55,000 and $155,000, respectively. The
allowance for loan losses in excess of specific reserves is available to
absorb losses from all loans, although allocations have been made for
certain loan categories as part of management's analysis of the
allowance. The average investment in impaired loans was approximately
$111,000, $237,000 and $372,000 during the years ended March 31, 2001,
2000, and 1999, respectively.
4. TRANSACTIONS WITH AFFILIATES
LOANS - Certain directors and executive officers of the Company are
customers of, and have had transactions with, the Bank in the ordinary
course of business. An analysis of activity with respect to loans
receivable from directors and executive officers of the Company for the
years ended March 31, 2001, 2000, and 1999 is summarized as follows (in
thousands):
Beginning balance $ 1,216 $ 1,362 $ 576
Additions 238 132 928
Reductions (209) (278) (142)
-------- -------- --------
Ending balance $ 1,245 $ 1,216 $ 1,362
======== ======== ========
At March 31, 2001, all loans to directors and executive officers of the
Company were current.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
61
March 31,
-----------------------
2001 2000
Loans receivable $ 1,615 $ 1,316
Mortgage-backed and related securities 410 505
U.S. government and government agencies 347 631
-------- --------
$ 2,372 $ 2,452
======== ========
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
March 31,
-----------------------
2001 2000
Land $ 1,226 $ 967
Buildings and improvements 8,733 6,838
Furniture, fixtures and equipment 3,999 3,601
Construction in process 36 1,602
-------- --------
13,994 13,008
Less accumulated depreciation 3,858 3,106
-------- --------
$ 10,136 $ 9,902
======== ========
7. DEPOSITS
Savings deposits at March 31 are summarized as follows (dollars in
thousands):
2001 2000
------------------- --------------------
Weighted Weighted
Average Average
Interest Interest
Rate Balance Rate Balance
Non-interest bearing - % $ 19,678 - % $ 14,961
NOW checking 1.25 35,972 1.25 36,758
Passbook savings accounts 2.33 16,251 2.35 19,425
Money market deposit 3.70 53,983 4.22 50,102
Time certificates 6.12 127,893 5.53 116,489
---- -------- ---- --------
4.20 % $253,777 3.98 % $237,735
==== ======== ==== ========
At March 31, 2001, time certificate maturities are as follows (dollars in
thousands):
62
Within one year $ 94,504
One year to two years 18,170
Two years to three years 7,198
Three years to four years 3,778
Four years to five years 2,913
Thereafter 1,330
--------
$127,893
========
The aggregate amount of time certificates with a minimum denomination of
$100,000 was $32,013,000 and $28,544,000 at March 31, 2001 and 2000,
respectively. Deposit accounts in excess of $100,000 are not insured by
the Federal Deposit Insurance Corporation ("FDIC").
Interest expense on deposits is summarized as follows for the years ended
March 31, 2001, 2000, and 1999 (dollars in thousands):
2001 2000 1999
NOW checking $ 462 $ 480 $ 532
Passbook savings accounts 398 472 579
Money market deposit 2,213 1,922 889
Time certificates 7,502 5,652 5,203
------- ------- -------
$10,575 $ 8,526 $ 7,203
======= ======= =======
8. BORROWINGS
The Bank has entered into borrowing arrangements with the FHLB to borrow
funds under a short-term cash management advance program and long-term
loan agreements. All borrowings are secured by stock of, and cash
deposits in, the FHLB. Additionally, mortgage loans receivable and
securities issued, insured, or guaranteed by the U.S. Government or
agencies thereof are pledged as security for the loans.
At March 31, 2001, FHLB advances were scheduled to mature as follows
(dollars in thousands):
63
Fixed Rate
Advances Total Advances
------------------ ------------------
Rate* Amount Rate* Amount
Due in less than one year 5.22 % $ 28,625 5.22 % $ 28,625
One to two years 6.01 5,000 6.01 5,000
Two to three years 6.37 17,500 6.37 17,500
Four to five years 7.01 7,000 7.01 7,000
Greater than five years 7.09 15,000 7.09 15,000
---- -------- ---- --------
6.10 % $ 73,125 6.10 % $ 73,125
==== ======== ==== ========
* Weighted average interest rate
The maximum and average outstanding balances and average interest rates
on advances from the FHLB were as follows for the years ended March 31,
2001, 2000, and 1999 (dollars in thousands):
2001 2000 1999
Maximum outstanding at any month end $ 87,300 $ 76,750 $ 50,250
Daily average outstanding 75,871 60,418 17,108
Weighted average interest rates:
Annual 6.34 % 5.37 % 5.03 %
End of year 6.10 % 5.91 % 5.15 %
Interest expense during the year $ 4,817 $ 3,246 $ 861
During the year ended March 31, 2000, the Bank opened a $15 million
overnight line of credit with Key Bank and a $50 million reverse re-
purchase agreement with Merrill Lynch. At March 31, 2001, the outstand-
ing balance was zero.
9. INCOME TAXES
A reconciliation between federal income taxes computed at the statutory
rate and the effective tax rate for the years ended March 31 is as
follows:
2001 2000 1999
Federal income taxes at statutory rate 34.0 % 34.0 % 34.0 %
State income taxes at statutory rate, net
of related federal tax effect 4.4 4.4 4.4
Tax exempt interest (6.8) (3.8) (1.1)
Tax credit for qualified loans (5.3) - -
Other, net 1.6 1.5 (1.0)
---- ---- ----
27.9 % 36.1 % 36.3 %
==== ==== ====
Provision (benefit) for income taxes for the years ended March 31, 2001,
2000, and 1999 is summarized as follows (in thousands):
64
2001 2000 1999
Current:
Federal $ 711 $ 1,436 $ 1,538
State 206 300 319
------ ------- -------
Total current 917 1,736 1,857
------ ------- -------
Deferred:
Federal (221) (219) (50)
State (46) (45) (10)
------ ------- -------
Total deferred (267) (264) (60)
------ ------- -------
Total provision for income taxes $ 650 $ 1,472 $ 1,797
====== ======= =======
The components of net deferred tax assets and liabilities at March 31,
2001 and 2000 are summarized as follows (in thousands):
Deferred tax assets:
Deferred loan fees $ 384 $ 319
Allowance for loan losses 807 549
Vacation accrual 122 114
Unrealized losses on securities
available for sale - 1,851
Other 142 151
-------- --------
Total deferred tax assets 1,455 2,984
-------- --------
Deferred tax liabilities:
Unrealized gains on securities
available for sale (538) -
FHLB stock dividends (1,161) (1,045)
Accumulated depreciation (120) (117)
Tax bad debt reserve in excess of
base-year reserve (103) (209)
Other - (106)
-------- --------
Total deferred tax liabilities (1,922) (1,477)
-------- --------
Net deferred tax asset (liability) $ (467) $ 1,507
======== ========
For the fiscal year ended June 30, 1996 and years prior, the Company
determined bad debt expense deducted from taxable income based on 8% of
taxable income before such deduction or based on the experience method as
provided by the Internal Revenue Code ("IRC"). In August 1996, the
provision in the IRC allowing the 8% of taxable income deduction was
repealed. Accordingly, the Company is required to use the experience
method to record bad debt expense, and must also recapture the excess
reserve accumulated from use of the 8% method ratably over a
six-taxable-year period for all years subsequent to 1987. The income tax
provision from 1987 to 1996 included an amount for the tax effect of such
reserves. At March 31, 2001, the Company had recaptured approximately
$1,300,000 of bad debt deductions taken in prior periods. At March 31,
2001, remaining bad debt deductions to be recaptured approximated
$254,000.
65
As a result of the bad debt deductions taken in years prior to 1988,
retained earnings include accumulated earnings of approximately
$2,500,000, on which federal income taxes have not been provided. If, in
the future, this portion of retained earnings is used for any purpose
other than to absorb losses on loans or on property acquired through
foreclosure, federal income taxes may be imposed at the then prevailing
corporate tax rates. The Company does not contemplate that such amounts
will be used for any purpose which would create a federal income tax
liability; therefore, no provision has been made.
10. SHAREHOLDERS' EQUITY
Oregon Trail Financial Corp. ("OTFC") was incorporated under Oregon law
in June 1997 to acquire and hold all of the outstanding capital stock of
the Bank, as part of the Bank's conversion from a federally chartered
mutual savings and loan association. In connection with the conversion,
which was consummated on October 3, 1997, OTFC issued and sold 4,694,875
shares of common stock including the shares allocated to the ESOP (par
value of $.01 per share) at a price of $10.00 per share for net total
proceeds of $45,729,000 after conversion expenses of $1,220,000. OTFC
retained one-half of the net proceeds and used the remaining net proceeds
to purchase the newly issued capital stock of the Bank. The net
conversion proceeds of $45,729,000 were held in withdrawable accounts at
the Bank at September 30, 1997.
At the time of conversion, the Company established a liquidation account
in an amount equal to its retained earnings as of March 31, 1997, the
date of the latest balance sheet used in the final conversion prospectus.
The liquidation account will be maintained for the benefit of eligible
withdrawable account holders who have maintained their deposit accounts
in the Bank after conversion. In the event of a complete liquidation of
the Bank (and only in such event), eligible depositors who have continued
to maintain accounts will be entitled to receive a distribution from the
liquidation account before any liquidation may be made with respect to
common stock. The Bank may not declare or pay cash dividends if the
effect thereof would reduce its regulatory capital below the amount
required for the liquidation account.
The repurchase programs result in a reduction of shares outstanding and
reduce equity. A portion of shares repurchased were used to fund the MRDP
and the Employee Stock Option Plan. These plans were approved by
shareholders in August 1998 and were implemented in October 1998.
Repurchases of the Company's stock which were approved by the Board of
Directors and completed by management are summarized as follows:
Number of Average
Month Completed Shares Price
August 1998 422,539 $ 15.51
February 1999 213,666 13.14
June 1999 210,666 13.03
November 1999 199,785 12.03
March 2001 179,005 10.71
In December 2000, the Company received approval from the OTS to
repurchase an additional 10%, or 331,900 of its outstanding shares. As of
March 31, 2001, 11,800 shares had been repurchased under the program at a
weighted average price per share of $14.23.
66
Since converting to a stock company, 1,237,461 shares, or 27% of shares
initially outstanding, have been repurchased.
11. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
As part of the conversion discussed in Note 10, an ESOP was established
for all employees. The ESOP borrowed $3,756,000 from the Company and used
the funds to purchase 375,590 shares of the common stock of the Company
issued in the conversion. The loan will be repaid by the Bank over a
seven-year period. The loan had an outstanding balance of $2,151,000 and
$2,658,000 at March 31, 2001 and 2000, respectively, at an interest rate
of 8.5%. The shares included in the ESOP are held in a suspense account
and released to participants quarterly over a seven-year period.
Compensation expense is recognized to the extent of the fair value of
shares committed to be released. The Company recorded compensation
expense related to the ESOP of $607,000, $612,000, and $723,000 during
the years ended March 31, 2001, 2000, and 1999, respectively.
ESOP share activity is summarized as follows:
Committed to
Unreleased be Released
ESOP Shares Shares
Balance, March 31, 1998 348,762 26,828
1999 release (53,656) 53,656
-------- --------
Balance, March 31, 1999 295,106 80,484
2000 release (53,656) 53,656
-------- --------
Balance, March 31, 2000 241,450 134,140
2001 release (53,656) 53,656
-------- --------
Balance, March 31, 2001 187,794 187,796
======== ========
12. MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN ("MRDP")
In May 1998, the Board of Directors approved an MRDP for the benefit of
officers and non-employee directors which authorizes the grant of 187,795
common stock shares. Shareholders approved the plan in July 1998. Those
eligible to receive benefits under the MRDP are determined by members of
a committee appointed by the Board of Directors of the Company. MRDP
awards vest ratably over a two- to six-year period beginning on the first
anniversary of the effective date of the MRDP, or upon the participant's
death or disability. The Company recognizes compensation expense based on
the fair value of the common stock on the grant date in accordance with
the vesting schedule during the years in which the shares are payable.
Compensation expense for the years ended March 31, 2001, 2000, and 1999
was $267,000, $373,000, and $189,000 respectively. In fiscal year 1998,
147,322 shares were granted to eligible participants covered under the
plan at a share price of $11.15. In fiscal year 2000, an additional 6,350
shares were granted at a share price of $11.18, and 36,871 shares were
forfeited at a share price of $11.15. In fiscal year 2001, 7,130 shares
were granted at a share price of $11.72. At March 31, 2001, total
outstanding MRDP shares totaled 123,931.
67
13. EARNINGS PER SHARE ("EPS")
EPS is computed in accordance with SFAS No. 128, Earnings Per Share.
Basic EPS is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding during the
period, without considering any dilutive items. 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 Plan and stock options granted under the stock option plan. Shares
held by the Company's ESOP that are committed for release are included in
the basic and diluted EPS calculations. The following is a summary of the
effect of dilutive securities in weighted average number of shares
(denominator) for the basic and diluted EPS calculations for the years
ended March 31, 2001, 2000, and 1999. There are no resulting adjustments
to net earnings:
2001 2000 1999
Weighted average common shares out-
standing - basic 3,331,002 3,546,873 4,065,423
Effect of dilutive securities on number
of shares:
MRDP shares 25,723 127,596 70,635
Stock options 10,485 49,131 23,482
--------- --------- ---------
Total dilutive securities 36,208 176,727 94,117
Weighted average common shares out-
standing - assuming dilution 3,367,210 3,723,600 4,159,540
14. STOCK OPTION PLAN
In May 1998, the Board of Directors approved a stock option plan for
officers, directors, and employees, which authorizes the granting of
stock options. Shareholders approved the Plan in July 1998. The maximum
number of shares which may be issued under this plan is 469,488 with a
maximum term of ten years for each option from the date of grant. All
awards vest in equal installments over a five- to six-year period.
Unvested options become immediately exercisable in the event of death or
disability.
68
Stock option activity is summarized as follows:
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual
Shares Price Life
Outstanding, March 31, 1998 356,500 $ 11.15 8.5 years
Granted - -
-------- --------
Outstanding, March 31, 1999 356,500 11.15 8.5 years
Granted 5,047 11.18
Canceled (80,551) 11.15
-------- --------
Outstanding, March 31, 2000 280,996 11.15 9.5 years
Granted 66,251 9.70
Canceled (16,565) 11.15
Exercised (5,592) 11.15
-------- --------
Outstanding, March 31, 2001 325,090 $ 10.85 8.5 years
======== ========
ADDITIONAL STOCK PLAN INFORMATION - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB No. 25 and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123 requires the disclosure of pro forma net income and earnings
per share had the Company adopted the fair value method as of the
beginning of fiscal year 1999. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which
greatly affect the calculated values.
The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions:
2001 2000
---- ----
Risk-free interest rate 4.64% 5.95%
Expected dividend 2.66% 2.61%
Expected lives, in years 5.0 5.0
Expected volatility 21% 19%
69
The estimated weighted average grant-date fair value of options granted
was $1.91, $2.39, and $4.85 per share for the years ended March 31, 2001,
2000, and 1999, respectively. Had compensation cost for these awards been
determined in accordance with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma
amounts for the years ended March 31, 2001, 2000, and 1999 (dollars in
thousands):
2001 2000 1999
Net income:
As reported $ 1,694 $ 2,609 $ 3,154
Pro forma 1,612 2,534 3,057
Earnings per common share - basic:
As reported $ 0.51 $ 0.74 $ 0.78
Pro forma 0.48 0.71 0.75
Earnings per common share - diluted:
As reported $ 0.50 $ 0.70 $ 0.76
Pro forma 0.48 0.68 0.73
15. REGULATORY MATTERS AND CAPITAL REQUIREMENTS
REGULATORY CAPITAL - The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's 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 the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk weighted assets, of Core capital to total
assets, and tangible capital to tangible assets (set forth in the table
below). Management believes that the Bank meets all capital adequacy
requirements to which it is subject as of March 31, 2001.
As of March 31, 2001, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized,"
the Bank must maintain minimum total risk-based and Tier I risk-based
ratios as set forth in the table below. There are no conditions or
events, since the notification, that management believes have changed the
Bank's category.
70
The Bank's actual and required capital amounts and ratios are presented in the table below (dollars in
thousands):
Categorized as
"Well Capitalized" Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provision
----------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2001
Total Capital
(To risk weighted assets) $ 50,646 22.3 % $ 18,203 8.0 % $ 22,754 10.0 %
Tier I Capital
(To risk weighted assets) $ 48,548 21.3 % N/A N/A $ 13,652 6.0 %
Core Capital
(To total assets) $ 48,548 12.5 % $ 15,490 4.0 % $ 19,362 5.0 %
Tangible Capital
(To tangible assets) $ 48,548 12.5 % $ 5,809 1.5 % N/A N/A
As of March 31, 2000
Total Capital
(To risk weighted assets) $ 53,812 28.5 % $ 15,114 8.0 % $ 18,892 10.0 %
Tier I Capital
(To risk weighted assets) $ 52,416 27.7 % N/A N/A $ 11,335 6.0 %
Core Capital
(To total assets) $ 52,416 14.0 % $ 14,934 4.0 % $ 18,667 5.0 %
Tangible Capital
(To tangible assets) $ 52,416 14.0 % $ 5,600 1.5 % N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles, to regulatory
tangible and risk-based capital at March 31, 2001 (in thousands):
Equity $ 49,650
Unrealized securities gains (817)
Equity of non-includable subsidiaries (178)
Goodwill and other intangible assets (107)
---------
Tangible capital 48,548
General valuation allowance 2,098
---------
Total capital $ 50,646
=========
At periodic intervals, the OTS and the FDIC routinely examine the Bank as
part of their legally prescribed oversight of the thrift industry. Based
on these examinations, the regulators can direct that the Bank's
financial statements be adjusted in accordance with their findings. A
future examination by the OTS or the FDIC could include a review of
certain transactions or other amounts reported in the Bank's 2001, 2000,
and 1999 financial statements. In view of the uncertain regulatory
environment in which the Bank operates, the
71
extent, if any, to which a forthcoming regulatory examination may
ultimately result in adjustments to the accompanying financial statements
cannot presently be determined.
16. EMPLOYEE BENEFIT PLAN
The Company sponsors a contributory defined contribution plan pursuant to
Section 401(k) of the IRC covering substantially all employees. Under the
plan, the Company made contributions limited to 3.33% of participating
employees' salaries for the years ended March 31, 2001, 2000 and 1999.
Contributions and plan administration expenses totaled $101,000,
$100,000, and $88,000 for the years ended March 31, 2001, 2000, and 1999,
respectively.
17. COMMITMENTS AND CONTINGENCIES
The Company is a party to certain financial instruments with off-balance
sheet risk to meet the financing needs of customers. Commitments to
extend credit were $36,504,000 at March 31, 2001, which include fixed
rate loan commitments of $1,580,000. The ranges of interest rates for
these loan commitments are 5.625% to 11.45%.
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 by the customer. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates creditworthiness on an individual
customer basis.
The Bank originates residential real estate loans and, to a lesser
extent, commercial, agriculture, and consumer loans. Greater than 75% of
all loans in the Bank's portfolio are secured by properties located in
communities of eastern Oregon and western Idaho.
The Company is party to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a
material adverse effect, if any, on the Company's financial position,
results of operations, or liquidity.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of carrying value and estimated fair value of financial
instruments is summarized as follows (in thousands):
72
March 31, 2001 March 31, 2000
--------------------- ---------------------
Carrying Carrying
Value Fair Value Value Fair Value
Financial assets:
Cash and cash equivalents $ 10,581 $ 10,581 $ 9,261 $ 9,261
Securities 96,924 96,924 122,051 122,051
Loans receivable, net of
allowance for loan losses 250,897 263,341 220,591 216,008
FHLB stock 4,651 4,651 3,897 3,897
Financial liabilities:
Demand and savings deposits 125,884 125,884 121,246 121,246
Time certificates of deposit 127,893 129,069 116,489 116,425
FHLB advances 73,125 75,715 76,750 76,208
Financial assets and liabilities other than investment securities are not
traded in active markets. Estimated fair values require subjective
judgments and are approximate. The above estimates of fair value are not
necessarily representative of amounts that could be realized in actual
market transactions, nor of the underlying value of the Company. Changes
in the following methodologies and assumptions could significantly affect
the estimates.
FINANCIAL ASSETS - The estimated fair value approximates the carrying
value of cash and cash equivalents. For securities, the fair value is
based on quoted market prices. The fair value of loans is estimated by
discounting future cash flows using current rates at which similar loans
would be made. The fair value of FHLB stock approximates the carrying
amount.
FINANCIAL LIABILITIES - The estimated fair value of demand and savings
deposits approximates carrying amounts. The fair value of time
certificates of deposit and FHLB advances is estimated by discounting the
future cash flows using current rates offered on similar instruments. The
value of long-term relationships with depositors is not reflected.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - Commitments to extend credit
represent all off-balance-sheet financial instruments. The fair value of
these commitments is not significant. See Note 17 to the consolidated
financial statements.
19. DIRECTORS' PENSION PLAN
The Company established a directors - emeritus plan (the "Plan")
effective February 25, 1997. The purpose of the Plan is to reward and
retain directors of experience and ability in key positions of
responsibility by providing such directors with a benefit upon their
retirement from the Board of Directors, as compensation for their past
services to the Bank and as an incentive to perform such services in the
future. The Plan is funded through current operations and no assets are
specifically identified to fund future benefit payments.
Following are disclosures related to the Plan (in thousands):
73
2001 2000
Change in benefit obligation:
Benefit obligation, beginning of year $ 303 $ 313
Service cost 8 8
Interest cost 23 23
Benefits paid (35) (41)
------ ------
Benefit obligation, end of year $ 299 $ 303
====== ======
Unrecognized prior service cost $ 259 $ 281
====== ======
Weighted average assumption - discount rate 7 % 7 %
====== ======
Components of net periodic benefit cost:
Service cost $ 8 $ 8
Interest cost 23 23
Amortization of prior service cost 22 22
------ ------
Net periodic benefit cost $ 53 $ 53
====== ======
20. PARENT COMPANY FINANCIAL INFORMATION
The Parent company financial information at March 31, 2001 and 2000 is as
follows (in thousands):
2001 2000
---- ----
Assets:
Cash $ 4,960 $ 823
Investment in subsidiary 49,632 49,316
Other assets 3,349 3,054
------- -------
Total $57,941 $53,193
======= =======
Liabilities and Shareholders' Equity:
Liabilities:
Other liabilities $ 135 $ 89
Shareholders' equity 57,806 53,104
------- -------
Total $57,941 $53,193
======= =======
The statements of income for the years ended March 31, 2001, 2000, and
1999 are as follows (in thousands):
74
2001 2000 1999
Other income:
Equity in undistributed income
of subsidiary $ 2,177 $ 3,015 $ 3,239
Interest on loan to ESOP - - 288
-------- -------- --------
Subtotal 2,177 3,015 3,527
Other expense:
Interest and other 784 651 426
Income tax benefit (301) (245) (53)
-------- -------- --------
Net income $ 1,694 $ 2,609 $ 3,154
======== ======== ========
The statements of cash flows for the years ended March 31, 2001, 2000,
and 1999 are as follows (in thousands):
2001 2000 1999
Cash flows from operating activities:
Net income $ 1,694 $ 2,609 $ 3,154
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed income of
subsidiary (2,177) (3,015) (3,239)
Compensation expense related to MRDP 267 373 189
Change in assets and liabilities:
Other assets (295) 448 398
Other liabilities 46 89 (27)
-------- -------- --------
Net cash provided by (used in)
operating activities (465) 504 475
-------- -------- --------
Cash flows from investing activities -
Investment in subsidiary 6,627 1,533 629
-------- -------- --------
Cash flows from financing activities:
Repurchase of common stock (946) (6,356) (9,361)
Payment of cash dividend (1,079) (1,056) (916)
-------- -------- --------
Net cash used in financing activities (2,025) (7,412) (10,277)
-------- -------- --------
Net increase (decrease) in cash 4,137 (5,375) (9,173)
Cash:
Beginning of year 823 6,198 15,371
-------- -------- --------
End of year $ 4,960 $ 823 $ 6,198
======== ======== ========
75
21. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Year ended March 31, 2001 (in thousands, except share data):
June 30 September 30 December 31 March 31
Total interest income $ 6,835 $ 7,245 $ 7,238 $ 6,961
Total interest expense 3,633 4,032 3,978 3,749
-------- -------- -------- --------
Net interest income 3,202 3,213 3,260 3,212
Provision for loan losses 104 502 117 71
-------- -------- -------- --------
Net interest income
after provision 3,098 2,711 3,143 3,141
Noninterest income 441 182 958 574
Noninterest expense 2,611 2,722 3,933 2,638
-------- -------- -------- --------
Income before income taxes 928 171 168 1,077
Provision for income taxes 315 55 52 228
-------- -------- -------- --------
Net income $ 613 $ 116 $ 116 $ 849
======== ======== ======== ========
Basic earnings per share $ 0.19 $ 0.03 $ 0.03 $ 0.26
Diluted earnings per share $ 0.19 $ 0.03 $ 0.03 $ 0.25
Year ended March 31, 2000 (in thousands, except share data):
June 30 September 30 December 31 March 31
Total interest income $ 5,621 $ 6,026 $ 6,360 $ 6,541
Total interest expense 2,523 2,810 3,123 3,320
-------- -------- -------- --------
Net interest income 3,098 3,216 3,237 3,221
Provision for loan losses 71 59 (12) 60
-------- -------- -------- --------
Net interest income
after provision 3,027 3,157 3,249 3,161
Noninterest income 342 523 406 331
Noninterest expense 2,343 2,477 2,658 2,637
-------- -------- -------- --------
Income before income taxes 1,026 1,203 997 855
Provision for income taxes 388 431 355 298
-------- -------- -------- --------
Net income $ 638 $ 772 $ 642 $ 557
======== ======== ======== ========
Basic earnings per share $ 0.17 $ 0.22 $ 0.18 $ 0.17
Diluted earnings per share $ 0.16 $ 0.20 $ 0.18 $ 0.16
* * * * * *
76
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement, and "Part I
- -- Business -- Personnel -- Executive Officers" of this report, is incorpor-
ated herein by reference. Reference is made to the cover page of this report
for information regarding compliance with Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Executive
Compensation," "Directors' Compensation" and "Benefits" under "Proposal I -
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of Certain
Beneficial Owners and Management" of the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of
Directors" and "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge
by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the
Company.
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I - Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the section captioned "Proposal I -
Election of Directors - Certain Transactions with the Bank" in the Proxy
Statement is incorporated herein by reference.
77
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant (1)
3(b) Bylaws of the Registrant (1)
3(c) Amendment to Bylaws of the Registrant (2)
10(a) Amended Employment Agreement with Berniel Maughan(3)
10(b) Amended Employment Agreement with Zane F. Lockwood(3)
10(c) Amended Employee Severance Compensation Plan (4)
10(d) Pioneer Bank, a Federal Savings Bank Employee Stock
Ownership Plan (4)
10(e) Pioneer Bank, a Federal Savings Bank 401 (k) Plan (1)
10(f) Pioneer Bank Director Emeritus Plan (1)
10(g) 1998 Stock Option Plan (5)
10(h) 1998 Management Recognition and Development Plan (5)
21 Subsidiaries of the Registrant
23 Consent of the Independent Auditors
- -------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (333-30051), as amended.
(2) Incorporated by reference to the Registrant's Amended Form 10-Q for the
quarter ended December 31, 2000.
(3) Incorporated by reference to the Registrant's Form 10-Q/A for the
quarter ended December 31, 2000.
(4) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended June 30, 2000.
(5) Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders.
(b) Reports on Form 8-K
Three Current Reports Form 8-K were filed during the quarter ended
March 31, 2001. Two Forms 8-K, were filed on January 22, 2001, in which (i)
the Company announced its restructuring and strategic focus; and (ii)
announced that the Company had provided documents to Stilwell Associates,
L.P., pursuant to a statutory shareholder's request. A third Form 8-K was
filed on February 15, 2001, which announced the Company's rejection of the
request by Joseph Stilwell that he be allowed to name two persons to the
Company's Board of Directors.
78
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.
OREGON TRAIL FINANCIAL CORP.
Date: June 29, 2001 By:/s/ Berniel L. Maughan
-----------------------------------------
Berniel L. Maughan
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Berniel L. Maughan President and Chief Executive June 29, 2001
- ------------------------- Officer (Principal Executive Officer)
Berniel L. Maughan
/s/ Jon McCreary Chief Financial Officer June 29, 2001
- ------------------------- (Principal Financial Officer)
Jon McCreary
/s/ Stephen R. Whittemore Chairman of the Board June 29, 2001
- -------------------------
Stephen R. Whittemore
/s/ John Gentry Director June 29, 2001
- -------------------------
John Gentry
Director June __, 2001
- -------------------------
Albert H. Durgan
/s/ Edward H. Elms Director June 29, 2001
- -------------------------
Edward H. Elms
/s/ John A. Lienkaemper Director June 29, 2001
- -------------------------
John A. Lienkaemper
Director June , 2001
- -------------------------
Charles Rouse
Exhibit 21
Subsidiaries of Registrant
Percentage Jurisdiction or
Subsidiary (1) Owned State of Incorporation
- -------------- ----- ----------------------
Pioneer Bank, A Federal Savings Bank 100% United States
Pioneer Development Corporation(2) 100% Oregon
Pioneer Bank Investment Corporation(2) 100% Oregon
- ------------
(1) The operations of the Company's subsidiary are included in the Company's
consolidated financial statements.
(2) Wholly-owned subsidiary of Pioneer Bank, A Federal Savings Bank.
Exhibit 23
Consent of Deloitte & Touche LLP
[Letterhead of Deloitte & Touche LLP]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-67541 and 333-37427 of Oregon Trail Financial Corp. on Form S-8, of our
report dated May 18, 2001, appearing in the Annual Report on Form 10-K of
Oregon Trail Financial Corp. for the year ended March 31, 2001.
/s/ Deloite & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
June 28, 2001