SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26556
OREGON TRAIL FINANCIAL CORP.
----------------------------
(Exact name of registrant as specified in its charter)
Oregon 91-1829481
- -----------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer or organization
incorporation Identification Number)
2055 First Street, Baker City, Oregon 97814
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 523-6327
--------------
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, Par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. YES [ X ] NO [ ]
As of January 31, 1998, there were issued 4,694,875 shares of the
Registrant's Common Stock. The Registrant's voting common stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"OTFC".
OREGON TRAIL FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information
- ------- ---------------------
Item I. Financial Statements (Unaudited) Page
--------
Consolidated Statements of Financial Condition 2
As of December 31, 1997 and March 31, 1997
Consolidated Statements of Income (For the 3
three months and nine months ended December 31,
1997 and 1996)
Consolidated Statement of Shareholders Equity
(For the nine months ended March 31, 1997 and
for the nine months ended December 31, 1997) 4
Consolidated Statements of Cash Flows (For the
nine months ended December 31, 1997 and 1996) 5 - 6
Notes to Consolidated Financial Statements 7 - 9
Item II. Management s Discussion and Analysis of Financial
Condition and Results of Operations 10 - 16
Item III. Quantitative and Qualitative Disclosures about
Market Risk 16
Part II. Other Information
- -------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
(1)
PART I. ITEM 1.
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1987 AND MARCH 31, 1997
(UNAUDITED)
December 31, March 31,
1997 1997
ASSETS
Cash (including interest earning accounts of
$4,705,595 and $3,793,206) $ 5,369,257 $ 4,975,461
Securities available for sale, at fair value
(amortized cost $76,098,496 and $35,850,256) 77,409,599 35,651,533
Securities held to maturity, at amortized cost
fair value: $13,928,245 and $15,391,851) 13,505,066 15,302,393
Loans receivable, net of allowance for loan
losses of $823,906 and $725,089 150,131,920 138,880,914
Loans held for sale 0 428,200
Accrued interest receivable 1,826,046 1,324,637
Premises and equipment, net 5,309,134 4,640,848
Stock in Federal Home Loan Bank of Seattle,
at cost 2,929,500 2,763,300
Other assets 568,602 245,380
------------ ------------
TOTAL ASSETS $257,049,124 $204,212,666
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Interest-bearing $ 77,824,508 $ 68,049,713
Noninterest-bearing 9,341,068 6,282,277
Time certificates 100,334,040 104,825,937
------------ ------------
Total deposits 187,499,616 179,157,927
Securities sold under agreements to repurchase 0 1,430,853
Accrued expenses and other liabilities 2,891,168 1,119,465
Advances from Federal Home Loan Bank of Seattle 0 800,000
Advances from borrowers for taxes and insurance 201,780 678,208
------------ ------------
Total liabilities 190,592,564 183,186,453
SHAREHOLDERS' EQUITY:
Preferred Stock - December 31, 1997;$.01
Par Value; 1,000,000 shares authorized;
no shares issued or outstanding
Common Stock - December 31, 1997; $.01 Par Value; 46,949 0
50,000,000 shares authorized; 4,694,875
shares issued, 4,332,699 shares outstanding
Additional Paid-In Capital 45,780,909 0
Unearned Shares issued to Employee Stock
Ownership Trust (3,621,761) 0
Retained earnings 23,439,064 21,148,510
Unrealized gain (loss) on securities available 811,399 (122,297)
available for sale, net of tax ------------ ------------
Total Shareholders' Equity 66,456,560 21,026,213
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $257,049,124 $204,212,666
============ ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(2)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
INTEREST INCOME
Interest and fees on
loans receivable $3,225,353 $3,001,002 $9,452,443 $8,828,423
Securities:
Mortgage-backed and
related securities 676,774 685,742 1,983,430 2,141,998
U.S. government and
government agency 669,371 273,315 1,473,810 928,259
Other interest and
dividends 465,745 79,714 797,040 238,223
---------- --------- ---------- ----------
Total interest income 5,037,243 4,039,773 13,706,723 12,136,903
INTEREST EXPENSE:
Deposits 1,849,146 1,837,725 5,799,060 5,509,533
Securities sold under
agreements to
repurchase 10,482 12,358 33,605 36,673
FHLB of Seattle advances 11,212 3,192 162,013 88,738
---------- --------- ---------- ----------
Total interest expense 1,870,840 1,853,275 5,994,678 5,634,944
Net interest income 3,166,403 2,186,498 7,712,045 6,501,959
Provision for Loan Losses 45,863 35,332 119,732 70,984
Net interest income
after provision for
loan losses 3,120,540 2,151,166 7,592,313 6,430,975
NONINTEREST INCOME:
Service charges on
deposit accounts 189,414 152,798 526,345 448,350
Loan servicing fees 61,397 68,006 201,226 184,246
Net gain(loss) on
trading securities 0 52,554 0 21,698
Other Income (5,690) (14,575) 43,613 (30,777)
---------- --------- ---------- ----------
Total noninterest
income (expense) 245,121 258,783 771,184 623,517
NONINTEREST EXPENSES:
Employee compensation
and benefits 1,099,857 720,008 2,692,002 2,122,899
Special SAIF assessment 0 0 0 1,146,387
Supplies, postage, and
telephone 120,202 102,010 344,513 286,060
Depreciation 99,835 92,405 289,574 258,796
Occupancy and equipment 108,736 71,626 281,254 212,864
FDIC insurance premium 28,741 78,988 85,292 282,497
Customer account 75,508 63,316 211,715 223,182
Advertising 68,408 28,698 192,421 194,323
Professional fees 42,998 36,739 111,408 115,771
Other 92,884 108,083 290,298 315,443
---------- --------- ---------- ----------
Total noninterest
expenses 1,737,169 1,301,873 4,498,477 5,158,222
Income before income
taxes 1,628,492 1,108,076 3,865,020 1,896,270
Provision for Income
Taxes 714,678 426,345 1,574,466 730,921
---------- --------- ---------- ----------
NET INCOME $ 913,814 $ 681,731 $2,290,554 $1,165,349
========== ========= ========== ==========
Basic Earnings
per share (1) $0.21 $0.53
========== ==========
Weighted Average Number of
Shares Outstanding (2) 4,319,431 4,319,370
(1) Per share information for the prior periods is not presented as the
Company did not until October 3, 1997. See Note 2.
(2) Shares outstanding for the quarter ended December 31, 1997 were used in
the calculated shares outstanding for the quarter and nine months ended
December 31, 1997.
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(3)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND DECEMBER 31, 1997
(UNAUDITED)
Unearned
gain (loss)
on securi-
Addi- ESOP ties avail-
Common Common tional shares able for Total
Stock Stock Paid-in at Retained sale, net shareholders'
Shares Amount Capital Cost Earnings of tax equity
Balance at
June 30, 1996 (1) $20,050,916 ($46,672) $20,004,244
Net Earnings 1,097,594 1,097,594
Change in
unrealized
gain (loss)
on securities
available for
sale, net
of tax (75,625) (75,625)
Balance at
March 31, 1997 $21,148,510 ($122,297) $21,026,213
Net earnings 2,290,554 2,290,554
Change in
unrealized
gain (loss)
on securities
available for
sale, net
of tax 933,696 933,696
Issuance of
Common Stock
related to
Conversion
(See Note 2) 4,694,875 46,949 45,761,801 45,808,750
Shares acquired
for ESOP (375,590) (3,755,900) (3,755,900)
Adjustment to
Paid in
Capital for
additional
Conversion
costs (79,820) (79,820)
Release of
ESOP shares 13,414 98,928 134,139 233,067
--------- ------- ----------- ----------- ----------- -------- -----------
Balance at
December 31,
1997 4,332,699 $46,949 $45,780,909 ($3,621,761) $23,439,064 $811,399 $66,456,560
========= ======= =========== =========== =========== ======== ===========
(1) At March 1997 the company changed to a March 31 fiscal year-end.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(4)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
31-Dec-97 31-Dec-96
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $2,290,554 $1,165,349
ADJUSTMENTS TO RECONCILE NET EARNINGS TO ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation of properties and equipment 289,574 258,796
Amortization/Accretion of Premium Discount
on invest. (33,244) 2,365
Amortization of deferred loan origination
fees, net of deferred loan origination
costs (172,618) (179,560)
Provision for loan loss 119,732 70,984
Deferred taxes (576,129) 17,242
Amortization and accretion of discounts
and premiums on loan (12,496) (8,922)
FHLB Dividends (166,200) (155,300)
Net loss on trading securities 0 (21,698)
Origination of real estate loans held for
sale (1,527,640) (586,782)
Sale of real estate loans held for sale 1,955,840 586,782
Gain on sale of fixed assets (50,269) 12,418
Other, net 14,721 23,860
CHANGES IN ASSETS AND LIABILITIES
Trading account securities 0 192,962
Interest receivable (501,409) 43,968
Prepaid and other assets (55,401) (19,759)
Other liabilities 1,489,161 (38,615)
----------- ----------
Net cash provided by operating activities 3,064,176 1,364,091
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations (42,356,961) (32,136,538)
Principal Repayments on Loans 35,243,820 24,742,203
Purchase of loans (4,072,484) (329,472)
Purchase of securities available for sale (105,525,775) (4,990,312)
Maturity of securities available for sale 63,279,128 7,985,270
Purchase of securities held to maturity (30,013) (3,375)
Principle reductions of securities held
to maturity 1,829,713 2,075,684
Principle reductions of securities available
for sale 2,029,278 2,455,843
Sales of premises and equipment 249,102 229,806
Purchases of premises and equipment (1,156,693) (368,413)
----------- ----------
Net cash used by investing activities (50,510,885) (339,304)
----------- ----------
(5)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits 8,341,689 (180,036)
Change in retail repurchase agreements (1,430,853) (70,859)
Change in advances from borrowers for
taxes and insurance (476,427) (847,423)
Change in borrowings from FHLB (800,000) (5,000,000)
Proceeds from issuance of Common Stock 41,973,029 0
Release of ESOP Shares 233,067 0
Net cash(used) provided by financing ----------- ----------
activities 47,840,505 (6,098,318)
----------- ----------
Net (decrease)increase in cash 393,796 (5,073,531)
Cash and cash equivalents at beginning of
period 4,975,461 10,111,599
----------- ----------
Cash and cash equivalents at end of period $5,369,257 $5,038,068
========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest on deposits and other borrowings $5,879,331 $5,706,641
Income taxes 1,475,000 755,677
Noncash activity:
Unrealized gain(loss) on securities available
for sale, net of tax (933,696) 27,710
(6)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
statements contain all adjustments necessary for a fair presentation of Oregon
Trail Financial Corp. (the "Company") financial condition as of December 31,
1997 and March 31, 1997, the results of operations for the three months and
nine months ended December 31, 1997 and 1996 and the cash flows for the nine
months ended December 31, 1997 and 1996. All adjustments are of a normal
recurring nature. Certain information and note disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Prospectus
dated August 12, 1997. The results of operations for the three months and
nine months ended December 31, 1997 are not necessarily indicative of the
results which may be expected for the entire fiscal year.
2. REORGANIZATION
On October 3, 1997, Pioneer Bank, A Federal Savings Bank, (the "Bank")
completed a mutual-to-stock conversion. The Company sold 4,694,875 shares of
common stock at $10 per share, 8% or 375,590 of which shares were purchased by
an Employee Stock Ownership Plan (the "ESOP"). Proceeds from the sale were
recorded as $46,949 of Common Stock at $.01 par value and $45,761,801 of Paid
in Capital. The Common Stock and Paid in Capital at December 31, 1997 are
offset by the unissued ESOP shares.
The Company purchased all of the stock of the Bank for one-half of the net
investable proceeds of the offering. The retained earnings of the Company
represent all prior earnings of the Bank as a mutual savings bank. The
transaction, which occurred for regulatory and statutory purposes on October
3, 1997, was recorded as if it occurred on September 30, 1997 for financial
statement presentation.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Earnings Per Share. SFAS No. 128 Earnings Per Share issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires the dual presentation of basic and diluted EPS on
the face of the income statement. This statement was adopted effective
December 31, 1997. The Company had a simple capital structure for all periods
presented, and accordingly has computed basic earnings per share presented on
the Income Statement. Earnings per share are calculated for both the three
months and nine months ended December 31, 1997, assuming shares had been
outstanding for both periods, although common stock was not outstanding prior
to October 3, 1997.
(7)
Comprehensive Income. SFAS No. 130, Reporting Comprehensive Income,
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is presented with the same prominence as other financial statements. SFAS
No. 130 requires that companies (I) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial condition. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comprehensive purposes are required.
Segment Disclosures. SFAS No. 131, In June 1997, the FASB issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related information.
SFAS No. 131 establishes standards for disclosure about operating segments in
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This statement
supersedes SFAS No. 14, Financial Reporting for Segments of Business
Enterprise. The new standard becomes effective for the Company s fiscal year
ending March 31, 1999, and requires that comparative information from earlier
years be restated to conform to the requirements of this standard. The
adoption of provisions of SFAS No. 131 is not expected to have a material
impact on the Company.
4. ALLOWANCE FOR LOAN LOSSES
December 31, 1997 March 31, 1997
----------------- --------------
Balance, beginning of period $ 725,089 $ 540,986
Charge-offs (21,312) (31,960)
Additions 120,129 216,063
--------- ---------
Balance, end of period $ 823,906 $ 725,089
========= =========
Amounts presented are for the nine months ended March 31, 1997 and for the
nine months ended December 31, 1997. At March 31, 1997, the Company changed
to a March 31, fiscal year end.
5. ADVANCES FROM FEDERAL HOME LOAN BANK
The Company had no borrowings from the Federal Home Loan Bank of Seattle
("FHLB"), at December 31, 1997. Advances at March 31, 1997 were
collateralized by certain mortgages or deeds of trust, government agency
securities and cash on deposit with the FHLB. Advances at March 31, 1997 were
all due within one year.
(8)
December 31, 1997 March 31, 1997
------------------------------------ -----------------------------
Weighted Range of Weighted
Amount Range of Interest Average Amount Interest Average
Rates Interest Rates Interest
Rate Rate
------ ----------------- -------- ------ --------- --------
NONE $800,000 5.70% 5.70%
6. REGULATORY CAPITAL
The Company is not subject to regulatory capital requirements. The following
table illustrates the Bank's compliance with currently applicable regulatory
capital requirements at December 31, 1997:
Categorized as "Well
For Capital Capitalized" Under Prompt
Actual Adequacy Corrective Action Provision
------------------- -------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
As of
December
31, 1997
Total
Capital: $47,011,018 35.78% 10,512,326 8.0% 13,140,407 10.0%
(To Risk
Weighted
Assets)
Tier I
Capital: 46,188,566 35.15% N/A N/A 7,884,224 6.0%
(To Risk
Weighted
Assets)
Tier I 46,188,566 18.06% 7,672,283 3.0% 12,787,138 5.0%
Capital:
(To
Tangible
Assets)
Tangible
Capital: 46,188,566 18.06% 3,836,141 1.5% N/A N/A
(To
Tangible
Assets)
(9)
ITEM III.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking
statement's". The Company desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protection of such safe harbor with respect to all of such forward-looking
statements. These forward-looking statements, which are included in
Management's Discussion and Analysis, describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors 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, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
General
The 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 is a member of the Federal Home Loan Bank of Seattle, conducting its
business through seven office facilities, with the headquarters located in
Baker City, Oregon. The primary market areas of the Bank are the counties of
Wallowa, Union, Baker, Malheur, Harney and Grant in Eastern Oregon.
As a traditional, community-oriented savings bank, the Bank focuses on
customer service within its principal market area. The Bank s primary market
activity is attracting deposits from the general public and using those and
other available sources of funds to originate permanent residential one-to-
four family real estate loans within its market area and, to a lesser extent,
loans on commercial property and multi-family dwellings. At December 31, 1997,
one-to-four family residential mortgage loans totaled $102.9 million, or 68.6%
of total loans receivable. The Bank began supplementing its traditional
lending activities in 1996 with the development of commercial business loans,
agricultural loans and the purchase of dealer-originated automobile contracts.
The Bank has hired experienced commercial lending officers familiar with the
Bank s primary market area in an attempt to develop commercial business and
agricultural lending and to expand the purchase of dealer-originated
automobile contracts to include the purchase of dealer-originated contracts
secured by recreational vehicles, trailers, motorcycles and other vehicles. As
a result of these activities at December 31, 1997 the Bank had agricultural
loans of $4.7 million, commercial business loans of $5.5 million, commercial
real estate loans of $7.9 million, and automobile loans of $ 5.5 million
(including $3.7 million of purchased dealer-originated contracts).
(10)
Net interest income, which is the difference between interest and dividend
income on interest-earning assets, primarily loans and investment securities,
and interest expense on interest-bearing deposits and borrowings, is the major
source of income for the Bank. Because the Company depends primarily on net
interest income for its earnings, the focus of the Company s management is to
create and implement strategies that will provide stable, positive spreads
between the yield on interest-earning assets and the cost of interest-bearing
liabilities. Such strategies include an increased focus on the origination of
adjustable rate mortgage loans. During the period April 1, 1997 through
December 31, 1997 the Bank originated $6.0 million in adjustable rate first
mortgage loans and $9.5 million in fixed rate first mortgage loans. Of the
fixed rate first mortgage loans originated $1.9 million were sold with
servicing released. None of the adjustable rate loans were sold. In addition
to the strategy of increasing origination of adjustable rate mortgage loans,
the Bank has added commercial and agricultural loans with rates adjustable
based upon the Wall Street Journal prime rate and has increased origination of
shorter term consumer loans, increasing auto loans from $2.1 million at March
31, 1997 to $ 5.5 million at December 31, 1997.
To a lesser degree, the net earnings of the Company rely on the level of its
non-interest income. The Company is aggressively pursuing strategies to
improve its service charge and fee income, and control its non-interest
expense, which includes employee compensation and benefits, occupancy and
equipment expense, deposit insurance premiums and miscellaneous other
expenses, as well as federal and state income tax expense. At December 31,
1997, the Bank recognized additional employee compensation and benefit
expenses associated with the implementation of the ESOP. The Bank recorded
$233,000 of expense related to the release of 1/28th of the 375,590 ESOP
shares. Shares were valued at $17.38, the closing price of the Company s stock
on December 31, 1997. The release of the shares resulted in a reduction of
$134,139 in unearned ESOP shares and an increase of $98,928 in additional
paid-in Capital. The implementation of other stock benefit programs may
result in recognition of additional material employee compensation and benefit
expense in future periods. The actual aggregate amount of this new expense
cannot be currently predicted because generally accepted accounting principals
require that such expense be based on the fair market value of the shares of
Common Stock when the expenses are recognized, which would occur when shares
are committed to be released. These expenses have been reflected in the pro
forma financial information presented in the Company s prospectus dated August
12, 1997. The pro forma data assumed the initial public offering purchase
price of $10.00 per share as fair market value. Actual expense, however, will
be based on the fair market value of the Common Stock at the time of
recognition, which may be higher or lower than the current stock price.
Year 2000
Data Processing for the Bank is done in-house primarily on an AS400 IBM
computer. In December 1997 the Company converted to new core software which
was purchased at a cost of approximately $200,000. The software purchased is
used to process all savings, loan and general ledger transactions. The vendor
has given assurance that their software is year 2000 compliant and that no
problems will arise from the turn of the century. They are anticipating
audits from regulatory agencies in the next few months and the Bank will
closely monitor the results of these audits. In addition to the core software,
the Bank uses
(11)
various personal computer software products, some of which are already
year 2000 compliant. Others are being monitored and the Bank is proactively
communicating with vendors to determine their course of action to become fully
compliant. The Bank does not anticipate any additional material expense
related to year 2000 compliance.
Changes in Financial Condition
At December 31, 1997, the consolidated assets of the Company totaled $257.0
million, an increase of $52.8 million, or 25.9%, from $204.2 million at March
31, 1997. The primary reason for the increase was the proceeds from the
mutual-to-stock conversion completed on October 3, 1997. Over-subscription
amounted to $78.0 million which was returned to subscribers at October 6,
1997. The net proceeds from the purchase of the common stock, amounting to
$45.8 million were invested by the Bank in government agency medium term notes
and mortgage backed securities and were also used to a lesser extent to meet
the Bank's increased loan demand.
Net loans receivable increased by $11.2 million, or 8.1%, to $150.1 million at
December 31, 1997 compared to $138.9 million at March 31, 1997. The increase
was primarily the result of continued new loan demand exceeding loan
repayments and sales, augmented by increases in agricultural and commercial
loans, auto loans and other consumer loans. Such loans are inherently riskier
than one to four family mortgage loans.
Nonperforming assets, consisting of non-accruing loans and other repossessed
assets increased $256,000 from March 31, 1997 to December 31, 1997, to
$456,000 primarily due to past due mortgage loans. One past due loan
amounting to $102,000 paid off on January 8, 1998. There was no real estate
owned at either date. Nonperforming assets were .18% of total assets at
December 31, 1997, compared to .10% at March 31, 1997. The allowance for loan
losses was 181% of nonperforming loans at December 31, 1997, compared to 382%
at March 31, 1997.
Investment securities increased $39.9 million, from $51.0 million at March 31,
1997 to $90.9 million at December 31, 1997. The increase included the
purchase of $4.6 million in a short term investment fund backed by adjustable
rate mortgage securities and $36.0 million in government agency securities
offset by maturities or calls of $8.0 million of government agencies. The
remaining increase was primarily due to the purchase of $10.0 million in
mortgage-backed securities, offset by principal payments of $3.9 million on
the mortgage-backed securities portfolio.
Savings deposits increased $8.3 million, or 4.6%, from $179.2 at March 31,
1997 to $187.5 million at December 31,1997. The increase is primarily
attributable to the growth of checking accounts (core deposits) due to
attracting new customers by securing total account relationships when
marketing loan products. A portion of the increase, $1.4 million, is due to
the decision not to offer customers the option of overnight repurchase
agreements. These funds were redirected into interest bearing sweep accounts
insured by FDIC and included in interest bearing deposits.
(12)
Advances from borrowers for taxes and insurance decreased $476,000, or 70.2%,
from $678,000 at March 31, 1997 to $202,000 at December 31, 1997. Taxes are
paid annually in November and accordingly, the decrease is attributed to the
payments. Advances from the FHLB decreased from $800,000 at March 31, 1997 to
$0.00 at December 31, 1997. All advances were repaid on October 7, 1997 with
net proceeds from the Conversion.
Total Shareholders equity increased $45.5 million to $66.5 million at December
31, 1997 from $21.0 million at March 31, 1997. $42.1 million of the increase
is attributable to the mutual-to-stock conversion, $2.3 million is due to
earnings for the nine month period and the remainder is due to the tax
effected increase in market value of securities available for sale and the
release of 1/28th of the 375,590 ESOP shares.
Results of Operations
Comparison of Nine Months Ended December 31, 1997 and 1996
General. Net interest income increased $1.2 million, or 18.1%, comparing the
nine month period ending December 31, 1997 to the same period ending December
31, 1996. Approximately $81,000 of net interest income is attributable to the
over-subscription proceeds of the Conversion, which were held in short-term
investments until the completion of the Conversion. In addition, the use of
the net proceeds of $45.8 million to fund the Bank's investment and loan
portfolio attributed to the increased net interest income. Interest income
increased $1.6 million while interest expense increased only $360,000
comparing the nine month period ended December 31, 1997 to the same period
ended December 31, 1996. Non-interest income increased $148,000, while the
provision for loan losses increased $49,000, non-interest expense decreased
$660,000, and income taxes increased $844,000 comparing the same two periods.
This resulted in net income increasing by $1.1 million, or 91.67%, from $1.2
million for the nine months ended December 31, 1996 to $2.3 million for the
nine months ended December 31, 1997. The increase is primarily due to the
inclusion of the special SAIF assessment of $707,000, after tax, in the nine
months ended December 31, 1996.
Interest Income. The increase of $1.6 million in interest income was
generated by an additional $32.5 million in average interest earning assets
for the nine months ended December 31, 1997 compared to the same period in
1996. The investment of over-subscription proceeds in short-term investments
resulted in $160,000 of interest income on an average balance of $6.2 million
for the nine month period. The additional increase in average interest
earning assets and accompanying interest income was due to increases in the
loan portfolio and the investment portfolio.
The average yield on interest earning assets decreased from 8.20% for the nine
months ending December 31, 1996 to 7.93% for the same period in the current
year. The decreased average yield is primarily due to a $17.0 million
increase in the average balance of investments in government agency securities
mostly medium term notes yielding at a lower rate and a $5.4 million increase
in the average balance in lower yielding commercial paper and overnight
investments.
(13)
Interest Expense. Interest expense on savings deposits increased only
$360,000 for the nine months ended December 31, 1997 as compared to the same
period in 1996. Interest expense related to over-subscription proceeds
amounted to $79,000. Interest was paid on the proceeds at the passbook rate
which was 2.75%. Although average deposits increased by $29.4 million
comparing December 31, 1996 to 1997, the average interest paid on deposits
declined 37 basis points from 4.24% for the nine months ended December 31,
1996 to 3.87% for the same period ended December 31, 1997 as a result of cash
received in the conversion. Net proceeds of $45.8 million were used in the
last quarter to fund the Bank's investment portfolio and, to a lesser degree,
loans at no interest cost.
Provision for Loan Losses. The provision for loan losses was $71,000 and net
charge-offs amounted to $29,000 during the nine months ended December 31, 1996
compared to a provision for loan losses of $120,000 and net charge-offs of
$21,000 for the nine month period ended December 31, 1997. The provision was
increased during the quarter ended December 31, 1997 primarily in response to
portfolio growth, especially in commercial and agricultural loans, and
additionally due to net charge-offs. At December 31, 1997, the allowance for
loan losses was equal to 180.68% of non-performing loans compared to 381.58%
at March 31, 1997. The decrease in the coverage ratio at December 31, 1997
was the result of an increase in non-performing loans from $190,000 at March
31, 1997 to $456,000 at December 31, 1997 as a result of several past due
mortgage loans. One past due loan in the amount of $102,000 paid off on
January 8, 1998.
Non-Interest Income. Non-interest income increased $148,000, or 23.7%, to
$771,000 for the nine months ended December 31, 1997 from $624,000 for the
nine months ended December 31, 1996. The increase was attributable to
increased fee income as well as a $51,000 gain on the sale of a branch
building located in La Grande, Oregon. The nine months ended December 31,
1996 included $21,000 in losses related to other Repossessed Assets and
$12,000 in losses due to write-offs of equipment, as well as unrealized gains
of $22,000 on trading securities. All trading securities were transferred to
the available for sale category at March 31, 1997, as the Company terminated
its trading activities. Additional fee income in the nine months ended
December 31,1997 resulted from increased fee income schedules related to
checking accounts and ATM's.
Non-Interest Expense. Non-interest expense decreased $660,000, or 12.8%, to
$4.5 million for the nine months ended December 31, 1997, from $5.2 million
for the comparable period in 1996. The decrease is primarily attributable to
the special SAIF assessment that was accrued in the prior year nine month
period to recapitalize the deposit insurance fund. Without the special
assessment, non-interest expense would have increased by $487,000 or, 12.1%
from the comparable period in 1996. Employee compensation expense increases
of $569,000 were partially offset by a reduction of $197,000 in deposit
insurance premiums resulting from reduced assessment rates beginning January
1, 1997. The increase compensation expense was partially due to $233,000 of
ESOP expense related to the release of 1/28th of the ESOP shares on December
31, 1997. The remaining increase is due to the addition of a Controller and
Commercial Lending Officer, normal salary increases and additional hours
attributed to the recent software conversion. The ratio of non-interest
expense to average total assets was 2.5% and 3.4% for the nine months ended
December 31, 1997 and 1996, respectively.
(14)
Income Taxes. The provision for income taxes increased $844,000 in the nine
months ended December 31, 1997 compared with the same period ended December
31, 1996. This was due to increased net income before taxes as well as
$233,000 of ESOP compensation expense which is not deductible for taxes in the
current or future periods.
Comparison of Three Months Ended December 31, 1997 and 1996
General. Net income increased $232,000, from $682,000 for the three months
ended December 31, 1996 to $914,000 for the three months ended December 31,
1997. This increase was primarily attributable to increased net interest
income of $969,000 partially offset by an increase of $435,000 in noninterest
expense and an increase in the tax provision due to the nondeductible nature
of ESOP expense and additional net taxable income.
Interest Income. Additional interest income generated by the $55.1
million increase in average interest earning assets contributed to an increase
of $969,000 in interest income for the three months ended December 31, 1997
compared to 1996. The average yield on interest earning assets decreased from
8.27% for the three months ended December 31, 1996 to 8.03% for the three
months ended December 31,1997. The decrease is primarily due to an increase
of $17.0 million in the average balance invested in lower yielding government
agency medium term notes for the three months ended December 31, 1997 as
compared to the same period of 1996.
Interest Expense. Interest expense on savings deposits increased only $11,000
for the three months ended December 31, 1997 as compared to the same period of
1996. Average deposits increased by $32.1 million comparing December 31, 1996
to 1997, while average interest paid on deposits decreased 61 basis points
from 4.16% for the three months ended December 31, 1996 to 3.55% for the same
period ended December 31, 1997 as a result of cash received in the conversion.
Net proceeds of $45.8 million from the conversion were used to fund the Bank's
invested portfolio and, to a lesser degree, loans at no interest cost.
Provision for Loan Losses. The provision for loan losses was $46,000 and net
charge-offs amounted to $2,000 during the three months ended December 31, 1997
compared to a $35,000 provision and $7,000 of net charge-offs during the three
months ended December 31, 1996. The provision was increased during the
quarter ended December 31, 1997 primarily in response to portfolio growth
especially in commercial and agricultural loans and additionally due to net
charge-offs.
Non-Interest Income. Non-interest income decreased $14,000, or 5.4%, to
$245,000 for the three months ended December 31, 1997 from $259,000 for the
three months ended December 31, 1996. The decrease was primarily attributable
to the inclusion of $53,000 of unrealized gains on trading securities in the
quarter ended December 31, 1996. All trading securities were transferred to
the available for sale category at March 31, 1997, and accordingly no gains
were recognized in the quarter ended December 31, 1997. Fee income on deposit
accounts increased $37,000 in the quarter ended December 31, 1997 as compared
to the same quarter in 1996 primarily due to improved fee income schedules
related to checking accounts and ATM's.
(15)
Non-Interest Expense. Non-interest expense increased $435,000, or 33.4% to
$1.7 million for the three months ended December 31, 1997 from $1.3 million in
the comparable period in 1996. The increase is primarily attributable to
$380,000 of increased compensation and benefits expense. Of the increase,
$233,000 is due to the release of 1/28th of the ESOP shares on December 31,
1997 and the remainder is due to staff increases, normal salary increases
which occurred in January 1997 and overtime worked during the core software
conversion. Other increases including $18,000 in supplies, postage and
telephone, $37,000 in occupancy and equipment, and $40,000 in advertising were
partially offset by a decrease of $50,000 in FDIC deposit insurance expense.
The increase in occupancy expense was due to the opening of the Island City
Branch in June 1997 and the increase in advertising expense were due to
special campaigns conducted in the quarter ended December 31, 1997 to promote
consumer loans. The decrease in deposit insurance premiums was due to
there-capitalization of the SAIF insurance fund via special assessments paid
in September 1996 that resulted in a reduction of the Bank's premium rate in
January 1997. The ratio of non-interest expense to average total assets was
2.7% and 2.5% for the three months ended December 31, 1997 and 1996,
respectively.
Income Taxes. The provision for income taxes increased $288,000 for the three
months ended December 31, 1997 compared with the prior period. The increase
was attributable to a higher level of net income before taxes, as well as
$233,000 of ESOP compensation expense which is not deductible for taxes in the
current or future periods.
Item No. 3 Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
(16)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is involved in various claims and legal actions arising
in the normal course of business. Management believes that these
proceedings will not result in a material loss to the Company.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
27 Financial Data Schedule
(17)
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OREGON TRAIL FINANCIAL CORP.
Date: February 13, 1998 By: /s/ Dan L. Webber
--------------------------------------
Dan L. Webber, President and
Chief Executive Officer
Date: February 13, 1998 By: /s/ Jerry F. Aldape
--------------------------------------
Jerry F. Aldape, Senior Vice
President and Chief Financial
Officer
(18)