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, 1998
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 17, 1998, there were issued and outstanding 4,694,875 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 17, 1998 of $16.125, was
$67,794,273.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareholders for the Fiscal
Year Ended March 31, 1998 ("Annual Report") (Parts I and II).
2. Portions of Registrant's Definitive Proxy Statement for the 1998
Annual Meeting of Shareholders (Part III).
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 ("Savings Bank") upon the Savings 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, 1998, the Company had total assets of $263.2 million, total deposits of
$192.7 million and shareholders' equity of $67.3 million. All references to
the Company herein include the Savings Bank where applicable.
The Savings Bank was organized in 1901. The Savings 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 Savings Bank also is a
member of the Federal Home Loan Bank ("FHLB") System.
The Savings 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 Savings Bank also
actively originates home equity and second mortgage loans. Beginning in 1996,
the Savings 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 Savings Bank invests excess
liquidity in short and intermediate 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 30.7% of total assets at March 31, 1998. See "--
Investment Activities."
Market Area
The Savings Bank's primary market area encompasses those regions
surrounding its offices in Baker, Grant, Harney, Malheur, Union, Wallowa and
Wheeler Counties in Oregon and Payette and Washington Counties in Idaho. The
Savings Bank's home office is located in Baker City, Oregon with branches in
Ontario, John Day, Burns, Enterprise and two locations in La Grande. In June
1997, one of the La Grande branches was relocated to nearby Island City.
The principal industries of the market area are agriculture and timber
products. The Savings 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 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 Savings Bank's loan portfolio totaled $153.8 million at
March 31, 1998, representing 58.4% of total assets at that date. The Savings
Bank concentrates its lending activities within its primary market area.
Historically, the Savings Bank's primary lending activity has been the
origination of one- to- four family residential mortgage loans. To a lesser
extent, the Savings Bank makes mortgage loans for the purpose of constructing
primarily single-family residences.
1
As a result of management's perception of minimal anticipated growth in
residential loan demand within the Savings Bank's primary market area and a
local demand for agricultural, commercial business and consumer loans, the
Savings Bank has significantly increased its origination of agricultural,
indirect dealer automobile 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.
Historically, the Savings Bank has been active in the origination of
consumer loans, which primarily consist of home equity loans, secured and
unsecured and, to a lesser extent, automobile loans, credit card loans, home
improvement loans, mobile home loans and loans secured by savings deposits.
More recently, the Savings Bank has increased its purchase of dealer-
originated automobile contracts. Subject to market conditions and other
factors, the Savings Bank is considering expansion of its purchase of
dealer-originated automobile contracts to include contracts secured by
recreational vehicles, trailers, motorcycles and other vehicles.
2
Loan Portfolio Analysis. The following table sets forth the composition of the Savings Bank's loan
portfolio (excluding loans held-for-sale) at the dates indicated. The Savings Bank had no concentration
of loans exceeding 10% of total gross loans other than as presented below.
At March 31, At June 30,
---------------------------------- ------------------------------------------------
- --
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- --------------- -------------
- --
Amount Percent Amount Percent Amount Percent Amount Percent Amount
Percent
(Dollars in thousands)
Mortgage Loans:
One-to-four-
family. . . . . . $100,740 64.65% $101,792 71.99% $101,199 74.71% $ 93,436 72.95% $ 84,385
73.08%
Multi-family . . . 1,194 0.77 1,844 1.30 1,927 1.42 1,935 1.51 2,060
1.78
Commercial . . . . 7,906 5.07 4,768 3.37 4,724 3.49 5,166 4.03 3,840
3.33
Construction . . . 1,616 1.04 853 0.60 1,745 1.29 1,798 1.40 3,114
2.70
Land . . . . . . . 297 0.19 223 0.16 14 0.01 15 0.01 32
0.03
Total mortgage -------- ------ -------- ------ -------- ------ -------- ------ -------- ----
- --
loans. . . . . . 111,753 71.72 109,480 77.42 109,609 80.92 102,350 79.90 93,431
80.92
-------- ------ -------- ------ -------- ------ -------- ------ -------- ----
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Consumer Loans:
Home equity and
second mortgage . 19,231 12.34 17,514 12.39 12,751 9.41 12,120 9.46 10,837
9.39
Credit card. . . . 854 0.55 844 0.60 791 0.58 712 0.56 426
0.37
Automobile(1). . . 5,719 3.67 2,064 1.46 1,405 1.04 1,507 1.18 1,382
1.19
Loans secured by
deposit accounts. 648 0.42 731 0.52 593 0.44 589 0.46 626
0.54
Unsecured. . . . . 2,047 1.31 1,611 1.14 4,580 3.38 4,404 3.44 3,720
3.22
Other. . . . . . . 4,623 2.97 2,627 1.85 2,587 1.91 3,585 2.80 3,297
2.86
Total consumer -------- ------ -------- ------ -------- ------ -------- ------ -------- ----
- --
loans. . . . . . 33,122 21.26 25,391 17.96 22,707 16.76 22,917 17.90 20,288
17.57
-------- ------ -------- ------ -------- ------ -------- ------ -------- ----
- --
Commercial business
loans. . . . . . . 5,968 3.83 4,066 2.88 3,142 2.32 2,822 2.20 1,749
1.51
-------- ------ -------- ------ -------- ------ -------- ------ -------- ----
- --
Agricultural loans. 4,979 3.19 2,466 1.74 -- -- -- -- --
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-------- ------ -------- ------ -------- ------ -------- ------ -------- ----
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Total loans. . . 155,822 100.00% 141,403 100.00% 135,458 100.00% 128,089 100.00% 115,468
100.00%
====== ====== ====== ======
======
Less:
Undisbursed portion
of loans in process 102 769 1,585 2,145 2,039
Net deferred loan
fees. . . . . . . 1,035 1,028 985 1,049 925
Allowance for loan
losses . . . . . . 847 725 541 455 403
Total loans -------- -------- -------- -------- --------
receivable, net. $153,838 $138,881 $132,347 $124,440 $112,101
======== ======== ======== ======== ========
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(1) Includes dealer-originated automobile contracts of $5.1 million and $389,000 at March 31, 1998 and
1997,
respectively.
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PAGE
One- to- Four Family Real Estate Lending. Historically, the Savings 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, 1998, $100.7 million, or 64.65%, of the
Savings Bank's total loan portfolio, consisted of such loans, with an average
loan balance of $45,000.
Generally, the Savings 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
Savings Bank's fixed-rate loans customarily include "due on sale" clauses,
which give the Savings 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, 1998, $56.4 million, or 36.2%, of the total loans before net
items were fixed rate one- to- four family loans and $44.3 million, or 28.4%,
were adjustable rate mortgage loans ("ARM loans"). The Savings 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 Savings Bank's ARMs are typically based on a 30-year amortization
schedule. The Savings Bank offers discounted or "teaser" ARM loans where the
initial interest rate is 2.625 to 2.750 percentage points below the prevailing
interest rate. The Savings Bank, however, qualifies the borrowers on its ARM
loans based on the fully indexed rate. The Savings 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, 1998, $35.1 million, or 22.5% of the Savings 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 Savings 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 Savings Bank's loan portfolio helps
reduce the Savings 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 Savings 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 Savings Bank has
no assurance that yields on ARM loans will be sufficient to offset increases
in the Savings Bank's cost of funds. The Savings Bank believes these risks,
which have not had a material adverse effect on the Savings Bank to date,
generally are less than the risks associated with holding fixed-rate loans in
portfolio during a rising interest rate environment.
The Savings Bank generally requires title insurance insuring the status
of its lien on all loans where real estate is the primary source of security.
The Savings Bank generally requires the maintenance of fire and casualty
insurance (and, if appropriate, flood insurance).
The Savings 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 Savings
Bank's Board of Directors, the Savings Bank can lend up to 95% of the lower of
cost or appraised value of the property securing
4
a one- to- four family residential loan; however, the Savings Bank generally
obtains private mortgage insurance on the portion of the principal amount that
exceeds 80% of the appraised value of the security property.
Agricultural Lending. Agriculture is the major industry in the Savings
Bank's market area and the Savings Bank has been making agricultural loans to
satisfy the demand of its market area. Subject to market conditions, the
Savings Bank intends to continue to emphasize agricultural loans. In 1996,
the Savings Bank began originating a significant number of loans to finance
agriculture production and the expense of farming and agricultural related
operations. Also, to a lesser extent, the Savings Bank has made agricultural
loans for the purchase of farmland and equipment which are secured by
agricultural real estate and equipment. At March 31, 1998, agricultural loans
amounted to $5.0 million, or 3.19%, of the total loan portfolio. The Savings
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 Savings Bank with the necessary financial reporting.
Agricultural operating loans are made to finance farm operating expenses
(i.e., acquisition of seed, fertilizer, livestock and feed, among other
things) together with, in some cases, family living expenses, over the course
of a growing season and typically are made in amounts of $500,000 or less.
However, the Savings Bank's largest agricultural operating loan at March 31,
1998 had a commitment of $1.6 million ($0 outstanding) and was provided to
finance a farming operation that grows mint and potatoes. This loan was
performing in accordance with its terms at March 31, 1998. Agricultural
operating loans generally are made in amounts of up to 75% of the borrower's
anticipated income (not including the value of the breeding herd in the case
of cattle loans) and are generally 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 cattle production, the cost
of feed and related expenses and the fluctuating market conditions or in the
case of crops, the acreage of the farm, the crop to be planted, the crop yield
and the expected price to be received for harvested crops. The interest rate
is 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 a farm's or ranch's annual operations, they are written on a one-year
renewable basis, and renewal is dependent upon prior year's performance and
the forthcoming year's projections as well as overall financial strength of
the borrower. The Savings Bank carefully monitors these loans and prepares
monthly variance reports on the income and expenses. To meet the seasonal
operating needs of a farm, borrowers may qualify for single payment notes,
revolving lines of credit and/or non-revolving lines of credit.
In underwriting agricultural operating loans, the Savings Bank considers
the cash flow of the borrower based upon the farm or ranch operations 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 grain, 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 Savings Bank may also
collateralize an operating loan with the farm's operating equipment, breeding
stock, real estate, and federal agricultural program payments to the borrower.
The Savings 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.
Such loans generally carry rates which adjust at least annually based on a
rate equal to the prime rate, as published in The Wall Street Journal, plus a
negotiated margin of up to 3%. For fixed rate loans for terms generally not
to exceed five years, rates are established at inception with margins set from
2% to 3.5% above the five-year Treasury Note.
Payments on an agricultural real estate loan depend to a large degree on
the results of operations of the related farm, and repayment is also subject
to adverse economic or weather conditions as well as market prices for
agricultural products, which can be highly volatile and are outside the
control of the farm borrower, among other things. Such loans are not made to
start up businesses and are generally reserved for profitable operators with
substantial equity and proven track records.
5
In addition to disease, weather presents one of the greatest risks as
hail, drought, floods, or other conditions, can severely limit or destroy crop
yields and thus impair loan repayments and the value of the underlying
collateral. This risk can be reduced substantially by the farmer with
multi-peril crop insurance which can guarantee yields to provide certainty of
repayment. Because of its high cost to the borrower, the Savings Bank
encourages but generally does not require multi-peril crop insurance. Grain
and livestock prices also present a risk as prices may decline prior to sale
resulting in a failure to cover production costs. These risks may be reduced
by the use of future set price contracts, which fixes in advance the price
that the farmer will receive for the harvested crops. Generally operating
margin reserves of 20% of the current year's budget usually cover any price
declines for the current year.
In addition, the value of collateral securing agricultural real estate
loans may be affected in the coming years by the gradual release of farmland
from the federal government's Conservation Reserve Program, which began in the
mid-1980's and pays farmers to keep their land out of farming production for a
ten-year period. Because such farmland is being released gradually over a ten
year period, which began in 1995, and because of the anticipated high economic
costs associated with preparing such farmland for active cultivation that may
discourage renewed farming thereon, management does not anticipate that
release of this land will have any significant effect on the value of its
current collateral.
Finally, many farms are dependent on a limited number of key individuals
whose injury or death may result in an inability to operate the farm
successfully. Therefore, consideration is given to succession, life insurance
and business continuation plans during underwriting.
Construction Lending. On a limited basis, the Savings Bank also offers
construction loans to qualified borrowers for construction of single-family
residences in the Savings Bank's primary market area. Typically, the Savings
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. At times, on a
limited basis, the Savings 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 Savings 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 Savings 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 Savings Bank may
advance funds beyond the amount originally committed to permit completion of
the development. The Savings Bank has sought to minimize this risk by
limiting construction lending to qualified borrowers in the Savings Bank's
market area and by limiting the aggregate amount of outstanding construction
loans. At March 31, 1998, construction loans amounted to $1.6 million, or
1.04%, of the loan portfolio.
Multi-Family and Commercial Real Estate Lending. The multi-family
residential loan portfolio consists primarily of loans secured by small
apartment buildings and the commercial real estate loan portfolio includes
loans to finance the construction or acquisition of small office buildings,
retail stores, car dealerships and agricultural land. The largest such loan
totalled $628,000 at March 31, 1998. At March 31, 1998, the Savings Bank had
$1.2 million of multi-family residential and $7.9 million of commercial real
estate loans, which amounted to .77% and 5.07%, 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 made at the prime rate, as published in The Wall Street
Journal, for 15 to 20 year
6
terms and they adjust at a rate equal to this prime rate plus a negotiated
margin up to 3%. On fixed rate loans for terms generally not to exceed five
years, rates are established at inception with margins set from 2.0% to 3.5%
above the current five year Treasury Note. Because of the inherently greater
risk involved in this type of lending, the Savings Bank generally limits its
multi-family and commercial real estate lending to borrowers within its market
area with which it has had prior experience.
Agricultural real estate loans primarily are secured by first liens on
farmland or buildings thereon located in the Savings Bank's market area,
primarily to service the needs of the Savings Bank's existing customers. The
largest such loan totalled $145,000 at March 31, 1998. Loans are generally
written in amounts up to 50% to 75% of the tax assessed or appraised value of
the property for terms of between 10 to 20 years. Such loans have interest
rates that generally adjust at least annually at a rate equal to the prime
rate, as published in The Wall Street Journal, plus a negotiated margin up to
3%. For fixed rate loans with terms generally not to exceed five years, rates
are established at inception with margins set from 2.0% to 3.5% above the
current five year Treasury Note. In originating an agricultural real estate
loan, the Savings Bank considers the debt service coverage of the borrower's
cash flow and the appraised value of the underlying property, as well as the
Savings Bank's experience with and knowledge of the borrower.
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
these risks, the Savings Bank generally limits itself to its market area or to
borrowers with which it has prior experience or who are otherwise well known
to the Savings Bank. In addition, in the case of commercial mortgage loans
made to a partnership or a corporation, the Savings Bank seeks, whenever
possible, to obtain personal guarantees and annual financial statements of the
principals of the partnership or corporation. The Savings Bank reviews all
significant commercial real estate loans on an annual basis to ensure that the
loan meets current underwriting standards. In addition, the Savings Bank
underwrites commercial real estate loans at a rate of interest significantly
above that carried on 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 Savings 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, 1998, the Savings
Bank's consumer loans totaled approximately $33.1 million, or 21.26%, of the
Savings Bank's total loans. The Savings Bank's consumer loans consist
primarily of home improvement and equity loans, automobile loans, boat and
recreational vehicle loans, unsecured loans, and deposit account loans. The
growth of the consumer loan portfolio in recent years has consisted primarily
of an increase in home equity loans, which the Savings Bank has more
aggressively marketed. Recently, the Savings Bank has significantly increased
its origination of indirect dealer automobile loans, as discussed below.
In recent periods, the Savings 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 Savings 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 Savings 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 Savings 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 two percentage points above the prime
lending rate, as published in The Wall Street Journal, while the rate on
unsecured lines is 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, 1998 were less than $25,000. The Savings Bank
7
requires repayment of at least 2% of the unpaid principal balance monthly. At
March 31, 1998, approved lines of credit totaled $14.6 million, of which $4.4
million was outstanding.
The Savings 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, 1998, fixed rate
home equity loans and second mortgage loans amounted to $14.1 million, or
9.0%, of total loans.
At March 31, 1998, the Savings Bank's automobile loan portfolio amounted
to $5.7 million, or 17.27%, of consumer loans at such date. Since January
1997, a substantial portion of the Savings Bank's automobile loans have been
originated indirectly by a network of approximately ten automobile dealers
located in the Baker City, La Grande, Burns, John Day and Enterprise market
areas. Indirect automobile loans accounted for approximately 29.2% of the
Savings Bank's total consumer loan originations during the year ended March
31, 1998. The applications for such loans are taken by employees of the
dealer, the loans are written on the dealer's contract pursuant to the Savings
Bank's underwriting standards using the dealer's loan documents with terms
substantially similar to the Savings Bank's. All indirect loans must be
approved by specific loan officers of the Savings Bank who have experience
with this type of lending. In addition to indirect automobile lending, the
Savings Bank also originates automobile loans directly. Subject to market
conditions and other factors, the Savings Bank is considering expanding its
purchase of dealer-originated contracts to include contracts secured by
recreational vehicles, trailers, motorcycles, and other vehicles.
Indirect automobile lending may involve greater risks than direct
automobile lending, such as dealer fraud. To mitigate these risks, the
Savings Bank has limited its indirect automobile lending relationships to
dealerships that are established and well known in its market area. However,
if a dealership were to enter into bankruptcy, the Savings Bank may be unable
to obtain clear title to the automobiles because the floor plan lender, who
originated a loan to the dealer to enable the dealer to purchase the
automobiles from the manufacturer or another party, would not assign its lien
to the Savings Bank.
The maximum term for the Savings Bank's automobile loans is 72 months.
The Savings Bank may lend up to 100% of the purchase price of the new or used
automobile. The Savings Bank requires all borrowers to maintain automobile
insurance, including collision, fire and theft, with a maximum allowable
deductible and with the Savings Bank listed as loss payee.
The Savings Bank's consumer loans also include unsecured loans and loans
secured by deposit accounts and loans to purchase recreational vehicles, motor
homes, boats and credit card loans. The Savings Bank generally will lend up
to 100% of the purchase price of vehicles other than automobiles.
At March 31, 1998, unsecured consumer loans amounted to $2.0 million, or
1.31%, 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 Savings Bank.
Since December 1992, the Savings Bank has offered credit card loans
through its participation as a VISA card issuer. Management believes that
providing credit card services to its customers helps the Savings Bank remain
competitive by offering customers an additional service. The Savings 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 Savings Bank on its credit card loans is the
prime rate, as published in The Wall Street Journal, plus 7%, and the Savings
Bank is permitted to change the interest rate quarterly. Processing of bills
and payments is contracted to an outside servicer. At March 31, 1998, the
Savings Bank had a commitment to fund an aggregate of $4.4 million of credit
card loans, which represented the aggregate credit limit on credit cards, and
had $854,000 of credit card loans outstanding, representing .55% of its total
loan portfolio. The Savings Bank intends to continue credit card lending
8
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 entail 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, 1998, the Savings Bank had $17,000 of consumer loans accounted for
on a nonaccrual basis.
Commercial Business Lending. The Savings Bank originates commercial
business loans to small and medium sized businesses in its primary market
area. Commercial business loans are generally made to finance the purchase of
seasonal inventory needs, new or used equipment, 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. Such loans are made for terms of five years or less,
depending on the purpose of the loan and the collateral, with loans to finance
operating expenses made for one year or less, with interest rates that adjust
at least annually at a rate equal to the prime rate, as published in The Wall
Street Journal, plus a margin of up to 3%. At March 31, 1998, the commercial
business loans amounted to $6.0 million, or 3.83%, of the total loan
portfolio.
At March 31, 1998, the largest outstanding commercial business loan was a
$1.0 million operating line of credit to a retail lumber and recreational
vehicle dealership. Such loan was performing according to its terms at March
31, 1998.
The Savings Bank is an approved Small Business Administration ("SBA")
lender and at March 31, 1998, had one SBA loans that totalled $129,000. The
Savings Bank intends to continue to originate these loans to local businesses
within its primary market area.
The Savings Bank 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, and the Savings Bank
seeks to structure such loans to have more than one source of repayment. The
borrower is required to provide the Savings Bank with sufficient information
to allow the Savings 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 balances exceeding $100,000, the
Savings Bank requires that borrowers and guarantors provide updated financial
information at least annually.
The Savings 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 assets and have maturities of five 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 may be subject to a greater extent to adverse conditions in the economy.
The Savings 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,
9
the Savings 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 Savings Bank.
Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 1998 regarding the dollar amount of loans maturing in
the Savings 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 $ 3,251 $ 8,345 $ 8,897 $80,247 $100,740
Multi-family . . . . 38 99 106 951 1,194
Commercial . . . . . 537 1,149 1,286 4,934 7,906
Construction . . . . 38 92 101 1,385 1,616
Land. . . . . . . . 15 29 45 208 297
Consumer loans:
Home equity and second
mortgage . . . . . 2,268 4,688 3,410 8,865 19,231
Automobile . . . . . 1,040 2,296 1,879 504 5,719
Credit card. . . . . 154 315 172 213 854
Loans secured by deposit
accounts. . . . . . 363 222 63 -- 648
Unsecured. . . . . . 648 972 385 42 2,047
Other. . . . . . . . 945 1,557 885 1,236 4,623
Commercial business
loans. . . . . . . . 2,252 1,916 1,062 738 5,968
Agricultural loans. . 3,594 611 446 328 4,979
------- ------- ------- ------- --------
Total. . . . . . $15,143 $22,291 $18,737 $99,651 $155,822
======= ======= ======= ======= ========
10
The following table sets forth the dollar amount of all loans due after
March 31, 1999, 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 . . . $54,469 $43,020
Multi-family. . . . . . . 647 509
Commercial. . . . . . . . 1,870 5,499
Construction. . . . . . . 839 739
Land. . . . . . . . . . . 282 --
------- -------
Consumer loans:
Home equity and second
mortgage . . . . . . . . 12,791 4,172
Automobile. . . . . . . . 4,679 --
Credit card . . . . . . . -- 700
Loans secured by deposit
accounts . . . . . . . . 285 --
Unsecured . . . . . . . . 121 1,278
Other . . . . . . . . . . 3,348 330
------- -------
Commercial business loans 1,781 1,935
Agricultural loans . . 715 670
------- -------
Total. . . . . . . . . $81,827 $58,852
======= =======
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 Savings 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
Savings 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 Savings Bank's lending activities
are subject to the written, non-discriminatory, underwriting standards and
loan origination procedures established by the Savings Bank's Board of
Directors and management. The customary sources of loan originations are
realtors, walk-in customers, referrals and existing customers. The Savings
Bank also advertises its loan products by radio and newspaper. The Savings
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 $175,000. 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 but less than $1.5 million requires
approval of a quorum of the Level 1 Executive Loan Committee. The Loan
Committee consists of the President/Chief Executive Officer, Senior Vice
President, Senior Credit Manager, Credit Manager, three commercial lenders and
six Board members. A quorum of the committee consists of one of the
President/Chief Executive Officer or Senior Vice President; Senior Credit
Manager or Credit
11
Manager; two Board members and if the loan is a commercial loan, one
commercial lender. Loans to borrowers with an aggregate borrowing
relationship in excess of $1.5 million but less than $3 million require the
approval of the Level 2 Board Loan Committee, which consists of the same
members as the Executive Loan Committee, but requires a larger quorum. Loans
to borrowers with an aggregate borrowing relationship exceeding $3 million
require approval by the same committee, but with an even larger quorum.
Loan Originations, Sales and Purchases. Historically, the Savings Bank's
primary lending activity has been the origination of one- to- four family
residential mortgage loans. In recent periods, the Savings Bank has increased
its origination of consumer, commercial business and agricultural loans.
During the year ended March 31, 1998, the Savings Bank did not sell a
material amount of its loans. At March 31, 1998, the Savings Bank was not
servicing any loans for investors.
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Nine Months Ended
Year Ended March 31, Year Ended
March 31, ----------------- June 30,
1998 1997 1996 1996
---- ---- ---- ----
(In thousands)
Loans originated:
Mortgage loans:
One- to- four family . . . $13,718 $ 8,966 $11,932 $17,416
Multi-family . . . . . . . 400 -- -- 514
Commercial . . . . . . . . 393 -- 325 908
Construction . . . . . . . 4,448 2,216 2,856 3,958
Land . . . . . . . . . . . 19 173 27 27
Consumer. . . . . . . . . . 19,122 8,769 5,548 7,642
Commercial business loans . 7,860 2,346 1,367 2,484
Agricultural loan . . . . . 10,631 6,352 -- --
------- ------- ------- -------
Total loans originated . 56,591 28,822 22,055 32,949
Loans purchased:
One-to four family mortgage 203 183 47 256
Dealer-originated automobile
contracts. . . . . . . . . 5,574 389 -- --
------- ------- ------- -------
Total loans purchased . 5,777 572 47 256
Loans sold:
Total whole loans sold . . 448 1,149 652 759
------- ------- ------- -------
Total loans sold. . . . 2,102 1,149 652 759
Loan principal repayments. . 46,983 21,711 16,712 24,539
------- ------- ------- -------
Net increase in loans
receivable, net . . . . . . $14,957 $ 6,534 $ 4,738 $ 7,907
======= ======= ======= =======
Loan Commitments. The Savings 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 45 days from approval, depending on the type of transaction.
At March 31, 1998, the Savings Bank had loan commitments of $23.0 million.
See Note 13 of Notes to Consolidated Financial Statements.
Loan Fees. In addition to interest earned on loans, the Savings Bank
receives income from fees in connection with loan originations, loan
modification, late payments and for miscellaneous service related to its
loans. Income from
12
these activities varies from period to period depending upon the volume and
type of loans made and competitive conditions.
The Savings Bank charges loan origination fees which are calculated 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 accredited and amortized in the same manner. The Savings
Bank recognized $184,000, $144,000 and $195,000 of deferred loan fees during
the year ended March 31, 1998, the nine months ended March 31, 1997 and the
year ended June 30, 1996, 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 Savings
Bank initiates collection procedures. When a borrower fails to make a
required payment on a loan, the Savings 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 through a
telephone call around the 20th day. While the Savings Bank generally prefers
to work with borrowers to resolve such problems, the Savings Bank will
institute foreclosure or other proceedings after the 90th day of delinquency,
as necessary, to minimize any potential loss.
Loans are placed on nonaccrual status when the loan becomes contractually
past due 90 days or more. Interest payments received on nonaccrual loans are
applied to principal if collection of principal is doubtful or reflected as
interest income on a cash basis. Loans may be reinstated to accrual status
when current and collectibility of principal and interest is no longer
doubtful.
The Savings Bank's Board of Directors is informed monthly of the status
of all loans delinquent more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Savings Bank.
13
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans at the dates indicated.
At March 31, At June 30,
------------------ -----------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to- four
family . . . . . $ 258 $ 167 $ 111 $ 47 $ 15
Consumer loans . . 17 23 52 20 26
----- ----- ----- ----- -----
Total . . . . . . 275 190 163 67 41
Accruing loans which are
contractually past due
90 days or more. . -- -- -- -- --
----- ----- ----- ----- -----
Total . . . . . . -- -- -- -- --
Total of nonaccrual
and 90 days past
due loans. . . . . 275 190 163 67 41
Foreclosed real
estate . . . . . . -- 13 -- --
Other repossessed
assets . . . . . . 313 10 34 -- 18
----- ----- ----- ----- -----
Total nonperforming
assets . . . . . $ 588 $ 200 $ 210 $ 67 $ 59
===== ===== ===== ===== =====
Restructured loans. $ 0 $ -- $ -- $ -- $ 18
===== ===== ===== ===== =====
Nonaccrual and 90 days
or more past due loans
as a percentage of
loans receivable, net 0.18% 0.14% 0.12% 0.05% 0.04%
Nonaccrual and 90 days
or more past due loans
as a percentage of
total assets . . . 0.10% 0.09% 0.08% 0.03% 0.02%
Nonperforming assets
as a percentage of
total assets . . . 0.22% 0.10% 0.10% 0.03% 0.03%
Loans receivable,
net. . . . . . . . $153,838 $138,881 $132,347 $124,440 $112,101
Total assets. . . . $263,224 $204,213 $203,457 $205,400 $196,736
Interest income that would have been recorded for the year ended March
31, 1998 had nonaccruing loans been current in accordance with their original
terms, and the amount of interest included in interest income on such loans
for such periods was immaterial.
Real Estate Acquired in Settlement of Loans. See Note 1 of Notes to
Consolidated Financial Statements regarding the Savings Bank's accounting for
foreclosed real estate. At March 31, 1998, the Savings Bank had $313,000 of
foreclosed real estate.
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
14
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 three classifications for problem
assets: substandard, 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
corrected. 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 "special mention" and
monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified and special
mention assets, and of the Savings Bank's general and specific loss allowances
at the dates indicated, were as follows:
At March 31,
------------------ At June 30,
1998 1997 1996
---- ---- ----
(In thousands)
Loss . . . . . . . . . . . . . $ 15 $ 7 $ --
Doubtful . . . . . . . . . . . -- 22 11
Substandard assets . . . . . . 568 796 905
Special mention. . . . . . . . 1,501 838 582
General loss allowances. . . . 832 718 541
Specific loss allowances . . . 15 7 --
At March 31, 1998, substandard assets consisted of 13 one- to- four
amily mortgage loans, seven secured consumer loans, four unsecured consumer
loans and three VISA credit card accounts.
At March 31, 1998, special mention assets consisted of 18 one- to- four
family mortgage loans, 13 secured consumer loans, four unsecured consumer
loans and nine VISA credit card accounts.
Allowance for Loan Losses. The Savings 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 Savings 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 Savings Bank increases its
allowance for loan losses by charging provisions for loan losses against the
Savings 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 Savings Bank also maintains general provisions for loan
losses based on evaluating known and 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
15
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 loans is susceptible
to future market factors beyond the Savings 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
Savings 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, 1998, the Savings Bank had an allowance for loan losses of
$847,000, which management believes was adequate to absorb losses inherent in
the portfolio at that date. Although management believes that it uses the
best information available to make such determinations, 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 Savings 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 Savings Bank's loan portfolio, will not request the Savings 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 Savings Bank's financial condition and results of operations.
16
The following table sets forth an analysis of the Savings Bank's
allowance for possible loan losses for the periods indicated.
Nine Months
Year Ended
Ended March 31, Year Ended June 30,
March 31, ------------- ---------------------
1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning
of period . . . . . . $725 $541 $455 $455 $403 $506
Provision (credit) for
loan losses . . . . . 138 216 91 115 67 (90)
Recoveries:
Mortgage loans:
One- to- four
family. . . . . . . 4 -- 9 12 5 4
Consumer loans:
Credit card. . . . . 4 4 1 1 -- --
Other. . . . . . . . 25 3 -- 1 -- 8
---- ---- ---- ---- ---- ----
Total recoveries. . 33 7 10 14 5 12
---- ---- ---- ---- ---- ----
Charge-offs:
Mortgage loans:
One- to- four
family. . . . . . . 5 5 -- -- -- 21
Consumer loans:
Credit card. . . . . 36 26 25 41 -- 1
Automobile . . . . . 8 -- -- -- -- --
Unsecured. . . . . . -- -- -- -- -- --
Other. . . . . . . . -- 8 -- 2 20 3
---- ---- ---- ---- ---- ----
Total charge-offs . 49 39 25 43 20 25
---- ---- ---- ---- ---- ----
Net charge-offs . . 16 (32) (15) (29) (15) (13)
Allowance at end of ---- ---- ---- ---- ---- ----
period. . . . . . $847 $725 $531 $541 $455 $403
==== ==== ==== ==== ==== ====
Allowance for loan losses
as a percentage of total
loans outstanding at the
end of the period . . . 0.55% 0.52% 0.41% 0.41% 0.37% 0.36%
Net charge-offs as a
percentage of average
loans outstanding
during the period . . . 0.01% 0.03% 0.02% 0.02% 0.01% 0.01%
Allowance for loan
losses as a percentage
of nonperforming loans
at end of period. . . .308.07% 381.58% 424.80% 331.90% 679.10% 982.93%
17
The following table sets forth the breakdown of the allowance for loan losses by loan category at
the dates indicated. Management believes 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, At June 30,
------------------------------ --------------------------------------------
- ---
1998 1997 1996 1995 1994
-------------- --------------- --------------- ---------------- -----------
- ---
Percent Percent Percent Percent
Percent
Loans Loans Loans Loans
Loans
of of of of of
Cate- Cate- Cate- Cate-
Cate-
gory gory gory gory
gory
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 . . . $329 66.65% $357 74.05% $354 80.92% $284 79.90% $244
80.92%
Non-mortgage loans. . . . . 236 20.29 173 16.84 174 18.06 162 19.08 155
18.54
Commercial business and
real estate. . . . . . . . 164 8.90 105 6.25 -- -- -- -- --
- --
Agricultural loans. . . . . 87 3.19 61 1.74 -- -- -- -- --
- --
Credit cards . . . . . . . 26 .55 24 0.60 9 0.58 5 0.56 --
- --
Loans secured by deposit
accounts. . . . . . . . . 5 .42 5 0.52 4 0.44 4 0.46 4
0.54
Total allowance ---- ------ ---- ------ ---- ------ ---- ------ ---- ----
- --
for loan losses. . . . . $847 100.00% $725 100.00% $541 100.00% $455 100.00% $403
100.00%
==== ====== ==== ====== ==== ====== ==== ====== ====
======
18
Investment Activities
The Savings 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 Savings Bank may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like the
Savings Bank are also required to maintain an investment in FHLB stock. The
Savings Bank is 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" in the Annual Report.
The Savings Bank purchases investment securities with excess liquidity
arising when investable funds exceed loan demand. The Savings 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 FNMA,
Federal Home Loan Mortgage Corporation ("FHLMC") and Government National
Mortgage Association ("GNMA") with maturities of up to 30 years. However, a
portion of the conversion oversubscription proceeds was invested in short-term
commercial paper of the two highest ratings with maturities of less than 45
days during September 1997.
At March 31, 1998, the Savings Bank held securities classified as
available-for-sale and held-to-maturity under SFAS 115. There were no trading
securities at March 31, 1998. See Note 2 of Notes to Consolidated Financial
Statements. Trading of investment securities is not part of the Savings
Bank's operating strategy.
The Savings 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 Savings
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 Savings 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 Savings Bank's credit and interest rate risk and risk-based
capital is also considered.
At March 31, 1998, the Savings Bank did not have any securities (other
than U.S. government and agency securities) which had an aggregate book value
in excess of 10% of the Savings Bank's shareholders' equity at that date.
19
The following table sets forth the amortized cost and fair value of the
Savings Bank's debt and mortgage-based and related securities, by accounting
classification and by type of security, at the dates indicated.
At March 31, At June 30,
------------------------------------- ------------------
1998 1997 1996
------------------ ------------------ ------------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value(1) Total Value(1) Total Value(1) Total
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
Held to Maturity:
U.S. Government
agency obligations $ -- --% $ -- --% $ -- --%
Mortgage-backed and
related securities 12,805 16.46 15,302 30.03 17,011 28.84
Total held to ------- ------ ------- ------ ------- ------
maturity securities 12,805 16.46 15,302 30.03 17,011 28.84
Available for Sale:
U.S. Government
agency obligations. 37,175 47.78 15,857 31.12 19,900 33.74
Mortgage-backed and
related securities. 27,778 35.70 19,745 38.75 19,451 32.98
Other. . . . . . . . 50 .06 50 0.10 50 0.08
Total available for ------- ------ ------- ------ ------- ------
sale securities. . 65,003 83.54 35,652 69.97 39,401 66.80
Trading:
Mortgage-backed and
related securities. -- -- -- -- 2,569 4.36
------- ------ ------- ------ ------- ------
Total. . . . . . . . $77,808 100.00% $50,954 100.00% $58,981 100.00%
======= ====== ======= ====== ======= ======
- ----------------
(1) The market value of the Savings Bank's investment portfolio amounted to
$78.2 million, $51.0 million and $58.8 million at March 31, 1998 and 1997
and June 30, 1996, respectively. At March 31, 1998, the market value of
the principal components of the Savings Bank's investment securities
portfolio was as follows: U.S. Government securities, $37.2 million;
mortgage-backed and related securities, $41.0 million.
The following table sets forth the maturities and weighted average yields of the debt and
mortgage-backed and related securities in the Savings Bank's investment securities portfolio at March 31,
1998.
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)
Held to Maturity:
Mortgage-backed and
related securities. . . . . $ -- --% $ -- --% $ -- --% $12,805 7.07%
$12,805
Available for Sale:
U.S. Government agency
obligations . . . . . . . . -- -- 15,028 6.24 22,147 7.02 -- --
37,175
Mortgage-backed and related
securities. . . . . . . . . -- -- 302 7.15 166 6.54 27,310 7.19
27,778
Other. . . . . . . . . . . . -- -- 50 8.38 -- -- -- --
50
Total available for
sale securities. . . . . . -- 15,380 22,313 27,310
65,003
------ ------- ------- ------- ------
- -
Total . . . . . . . . . . . . $ -- $15,380 $22,313 $40,115
$77,808
====== ======= ======= =======
=======
20
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Savings
Bank's lending and other investment activities. In addition, the Savings 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 and repurchase agreements
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. Presently, the Savings Bank has no
other borrowing arrangements.
Deposit Accounts. A substantial number of the Savings Bank's depositors
reside in Oregon. The Savings 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
difference being the minimum balance deposit, early withdrawal penalties and
the interest rate. The Savings Bank reviews its deposit mix and pricing
weekly. The Savings Bank does not utilize brokered deposits, nor has it
aggressively sought jumbo certificates of deposit. The Savings Bank has also
begun to seek business checking accounts in connection with its community
banking activities.
The Savings Bank believes it is competitive in the type of accounts and
interest rates it offers on its deposit products. The Savings Bank does not
seek to pay the highest deposit rates but a competitive rate. The Savings
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 Savings
Bank is seeking to achieve.
In the unlikely event the Savings Bank is liquidated, depositors will be
entitled to full payment of their deposit accounts before any payment is made
to the Company as the sole stockholder of the Savings Bank.
21
The following table sets forth information concerning the Savings Bank's time
deposits and other interest-bearing deposits at March 31, 1998.
Per-
Weighted centage
Average of
Interest Minimum Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In thousands except minimum balance)
N/A% N/A Non-interest-bearing $ 8,648 10 4.49%
1.70 N/A NOW accounts 33,365 10 17.31
3.62 N/A Money market accounts 22,081 1,000 11.46
2.86 N/A Passbook savings accounts 23,741 5 12.32
Certificates of Deposit
-----------------------
5.84 3 to 5 years Fixed-term, fixed-rate 20,365 1,000 10.57
4.60 3 1/2 years Fixed-term, fixed-rate 240 1,000 0.12
4.29 91 day Fixed-term, fixed-rate 2,230 1,000 1.16
4.89 182 day Fixed-term, fixed-rate 8,768 1,000 4.55
5.29 1 year Fixed-term, variable-rate 35,299 1,000 18.31
5.37 2 1/2 year Fixed-term, variable-rate 11,042 1,000 5.73
5.53 5 year Fixed-term, variable-rate 427 1,000 0.22
4.60 18 month Fixed-term, adjustable-rate 1,864 5 0.97
5.79 6 year Fixed-term, adjustable-rate 716 0 0.37
5.71 Varies Various term, fixed-rate 5,169 1,000 2.68
5.67 Varies Jumbo certificates 18,780 100,000 9.74
-------- ------
TOTAL $192,735 100.00%
======== ======
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 1998.
Jumbo certificates of deposit have principal balances of $100,000 or more and
generally have negotiable interest rates.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Three months or less . . . . . . . $10,243
Over three through six months. . . 3,274
Over six through twelve months . . 2,806
Over twelve months . . . . . . . . 2,457
-------
Total. . . . . . . . . . . . . $18,780
=======
22
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 Savings Bank
between the dates indicated.
At March 31, At June 30,
--------------------------------------------------------- --------------
- --
1998 1997 1996
---------------------------- --------------------------- --------------
- --
Percent Percent
Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in thousands)
Non-interest-bearing . . . . . $ 8,648 4.49% $ 2,366 $ 6,282 3.51% $1,388 $ 4,894
2.77%
NOW checking . . . . . . . . . 33,365 17.31 6,104 27,261 15.22 735 26,526
15.02
Passbook savings accounts. . . 23,741 12.32 (263) 24,004 13.40 (964) 24,969
14.14
Money market deposit . . . . . 22,081 11.46 5,296 16,785 9.37 1,900 14,885
8.43
Fixed-rate certificates which
mature:
Within 1 year. . . . . . . . 72,279 37.50 (5,161) 77,440 43.22 7,624 69,816
39.53
After 1 year, but within 3
years . . . . . . . . . . . 25,996 13.49 6,738 19,258 10.75 (6,097) 25,354
14.36
After 3 years, but within 5
years . . . . . . . . . . . 4,581 2.37 (2,071) 6,652 3.71 (619) 7,271
4.12
Certificates maturing
thereafter. . . . . . . . . 2,044 1.06 568 1,476 0.82 (1,428) 2,904
1.63
-------- ------ ------- -------- ------ ------ -------- -----
- -
Total . . . . . . . . . . $192,735 100.00% $13,577 $179,158 100.00% $2,539 $176,619
100.00%
======== ====== ======= ======== ====== ====== ========
======
Time Deposits by Rates. The following table sets forth the amount of
time deposits in the Savings Bank categorized by rates at the dates indicated.
At March 31,
----------------------- At June 30,
1998 1997 1996
---- ---- ----
(In thousands)
2.00 - 3.99% . . . . . $ 229 $ 952 $ 979
4.00 - 4.99% . . . . . 23,094 21,618 25,383
5.00 - 5.99% . . . . . 74,946 58,210 53,156
6.00 - 6.99% . . . . . 5,390 16,342 16,475
7.00% and over . . . . 1,241 7,704 9,352
-------- -------- --------
Total. . . . . . . . . $104,900 $104,826 $105,345
======== ======== ========
Deposit Activity. The following table sets forth the deposit activity of
the Savings Bank for the periods indicated.
Year Nine Months Ended Year Ended
Ended March 31, June 30,
March 31, ----------------- ----------
1998 1997 1996 1996
---- ---- ---- ----
(In thousands)
Beginning balance . . . . . . . $179,158 $176,619 $172,569 $172,569
-------- -------- -------- --------
Net (withdrawals) deposits
before interest credited. . . 5,964 (2,946) (477) (3,529)
Interest credited . . . . . . . 7,613 5,485 5,739 7,579
-------- -------- -------- --------
Net increase (decrease)
in deposits . . . . . . . . . 13,577 2,539 5,262 4,050
-------- -------- -------- --------
Ending balance. . . . . . . . . $192,735 $179,158 $177,831 $176,619
======== ======== ======== ========
23
Borrowings. The Savings Bank utilizes advances from the FHLB-Seattle
to supplement its supply of lendable 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 Savings 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. Each
credit program has its own interest rate 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 Savings Bank is currently authorized to
borrow from the FHLB up to an amount equal to 20% of total assets. The
Savings Bank may increase the amount of its FHLB advances if loan demand
exceeds deposit growth.
Prior to December 1997, the Savings Bank also used retail repurchase
agreements due generally within one day as a source of funds, but discontinued
their use in December 1997. See Note 7 of Notes to Consolidated Financial
Statements.
The following table sets forth certain information regarding borrowings
by the Savings Bank at the end of and during the periods indicated:
At or
At or At or For the For the
For the Nine Months Ended Year Ended
Year Ended March 31, June 30,
March 31, ----------------- ----------
1998 1997 1996 1996
---- ---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase. . . . . . . . . . . $1,473 $1,459 $1,432 $1,432
FHLB advances . . . . . . . . . . . 8,000 2,850 9,100 9,100
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase . . . . . . . . . . 924 1,396 1,215 1,260
FHLB advances . . . . . . . . . . 3,024 861 7,939 6,965
Approximate weighted average rate paid on:
Securities sold under agreements
to repurchase. . . . . . . . . . . 3.55% 3.50% 3.57% 3.56%
FHLB advances . . . . . . . . . . . 5.85 4.88 6.08 6.21
REGULATION
General
The Savings 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, as amended ("HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDIA")
24
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 Savings 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 Savings Bank's mortgage documents. The Savings Bank must
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 Savings 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 Savings
Bank and their operations. The Company, as a savings and loan holding
company, is also required to file certain reports with, and otherwise comply
with the rules and regulations of, the OTS and the Securities and Exchange
Commission ("SEC").
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 generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
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; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The Savings 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 (borrowings) from the FHLB-Seattle.
The Savings Bank complied with this requirement with an investment in
FHLB-Seattle stock of $2.8 million at March 31, 1998. Among other benefits,
the FHLB-Seattle 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 Savings Bank Insurance Fund ("BIF") and the SAIF. As insurer of
the Savings Bank's deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The Savings Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Savings Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
under the FDIA as discussed below. The matrix so created results in nine
assessment risk classifications, with rates that until September 30, 1996
ranged from 0.23% for well capitalized, financially sound institutions with
only a few minor weaknesses to 0.31% for undercapitalized institutions that
pose a substantial risk of
25
loss to the SAIF unless effective corrective action is taken. The Savings
Bank's assessments expensed for the year ended March 31, 1998 equaled
$133,000.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the Savings
Bank, paying 0%. This assessment schedule is the same as that for the BIF,
which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980's to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be
the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 4.0%) of its net withdrawable accounts plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources --
Liquidity and Capital Resources" contained in the Annual Report. At March 31,
1998, the Savings Bank's liquidity ratio was 15.75%.
Prompt Corrective Action. Under the FDIA, as added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each federal
banking agency is required to implement a system of prompt corrective action
for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
26
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At March 31, 1998, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, 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; and
(vi) compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("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 Savings Bank fails to meet any
standard prescribed by the Guidelines, the agency may require the Savings Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review
of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after
the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in
any activity not permissible for a national bank and would be required to
repay any outstanding advances to any FHLB. In addition, within one year of
the date on which a savings association controlled by a company ceases to be a
QTL, the company must register as a bank holding company and become subject to
the rules applicable to such companies. A savings institution may requalify
as a QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer- related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity
loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
27
assets, among others, may be included in meeting the test subject to an
overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of consumer loans; and stock issued by FHLMC or FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At March
31, 1998, the qualified thrift investments of the Savings Bank were
approximately 79.1% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
An institution that fails to meet the core capital requirement would be
required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of
less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Federal Regulation of Savings Associations -- Prompt
Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans)
28
are assigned a 50% risk weight. Consumer, commercial, home equity and
residential construction loans are assigned a 100% risk weight, as are
nonqualifying residential mortgage loans and that portion of land loans and
nonresidential construction loans that do not exceed an 80% loan-to-value
ratio. The book value of assets in each category is multiplied by the
weighing factor (from 0% to 100%) assigned to that category. These products
are then totalled to arrive at total risk-weighted assets. Off-balance sheet
items are included in risk-weighted assets by converting them to an
approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk
categories in the same manner as balance sheet assets and included
risk-weighted assets.
The following table presents the Savings Bank's regulatory capital
compliance as of March 31, 1998.
Percent of
Adjusted Total
Amount Assets(1)
------ ------
(Dollars in thousands)
Tangible capital . . . . . . . . . $46,921 17.9%
Minimum required
tangible capital. . . . . . . . . 3,923 1.5%
------- ----
Excess . . . . . . . . . . . . . . $42,998 16.4%
======= ====
Core capital . . . . . . . . . . . $46,921 17.9%
Minimum required core
capital(2). . . . . . . . . . . . 10,462 4.0%
------- ----
Excess . . . . . . . . . . . . . . $36,459 13.9%
======= ====
Risk-based capital(3). . . . . . . $47,768 37.5%
Minimum risk-based
capital requirement . . . . . . . 10,180 8.0%
------- ----
Excess . . . . . . . . . . . . . . $37,588 29.5%
======= ====
- ----------------
(1) Based on adjusted total assets of $261.8 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $127.3
million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
that would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by
total risk-weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital
29
distributions in excess of such amount require advance notice to the OTS. A
Tier 2 savings association has capital equal to or in excess of its minimum
capital requirement but below its fully phased-in capital requirement (both
before and after the proposed capital distribution). Such an association may
make (without application) capital distributions up to an amount equal to 75%
of its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association may not make any capital distributions without prior approval from
the OTS.
The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At March 31, 1998, the Savings
Bank's limit on loans to one borrower was $7.0 million. At March 31, 1998,
the Savings Bank's largest aggregate amount of loans to one borrower was $2.4
million, all of which were performing according to their 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 ("Sections 23A and 23B")
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. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guarantee and
similar types of transactions. Any loan or extension of credit by the Savings
Bank to an affiliate must be secured by collateral in accordance with Section
23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
30
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary);
and(iii) the OTS may, for reasons of safety and soundness, impose more
stringent restrictions on savings associations but may not exempt transactions
from or otherwise abridge Section 23A or 23B. Exemptions from Section 23A or
23B may be granted only by the Federal Reserve Board, as is currently the case
with respect to all FDIC-insured banks. The Savings Bank has not been
significantly affected by the rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations generally
require that such loans be made on terms and conditions substantially the same
as those offered to unaffiliated individuals and not involve more than the
normal risk of repayment. Generally, Regulation O also places individual and
aggregate limits on the amount of loans the Savings Bank may make to such
persons based, in part, on the Savings Bank's capital position, and requires
certain board approval procedures to be followed. The OTS regulations, with
certain minor variances, apply Regulation O to savings institutions.
Community Reinvestment Act. Under the federal 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 Savings 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
Holding Company Acquisitions. The HOLA 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.
Holding Company Activities. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions under
the HOLA. 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. 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. The HOLA
provides that, among other things, no multiple
31
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. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Savings 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 Savings 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 Savings Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings
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 Savings
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 Savings Bank's actual loss experience, or a
percentage equal to 8% of the Savings 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 Savings Bank's loss experience, the
Savings Bank generally recognized a bad debt deduction equal to 8% of taxable
income.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate 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 require 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 Savings Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Savings
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 Savings 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 Savings 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
32
be included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank's current and accumulated
earnings and profits, distributions in redemption of stock and distributions
in partial or complete liquidation. However, dividends paid out of the
Savings 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 Savings 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, the Savings 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
Savings Bank. The Savings 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 Savings 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 Savings 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 Savings 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 Savings Bank will not file a
consolidated tax return, except that if the Company or the Savings 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 Savings Bank's federal income tax returns have not been
audited within the past five years.
State Taxation
The Savings Bank is subject to an Oregon corporate excise tax at a
statutory rate of 6.6% of income. The Savings Bank's state income tax returns
have not been audited during the past five years.
Competition
The Savings 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, 1998, there were eight
commercial banks and two other thrifts operating in the Savings Bank's primary
market area. Particularly in times of high interest rates, the Savings Bank
has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Savings 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 Savings
Bank's growth in the future.
Subsidiary Activities
The Savings Bank has two subsidiaries, Pioneer Development Corporation
("PDC") and Pioneer Bank Investment Corporation ("PBIC"). PDC's primary
interest is to purchase land sale contracts. PBIC's primary interest is to
hold the Savings Bank's non-conforming assets. At March 31, 1998, the Savings
Bank's equity investment in PDC
33
and PBIC was $1.9 million and $210,000, respectively, including loans to PDC
and PBIC with outstanding balances of $245,000 and $165,000, respectively, at
March 31, 1998.
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 Savings Bank's investment in its subsidiaries did
not exceed these limits at March 31, 1998.
Personnel
As of March 31, 1998, the Savings Bank had 98 full-time and three
part-time employees, none of whom is represented by a collective bargaining
unit. The Savings 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
- ---- ------ --------
Jerry F. Aldape 49 President and Chief Executive Officer
Zane F. Lockwood 43 Senior Vice President
- -------------
(1) At March 31, 1998.
Jerry F. Aldape has served as President and Chief Executive Officer of
the Company and the Savings Bank since March 1998, succeeding Dan L. Webber.
He served as the Savings Bank's Senior Vice President since 1994 and Corporate
Secretary since 1997. Mr. Aldape served as Controller/Financial Advisor/
Consultant/Personnel Officer with Insight Distributing, Inc., Sandpoint,
Idaho, from 1993 to 1994. Before 1994 he served as the Senior Vice President/
Chief Financial Officer for United First Federal Bank, a Federal Savings Bank,
located in Boise, Idaho, for seven years. Mr. Aldape has over 25 years of
business and banking experience.
Zane F. Lockwood has served as the Savings Bank's Senior Vice President
since March of 1998. Prior to that time, he served as Senior Commercial
Lender after joining the Savings Bank in October 1997. Mr. Lockwood was
employed by U.S. Bank for over 24 years in various capacities before joining
the Savings 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.
Item 2. Properties
- -------------------
The following table sets forth certain information regarding the Savings
Bank's offices at March 31, 1998, all of which are owned.
34
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
Main Office:
2055 First Street 1979 10,700 $ 63,152
Baker City, Oregon 97814
Branch Offices:
La Grande Branch 1975 6,758 44,758
1215 Adams Avenue
La Grande, Oregon 97850
Island City Branch 1997 4,200 12,600
3106 Island Avenue
La Grande, Oregon 97850
Ontario Branch 1960 3,700 25,606
225 SW Fourth Avenue
Ontario, Oregon 97914
John Day Branch 1973 2,420 13,272
150 West Main Street
John Day, Oregon 97845
Burns Branch 1975 2,567 12,242
77 W. Adams Street
Burns, Oregon 97720
Enterprise Branch 1976 3,360 21,105
205 West Main Street
Enterprise, Oregon 97828
The Savings Bank uses the services of an in-house data processing system.
At March 31, 1998, the Savings Bank had ten proprietary automated teller
machines, six of which were located in existing branches. At March 31, 1998,
the net book value of the Savings Bank's office properties and the Savings
Bank's fixtures, furniture and equipment was $5.6 million or 2.1% of total
assets. See Note 5 of the Notes to the Consolidated Financial Statements in
the Annual Report.
Item 3. Legal Proceedings
- -------------------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Savings Bank holds
security interests, claims involving the making and servicing of real property
loans and other issues incident to the Savings Bank's business. The Savings
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
Savings Bank.
35
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, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
- --------------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Stock Listing" on
the inside back cover of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained under the section captioned "SELECTED
CONSOLIDATED FINANCIAL DATA" on pages 7 through 9 of the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
The information contained in the section captioned "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
beginning on page 10 of the Annual Report is incorporated herein by reference.
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" on pages 19 and 20 of the
Annual Report are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
(a) Financial Statements
Independent Auditors' Reports*
Consolidated Balance Sheets as of March 31, 1998 and 1997*
Consolidated Statements of Income for the Year Ended March 31,
1998, the Nine Months Ended March 31, 1997 and the Year Ended
June 30, 1996*
Consolidated Statements of Shareholder's Equity for the Year
Ended March 31, 1998, the Nine Months Ended March 31, 1997 and
the Year Ended June 30, 1996*
Consolidated Statements of Cash Flows for the Year Ended March
31, 1998, the Nine Months Ended March 31, 1997 and the Year
Ended June 30, 1996*
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted
as the required information is either inapplicable or included in
the Consolidated Financial Statements or related Notes contained in
the Annual Report.
(b) Supplementary Data
The information contained in Note 19 to the Consolidated Financial
Statements included in the Annual Report is incorporated herein by reference.
36
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
incorporated 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 Savings Bank" in the
Proxy Statement is incorporated herein by reference.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Jerry F. Aldape**
10(b) Severance Agreement with Nadine J. Johnson**
10(c) Severance Agreement with William H. Wineger**
10(d) Employee Severance Compensation Plan**
10(e) Pioneer Bank, a Federal Savings Bank Employee Stock Ownership
Plan
10(f) Pioneer Bank, a Federal Savings Bank 401(k) Plan*
10(g) Pioneer Bank Director Emeritus Plan*
10(h) 1998 Stock Option Plan***
10(i) 1998 Management Recognition and Development Plan***
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Former Independent Auditors' Report
- ----------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (333-30051), as amended.
** Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1997.
*** Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on March 24, 1998 to report
the resignation of Dan L. Webber, President and Chief Executive Officer of the
Company and the Savings Bank, and to announce the appointment of Jerry F.
Aldape as his successor.
38
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, 1998 By: /s/ Jerry F. Aldape
----------------------------------------
Jerry F. Aldape
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/ Jerry F. Aldape President, Chief Executive Officer June 29, 1998
- -------------------------- and Director
Jerry F. Aldape (Principal Executive Officer)
/s/ Nadine J. Johnson Chief Financial Officer June 29, 1998
- -------------------------- (Principal Financial Officer)
Nadine J. Johnson
/s/ John Gentry Chairman of the Board June 29, 1998
- --------------------------
John Gentry
/s/ Albert H. Durgan Director June 29, 1998
- --------------------------
Albert H. Durgan
/s/ Edward H. Elms Director June 29, 1998
- --------------------------
Edward H. Elms
/s/ John A. Kienkaemper Director June 29, 1998
- --------------------------
John A. Lienkaemper
/s/ Charles Rouse Director June 29, 1998
- --------------------------
Charles Rouse
/s/ Stephen R. Whittemore Director June 29, 1998
- --------------------------
Stephen R. Whittemore
EXHIBIT 13
1998 Annual Report to Shareholders
THE NEW PIONEERS
OREGON TRAIL FINANCIAL CORPORATION 1998 ANNUAL REPORT
[LOGO] OREGON
TRAIL
FINANCIAL CORP.
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
TABLE OF CONTENTS
- --------------------------------------------
Letters to Shareholders 3
Directors, Officers and Managers 4
Selected Consolidated
Financial and Other Data 7
Management's Discussion and Analysis 10
Independent Auditors' Report 22
Consolidated Financial Statements 23
Notes to Consolidated
Financial Statements 30
Community Involvement 47
Corporate and inside
Investor Information back cover
Dear Shareholders:
The past year has been one of solid growth and improvement for Pioneer
Bank and the newly formed Oregon Trail Financial Corp. We opened a new branch
in Island City and extensively remodeled our John Day branch. Construction of
a new branch in Burns will be completed in the fall of 1998. These changes are
helping to improve our level of customer service and increase our commitment
to the local communities.
Pioneer Bank's total loans receivable increased by $14.9 million or
10.7%. The growth in the lending portfolio can be attributed to a continuing
focus on increasing consumer, commercial and agricultural lending
relationships. Concurrently, the total deposits of the bank increased by $13.6
million or 7.58%. We feel this increase was attributable to successfully
attracting core deposits due to our commitment to personal customer service.
We have made a commitment to continue to build our commercial and
agricultural relationships and still maintain our consumer and home mortgage
markets. As our relationships grow, we enhance our commitment to Eastern
Oregon and Western Idaho.
Very truly yours,
/s/ Jerry F. Aldape
Jerry F. Aldape
President and Chief Executive Officer
In 1997, we forged a new trail. The initial public offering of our stock
on October 3, 1997 opened the way for a whole new era of growth and service
for Pioneer Bank and its customers.
Our conversion from a mutual savings bank to a federal stock savings bank
enables us to continue our expansion of lending and investment activities,
diversify our operations, and investigate future branch acquisitions, while
allowing local and employee ownership.
Our mission statement is: "to be your preferred community bank." We will
continue to support our communities' growth, building on our distinguished
heritage and always looking to the future. Our continued investment in our
facilities, our product diversity, and more importantly, the investment in our
people verify our commitment.
I thank our employees for their continued dedication and contributions. I
also thank our thousands of customers, the people in the communities we have
the privilege to serve, and you, our stockholders, for your continued support.
Very truly yours,
/s/ John Gentry
John Gentry
Chairman of the Board of Directors
[picture] John Gentry
Chairman of the Board
[picture] [Directors]
(standing, from far left)
John Gentry
John A. Lienkaemper
Stephen R. Whittemore
Edward H. Elms
Chuck Rouse
Albert H. Durgan
[picture] [Directors Emeritus]
(seated, from far left)
Donald R. Guyer
Carl Davis
Ivan P. Patrick
W.S. Thomas
Bruce Kirkpatrick
[picture] [Officers]
(standing, from far left)
Chad Holt
Human Resources Manager
Bruce Barfuss
Treasurer/Controller
Karen Yeakley
Operations Manager
Tom Bennett
Senior Credit Manager
Hank Winegar
Chief Operations Officer
(seated, from far left)
Nadine Johnson
Chief Financial Officer
Michelle Kaseberg
Marketing/Training Coordinator
[picture] Jerry Aldape
President/CEO
[picture] Zane Lockwood
Senior Vice President
4
[picture] [Branch Managers]
(standing, from far left)
Rod Howley
John Day Branch
Jim Thomssen
Ontario Branch
Jeff Puckett
La Grande & Island City Branches
David Banta
Baker City Branch
(seated, from far left)
Annette Aschenbrenner
Enterprise Branch
Karen Smelser
Burns Branch
Eastern Oregon's Own Since 1901.
[picture] [Commercial Loan Officers]
(left to right)
Jerry Kincaid
Craig Nightingale
Craig Klug
5
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Financial Condition Data AT MARCH 31, AT JUNE 30,
(in thousands) -------------------- -------------------------------
1998 1997 1996 1995 1994
Total assets $ 263,224 $ 204,213 $ 203,457 $ 205,400 $ 196,736
Loans receivable, net 153,838 138,881 132,347 124,440 112,101
Loans held-for-sale 0 428 0 0 0
Investment securities
held to maturity 2,985 2,763 2,609 21,657 22,735
Investment securities
available for sale 37,225 15,907 19,950 2,902 2,780
Mortgage-backed and
related securities
held for trading 0 0 2,569 3,786 3,668
Mortgage-backed and
related securities
available for sale 27,778 19,745 19,451 0 0
Mortgage-backed and
related securities
held to maturity 12,805 15,302 17,011 42,245 46,441
Cash and interest-
bearing deposits 20,311 4,975 3,416 4,844 4,867
Deposit accounts 192,735 179,158 176,619 172,569 177,107
Borrowings 0 2,231 4,082 12,161 1,896
Shareholders' equity
(retained earnings
before 3/31/98) 67,301 21,026 20,004 17,812 15,477
Shares outstanding
excluding unearned
restricted shares
held in ESOP 4,346 N/A N/A N/A N/A
AT MARCH 31, AT JUNE 30,
-------------------- -------------------------------
1998 1997 1996 1995 1994
Number of:
Real estate loans
outstanding 2,245 2,381 2,493 2,527 2,545
Deposit accounts 28,781 29,455 30,524 30,136 28,839
Full-service offices 7 7 7 7 7
(Continued)
7
Selected Consolidated Financial and Other Data
Twelve Months Nine Months
Ended Ended
March 31, March 31, Year Ended June 30,
--------------- --------------- -----------------------
1998 1997 1997 1996 1996 1995 1994
(unaudited) (unaudited)
OPERATING DATA
(in thousands except
per share data)
Interest income $18,511 $16,082 $12,030 $11,960 $16,012 $14,807 $14,621
Interest expense 7,824 7,475 5,553 6,134 8,057 7,083 6,534
------- ------- ------- ------- ------- ------- -------
Net interest income 10,687 8,607 6,477 5,826 7,955 7,724 8,087
Provision (credit)
for loan losses 138 226 216 91 115 67 (90)
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses 10,549 8,381 6,261 5,735 7,840 7,657 8,177
Gains (losses) from
sale of securities 0 (51) 0 34 34 0 59
Other income 1,046 828 661 563 677 1,141 629
Other expenses(1) 6,533 6,454 5,075 3,647 5,009 5,027 4,602
------- ------- ------- ------- ------- ------- -------
Income before income
taxes 5,062 2,704 1,847 2,685 3,542 3,771 4,263
Provision for income
taxes 2,026 1,080 749 1,033 1,363 1,512 1,616
------- ------- ------- ------- ------- ------- -------
Net income $ 3,036 $ 1,624 $ 1,098 $ 1,652 $ 2,179 $ 2,259 $ 2,647
======= ======= ======= ======= ======= ======= =======
Earnings per common
share-since date of
conversion (See Note
1 of Notes to Con-
solidated Financial
Statements) $ 0.38 N/A N/A N/A N/A N/A N/A
Weighted average
number (since date
of conversion of
common shares out-
standing) 4,326 N/A N/A N/A N/A N/A N/A
(Continued)
8
Selected Consolidated Financial and Other Data
At or For the At or For the
Twelve Months Nine Months
Ended Ended At or For the
March 31, March 31, Year Ended June 30,
SELECTED FINANCIAL --------------- --------------- -----------------------
RATIOS 1998 1997 1997 1996 1996 1995 1994
Performance Ratios:(2)
Return on average
assets(3) 1.25% 0.80% 0.72% 1.06% 1.06% 1.12% 1.35%
Return on average
equity(4) 6.65 7.96 7.09 11.67 11.40 13.59 18.57
Interest rate spread(5) 3.73 3.89 3.90 3.45 3.56 3.61 3.95
Net interest margin(6) 4.60 4.37 4.40 3.87 3.97 3.94 4.22
Average interest-
earning assets to
average interest-
bearing liabilities 125.92 112.74 113.20 110.33 110.64 109.27 107.88
Noninterest expense
as a percent of
average total assets 2.69 3.16 3.31 1.76 2.43 2.49 2.34
Efficiency ratio(7) 56.35 70.47 73.31 57.60 58.58 57.14 51.92
Dividend payout
ratio(8) 13.16 N/A N/A N/A N/A N/A N/A
Asset Quality Ratios:
Nonaccrual and 90 days
or more past due loans
as a percent of total
loans, net 0.18 0.14 0.14 0.10 0.12 0.05 0.04
Nonperforming assets as
a percent of total
assets 0.22 0.10 0.10 0.06 0.10 0.03 0.03
Allowance for losses as
a percent of gross
loans receivable 0.55 0.52 0.52 0.41 0.41 0.37 0.36
Allowance for losses as
a percent of nonper-
forming loans 308.07 381.58 381.58 424.80 331.90 679.10 982.93
Net charge-offs to
average outstanding
loans 0.01 0.02 0.03 0.02 0.02 0.01 0.01
Capital Ratios:
Total equity-to-assets
ratio 25.57 10.30 10.30 8.68 9.83 8.67 7.87
Average equity to
average assets(9) 18.82 10.01 10.14 9.11 9.26 8.25 7.25
(1) Includes FDIC SAIF assessment of $1.1 million during the nine months ended
March 31, 1997.
(2) Annualized, where appropriate for the nine months ended March 31, 1997 and
1996.
(3) Net earnings divided by average total assets.
(4) Net earnings divided by average equity.
(5) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) 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.
(8) Dividends declared per share divided by net income per share.
(9) Average total equity divided by average total assets.
(Concluded)
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Management's discussion and analysis and other portions of this report
contain certain "forward-looking statements" concerning the expected future
operations of Oregon Trail Financial Corp. ("Company"). Management 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 the Company of the protections of such safe harbor with
respect to all "forward-looking statements" contained in our Annual Report.
"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 ("Bank") upon the
Bank's conversion from a federally chartered mutual to a federally chartered
stock savings Bank ("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 seven 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 primarily
of attracting retail deposits from the general public and using those funds to
originate one-to-four family residential and consumer loans in its primary
market area. To a lesser but growing extent, the Bank also originates
agricultural loans, commercial business loans and indirect automobile loans.
The Bank's results of operations depend primarily on 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 Federal Home Loan Bank ("FHLB") of
Seattle 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.
Year 2000
Data processing for the Bank is performed in-house primarily on an AS400
IBM computer. In December 1997, the Bank converted to new core software that
was purchased at a cost of approximately $200,000. The new software is used to
process all deposit and loan transactions and most general ledger
transactions. The vendor has assured that the new software is year 2000
compliant in all material respects. The vendor anticipates audits by
regulatory agencies as well as the performance of various tests in the year
ahead. The Bank will closely monitor the results of any audits and of the
proposed tests. In addition to the core software, the Bank uses various other
computer software products, some of which are already year 2000 compliant.
Others are being monitored and the Bank is proactively communicating with
vendors to
10
determine their course of action to become fully compliant. The Bank does not
anticipate any additional material expense related to year 2000 compliance.
Comparison of Financial Condition at March 31, 1998 and March 31, 1997
Total assets at March 31, 1998 amounted to $263.2 million compared to
$204.2 million at March 31, 1997. The primary reason for the $59.0 million or
28.9% increase in total assets was the net proceeds resulting from the Bank's
mutual-to-stock conversion which was completed on October 3, 1997. Net
proceeds were used to fund a $21.3 million net increase in the Bank's
available-for-sale portfolio of U.S. government agency medium term notes and a
$8.0 million net increase in available-for-sale U.S. government agency
mortgage-backed securities. Net proceeds were used to a lesser extent to fund
a $14.9 million increase in loans receivable.
Loans receivable, net, were $153.8 million at March 31, 1998 compared to
$138.9 million at March 31, 1997, a 10.7% increase. A substantial portion of
the Bank's loan portfolio is secured by real estate, either as primary or
secondary collateral, located in its primary market area. In addition, the
year ended March 31, 1998 saw a continuing trend in the growth of the
consumer, commercial business, and agricultural loan portfolios as the Bank
emphasized the origination of loans with shorter maturities for asset and
liability management purposes. Total consumer loans increased 30.3% or $7.7
million from $25.4 million at March 31, 1997 to $33.1 million at fiscal year
end 1998, primarily due to the purchase of $5.6 million of indirect dealer
automobile loans. Commercial business loans increased $1.9 million or 46.3%
from $4.1 million to $6.0 million. Commercial real estate loans increased $3.1
million or 64.6% from $4.8 million to $7.9 million. The development of an
agricultural loan portfolio continued with a 100% increase for the year from
$2.5 million at March 31, 1997 to $5.0 million at March 31, 1998. Management's
strategy to balance the interest rate risk of a fixed rate portfolio of
primarily long term real estate loans with the fulfillment of local demand for
shorter term agricultural, commercial business and indirect dealer automobile
loans was enhanced by the experience of its Senior Vice President Zane
Lockwood, who joined the Bank's commercial lending personnel in October 1997
and brought several additional lending relationships to the Bank. As a result
of the increased emphasis on other types of lending, mortgage loans on
one-to-four family dwellings decreased by $1.0 million or 1% from $101.8
million at the prior year-end to $100.7 million at March 31, 1998.
No loans were classified as held-for-sale at March 31, 1998 compared to
loans held-for-sale of $428,000 at March 31, 1997. To mitigate interest rate
risk, the Bank occasionally classifies fixed-rate one-to-four family mortgage
loans that conform to secondary market standards and with terms of 15 years or
more as held-for-sale. The Bank generally sells such loans and the related
servicing rights to private investors.
Cash and cash equivalents were $20.3 million at March 31, 1998 compared
to $5.0 million at March 31, 1997. The increase between March 31, 1997 and
March 31, 1998 primarily reflects a short term $7.0 million increase in
deposits and the proceeds from securities called at or near year end. The $7.0
million deposit matured in April 1998. In addition, approximately $6.0 million
of cash was invested in fixed-rate U.S. government agency mortgage-backed
securities in May 1998, reducing the balance of cash to more normal levels.
Available-for-sale securities were $65.0 million at March 31, 1998,
compared to $35.7 million at March 31, 1997. This increase was primarily due
to the purchase of approximately $36.0 million in U.S. government agency
obligations and $10.0 million in U.S. government agency mortgage-backed and
related securities. The purchases were partially offset by calls and
maturities of $15.0 million in U.S. government agency obligations and
principal pay-downs of $2.9 million on U. S. government agency mortgage-backed
and related securities.
Held-to-maturity securities declined to $12.8 million at March 31, 1998
from $15.3 million at March 31, 1997 because of principal reductions on U. S.
government agency mortgage-backed and related securities.
Premises and equipment, net, increased to $5.6 million at March 31, 1998
from $4.6 million at March 31, 1997 primarily as a result of the completion
of the Island City branch office on June 9, 1997 for a total cost of $1.1
million. In addition, during the year the Bank purchased land and began
construction on a new branch to replace the existing branch in Burns, Oregon.
A remodeling project was completed at the John Day branch in April 1998. At
March 31, 1998 construction in process for these two projects totaled
$247,000.
11
Total deposits were $192.7 million at March 31, 1998, compared to $179.2
million at March 31, 1997. Management attributes the $13.6 million increase
primarily to a successful attempt to attract core deposits, i.e. savings
passbook accounts and checking accounts, enhanced by the consolidation of
larger banks in their marketplace and a commitment to personal customer
service, as well as a $7.0 million short term deposit received at year end
which matured in April 1998. The Bank has also been able to attract the core
deposits of its new agricultural and commercial lending clients.
The Bank had no outstanding advances from FHLB Seattle compared to
$800,000 at March 31, 1997 as deposit growth and funds generated from the
mutual-to-stock conversion were sufficient to meet liquidity needs.
Advances from borrowers for taxes and insurance increased slightly to
$789,000 at March 31, 1998 from $691,000 at March 31, 1997 as a result of an
increased assessment of property tax values.
Total equity increased to $67.3 million at March 31, 1998 from $21.0
million at March 31, 1997 primarily due to net proceeds of the mutual-to-stock
conversion amounting to $45.7 million. The Bank paid its first cash dividend
of $.05 per share in March 1998, decreasing equity by $217,000. The release of
26,828 shares held by the ESOP in December and March increased equity by
$471,000.
COMPARISON OF OPERATING RESULTS FOR THE
TWELVE MONTHS ENDED MARCH 31, 1998 AND 1997
General. Subsequent to June 30, 1996, the Bank changed its fiscal year
end from June 30 to March 31. To assist in the analysis of the results of
operations for the year ended March 31, 1998, the results of operations for
such period have been compared to the unaudited results of operations for the
twelve months ended March 31, 1997, rather than the nine month fiscal year
ended March 31, 1997. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for
summary numerical information regarding the results of operations for the
twelve months ended March 31, 1997.
Net Income. Net income was $3.0 million for the year ended March 31,
1998, compared to $1.6 million for the twelve months ended March 31, 1997.
This 87.5% increase resulted primarily from an increase in net interest income
of $2.1 million and a $218,000 increase in noninterest income partially offset
by a $79,000 increase in noninterest expense. Noninterest expense would have
increased $1.2 million except that the prior twelve month period included the
legislatively mandated, one-time assessment levied by the FDIC on all
SAIF-insured institutions to recapitalize the SAIF. Without this assessment,
which amounted to $1.1 million ($707,000 after tax), net income would have
been $2.3 million for the twelve months ended March 31, 1997.
Net Interest Income. Net interest income increased 24.4% to $10.7 million
for the year ended March 31, 1998 from $8.6 million for the twelve months
ended March 31, 1997. The increase was primarily due to using the net proceeds
or $45.7 million from the mutual-to-stock conversion to fund a $14.9 million
increase in loans outstanding as well as a $26.8 million net increase in the
investment portfolio. Core deposits also increased by $13.5 million. Such
deposits are at a lower interest cost than time deposits. Interest income
increased 15.6% to $18.5 million for the twelve months ended March 31, 1998
compared to $16.0 million for the same period ended March 31, 1997. Interest
expense increased only 4.0% from $7.5 million for the twelve months ended
March 31, 1997 to $7.8 million for the twelve months ended March 31, 1998. The
increase was relatively small due to a decrease in the volume of interest-
bearing liabilities required to fund interest-earning assets as a result of
the mutual-to-stock conversion net proceeds. The average cost of deposits
decreased from 4.27% for the twelve months ended March 31, 1997 to 4.22% for
the twelve months ended March 31, 1998, primarily as a result of a higher
average balance of core deposits compared to higher interest costing time
deposits. To date, the Bank has been able to maintain its deposit base without
resorting to aggressive deposit pricing. The average rate paid on securities
sold under agreements to repurchase increased from 3.43% for the twelve months
ended March 31, 1997 to 3.68% for the year ended March 31, 1998. In December,
1997 the Bank discontinued the use of this product as a funding source.
Customer balances were transferred to other deposit account products. The
average rate paid on FHLB of Seattle advances increased from 5.48% for the
twelve months ended March 31, 1997 to 5.85% for the twelve months ended March
31, 1998, as a result of the use of a higher rate term advance in the months
just preceding the mutual-to-stock conversion. Interest rate spread decreasd
to 3.73% for the twelve months ended March 31, 1998 from 3.89% for the twelve
months ended March 31, 1997. The decrease is attributed to 10 basis point
decrease in the yield on the Bank's loan portfolio, a 29 basis point decrease
in the yield on the mortgage-backed securities portfolio and a higher volume
of assets in the investment portfolio which has a lower yield than the loan
portfolio.
12
Provision for Loan Losses. The provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level 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 $138,000 for the year ended March 31,
1998 compared to $226,000 for the same period in 1997. During the 1997 period
management deemed an increase in the provision for loan losses necessary in
light of the increase in the relative level of estimated losses caused by the
growth of the loan portfolio, particularly in agricultural, commercial
business and consumer loans, which are inherently riskier than one-to-four
family mortgage loans. Considering the same factors, management deemed the
allowance for loan losses adequate at March 31, 1998.
Other Income. Other income was $1.0 million for the year ended March 31,
1998, compared to $828,000 for the twelve months ended March 31, 1997. This
20.8% increase resulted primarily from an approximate $50,000 gain on sale on
one of the La Grande branches when operations were moved to the new Island
City branch, as well as increased core deposit fees and fees related to
lending activities.
Other Expenses. Other expenses were $6.5 million for both the year ended
March 31, 1998 and the twelve months ended March 31, 1997. The 1997 period
included the FDIC special assessment on all SAIF-insured institutions to
recapitalize the SAIF. The Bank's assessment amounted to $1.1 million,
pre-tax, and was accrued at September 30, 1996. Prior to the SAIF
recapitalization, the Bank's total annual deposit insurance premiums amounted
to 0.23% of assessable deposits. Effective January 1, 1997, the rate decreased
to 0.065% of assessable deposits. See Note 10 of Notes to Consolidated
Financial Statements. Without the special assessment other expenses would have
been only $5.3 million for the twelve months ended March 31, 1997 compared to
$6.5 million for the twelve months ended March 31, 1998, a $1.2 million or
22.6% increase. The increase from the prior twelve-month period was primarily
due to a $1.1 million increase in compensation and benefits expense. The
increases in this area were due to $471,000 of expense related to the Employee
Stock Ownership plan (See Note 1 and Note 16 of the Notes to Consolidated
Financial Statements), as well as $559,000 of increased salaries. An increase
of $200,000 of salary expense was due to the severance paid and/or accrued for
Dan Webber, former President and Chief Executive Officer upon his resignation
in March 1998. The remaining $359,000 was due to the addition of two loan
personnel, an accounting professional and several staff support positions, as
well as a general increase in salary levels particularly for customer service
positions. A primary goal of the Bank is to recruit and retain a quality staff
and management has made an effort to increase salaries of certain positions to
more nearly equate those of the industry and the Bank's marketplace. The
remaining increase of approximately $100,000 included increased Directors'
fees due to the formation of the Holding Company, general increases in the
cost of employee medical insurance and increased payroll taxes related to
increaed salary expense.
For the year ended March 31, 1998 compared to the twelve months ended
March 31, 1997, other expense fluctuations included a $132,000 increase in
supplies, postage and telephone expense, primarily due to increased core
deposits and upgrading of several telephone systems, as well as a general
increase in business activities. Depreciation expense increased $46,000 due to
the opening of the new Island City branch, as well as computer hardware and
core software purchases. Occupancy and equipment maintenance expense increased
$84,000 due to the placement of additional ATMs in new locations in an attempt
to improve customer service and due to the opening of the Island City branch.
These increases were partially offset by a $178,000 decrease in deposit
insurance expense.
Income Taxes. The provision for income taxes was $2.0 million for the
twelve months ended March 31, 1998 compared to $1.1 million for the twelve
months ended March 31, 1997 as a result of higher income before income taxes.
13
COMPARISON OF OPERATING RESULTS FOR THE
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
General. Subsequent to June 30, 1996, the Bank changed its fiscal year
end from June 30 to March 31. To assist in the analysis of the results of
operations for the nine months ended March 31, 1997, the results of operations
for such period have been compared to the unaudited results of operations for
the nine months ended March 31, 1996, rather than the year ended June 30,
1996. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for summary numerical
information regarding the results of operations for the nine months ended
March 31, 1996.
Net Income. Net income was $1.1 million for the nine months ended March
31, 1997, compared to $1.7 million for the nine months ended March 31, 1996.
This 35.3% decline resulted primarily from an increase in other expenses and,
to a lesser extent, an increase in the provision for loan losses. The increase
in other expenses was primarily the result of the legislatively mandated,
one-time assessment levied by the FDIC on all SAIF-insured institutions to
recapitalize the SAIF. Without this assessment, which amounted to $1.1 million
($707,000 after tax), net income would have been $1.8 million for the nine
months ended March 31, 1997.
Net Interest Income. Net interest income increased 12.1% to $6.5 million
for the nine months ended March 31, 1997 from $5.8 million for the nine months
ended March 31, 1996 primarily as a result of a decrease in interest expense.
Interest income was $12.0 million for both the nine months ended March 31,
1997 and 1996. Interest expense decreased 8.2% from $6.1 million for the nine
months ended March 31, 1996 to $5.6 million for the nine months ended March
31, 1997, primarily as a result of a decrease in the average cost of all
interest-bearing liabilities. The average cost of deposits decreased from
4.43% for the nine months ended March 31, 1996 to 4.27% for the nine months
ended March 31, 1997, primarily as a result of a lower average rate paid on
all deposits, other than passbook accounts. To date, the Bank has been able to
maintain its deposit base without resorting to aggressive deposit pricing. The
average rate paid on securities sold under agreements to repurchase decreased
from 3.58% for the nine months ended March 31, 1996 to 3.47% for the nine
months ended March 31, 1997, primarily as a result of a general decline in
interest rates. The average rate paid on FHLB of Seattle advances decreased
from 6.08% for the nine months ended March 31, 1996 to 4.88% for the nine
months ended March 31, 1997, as a result of the repayment of higher cost
longer term advances. Interest rate spread increased to 3.90% for the nine
months ended March 31, 1997 from 3.45% for the nine months ended March 31,
1996.
The Provision for Loan Losses. The provision for loan losses was $216,000
for the nine months ended March 31, 1997 compared to $91,000 for the same
period in 1996. Management deemed the increase in the provision for loan
losses necessary in light of the increase in the relative level of estimated
losses caused by the growth of the loan portfolio, particularly in
agricultural, commercial business and consumer loans, which are inherently
riskier than one-to-four family mortgage loans. Management deemed the
allowance for loan losses adequate at March 31, 1997.
Other Income. Other income was $661,000 for the nine months ended March
31, 1997, compared to $597,000 for the nine months ended March 31, 1996. This
10.7% increase resulted primarily from a general increase in the Bank's
service charge and fee schedule.
Other Expenses. Other expenses were $5.1 million for the nine months
ended March 31, 1997, compared to $3.6 million for the same period in 1996.
This increase resulted primarily from the FDIC special assessment on all
SAIF-insured institutions to recapitalize the SAIF. The Bank's assessment
amounted to $1.1 million, pre-tax, and was accrued during the quarter ended
September 30, 1996. Prior to the SAIF recapitalization, the Savings Bank's
total annual deposit insurance premiums amounted to 0.23% of assessable
deposits. Effective January 1, 1997, the rate decreased to 0.065% of
assessable deposits. See Note 10 to the Consolidated Financial Statements
included herein. Other expenses also increased as a result of increases in
occupancy, compensation and marketing expenses. Occupancy expenses increased
from $206,000 for the nine months ended March 31, 1996
14
to $232,000 for the same period in 1997 as a result of remodeling expenses of
two branch facilities. Compensation expenses increased from $2.0 million for
the nine months ended March 31, 1996 to $2.2 million for the same period in
1997 as a result of the hiring of new lending and support personnel. Marketing
expenses increased from $107,000 for the nine months ended March 31, 1996 to
$173,000 for the same period in 1997 as a result of general increases in
marketing expenses. The general growth of the Bank and inflation also resulted
in normal increases in the various other categories of other expenses.
Income Taxes. The provision for income taxes was $749,000 for the nine
months ended March 31, 1997 compared to $1.0 million for the nine months ended
March 31, 1996 as a result of lower income before income taxes.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
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 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. Certain month-end balances were
adjusted to approximate daily balances for the months of September 1997
through November 1997 due to the cash position and investment activity related
to the $45.7 million of net proceeds from the stock conversion and the over
subscription proceeds of $78.0 million.
15
Twelve Months Ended Twelve Months Ended
March 31, 1998 March 31, 1997
ANALYSIS OF NET --------------------------- --------------------------
INTEREST SPREAD Average Interest & Yield/ Average Interest & Yield/
(Dollars in Thousands) Balance Dividends Cost Balance Dividends Cost
- ---------------------------------------------------------------------------------------------------------
- ---
Interest earning assets
Loans receivable, net(1) $146,043 $12,661 8.67% $134,478 $11,788 8.77%
Mortgage backed securities 38,251 2,733 7.14% 37,720 2,803 7.43%
Investment securities 35,171 2,345 6.67% 17,833 1,194 6.70%
FHLB stock 2,855 222 7.78% 2,646 203 7.67%
Federal funds sold and
overnight interest-bearing
deposits 9,946 550 5.53% 4,222 94 2.23%
-------- ------- -------- -------
Total interest-earning
assets 232,266 18,511 7.97% 196,899 16,082 8.17%
-------- ------- -------- -------
Non-interest-earning
assets 10,497 7,039
-------- --------
Total assets $242,763 $203,938
======== ========
Interest-bearing
liabilities
Passbook accounts $ 27,236 $ 779 2.86% $ 24,393 $ 705 2.89%
Money market accounts 18,972 687 3.62% 15,228 539 3.54%
NOW accounts 30,516 519 1.70% 27,156 424 1.56%
Certificates of deposit 103,790 5,628 5.42% 104,619 5,658 5.41%
-------- ------- -------- -------
Total Interest-bearing
deposits 180,514 7,613 4.22% 171,396 7,325 4.27%
-------- ------- -------- -------
Securities sold under
agreements to
repurchase 924 34 3.68% 1,399 48 3.43%
FHLB advances 3,024 177 5.85% 1,860 102 5.48%
Total interest-bearing -------- ------- -------- -------
liabilities 184,462 7,824 4.24% 174,655 7,475 4.28%
Non-interest-bearing -------- ------- -------- -------
liabilities 12,618 8,872
-------- --------
Total liabilities 197,080 183,527
-------- --------
Shareholders' equity 45,683 20,411
-------- --------
Total liabilities and
shareholders' equity $242,763 $203,938
======== ========
Net interest income $10,687 $ 8,607
======= =======
Interest rate spread 3.73% 3.89%
Net interest margin 4.60% 4.37%
Ration of average
interest-earning
assets to average
interest-bearing
liabilities 125.92% 112.74%
(1) Does not include interest on loans 90 days or more past due. Includes loans originated for sale.
16
Nine Months Ended Nine Months Ended
March 31, 1997 March 31, 1996 Year Ended June 30,
1996
ANALYSIS OF NET --------------------------- ------------------------- ----------------------
- ---
INTEREST SPREAD Average Interest & Yield/ Average Interest & Yield/ Average Interest &
Yield/
(Dollars in Thousands) Balance Dividends Cost Balance Dividends Cost Balance Dividends
Cost
- ---------------------------------------------------------------------------------------------------------
- ---
Interest earning assets
Loans receivable, net(1) $135,768 $ 8,916 8.75% $128,305 $ 8,284 8.59% $128,986 $11,154
8.65%
Mortgage backed securities 36,942 2,058 7.42% 43,580 2,378 7.26% 42,660 3,123
7.32%
Investment securities 17,181 860 6.67% 20,788 1,122 7.18% 20,673 1,445
6.99%
FHLB stock 2,672 154 7.69% 2,477 135 7.25% 2,500 185
7.39%
Federal funds sold and
overnight interest-bearing
deposits 3,584 42 1.55% 5,078 43 1.12% 4,850 105
2.17%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 196,147 12,030 8.17% 200,228 11,962 7.95% 199,669 16,012
8.02%
-------- ------- -------- ------- -------- -------
Non-interest-earning
assets 7,161 6,607 6,635
-------- -------- --------
Total assets $203,308 $206,835 $206,304
======== ======== ========
Interest-bearing
liabilities
Passbook accounts $ 24,245 $ 525 2.88% $ 25,640 $ 555 2.88% $ 25,446 $ 735
2.89%
Money market accounts 15,195 404 3.54% 14,242 396 3.70% 14,469 530
3.67%
NOW accounts 27,102 318 1.56% 28,470 422 1.97% 28,170 532
1.89%
Certificates of deposit 104,480 4,238 5.40% 103,971 4,365 5.59% 104,156 5,782
5.55%
-------- ------- -------- ------- -------- -------
Total Interest-bearing
deposits
171,022 5,484 4.27% 172,323 5,738 4.43% 172,241 7,579
4.40%
-------- ------- -------- ------- -------- -------
Securities sold under
agreements to
repurchase 1,396 36 3.47% 1,215 33 3.58% 1,260 45
3.56%
FHLB advances 862 32 4.88% 7,939 363 6.08% 6,965 433
6.21%
Total interest-bearing -------- ------- -------- ------- -------- -------
liabilities 173,280 5,552 4.27% 181,477 6,133 4.50% 180,466 8,057
4.46%
Non-interest-bearing -------- ------- -------- ------- -------- -------
liabilities 9,418 6,522 6,777
-------- -------- --------
Total liabilities 182,698 187,999 187,243
-------- -------- --------
Shareholders' equity 20,610 18,836 19,061
Total liabilities and -------- -------- --------
shareholders' equity $203,308 $206,835 $206,304
======== ======== ========
Net interest income $ 6,477 $ 5,828 $ 7,955
======= ======= =======
Interest rate spread 3.90% 3.45%
3.56%
Net interest margin 4.40% 3.87%
3.97%
Ration of average
interest-earning
assets to average
interest-bearing
liabilities 113.20% 110.33% 110.64%
(1) Does not include interest on loans 90 days or more past due. Includes loans
originated for sale.
17
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).
Twelve Months Ended Twelve Months Ended
March 31, 1998 March 31, 1997
Compared to Twelve Months Compared to Nine Months
Ended March 31, 1997 Ended March 31, 1996
Increase (Decrease) Due Increase (Decrease) Due
---------------------------- -------------------------
RATE/VOLUME ANALYSIS Rate/ Rate/
(Dollars in Thousands) Rate Volume Volume Total Rate Volume Volume Total
Interest-earning assets:
Loans receivable(1) $(129) $1,014 $ (12) $ 873 $ 141 $ 483 $ 9 $ 633
Mortgage-backed and
related securities (107) 39 (2) (70) 52 (362) (10) (320)
Investment securities (6) 1,162 (5) 1,151 (81) (195) 14 (262)
FHLB-Seattle stock 3 16 . -- 19 7 11 1 19
Federal funds sold
and overnight
interest-bearing
deposits 139 128 189 456 16 (12) (5) (1)
----- ------ ---- ------ ----- ----- ---- ----
Total net change in
income on interest-
earning assets (100) 2,359 170 2,429 135 (75) 9 69
----- ------ ---- ------ ----- ----- ---- ----
Interest-bearing
liabilities:
Passbook accounts (7) 82 (1) 74 1 (30) --. (29)
Money market accounts 12 134 3 149 (88) (20) 4 (104)
NOW accounts 38 52 5 95 (18) 27 (1) 8
Certificate accounts 15 (45) 0 (30) (148) 21 (1) (128)
Securities sold under
agreements to
repurchase 3 (16) (1) (14) (2) 5 -- . 3
FHLB advances 7 64 4 75 (73) (321) 63 (331)
----- ------ ---- ------ ----- ----- ---- ----
Total net change in
expense on interest-
bearing liabilities 68 271 10 349 (328) (318) 65 (581)
----- ------ ---- ------ ----- ----- ---- ----
Net change in net
interest income $(168) $2,088 $160 $2,080 $ 463 $ 243 $(56) $ 650
===== ====== ==== ====== ===== ===== ==== =====
(1) Does not include interest on loans 90 days or more past due. Includes
loans originated for sale.
18
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 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). In addition, the Bank maintains an investment portfolio of U.S.
government and government agency securities with contractual maturities of
generally between one and ten years. 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 fluctuations because they
generally represent a more stable source of funds. As part of its interest
rate risk management strategy, the Bank promotes transaction accounts and
certificates of deposit with terms up to six years.
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 Seattle. 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
Seattle 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 Seattle and sets forth the
change in the Bank's NPV at March 31, 1998, based on FHLB Seattle 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.
Estimated Change in
Basis Point ("bp") Net Portfolio Value
Change in Rates (Dollars in Thousands)
400 $ (19,023) (36.95)%
300 (13,704) (26.62)
200 (8,492) (16.49)
100 (3,778) (7.34)
0
(100) 2,094 4.07
(200) 4,055 7.88
(300) 6,900 13.40
(400) 10,762 20.90
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 1998 would reduce the
Bank's NPV by approximately $8.5 million, or 16.5%, at that date.
19
Certain assumptions utilized by the FHLB Seattle 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 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, 1998. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
INTEREST After
SENSITIVE One Three
ASSETS Within Year to Years to Beyond
(Dollars in Average One Three Five Five Fair
Thousands) Rate Year Years Years Years Total Value
Loans
receivable 8.30% $82,868 $29,193 $17,809 $23,968 $ 153,838 $15,909
Mortgage-
backed
securities 7.11% 20,717 5,645 3,950 10,271 40,583 41,003
Investments
and other
interest-
earning
assets 5.99% 22,677 1,012 10,056 22,147 55,892 55,892
FHLB stock 7.00% 2,985 2,985 2,985
Interest-
Sensitive
Liabilities:
NOW checking 1.70% 10,010 11,911 5,837 5,607 33,365 33,365
Passbook
savings 2.86% 7,122 8,476 4,153 3,990 23,741 23,741
Money market
deposits 3.62% 17,178 4,488 291 124 22,081 22,081
Time certi-
ficates 5.38% 72,045 26,083 6,380 392 104,900 104,592
Off-Balance
Sheet Items:
Commitments
to extend
credit 8.00% 12,402 4,369 2,665 3,587 23,023 23,023
Liquidity and Capital Resources
The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on and the sale of 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 the
availability of 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, 1998,
cash and cash equivalents totaled $20.3 million, or 7.7% of total assets. The
Bank also maintained, an uncommitted credit facility with the FHLB Seattle,
which provided for immediately available advances up to an aggregate amount of
$52.6 million, under which no advances were outstanding at March 31, 1998.
20
OTS 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, 1998 was
15.75%.
The Bank's primary investing activity is the origination of one-to-four
family mortgage loans within its primary market area. During the year ended
March 31, 1998 and the nine months ended March 31, 1997 and the year ended
June 30, 1996, the Bank originated $21.8 million, $9.0 million, $17.4 million
of such loans, respectively. At March 31, 1998, the Bank had commitments to
extend credit totaling $23.0 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, 1998
totaled $71.8 million. Historically, the Bank has been able to retain a
significant amount of its deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of
regulatory capital. As of March 31, 1998, the Bank complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 17.9%, 17.9% and 38.2%, respectively. See Note
10 of Notes to the 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 GAAP, 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.
21
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", formerly known as Pioneer
Bank, a Federal Savings Bank, prior to the October 3, 1997 conversion
discussed in Note 15) as of March 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year ended March 31, 1998 and the nine-month period ended March 31, 1997.
These consolidated 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. The consolidated financial
statements for the year ended June 30, 1996 were audited by other auditors
whose report, dated August 2, 1996, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the 1998 and 1997 consolidated financial statements
present fairly, in all material respects, the financial position of Oregon
Trail Financial Corp. and Subsidiary as of March 31, 1998 and 1997, and the
results of their operations and their cash flows for the year ended March 31,
1998 and the nine-month period ended March 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Portland, Oregon
May 22, 1998
22
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
Assets 1998 1997
Cash and due from banks $ 1,644,059 $ 1,182,255
Interest-bearing deposits 18,666,798 3,793,206
------------ ------------
Total cash and cash equivalents 20,310,857 4,975,461
Securities:
Available for sale, at fair value (amortized
cost: $63,566,118 and $35,850,256) 65,002,847 35,651,533
Held to maturity, at amortized cost (fair
value: $13,224,885 and $15,391,851) 12,805,057 15,302,393
Loans receivable, net of allowance for loan
losses of $847,195 and $725,089 153,837,834 138,880,914
Loans held for sale -- . 428,200
Accrued interest receivable 1,676,069 1,324,637
Premises and equipment, net 5,581,733 4,640,848
Stock in Federal Home Loan Bank of Seattle,
at cost 2,985,400 2,763,300
Real estate owned 312,951 . --
Other assets 711,437 245,380
------------ ------------
TOTAL ASSETS $263,224,185 $204,212,666
============ ============
(Continued)
23
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
LIABILITIES:
Deposits:
Interest-bearing $ 79,187,092 $ 68,049,713
Noninterest-bearing 8,647,567 6,282,277
Time certificates 104,900,121 104,825,937
------------ ------------
Total deposits 192,734,780 179,157,927
Securities sold under agreements to repurchase . -- 1,430,853
Accrued expenses and other liabilities 1,258,697 637,737
Net deferred tax liability 1,141,476 469,205
Advances from borrowers for taxes and insurance 788,558 690,731
Advances from Federal Home Loan Bank of Seattle -- 800,000
------------ ------------
Total liabilities 195,923,511 183,186,453
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 250,000 shares
authorized; no shares issued or outstanding . -- . --
Common stock, $.01 par value; 8,000,000 shares
authorized; March 31, 1998, 4,694,875 issued,
4,346,113 outstanding 46,949 --
.
Additional paid-in capital 45,884,866 .--
Retained earnings (substantially restricted) 23,967,639 21,148,510
Unearned shares issued to the Employee Stock
Ownership Plan (3,487,620) --
.
Net unrealized gain (loss) on securities
available for sale, net of tax 888,840 (122,297)
------------ ------------
Total shareholders' equity 67,300,674 21,026,213
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $263,224,185 $204,212,666
============ ============
See Notes to Consolidated Financial Statements.
(Concluded)
24
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, NINE MONTHS ENDED MARCH 31, 1997, AND YEAR ENDED
JUNE 30, 1996
1998 1997 1996
INTEREST INCOME:
Interest and fees on loans
receivable $12,661,336 $ 8,916,375 $11,154,250
Securities:
Mortgage-backed and related
securities 2,733,349 2,058,194 3,123,102
U.S. government and government
agencies and other 2,894,286 901,456 1,550,094
Other interest and dividends 222,100 154,212 184,659
----------- ----------- -----------
Total interest income 18,511,071 12,030,237 16,012,105
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 7,613,324 5,484,996 7,579,041
Securities sold under agreements
to repurchase 33,605 36,329 44,795
FHLB of Seattle advances 176,998 31,578 432,896
----------- ----------- -----------
Total interest expense 7,823,927 5,552,903 8,056,732
----------- ----------- -----------
Net interest income 10,687,144 6,477,334 7,955,373
PROVISION FOR LOAN LOSSES 137,886 216,063 115,397
----------- ----------- -----------
Net interest income after
provision for loan losses 10,549,258 6,261,271 7,839,976
----------- ----------- -----------
Noninterest INCOME:
Service charges on deposit accounts 686,553 482,713 520,346
Loan servicing fees 243,937 49,932 64,905
Net gain (loss) on trading securities . -- (2,151) (71,274)
Other income 115,195 130,217 196,913
----------- ----------- -----------
Total noninterest income 1,045,685 660,711 710,890
----------- ----------- -----------
(Continued)
25
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, NINE MONTHS ENDED MARCH 31, 1997, AND YEAR ENDED
JUNE 30, 1996
1998 1997 1996
Noninterest EXPENSES:
Employee compensation and benefits $ 3,977,739 $ 2,168,413 $ 2,685,328
Supplies, postage, and telephone 512,390 284,567 361,913
Depreciation 399,907 271,012 299,611
Occupancy and equipment 383,384 231,803 273,109
Customer account 273,795 187,021 272,919
Advertising 231,594 172,606 202,292
Professional fees 212,628 125,413 138,832
FDIC insurance premium 133,413 209,188 402,572
Special SAIF assessment . -- 1,146,387 .--
Other 408,548 278,309 372,254
----------- ----------- -----------
Total noninterest expenses 6,533,398 5,074,719 5,008,830
----------- ----------- -----------
Income before income taxes 5,061,545 1,847,263 3,542,036
PROVISION FOR INCOME TAXES 2,025,781 749,669 1,362,907
----------- ----------- -----------
NET INCOME $3,035,764 $ 1,097,594 $ 2,179,129
========== =========== ===========
Earnings per common share since
date of conversion (Note 1) $ 0.38 N/A N/A
Weighted average number (since
date of conversion) of common
shares outstanding 4,326,066 N/A N/A
See Notes to Consolidated Financial Statements.
(Concluded)
26
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1998, NINE MONTHS ENDED MARCH 31, 1997, AND YEAR ENDED JUNE 30, 1996
Unearned
Shares
Issued Unrealized
To Employee Gain (Loss)
Common Stock Additional Stock on Securities
----------------- Paid-in Retained Ownership Available
Shares Amount Capital Earnings Trust for Sale Total
BALANCE, JULY 1, 1995 -- $ -- $ -- $17,871,787 $ -- $ (60,102)
$17,811,685
Net income -- -- -- 2,179,129 -- --
2,179,129
Change in unrealized loss
on securities available
for sale, net of tax -- -- -- -- -- 13,430
13,430
--------- ------- ----------- ----------- ------------ ---------- ----------
- -
BALANCE, JUNE 30, 1996 -- -- -- 20,050,916 -- (46,672)
20,004,244
Net income -- -- -- 1,097,594 -- --
1,097,594
Change in unrealized loss
on securities available
for sale, net of tax -- -- -- -- -- (75,625)
(75,625)
--------- ------- ----------- ----------- ------------ ---------- ----------
- -
BALANCE, MARCH 31, 1997 -- -- -- 21,148,510 -- (122,297)
21,026,213
Net income -- -- -- 3,035,764 -- --
3,035,764
Cash dividends paid -- -- -- (216,635) -- --
(216,635)
Issuance of common stock,
net 4,694,875 46,949 45,681,982 -- -- --
45,728,931
Unearned ESOP shares (375,590) -- -- -- (3,755,900) --
(3,755,900)
Earned ESOP shares 26,828 -- 202,884 -- 268,280 --
471,164
Change in unrealized gain
on ecurities available
for sale, net of tax -- -- -- -- -- 1,011,137
1,011,137
--------- ------- ----------- ----------- ------------ ---------- ----------
- -
BALANCE, MARCH 31, 1998 4,346,113 $46,949 $45,884,866 $23,967,639 $(3,487,620) $ 888,840
$67,300,674
========= ======= =========== =========== =========== ==========
===========
See Notes to Consolidated Financial Statements.
27
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1998, NINE MONTHS ENDED MARCH 31, 1997, AND YEAR ENDED
JUNE 30, 1996
1998 1997 1996
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,035,764 $ 1,097,594 $ 2,179,129
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 399,907 271,012 299,611
Compensation expense related to
ESOP benefit 471,164 -- --
Amortization of deferred loan
fees, net (183,622) (195,002) (301,429)
Provision for loan losses 137,886 216,063 115,397
Deferred income tax provision (624,315) (90,605) 33,562
Amortization and accretion of
premiums and discounts on
investments and insurance (125,432) (21,680) (35,281)
Federal Home Loan Bank of
Seattle dividends (222,100) (154,100) (184,400)
Net unrealized loss on trading
securities -- 2,151 71,274
(Gain) loss on sale/disposition
of fixed assets (48,256) 21,514 --
Other -- -- 1,859
Change in assets and liabilities:
Trading securities -- 180,675 1,165,434
Loans held for sale 428,200 (428,200) --
Accrued interest receivable (351,432) 11,388 (42,117)
Other assets (466,057) 148,552 22,981
Accrued expenses and other
liabilities 1,293,231 (54,435) (40,760)
------------- ------------ ------------
Net cash provided by
operating activities 3,744,938 1,004,927 3,285,260
------------- ------------ ------------
(Continued)
28
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1998, NINE MONTHS ENDED MARCH 31, 1997, AND YEAR ENDED
JUNE 30, 1996
1998 1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations $ (56,591,367) $(27,245,000) $ 31,984,744)
Loan principal repayments 47,174,656 21,284,824 24,538,000
Loans purchased (5,776,952) (572,000) (256,000)
Proceeds from maturity of securities
available for sale 77,427,025 5,000,000 3,000,000
Principal repayments of securities
available for sale 2,986,027 2,053,409 1,662,503
Purchase of securities available
for sale (108,048,853) (1,000,000) (4,000,000)
Maturity of securities held to
maturity -- -- 3,000,000
Principal repayments of securities
held to maturity 2,545,498 1,667,726 4,323,112
Purchase of securities held to
maturity (33,263) -- --
Purchase of premises and equipment (1,517,829) (560,174) (866,893)
Proceeds from sale of premises and
equipment 225,293 -- 8,000
Net cash provided by (used in)------------- ------------ ------------
investing activities (41,609,765) 628,785 (576,022)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net of
withdrawals $ 13,576,853 $ 2,538,721 $ 4,050,601
Increase (decrease) in securities
sold under agreements to
repurchase (1,430,853) (1,225) 270,593
Change in advances from borrowers
for taxes and insurance 97,827 (762,081) (107,806)
Proceeds from Federal Home Loan
Bank of Seattle advances 41,600,000 21,850,000 6,150,000
Repayment of Federal Home Loan
Bank of Seattle advances (42,400,000) (23,700,000) (14,500,000)
Proceeds from issuance of common
stock, net of conversion expenses 123,779,131 -- --
Repayment of stock over subscription (78,050,200) -- --
Funding provided to ESOP for
purchase of common stock (3,755,900) -- --
Payment of cash dividend (216,635) -- --
------------- ------------ ------------
Net cash provided by (used
in) financing activities 53,200,223 (74,585) (4,136,612)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,335,396 1,559,127 (1,427,374)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,975,461 3,416,334 4,843,708
------------- ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 20,310,857 $ 4,975,461 $ 3,416,334
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and other
borrowings $ 7,769,378 $ 5,615,984 $ 8,087,606
Income taxes 2,191,791 885,677 945,000
Noncash investing activities:
Transfer of loans to foreclosed
real estate 312,951 -- 46,539
Unrealized gain (loss) on
securities available for sale,
net of tax 1,011,137 (75,625) 13,430
Transfer of trading securities
to available for sale securities,
at fair value -- 2,386,522 --
See Notes to Consolidated Financial Statements.
(Concluded)
29
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1998, NINE MONTHS ENDED MARCH 31, 1997, AND YEAR ENDED
JUNE 30, 1996
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 (Note 15). All intercompany accounts and transactions have been
eliminated in consolidation. Certain prior period amounts have been
reclassified to conform to current period presentation. In 1997, the Company
changed its fiscal year end from June 30 to March 31. As a result, the
consolidated financial statements present the Company's operations for the
year ended March 31, 1998, the nine months ended March 31, 1997, and the year
ended June 30, 1996.
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 generally accepted accounting principles requires management to make
assumptions. These assumptions result in estimates that affect the reported
amounts of certain assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of related revenue and expense during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents--The Company considers all deposits and
investment securities with an original term to maturity of three months or
less to be cash equivalents. Cash equivalents consist of currency on hand and
due from banks and interest-bearing deposits with financial institutions.
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 at March 31, 1998 and 1997.
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. 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 ("FHLB") of Seattle stock is carried at cost, which reasonably
approximates its fair value. As a member of the FHLB system, the Company is
required to maintain a minimum level of investment in FHLB stock based on
specified percentages of its outstanding mortgages, total assets or FHLB
advances. At March 31, 1998, the Company's minimum investment requirement was
approximately $1,386,500. 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 of Seattle.
30
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, 1998, 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 ultimate recovery of loans is susceptible to future market
factors beyond the Company's control, which may result in losses or recoveries
differing significantly from those provided in the consolidated financial
statements.
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. A
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. The Company excludes
smaller balance homogeneous loans, including single family residential and
consumer loans, 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 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, 1998 and
1997, respectively, the Company had no loans deemed to be impaired as defined
by SFAS No. 114.
Loan Servicing Fees--Fees earned for servicing loans for the Federal Home
Loan Mortgage Corporation ("FHLMC") are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred. As of March 31, 1998, no loans are being serviced for
FHLMC.
31
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.
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
expense.
Income Taxes--The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities
are recognized for temporary differences between tax and financial reporting
bases of assets and liabilities based on enacted tax rates. A valuation
allowance is established to reduce deferred tax assets to the amount that
management believes will more likely than not be realized. The change in the
deferred tax assets and liabilities together with income taxes currently
payable are reflected as provision for income taxes in the consolidated
financial statements.
Earnings per Share ("EPS")--EPS is computed based on net income since the
date of conversion (October 3, 1997) divided by the weighted average number of
shares of common stock and common stock equivalents assumed to be outstanding
for the period October 3, 1997 through March 31, 1998. SFAS No. 128, Earnings
Per Share, was adopted effective December 31, 1997. Because the Company had a
simple capital structure for all periods, calculation of diluted earnings per
share is not applicable.
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 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 quarterly over a seven-year period
beginning with the first allocation on December 31, 1997.
Accounting Standards Issued but Not Yet Adopted--During 1997, the
Financial Accounting Standards Board ("FASB") issued certain Statements of
Financial Accounting Standards which are described below. Adoption of these
statements in fiscal year 1999 is not expected by management to have a
material impact on the Company's results of operations, financial position, or
cash flows.
In July 1997, SFAS No. 130, Reporting Comprehensive Income, was issued.
SFAS No. 130 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 (1) classify items of other comprehensive income
by their nature in a financial statement and (2) 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. Reclassification of financial statements for earlier periods
provided for comprehensive purposes is required. The new standard becomes
effective for the Company's fiscal year ending March 31, 1999.
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, was issued. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about the Company's operating segments. The Company
believes the segment information required to be disclosed under SFAS No. 131
will be more comprehensive than previously provided, including expanded
disclosure of income statement and balance sheet items for each of its
reportable operating segments. 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.
32
2. SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair
value of securities classified as available for sale and held to maturity at
March 31, 1998 and 1997 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
MARCH 31, 1998 Cost Gains Losses Value
Available for sale:
U.S. government and
government agency
obligations:
Maturing after one year
through five years $15,041,643 $ 60,082 $ (23,599) $ 15,078,126
Maturing after five
years through ten
years 21,779,462 373,507 (5,938) 22,147,031
----------- ---------- ---------- ------------
36,821,105 433,589 (29,537) 37,225,157
----------- ---------- ---------- ------------
Mortgage-backed and
related securities:
GNMA maturing after
one year through
five years 168,820 1,268 -- 170,088
FNMA maturing after
one year through
five years 126,675 5,368 -- 132,043
GNMA maturing after
five years through
ten years 164,613 1,143 -- 165,756
GNMA maturing after
ten years 15,716,707 903,079 (537) 16,619,249
FHLMC maturing after
ten years 62,292 3,772 -- 66,064
FNMA maturing after
ten years 10,505,906 121,169 (2,585) 10,624,490
----------- ---------- ---------- ------------
26,745,013 1,035,799 (3,122) 27,777,690
----------- ---------- ---------- ------------
Total available for
sale $63,566,118 $1,469,388 $ (32,659) $ 65,002,847
=========== ========== ========== ============
Held to maturity:
Mortgage-backed and
related securities
held to maturity:
GNMA maturing after
ten years $11,138,922 $ 385,268 $ -- $ 11,524,190
FNMA maturing after
ten years 1,366,496 23,286 -- 1,389,782
FHLMC maturing after
ten years 299,639 11,274 -- 310,913
----------- ---------- ---------- ------------
Total held to
maturity $12,805,057 $ 419,828 $ -- $ 13,224,885
=========== ========== ========== ============
33
Gross Gross
Amortized Unrealized Unrealized Fair
MARCH 31, 1997 Cost Gains Losses Value
Available for sale:
U.S. government and
government agency
obligations:
Maturing after one
year through five
years $ 10,040,824 $ 1,710 $ (161,308) $ 9,881,226
Maturing after five
years through ten
years 6,194,550 4,065 (173,240) 6,025,375
----------- ---------- ---------- ------------
16,235,374 5,775 (334,548) 15,906,601
----------- ---------- ---------- ------------
Mortgage-backed and
related securities:
GNMA maturing after
one year through five
years 202,958 -- (14,751) 188,207
FHLMC maturing after
one year through five
years 69,399 3,928 -- 73,327
GNMA maturing after
five years through
ten years 273,387 -- (19,911) 253,476
GNMA maturing after
ten years 12,670,647 454,965 (43,532) 13,082,080
FHLMC maturing after
ten years 89,634 4,196 -- 93,830
FNMA maturing after
ten years 6,308,857 17,290 (272,135) 6,054,012
----------- ---------- ---------- ------------
19,614,882 480,379 (350,329) 19,744,932
----------- ---------- ---------- ------------
Total available for
sale $35,850,256 $ 486,154 $ (684,877) $ 35,651,533
=========== ========== ========== ============
Held to maturity:
Mortgage-backed and
related securities
held to maturity:
GNMA maturing after
ten years $13,216,550 $ 153,686 $ (24,777) 13,345,459
FNMA maturing after
ten years 1,717,431 -- (29,603) 1,687,828
FHLMC maturing after
ten years 368,412 -- (9,848) 358,564
----------- ---------- ---------- ------------
Total held to
maturity $15,302,393 $ 153,686 $ (64,228) $ 15,391,851
=========== ========== ========== ============
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.
Investments and mortgage-backed and related securities totaling $41,002,575
and $6,039,219 were pledged against public funds and other deposits at March
31, 1998 and 1997, respectively.
34
3. LOANS RECEIVABLE
Loans receivable are summarized as follows:
1998 1997
Mortgage loans:
One-to-four family $ 100,740,010 $ 101,791,973
Multi-family 1,194,007 1,844,098
Commercial 7,905,424 4,768,603
Construction 1,616,452 852,852
Land 297,217 222,733
------------- -------------
Total mortgage loans 111,753,110 109,480,259
------------- -------------
Consumer loans:
Unsecured 2,046,894 1,610,402
Home equity and second mortgage 19,231,214 17,514,040
Auto loans 5,718,589 2,064,403
Credit card 853,912 844,145
Loans secured by savings deposits 648,091 730,714
Other secured 4,623,509 2,627,025
------------- -------------
Total consumer loans 33,122,209 25,390,729
------------- -------------
Commercial business loans 5,968,214 4,066,100
Agricultural loans 4,978,918 2,466,095
------------- -------------
Total commercial business and
agricultural loans 10,947,132 6,532,195
------------- -------------
Total loans 155,822,451 141,403,183
Less:
Net deferred loan fees 1,035,043 1,028,465
Undisbursed portion of loans in process 102,379 768,715
Allowance for loan losses 847,195 725,089
------------- -------------
Total loans receivable, net $ 153,837,834 $ 138,880,914
============= =============
The weighted average interest rate on loans at March 31, 1998 and 1997 were
8.31% and 8.77%, respectively.
The unpaid principal balance of loans serviced for the FHLMC, which is not
included in the consolidated financial statements, was zero, $1,388,249, and
$1,891,598 at March 31, 1998, 1997 and at June 30, 1996, respectively.
35
Allowance for loan loss activity is summarized as follows:
1998 1997
Balance, beginning of year $ 725,089 $ 540,986
Provision for loan losses 137,886 216,063
Charge-offs (49,183) (38,860)
Recoveries 33,403 6,900
------------- -------------
$ 847,195 $ 725,089
============= =============
Nonaccrual loans were $274,559 and $190,124 at March 31, 1998 and 1997,
respectively. Interest income that would have been recorded under the original
terms of nonaccrual loans totaled $7,348 and $15,511 for the periods ended
March 31, 1998 and 1997, respectively.
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
1998 1997
Loans receivable $ 869,802 $ 805,727
Mortgage-backed and related securities 222,725 219,881
U.S. government and government agencies 583,542 299,029
------------- -------------
$ 1,676,069 $ 1,324,637
============= =============
5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1998 1997
Land $ 875,594 $ 783,835
Buildings and improvements 4,524,193 3,712,853
Furniture, fixtures and equipment 2,141,438 1,630,625
Construction in process 247,042 339,995
------------- -------------
7,788,267 6,467,308
Less accumulated depreciation 2,406,836 2,026,762
------------- -------------
5,381,431 4,440,546
Land held for development 200,302 200,302
------------- -------------
$ 5,581,733 $ 4,640,848
============= =============
36
6. DEPOSITS
Savings deposits at March 31 are summarized as follows:
1998 1997
---------------------------- ----------------------------
Weighted Weighted
Average Average
Interest Interest
Rate Balance Percent Rate Balance Percent
Noninterest
bearing -- % $ 8,647,567 4.49% --% $ 6,282,277 3.51%
NOW checking 1.70 33,365,179 17.31 1.56 27,260,167 15.22
Passbook savings
accounts 2.86 23,741,267 12.32 2.89 24,004,738 13.40
Money market
deposit 3.62 22,080,646 11.46 3.53 16,784,808 9.37
Time certificates 5.38 104,900,121 54.42 5.44 104,825,937 58.50
---- ------------- ------ ---- ------------- ------
3.99% $ 192,734,780 100.00% 4.13% $ 179,157,927 100.00%
==== ============= ====== ==== ============= ======
At March 31, 1998, time certificate maturities are as follows:
Within one year $ 72,279,323
One year to two years 14,783,065
Two years to three years 11,212,910
Three years to four years 3,195,975
Four years to five years 1,385,431
Thereafter 2,043,417
-------------
$ 104,900,121
=============
The aggregate amount of time certificates with a minimum denomination of
$100,000 was $18,243,751 and $9,633,083 at March 31, 1998 and 1997. 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:
1998 1997 1996
NOW checking $ 518,664 $ 317,950 $ 532,392
Passbook savings accounts 779,308 525,987 735,392
Money market deposit 687,137 403,551 530,403
Time certificates 5,628,215 4,237,508 5,780,854
----------- ----------- -----------
$ 7,613,324 $ 5,484,996 $ 7,579,041
=========== =========== ===========
37
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1998 1997
Average balance $ 924,125 $ 1,396,032
Maximum month end balance 1,472,912 1,458,603
Average interest rate at year end N/A 3.50%
Mortgage-backed and related
securities pledged as collateral
for securities sold under agreements
to repurchase at year end:
Amortized cost -- $ 2,047,781
Fair value -- 2,072,354
The average balance is computed on a monthly average method. All
agreements mature the following business day. The Company maintains control of
the securities pledged as collateral. Effective December 1997, the Company
discontinued transactions of this type.
8. FHLB OF SEATTLE BORROWINGS
As a member of the FHLB of Seattle, the Company maintains an available
credit line in an amount equal to 20% of total assets, less current
outstanding advances, subject to collateralization requirements. At March 31,
1998 and 1997, FHLB of Seattle variable rate advances amounted to zero and
$800,000, respectively.
Borrowings are collateralized in aggregate, as provided for in the
Advances, Security, and Deposit Agreement with the FHLB of Seattle, by certain
mortgages or deeds of trust, securities of the U.S. Government and agencies
thereof and cash on deposit with the FHLB of Seattle.
Financial data pertaining to the weighted average cost, the level of FHLB
of Seattle borrowings and the related interest expense are summarized as
follows:
1998 1997
Weighted average interest rate at year end N/A 5.70%
Weighted monthly average interest rate during
the year 5.85% 4.88%
Monthly average FHLB of Seattle borrowings $ 3,024,335 $ 861,513
Maximum FHLB borrowings at any month end 8,000,000 2,850,000
9. INCOME TAXES
A reconciliation of the tax provision based on statutory corporate tax
rates on pre-tax income and the provision shown in the accompanying
consolidated statements of income for the year ended March 31, 1998, the nine
months ended March 31, 1997, and the year ended June 30, 1996 is summarized as
follows:
1998 1997 1996
------------------ ---------------- ------------------
Amount Percent Amount Percent Amount Percent
Federal income taxes
at statutory rate $1,721,000 34.0% $628,000 34.0% $1,204,292 34.0%
State income taxes at
statutory rate, net
of related federal
tax effect 223,000 4.4 85,000 4.6 143,351 4.0
Other, net 81,781 1.6 36,669 2.0 15,264 0.5
---------- ---- -------- ---- ---------- ----
$2,025,781 40.0% $749,669 40.6% $1,362,907 38.5%
========== ==== ======== ==== ========== ====
(Continued)
38
Provision for income taxes for the year ended March 31, 1998, the nine
months ended March 31, 1997, and the year ended June 30, 1996 is summarized as
follows:
1998 1997 1996
Current provision:
Federal $ 1,643,192 $ 694,114 $ 1,100,602
State 341,512 146,160 228,743
----------- ----------- -----------
1,984,704 840,274 1,329,345
Deferred provision (benefit) 41,077 (90,605) 33,562
----------- ----------- -----------
$ 2,025,781 $ 749,669 $ 1,362,907
=========== =========== ===========
The components of net deferred income tax assets and liabilities at March
31, 1998 and 1997 are summarized as follows:
1998 1997
Deferred tax assets:
Deferred loan fees $ 195,415 $ 211,293
Unrealized securities losses trading 49,134 120,556
Vacation accrual 102,377 75,208
Unrealized securities losses available
for sale -- 79,490
Other 22,865 62,689
------------ ------------
Total deferred tax assets 369,791 549,236
Deferred tax liabilities: ------------ ------------
FHLB stock dividends (806,087) (692,720)
Accumulated depreciation (65,811) (65,342)
Allowance for loan losses (87,665) (260,379)
Unrealized securities gains available
for sale (551,704) --
------------ ------------
Total deferred tax liabilities (1,511,267) (1,018,441)
------------ ------------
Net deferred tax liability $ (1,141,476) $ (469,205)
============ ============
For the fiscal year ended June 30, 1996 and years prior, the Company
determined bad debt expense deducted from taxable income be based on 8% of
taxable income before such deduction or be 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 for the current period and prospectively, 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. During the year ended March 31, 1998 and the nine-month period ended
March 31, 1997, the Company recaptured approximately $520,000 of bad debt
deductions taken in prior periods. At March 31, 1998, remaining bad debt
deductions to be recaptured approximated $1,040,000.
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.
39
10. 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 Tier I
capital to risk weighted assets, of Tier I capital to total assets, and
tangible capital to tangible assets (set forth in the table below). Management
believes that as of March 31, 1998, the Bank meets all capital adequacy
requirements to which it is subject as of March 31, 1998.
As of March 31, 1998 and 1997, the most recent notification from the
Office of Thrift Supervision ("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, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below. There are no conditions or events, since the notification, that
management believes have changed the institution's category.
The Bank's actual and required capital amounts and ratios are presented
in the table below:
Categorized As Well
Capitalized Under
For Capital Prompt Correction
Actual Adequacy Purposes Action Provision
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
AS OF MARCH 31, 1998
Total Capital
(To risk
weighted
assets) $ 47,767,793 37.5% $ 10,180,320 8.0% $ 12,725,400 10.0%
Tier I Capital
(To risk
weighted
assets) $ 46,920,598 36.9% N/A N/A $ 7,635,240 6.0%
Core Capital
(To total
assets) $ 46,920,598 17.9% $ 10,462,031 4.0% $ 13,121,980 5.0%
Tangible Capital
(To tangible
assets) $ 46,920,598 17.9% $ 3,923,261 1.5% N/A N/A
AS OF MARCH 31, 1997
Total Capital
(To risk
weighted
assets) $ 21,635,599 21.2% $ 8,173,920 8.0% 10,217,400 10.0%
Tier I Capital
(To risk
weighted
assets) $ 20,910,510 20.5% N/A N/A $ 6,130,440 6.0%
Core Capital
(To total
assets) $ 20,910,510 10.3% $ 6,122,909 3.0% $ 10,198,733 5.0%
Tangible Capital
(To tangible
assets) $ 20,910,510 10.3% $ 3,061,454 1.5% N/A N/A
40
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles (GAAP), to regulatory
tangible and risk-based capital at March 31, 1998:
Equity $ 48,056,438
Unrealized securities gains (888,840)
Equity of non-includable subsidiaries (247,000)
Tangible capital 46,920,598
General valuation allowance 847,195
------------
Total capital $ 47,767,793
============
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 1998, 1997, and 1996 financial statements. In
view of the uncertain regulatory environment in which the Bank operates, the
extent, if any, to which a forthcoming regulatory examination may ultimately
result in adjustments to the accompanying financial statements cannot
presently be determined.
On September 30, 1996, the United States Congress passed and the
President signed into law the omnibus appropriations package, including the
Bank Insurance Fund/Savings Association Insurance Fund (BIF/SAIF) and
Regulatory Burden Relief packages. Included in this legislation was a
requirement for SAIF-insured institutions to recapitalize the SAIF insurance
fund through a one-time special assessment to be paid within 60 days of the
first of the month following enactment. As the Bank is insured by the SAIF,
this assessment resulted in a pre-tax charge to other expenses for the
nine-month period ended March 31, 1997 of $1,146,387 based on the March 31,
1995 SAIF deposit assessment base of $174,488,122.
11. 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 6.67% of participating
employees' salaries. Contributions and Plan administration expenses aggregated
to $91,611, $94,622, and $133,886 for the year ended March 31, 1998, the nine
months ended March 31, 1997, and the year ended June 30, 1996, respectively.
12. 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, and the Bank expects to have similar transactions in the future.
41
An analysis of activity with respect to loans receivable from directors
and executive officers of the Company for the year ended March 31, 1998, the
nine months ended March 31, 1997, and the year ended June 30, 1996 is
summarized as follows:
1998 1997 1996
Beginning balance $ 326,053 $ 204,451 $ 414,472
Additions 490,794 133,125 203,700
Reductions (240,496) (11,523) (413,721)
---------- ---------- ----------
Ending balance $ 576,351 $ 326,053 $ 204,451
========== ========== ==========
At March 31, 1998, all loans to directors and executive officers of the
Company were current.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
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 $23,022,521 and $11,164,041 at March 31, 1998 and 1997,
respectively, which include fixed rate loan commitments of $1,821,236 and
$1,123,000 at March 31, 1998 and 1997, respectively. The ranges of interest
rates for these loan commitments are 7.0% to 9.50% for both years.
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 90% of all
loans in the Bank's portfolio are secured by properties located in communities
of Eastern Oregon.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of book value and estimated fair value of financial instruments
is summarized as follows:
1998 1997
-------------------- --------------------
Balance Estimate Balance Estimated
Sheet Fair Sheet Fair
(Dollares in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 20,311 $ 20,311 $ 4,975 $ 4,975
Securities 77,808 78,228 50,954 51,043
Loans held for sale -- -- 428 428
Loans receivable, net of
allowance for loan losses 153,838 159,009 138,881 140,592
FHLB stock 2,985 2,985 2,763 2,763
Financial liabilities:
Demand and savings deposits 87,835 87,835 74,332 74,332
Time certificates of deposit 104,900 104,443 104,826 105,168
Securities sold under agreements
to repurchase -- -- 1,431 1,431
FHLB advances -- -- 800 800
42
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 book 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 loans held for sale and FHLB of Seattle stock approximates the carrying
amounts.
Financial Liabilities--The estimated fair value of demand and savings
deposits, securities sold under agreements to repurchase, and FHLB advances
approximates carrying amounts. The fair value of time certificates of deposit
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 13 to the consolidated financial
statements.
15. 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 $45,728,931
after conversion expenses of $1,219,820. 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 $45,728,931 were
held in withdrawable accounts at the Bank at September 30, 1997. Since, among
other things, all required regulatory approvals to consummate the conversion
were received prior to September 30, 1997, the conversion has been accounted
for as being effective as of September 30, 1997. The oversubscription proceeds
of $78,050,200 were refunded, with accrued interest, on October 3, 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 statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible withdrawable accountholders 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.
16. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
As part of the conversion discussed in Note 15, an ESOP was established
for all employees. The ESOP borrowed $3,755,900 from OTFC and used the funds
to purchase 375,590 shares of the common stock of OTFC issued in the
conversion. The loan will be repaid by the Bank over a seven-year period. The
loan had an outstanding balance of $3,551,818 at March 31, 1998, and 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. As of
March 31, 1998, 26,828 shares have been released to participants. 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
$471,164 during the year ended March 31, 1998.
43
17. 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.
The periodic pension cost for the period is $53,173 composed of the
following components:
Service cost $ 8,305
Interest cost 22,652
Other costs 22,216
------------
Total $ 53,173
============
The following is the funded status of the Plan as of March 31, 1998 and
1997:
1998 1997
Accumulated and vested benefits $ 330,001 $ 348,044
----------- ------------
Projected benefit for service rendered to date 330,001 348,044
Plan assets at fair value -- --
----------- ------------
Projected benefit in excess of plan assets 330,001 348,044
Unrecognized prior service cost (325,828) (348,044)
----------- ------------
Accrued pension cost (included with accrued
expenses and other liabilities) $ 4,173 $ --
=========== ============
Weighted average discount rate 7% 7%
18. PARENT COMPANY ONLY FINANCIAL INFORMATION
Oregon Trail Financial Corp. was formed on October 3, 1997. The (Parent
Company only) financial statements at March 31, 1998 is as follows. Since OTFC
was not formed at March 31, 1997, no comparable data is available.
Assets:
Cash $ 15,371,203
Investment in subsidiary 24,890,945
Other assets 3,899,542
------------
Total $ 44,161,690
============
Liabilities and Stockholders' Equity:
Liabilities:
Other liabilities $ 26,532
Stockholders' equity 44,135,158
------------
Total $ 44,161,690
============
44
The statement of income for the period from October 3, 1997 (inception) to
March 31, 1998 is as follows:
Other income:
Equity in undistributed income of subsidiary $ 2,141,009
Other expense:
Interest and other 282,548
Income tax benefit (49,138)
------------
Net income $ 1,907,599
============
The statement of cash flows for the period from October 3, 1997
(inception) to March 31, 1998 is as follows:
Operating activities:
Net income $ 1,907,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiary (2,141,009)
Compensation expense related to ESOP 471,164
Cash provided (used) by changes in operating
assets and liabilities:
Other assets (3,899,542)
Other liabilities 75,670
Income tax accrual (49,138)
------------
Net cash used in operating activities (3,635,256)
Investing activities: ------------
Investment in subsidiary (22,749,937)
------------
Financing activities:
Net proceeds from issuance of common stock 45,728,931
Proceeds from stock oversubscription 78,050,200
Repayment of stock oversubscription (78,050,200)
Payment of cash dividend (216,635)
Funding provided to ESOP for purchase of common stock (3,755,900)
------------
Net cash provided by financing activities 41,756,396
------------
Net increase (decrease) in cash 15,371,203
Cash:
Beginning of period --
------------
End of period $ 15,371,203
============
45
19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Twelve months ended March
31, 1998 (in thousands): June 30 September 30 December 31 March 31
Total interest income $ 4,113 $ 4,556 $ 5,037 $ 4,805
Total interest expense 1,934 2,190 1,871 1,829
--------- --------- --------- --------
Net interest income 2,179 2,366 3,166 2,976
Provision for loan losses 31 43 46 18
--------- --------- --------- --------
Net interest income
after provision 2,148 2,323 3,120 2,958
Noninterest income 275 251 245 275
Noninterest expense 1,359 1,402 1,737 2,035
--------- --------- --------- --------
Income before income tax 1,064 1,172 1,628 1,198
Provision for income taxes 409 450 714 453
--------- --------- --------- --------
Net income $ 655 $ 722 $ 914 $ 745
========= ========= ========= ========
Net income per common share N/A N/A $ 0.21 $ 0.17
Twelve months ended March
31, 1997 (in thousands): June 30 September 30 December 31 March 31
Total interest income $ 4,052 $ 4,045 $ 4,039 $ 3,946
Total interest expense 1,922 1,859 1,853 1,841
--------- --------- --------- --------
Net interest income 2,130 2,186 2,186 2,105
Provision for loan losses 10 26 35 155
--------- --------- --------- --------
Net interest income
after provision 2,120 2,160 2,151 1,950
Noninterest income 116 249 259 153
Noninterest expense 1,379 2,477 1,302 1,296
--------- --------- --------- --------
Income (loss) before
income tax 857 (68) 1,108 807
Provision (benefit) for
income taxes 330 (25) 426 348
--------- --------- --------- --------
Net income (loss) $ 527 $ (43) $ 682 $ 459
========= ========= ========= ========
Net income per common
share N/A N/A N/A N/A
46
[Baker County]
Ready & Welcoming Growth
The rate of business growth in Baker City is Eastern Oregon's highest.
While agriculture continues to play a stabilizing role, tourism is the
county's fastest-growing industry. One of the most popular attractions in
Baker County is the Oregon Trail Interpretive Center.
The revitalization of Baker City's historic Main Street continues to
attract attention throughout the western United States, highlighted by the
restoration and reopening of the Geiser Grand Hotel, built in 1889.
Pioneer Bank has also remodeled and expanded its Baker City branch and
corporate offices. Pioneer's growth in commercial/agricultural lending
enhances the commitment to the area's future.
In fact, Pioneer's Baker City branch received the Outstanding Business
Award from Historic Baker City and the Most Outstanding Downtown Business in
Oregon from Livable Oregon. The branch is also proud to support local high
schools by co-sponsoring the Kiwanis Students of the Month awards as well as
sporting events on the local, regional and state levels, including Little
League and YMCA sports. The branch also sponsors the Christmas Parade and
rodeo events during Miner's Jubilee.
[picture]
47
[Union County]
Education & Service for the Next Century
In Union County, Boise Cascade, Grande Ronde Hospital and government
services represent the largest sectors of the economy. A number of regional
state offices are located in La Grande, as well as Eastern Oregon University.
To keep up with the area's continued growth, Pioneer Bank opened a new
state-of-the-art Island City branch. The full-service facility features a loan
center with customized real estate, personal, mortgage, business and
agricultural loan services.
Service to the community is a priority for the employees of Pioneer Bank
in Union County. Manager Jeff Puckett leads the way by volunteering on the
executive board of the local United Way and the Union County Chamber of
Commerce. The branch also supports the Eastern Oregon Livestock Show, Little
League, and Union County Soccer Association.
[picture]
48
[Malheur County]
Growing into the Millennium
Eastern Oregon's fastest-growing county, Malheur, is predicted to
experience nearly a 25% job growth rate in the next few years. Agriculture is
the area's strongest industry. The county is also supported by the expanding
Snake River Correctional Institution and Treasure Valley Community College.
The Four Rivers Cultural Center, opened in 1997, is the centerpiece of an
increased tourism focus in the county.
With a commercial/agricultural loan officer based here, the recently
remodeled Ontario branch is well-positioned to keep pace with the western
Treasure Valley. This is the largest market served by Pioneer Bank.
Pioneer Bank actively participates in special local events honoring this
ethnically diverse community, including the Four Rivers Cultural Center's
annual ball, Ontario Visitors & Convention Board, Ontario Chamber Board, and
American Musical Jubilee. The bank is also an enthusiastic sponsor of a Parks
and Recreation youth soccer team.
[picture]
49
[Grant County]
Exploring New Opportunities
Grant County's unique natural treasures hold the potential to increase
jobs and create new businesses. Thousands of visitors each year travel to the
John Day Fossil Beds National Monument east of John Day. The Painted Hills
area attracts tourists from around the world.
Other natural resources including timber and agriculture continue to
provide a base for the region's economy. The government sector provides the
largest percentage of Grant County's available jobs.
Pioneer Bank's John Day branch has played an active role in Grant County
and neighboring Wheeler County since 1973. Branch employees are active
supporters of area events, especially the youth rodeo and 4-H programs.
Grant County Customers will see the benefits of a remodeled and expanded
branch, with the addition of an ATM and safe deposit boxes.
[picture]
50
[Harney County]
Manufacturing the Future
Talk about a turnaround. As of the close of 1997, Harney County's economy
is showing the second-fastest job growth in Oregon. The Safari Motor Coaches
production facility opened in 1996 and continues to expand, with 100 new jobs
planned for 1998.
Additionally, the opening of Oregon's new state correctional facility
for juveniles in late 1997 and a collection of new retail and service
businesses are all factors in Harney County's increased vitality.
The Burns branch participates in a local organization called PRIDE, a
volunteer committee dedicated to enhancing community pride. Pioneer Bank in
Burns was instrumental in initiating a fundraising effort for children's art
awards at the John Scharff Migratory Bird Festival. The branch is also an
ongoing sponsor of Little League teams, softball teams, the fair/rodeo and
supports Air Life of Eastern Oregon for Harney County.
Pioneer Bank will take on a new look in Burns when a new branch facility
opens in fall of 1998.
[picture]
51
[Wallowa County]
A Scenic Attraction
Being a popular tourist spot has led Wallowa County's service industry to
double in size over the last ten years. As the spectacular beauty of the
state's northeastern corner becomes even more widely known, that trend should
continue. Likewise, construction employment in the area tripled between 1986
and 1996.
The arts continue to emerge as an area of growth, attracting visitors to
galleries featuring local talent in bronze sculpture, photography, painting
and more.
The Enterprise branch of Pioneer Bank has given steady support to
community events since opening in 1976. Each year Pioneer Bank is an event
sponsor for the Team Roping competition during July's Chief Joseph Days, one
of Eastern Oregon's most popular annual events. The branch is also active in
the Downtown Association, dedicated to restoring Enterprise's historic
downtown district.
[picture]
52
CORPORATE
INFORMATION
CORPORATE HEADQUARTERS:
2055 FIRST STREET
PO BOX 786
BAKER CITY, OR 97814
(541) 523-6327
SUBSIDIARIES
PIONEER BANK, A FSB
TRANSFER AGENT AND REGISTRAR
REGISTRAR & TRANSFER COMPANY
10 COMMERCE DRIVE
CRANFORD, NJ 07016
INDEPENDENT PUBLIC ACCOUNTANTS AND AUDITORS
DELIOTTE & TOUCHE LLP
3900 US BANCORP TOWER
111 SW FIFTH AVE.
PORTLAND,OR 97204
SPECIAL COUNSEL
BREYER & AGUGGIA LLP
1300 I STREET, NW
470E
WASHINGTON, DC 20005
ANNUAL MEETING OF STOCKHOLDERS
10:00 AM, TUESDAY, AUGUST 4, 1998
SUNRIDGE INN
ONE SUNRIDGE LANE
BAKER CITY, OR 97814
EXECUTIVE OFFICERS
JERRY F. ALDAPE, PRESIDENT AND CEO
ZANE F. LOCKWOOD, SENIOR VICE PRESIDENT
INVESTOR INFORMATION
A COPY OF THE FORM 10-K, INCLUDING
CONSOLIDATED FINANCIAL STATEMENTS, AS
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WILL BE FURNISHED WITHOUT
CHARGE TO STOCKHOLDERS AS OF THE RECORD
DATE FOR VOTING AT THE ANNUAL MEETING
OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE
SECRETARY, OREGON TRAIL FINANCIAL CORP.,
2055 FIRST STREET, PO BOX 786, BAKER CITY,
OREGON 97814.
BOARD OF
DIRECTORS
JOHN GENTRY
CHAIRMAN OF THE BOARD
President and General Manager;
Gentry Ford Sales, Inc.
JOHN A. LIENKAEMPER
Consultant and U.S. Safety Coordinator;
The Loewen Group
ALBERT H. DURGAN
Retired President, Pioneer Bank
EDWARD H. ELMS
Owner, P&E Distributing and
Co-Owner, Heritage Chevrolet
STEPHEN R. WHITTEMORE
Owner, BesTruss, Inc. and
Partner, Wallowa Lake Tram
CHUCK ROUSE
Self Employed Property Developer and Manager
JERRY F. ALDAPE
President and CEO
Oregon Trail Financial Corp. and Pioneer Bank, FSB
STOCK LISTING
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, 1998
TOTALED 1,118. 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 SINCE THE INITIAL
OFFERING ON OCTOBER 3, 1997.
CASH
DIVIDENDS
FISCAL 1998 LOW HIGH DECLARED
- ----------- --- ---- --------
INITIAL OFFERING PRICE 10 -- --
THIRD QUARTER 15 1/2 17 3/8 $--
FOURTH QUARTER 16 18 1/2 0.05
THE PAYMENT OF DIVIDENDS IS SUBJECT TO REGULATORY
RESTRICTIONS. SEE NOTES 10 AND 15 TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
ADMINISTRATIVE OFFICES
2055 First Street
Baker City, Oregon 97814
541.523.6327
BAKER CITY BRANCH BRANCH
2055 First Street LOCATIONS
Baker City, Oregon 97814
541.523.5884
LA GRANDE BRANCH
1215 Adams Avenue
La Grande, Oregon 97850
541.963.4126
ONTARIO BRANCH
225 SW Fourth Avenue
Ontario, Oregon 97914
541.889.3154
JOHN DAY BRANCH
150 W. Main Street
John Day, Oregon 97845
541.575.0257
BURNS BRANCH
77 Adams Street
Burns, Oregon 97720
541.573.2121
ENTERPRISE BRANCH
205 W. Main Street
Enterprise, Oregon 97828
541.426.4529
ISLAND CITY BRANCH
3106 Island Avenue
La Grande, Oregon 97850
541.963.2200
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
Deloitte &
Touche LLP
- -------------- -------------------------------------------------
Suite 3900 Telephone: (503) 222-1341
111 S.W. Fifth Avenue Facsimile: (503) 224-2172
Portland, Oregon 97204-3642
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in the Registration
Statement of Oregon Trail Financial Corp. on Form S-8 (File. No. 333-37427),
of our report dated May 22, 1998, accompanying the consolidated financial
statements incorporated by reference in Oregon Trail Financial Corp.'s Annual
report on Form 10-K for the year ended March 31, 1998.
/s/ Deloite & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
June 25, 1998
- ----------------
Deloitte Touche
Tohmatsu
International
- ----------------
Exhibit 99
Former Independent Auditors' Report
Coopers Coopers & Lybrand L.L.P.
& Lybrand
a professional services firm
Report of Independent Accountants
To the Board of Directors
Pioneer Bank, a Federal Savings Bank
Baker City, Oregon
We have audited the accompanying consolidated statements of income,
shareholder's equity and cash flows of Pioneer Bank, a Federal Savings Bank,
and subsidiaries for the year ended June 30, 1996. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Pioneer Bank, a Federal Savings Bank, and subsidiaries for the year ended
June 30, 1996 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boise, Idaho
August 2, 1996
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
Swiss limited liability association.