SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26556
OREGON TRAIL FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Oregon 91-1829481
- ------------------------------------------------------------------------------
State or other jurisdiction of incorporation (I.R.S. Employer or
organization)
Identification Number)
2055 First Street, Baker City, Oregon 97814
- ------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 523-6327
-----------------------
Securities registered pursuant to Section 12(b) of the Act: None
-----------------------
Securities registered pursuant to Common Stock. Par value $.01 per share
Section 12(g) of the Act: --------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
As of July 31, 1999, there were issued and outstanding 3,566,679 shares of the
Registrant's Common Stock. The Registrant's voting common stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"OTFC".
OREGON TRAIL FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information
Item I. Financial Statements (Unaudited) Page
Consolidated Balance Sheets 2
as of June 30, 1999 and March 31, 1999
Consolidated Statements of Income; For the Three 3
Months Ended June 30, 1999 and 1998
Consolidated Statements of Shareholders' Equity
(For the Three Months Ended June 30, 1999 and for
the Year Ended March 31, 1999). 4
Consolidated Statements of Cash Flows (For the
Three Months Ended June 30, 1999 and 1998) 5 - 6
Notes to Consolidated Financial Statements 7 - 10
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
Item III. Quantitative and Qualitative Disclosures about Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,1999 and MARCH 3
(UNAUDITED)
($ in thousands except share data)
June 30, March 31,
1999 1999
ASSETS ------- ------
Cash and due from banks (including
interest earning accounts of $5,520 and $4,520 $7,607 $6,276
Securities:
Available for sale, at fair value (amortized cost:
$115,405 and $98,527) 112,698 98,336
Held to maturity, at amortized cost (fair value:
$0 and $9,518) 0 9,338
Loans receivable, net of allowance for loan
losses of $1,324 and $1,228 198,310 185,747
Accrued interest receivable 2,221 2,012
Premises and equipment, net 8,334 7,825
Stock in Federal Home Loan Bank of Seattle, at cost 3,280 3,221
Real estate owned 71 37
Other assets 1,214 681
-------- --------
TOTAL ASSETS $333,735 $313,473
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Interest-bearing $96,966 $88,245
Noninterest-bearing 13,150 11,594
Time certificates 102,211 99,750
-------- --------
Total deposits 212,327 199,589
Advances from Federal Home Loan Bank of Seattle 60,150 50,250
Accrued expenses and other liabilities 3,316 2,854
Advances from borrowers for taxes and insurance 1,226 697
-------- --------
Total liabilities 277,019 253,390
SHAREHOLDERS' EQUITY
Preferred Stock - $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding 0 0
Common stock - $.01 par value; 8,000,000 shares
authorized June 30, 1999, 4,694,875 issued,
3,586,378 outstanding; March 31, 1999, 4,694,875
issued, 3,763,564 outstanding 40 42
Additional paid-in capital 35,907 38,357
Retained earnings (substantially restricted) 26,613 26,206
Unearned shares issued to the Employee Stock
Ownership Plan (2,817) (2,951)
Unearned shares issued to the Management Recognition
and Development Plan (1,358) (1,453)
Accumulated other comprehensive income (loss) (1,669) (118)
-------- --------
Total shareholders' equity 56,716 60,083
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $333,735 $313,473
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(2)
OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
($ in thousands except share data)
3 Mos Ended 3 Mos Ended
30-Jun-99 30-Jun-98
--------- ---------
INTEREST INCOME:
Interest and fees on loans receivable $3,870 $3,314
Securities:
Mortgage-backed and related securities 1,107 736
U.S. government and government agencies 586 680
Federal Home Loan Bank of Seattle dividends 58 56
------ ------
Total interest income 5,621 4,786
INTEREST EXPENSE:
Deposits 1,882 1,817
Federal Home Loan Bank of Seattle advances 641 0
------ ------
Total interest expense 2,523 1,817
Net interest income 3,098 2,969
PROVISION FOR LOAN LOSSES 71 86
Net interest income after provision for ------ ------
loan losses 3,027 2,883
NONINTEREST INCOME:
Service charges on deposit accounts 242 154
Loan servicing fees 88 81
Other Income 12 3
------ ------
Total noninterest income 342 238
NONINTEREST EXPENSE:
Employee compensation and benefits 1,404 1,058
Supplies, postage, and telephone 190 125
Depreciation 155 112
Occupancy and equipment 131 101
FDIC insurance premium 30 31
Customer accounts 73 74
Advertising 142 85
Professional fees 42 54
Other 176 154
------ ------
Total noninterest expense 2,343 1,794
Income before income taxes 1,026 1,327
PROVISION FOR INCOME TAXES 388 551
------ ------
NET INCOME $638 $776
====== ======
Basic Earnings per share $0.17 $0.18
Diluted Earnings per share $0.16 $0.18
Weighted average common shares outstanding:
Basic 3,717,381 4,346,260
Diluted 3,913,680 4,346,260
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(3)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND THE YEAR ENDED MARCH 31, 1999
(UNAUDITED)
($ in thousands except share data)
Unearned
Unearned Shares
Shares Issued to Accumu-
Issued to Manage- lated
Employee ment Other
Stock and Compre- Compre-
Additional Owner- Develop- hensive hensive
Common Stock Paid-In Retained ship ment Income Income
Shares Amount Capital Earnings Trust Plan (Loss) (Loss) Total
------ ------ ------- -------- ----- ---- ------ ------ -----
Balance, April 1,
1998 4,346,113 47 45,885 23,968 (3,488) 0 889 67,301
Net income 3,154 $3,154 3,154
Cash dividends
paid (916) (916)
Stock repurchased (488,883) (6) (9,355) (9,361)
Stock repurchased
and issued to
MRDP Trust (147,322) 1 1,641 (1,642) 0
Earned ESOP shares 53,656 186 537 723
Earned MRDP shares 189 189
Unrealized loss
on securities
available for
sale, net of tax (1,007) (1,007) (1,007)
------
Comprehensive
income $2,147
--------- --- ------- ------- ------- ------- ====== ------- -------
Balance, March
31, 1999 3,763,564 42 38,357 26,206 (2,951) (1,453) (118) 60,083
Net income 638 $638 638
Cash dividends
paid (231) (231)
Stock
repurchased (190,600) (2) (2,487) (2,489)
Earned ESOP
shares 13,414 37 134 171
Earned MRDP shares 95 95
Unrealized loss
on securities
available for
sale, net of tax (1,551) (1,551) (1,551)
------
Comprehensive income ($913)
--------- --- ------- ------- ------- ------- ====== ------- -------
Balance, June
30, 1999 3,586,378 $40 $35,907 $26,613 ($2,817) ($1,358) ($1,669) $56,716
========= === ======= ======= ======= ======= ======= =======
(4)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,1999 AND 1998
(UNAUDITED)
($ in thousands)
30-Jun-99 30-Jun-98
CASH FLOWS FROM OPERATING ACTIVITIES --------- ---------
Net income $638 $776
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 155 112
Compensation expense related to ESOP benefit 172 211
Compensation expense related to MRDP benefit 95 0
Amortization of deferred loan fees, net (92) (26)
Provision for loan losses 71 86
Amortization/accretion of premiums/discounts
on investments and loans purchased 54 (39)
Federal Home Loan Bank of Seattle dividends (58) (56)
Changes in assets and liabilities:
Accrued interest receivable (209) (147)
Other assets 347 31
Accrued expenses and other liabilities 461 678
------ ------
Net cash provided by operating activities 1,634 1,626
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (35,287) (22,343)
Loan principal repayments 25,431 16,437
Loans purchased (2,709) (1,572)
Purchase of securities available for sale (12,683) (7,093)
Proceeds from maturity of securities available for
sale 2,004 5,000
Principal repayments of securities available for sale 3,110 1,054
Principal repayments of securities held to maturity 0 1,261
Proceeds from sales of real estate owned 53 189
Proceeds from sales of premises and equipment 6 0
Purchases of premises and equipment (675) (434)
------ ------
Net cash used in investing activities (20,750) (7,501)
------ ------
(5)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits, net of withdrawals $12,738 ($8,550)
Change in advances from borrowers for taxes and
insurance 529 527
Proceeds from Federal Home Loan Bank of Seattle
advances 57,600 0
Repayment of Federal Home Loan Bank of Seattle
advances (47,700) 0
Payment of cash dividend (231) (217)
Stock repurchase (2,489) 0
------ ------
Net cash provided by (used in) financing activities 20,447 (8,240)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,332 (14,115)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,276 20,311
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $7,607 $6,196
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and other borrowings $2,373 $1,992
Income taxes 0 441
Noncash investing activities:
Transfer of loans to foreclosed real estate 71 0
Unrealized (loss) on securities available for sale,
net of tax (1,551) (118)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(6)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair presentation
of Oregon Trail Financial Corp.'s (the "Company") financial condition as of
June 30, 1999 and March 31, 1999, the results of operations for the three
months ended June 30, 1999 and 1998 and the cash flows for the three months
ended June 30, 1999 and 1998. All adjustments are of a normal recurring
nature. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report to Shareholders filed as
an exhibit to the Company's Form 10-K for the year ended March 31, 1999. The
results of operations for the three months ended June 30, 1999 are not
necessarily indicative of the results which may be expected for the entire
fiscal year. Certain prior period amounts have been reclassified to conform to
current period presentation.
2. REORGANIZATION
On October 3, 1997, Pioneer Bank, A Federal Savings Bank, (the "Bank")
completed a mutual-to-stock conversion. The Company sold 4,694,875 shares of
common stock at $10 per share, 8% or 375,590 of which shares were purchased by
an Employee Stock Ownership Plan (the "ESOP"). Proceeds from the sale were
recorded as $46,949 of Common Stock at $.01 par value and $45,681,982 of Paid
in Capital. The Common Stock and Paid in Capital at June 30, 1999 are
partially offset by the unissued ESOP shares and unissued Management
Recognition and Development Plan ("MRDP") shares.
The Company purchased all of the stock of the Bank for one-half of the net
investable proceeds of the offering. The retained earnings of the Company
represent all prior earnings of the Bank as a mutual savings bank.
The primary business of the Company is overseeing the operations of the Bank.
Accordingly, the information presented herein relates primarily to the Bank.
3. COMPREHENSIVE INCOME (LOSS)
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income to be reported in a
financial statement that is displayed in equal prominence with the other
financial statements and to disclose as a part of shareholders' equity
accumulated comprehensive income. Comprehensive income is defined as the
change in equity during a period from transactions and other events from
nonowner sources.
(7)
Comprehensive income is the total of net income and other comprehensive
income, which for the Company is comprised entirely of unrealized gains and
losses on securities available for sale.
For the three months ended June 30, 1999, the Company's total comprehensive
loss was $913,000 compared to comprehensive income of $658,000 for the three
months ended June 30, 1998. Total comprehensive income for the three months
ended June 30, 1999 was comprised of net income of $638,000 and other
comprehensive loss of $1.6 million, net of tax. Total comprehensive income
for the three months ended June 30, 1998 was comprised of net income of
$776,000 and other comprehensive loss of $118,000, net of tax.
4. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows for the year
ended March 31, 1999 and for the three months ended June 30, 1999:
June 30, 1999 March 31, 1999
(in thousands) (in thousands)
------------------ ------------------
Balance, beginning of
period $ 1,228 $ 847
Charge-offs (2) (115)
Recoveries 27 13
Provision for loan losses 71 483
------- ------
Balance, end of period $ 1,324 $1,228
======= ======
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at June 30, 1999 consisted of twelve term advances varying in
length from seven days to 51 months totaling $53.5 million and an overnight
advance of $6.7 million from the Federal Home Loan Bank of Seattle ("FHLB").
The advances are collateralized in aggregate as provided for in the Advances
Security and Deposit Agreement with the FHLB by certain mortgages or deeds of
trust, government agency securities and cash on deposit with the FHLB.
Scheduled maturities of advances from the FHLB were as follows at June 30,
1999:
Due in less than one year:
- --------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- --------------------------------------------------------
$44,650,000 4.62% - 5.90% 5.24%
(8)
Due within one to five years:
- -----------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- ---------------------------------------------------
$15,500,000 4.75% - 5.29% 5.07%
6. SHAREHOLDERS' EQUITY
In May 1999, the Company received a non-objection response from the Office of
Thrift Supervision ("OTS") to a request to repurchase 5% of its outstanding
shares, or 210,299 shares. As of June 30, 1999, the Company had repurchased
190,600 shares under this program at an average price of $13.06. The
repurchase resulted in a $1,906 reduction in common stock and a $2,487,000
reduction in paid-in-capital. Shares repurchased in this program have been
retired.
7. EARNINGS PER SHARE
Shares held by the Company's ESOP that are committed for release are
considered common stock equivalents and are included in weighted average
shares outstanding (denominator) for the calculation of basic and diluted
Earning Per Share ("EPS"). Diluted EPS is computed using the treasury stock
method, giving effect to potential additional common shares that were
outstanding during the period. Potential dilutive common shares include
shares awarded but not released under the Company's MRDP and stock options
granted under the Stock Option Plan. Following is a summary of the effect of
dilutive securities in weighted average number of shares (denominator) for the
basic and diluted EPS calculations. There are no resulting adjustments to net
earnings.
For the Three Months ended June 30,
1999 1998
- ------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic 3,717,381 4,346,260
- ------------------------------------------------------------------------------
Effect of Dilutive Securities on
Number of Shares:
MRDP shares 147,322 0
- ------------------------------------------------------------------------------
Stock Options 48,977 0
- ------------------------------------------------------------------------------
Total Dilutive Securities 196,299 0
- ------------------------------------------------------------------------------
Weighted average common shares
outstanding - with dilution 3,913,680 4,346,260
- ------------------------------------------------------------------------------
8. REGULATORY CAPITAL
The Company is not subject to separate regulatory capital requirements. The
following table illustrates the Bank's compliance with currently applicable
regulatory capital requirements at June 30, 1999 and March 31, 1999.
(9)
As of June 30, 1999:
Categorized as
"Well Capitalized"
Actual For Capital Under Prompt
(In Thousands) Adequacy Corrective
Purposes Action Provision
(In Thousands) (In Thousands)
------------------ ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 1999:
Total Capital:
(To Risk Weighted
Assets) $ 52,288 30.8% $ 13,541 8.0% $ 16,926 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 50,964 30.0 N/A N/A 10,156 6.0
Tier I Capital:
(To Tangible Assets) 50,964 15.2 13,383 4.0 16,729 5.0
Tangible Capital:
(To Tangible Assets) 50,964 15.2 5,019 1.5 N/A N/A
As of March 31, 1999
Categorized as
"Well Capitalized"
Actual For Capital Under Prompt
(In Thousands) Adequacy Corrective
Purposes Action Provision
(In Thousands) (In Thousands)
------------------ ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 1999:
Total Capital:
(To Risk Weighted
Assets) $ 51,516 33.1% $ 12,455 8.0% $ 15,569 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 50,288 32.3 N/A N/A 9,342 6.0
Tier I Capital:
(To Tangible Assets) 50,288 16.1 12,521 4.0 15,652 5.0
Tangible Capital:
(To Tangible Assets) 50,288 16.1 4,695 1.5 N/A N/A
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective April 1, 1999, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and disclosure requirements for derivative instruments, including certain
instruments embedded in other financial instruments, and for hedging
activities. The Company does not have any derivative instruments that meet
the scope of this statement. The statement also allows, on the date of
initial application, an entity to transfer any held to maturity securities
into the available for sale or trading categories. The Company transferred
all held to maturity securities with a book value and fair value of $9,338,000
and $9,518,000, respectively, to its available for sale portfolio. The
transfer was recorded as a direct increase to other comprehensive income of
$111,000 (net of income tax of $69,000).
(10)
ITEM II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking
statements". The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protection of such safe harbor with respect to all of such forward-looking
statements. These forward-looking statements, which are included in
Management's Discussion and Analysis, describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
General
Oregon Trail Financial Corp. ("Company"), an Oregon corporation, was organized
on June 9, 1997 for the purpose of becoming the holding company for Pioneer
Bank, a Federal Savings Bank ("Bank") upon the Bank's conversion from a
federal mutual to a federal stock savings bank ("Conversion"). The Conversion
was completed on October 3, 1997. At June 30, 1999, the Company had total
assets of $333.7 million, total deposits of $212.3 million and shareholders'
equity of $56.7 million. The Company is currently not engaged in any business
activity other than holding the stock of the Bank. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to the Bank. All references to the Company
herein include the Bank where applicable.
The Bank was organized in 1901. It is regulated by the OTS and its deposits
are insured up to applicable limits under the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the FHLB of Seattle, conducting its business through
eight office facilities, with the headquarters located in Baker City, Oregon.
The primary market areas of the Bank are the counties of Wallowa, Union,
Baker, Malheur, Harney and Grant in Eastern Oregon. On May 3, 1999 the
Company opened a branch in Vale, Oregon located in Malheur County to better
serve the customers in that County.
As a traditional, community-oriented savings bank, the Company focuses on
customer service within its principal market area. The Company's primary
market activity is attracting deposits from the general public and using those
and other available sources of funds to originate permanent residential
one-to-four family real estate loans within its market area and, to a lesser
extent, loans
(11)
on commercial property and multi-family dwellings. At June 30, 1999, one to
four family residential mortgage loans totaled $115.7 million, or 57.9% of
total loans receivable. The Company began supplementing its traditional
lending activities in 1996 with the development of commercial business loans,
agricultural loans and the purchase of dealer-originated automobile contracts.
The Company has hired experienced commercial lending officers familiar with
the its primary market area in an attempt to develop commercial business and
agricultural lending and to expand the purchase of dealer-originated
automobile contracts. As a result of these activities at June 30, 1999 the
Company had agricultural loans of $15.5 million, commercial business loans of
$11.2 million, commercial real estate loans of $17.4 million, and automobile
loans of $14.0 million (including $10.9 million of purchased dealer-originated
contracts).
Net interest income, which is the difference between interest and dividend
income on interest-earning assets, primarily loans and investment securities,
and interest expense on interest-bearing deposits and borrowings, is the major
source of income for the Company. Because the Company depends primarily on
net interest income for its earnings, the focus of management is to create and
implement strategies that will provide stable, positive spreads between the
yield on interest- earning assets and the cost of interest-bearing
liabilities. Such strategies include increasing the origination of commercial
and agricultural loans with rates that are adjustable based upon the Wall
Street Journal prime rate or the current five year Treasury Note yield.
Commercial (including both commercial real estate and commercial business) and
agricultural loans outstanding totaled $27.9 million and $12.2 million,
respectively at March 31, 1999 and increased to $28.6 million and $15.5
million respectively at June 30, 1999. The Company has also increased
origination of shorter term consumer loans, increasing auto loans from $11.8
million at March 31, 1999 to $14.0 million at June 30, 1999.
To a lesser degree, the net earnings of the Company rely on the level of its
non-interest income. The Company is pursuing strategies to improve its
service charge and fee income, and control its non-interest expense, which
includes employee compensation and benefits, occupancy and equipment expense,
deposit insurance premiums and miscellaneous other expenses, as well as
federal and state income tax expense.
YEAR 2000 READINESS
The Year 2000 issue exists because many computer systems and applications use
two-digit fields to designate a year. As the century date occurs, date-
sensitive systems may recognize the Year 2000 as 1900, or not at all. This
inability to recognize or properly treat the Year 2000 may cause systems to
fail to process financial and operational information correctly.
The Bank established a committee in 1997 to address Year 2000 issues. The
committee consists of executive management and technical staff and reports to
the Board of Directors on a monthly basis. The committee has conducted a
comprehensive review of its computer systems and equipment to identify
applications that could be affected by Year 2000 issues and has implemented a
plan designed to ensure that all software used in connection with the Bank's
business will function correctly with dates past 1999. In conducting its
review, the committee used the OTS Year 2000 checklist and the Federal
Financial Institutions Examination Council ("FFIEC") guidelines for Year 2000
project management. These guidelines identify the five steps for Year 2000
conversion programs.
(12)
The first step is the Awareness Phase in which the Bank defined the Year 2000
problem and established a Year 2000 program team and strategy. The Bank
completed this step as of March 31, 1999. In the next phase, the Assessment
Phase, the Bank assessed the size and complexity of the problem and detailed
the magnitude of effort necessary to address Year 2000 issues, including
hardware, software, networks, automated teller machines, etc. This step was
completed on June 15, 1999.
The third step or Renovation Phase includes hardware and software upgrades,
system replacements, vendor certification and associated changes. Data
processing for the Bank is done in-house primarily on an AS/400 IBM computer.
In December 1997, the Bank converted to new core software from Jack Henry and
Associates Inc., which was purchased at a cost of approximately $250,000. The
software purchased is used to process all savings, loan and related general
ledger transactions. The vendor has given assurance their software is Year
2000 compliant and that no problems will arise from the turn of the century.
The Bank has joined a User Group, which began testing the Jack Henry system in
September 1998. Testing was completed December 31, 1998 and the committee has
evaluated the third party review. In July 1998, the Bank upgraded its IBM AS/
400 computer hardware and upgraded the operating system to OS400 V4R2MO, at a
cost of approximately $84,500, both of which are Year 2000 compatible as
represented by IBM. Century rollover testing has been done on the upgraded
AS/400 with satisfactory results.
In addition to the core software, the Bank uses various personal computer
software products, the majority of which are already Year 2000 compliant.
Others are being monitored and the Bank is proactively communicating with
vendors to determine their course of action to become fully compliant. The
Bank replaced all necessary computer hardware to become Year 2000 compliant.
The total cost of hardware approximated $125,000. That cost combined with the
cost of the new software brings the total cost of compliance to $375,000,
which is very close to the Bank's initial estimate. With the final
replacement of some personal computers and attendant software in May 1999, the
Bank completed the renovation.
The next phase is the Validation/Testing Phase, which primarily included the
previously mentioned testing of the core Jack Henry software, as well as
various other tests with vendors, including the Federal Reserve Fedline system
and ATM processing. This phase is 100% complete as of June 30, 1999.
The final phase, the Implementation Phase, is in process. Systems
successfully tested will be certified Year 2000 compliant. This phase was
completed at June 30, 1999. All personal computers and related software have
been tested for Year 2000 compliance. As of March 31, 2000, all of the Bank's
mission critical personal computers and software were Year 2000 compliant.
The Bank's wide area network and various local area networks have also been
upgraded, tested, and determined to be Year 2000 compliant. All mission
critical data processing applications have been identified and are Year 2000
compliant. Third party vendors were sent questionnaires in 1998 regarding
their preparation for Year 2000. Responses have been received and further
updates will be requested in order to monitor vendors' status.
In addition, contingency plans have been developed. The contingency plan
addresses actions to be taken to continue operations in the event of system
failure due to areas that cannot be tested in advance, such as power and
telephone service, which are vital to business continuation. To assist
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customers in understanding Year 2000 issues and to inform them of the Bank's
action to prepare brochures regarding Year 2000 preparedness have been
distributed have been distributed to all customers. Another mailing is
anticipated before the end of the calendar year. The contingency plan is now
in the implementation phase. This phase is planned to be completed by
September 30, 1999.
In addition to the Year 2000 preparations described above, the Bank has
required that its lending personnel ascertain loan customer awareness and
intent to timely achieve Year 2000 compliance. The Bank's credit risk
associated with borrowers may increase to the extent borrowers fail to
adequately address Year 2000 issues.
The Bank believes that the Year 2000 issue will not pose significant
operational problems and does not anticipate a material effect on its
financial position or results of operations.
Changes in Financial Condition
At June 30, 1999, the consolidated assets of the Company totaled $333.7
million, an increase of $20.3 million, or 6.5%, from $313.5 million at March
31, 1999. The primary reason for the increase was a $12.6 million increase in
net loans receivable and a $5.0 million increase in securities. The increase
in assets was funded by a $12.7 million increase in deposits and a $9.9
million increase in FHLB borrowings.
Net loans receivable increased by $12.6 million, or 6.8%, to $198.3 million at
June 30, 1999 compared to $185.7 million at March 31, 1999. The increase was
primarily the result of continued new loan demand for all types of loans
exceeding loan repayments.
Nonperforming assets, consisting of non-accruing loans, real estate owned and
other repossessed assets, increased $17,000 from $175,000 at March 31, 1999 to
$192,000 at June 30, 1999, primarily due to an increase of $34,000 in Real
Estate Owned from $37,000 at March 31, 1999 to $71,000 at June 30, 1999.
Nonperforming assets were .06% of total assets both at June 30, 1999 and at
March 31, 1999. The allowance for loan losses was 1,151% of nonperforming
loans at June 30, 1999, compared to 890% at March 31, 1999.
Investment securities increased $5.0 million, from $107.7 million at March 31,
1999 to $112.7 million at June 30, 1999. The increase included the purchase of
$7.6 million of fixed rate government agency mortgage backed securities, $4.0
million of government agency medium term notes and $1.3 million of AAA rated
municipal bonds of several Oregon municipalities. These increases were
partially offset by $2.0 million of government agency medium term notes that
were either called or matured and $3.7 million of principal payments on
government agency mortgage backed securities. During the quarter $9.3 million
of securities held to maturity were reclassified to available for sale in
accordance with provision of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
Deposits increased $12.7 million or 6.4%, from $199.6 million at March 31,
1999 to $212.3 million at June 30, 1999. The increase is attributable to an
increase of $10.2 million in checking and savings core deposits and $2.5
million in certificates of deposit ("CD"). The Company
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conducted an aggressive deposit campaign from March 15, 1999 to May 15, 1999.
A feature of the campaign was a special 20-month CD to lengthen the term of
deposits past January 1, 2000. Approximately $14.0 million was received in
the 20 month CD during the campaign. Other featured deposits were the money
market checking and the 6-month CD. The Company gained many relationship
accounts during the campaign as customers also moved their checking account
balances when opening other types of accounts. Other liabilities increased
$462,000. Advances from borrowers for taxes and insurance increased $529,000
from $697,000 at March 31, 1999 to $1.2 million at June 30, 1999. Taxes are
paid annually in November and accordingly, such deposits increase ratably from
December to November when the taxes are paid. The Company had $60.2 million
in advances from the FHLB at June 30, 1999 compared to $50.3 million at March
31, 1999. The increased borrowings were used to fund loan growth and
investment purchases.
Total shareholders' equity decreased $3.4 million to $56.7 million at June 30,
1999 from $60.1 million at March 31, 1999. The decrease is primarily due to
the repurchase of 190,600 of outstanding shares in May and June 1999 at a
total cost of $2.5 million. The repurchase reduced common stock by $2000 and
paid in capital by $2.5 million. Shares repurchased during the quarter ended
June 30, 1999 were retired. Cash dividends paid of $231,000 also reduced
shareholders' equity as did the $1.6 million charge to accumulated other
comprehensive income for the market valuation on securities available for
sale. These reductions to shareholders' equity were partially offset by net
income of $638,000.
Results of Operations
Comparison of Three Months Ended June 30, 1999 and 1998
General. The decrease in net income of $138,000 was primarily due to an
increase in non- interest expense partially offset by increased net interest
income and increased non-interest income. Net interest income increased
$129,000, or 4.3%, comparing the three-month period ended June 30, 1999 to the
same period in the prior year. Interest income increased $835,000 while
interest expense increased $706,000. Non-interest income increased $104,000
while the provision for loan losses decreased $15,000. Non-interest expense
increased $549,000, and income taxes decreased $163,000. This resulted in net
income decreasing by $138,000, or 17.8% for the three months ended June 30,
1999 compared to the same period in 1998.
Interest Income. The increase of $835,000 in interest income was generated by
an additional $60.1 million in average interest earning assets for the three
months ended June 30, 1999 compared to the same period in 1998. The increase
in average interest earning assets was primarily due to increases in the
average loan portfolio of $36.3 million and the average investment portfolio
of $31.2 million, partially offset by a decrease in average interest bearing
deposits of $7.5 million.
The average yield on interest earning assets decreased from 7.71% for the
three months ending June 30, 1998 to 7.32% for the same period in the current
year. The decrease in the average yield was primarily due to the $31.2
million increase in the average balance of investments, mostly medium term
government agency notes and fixed rate government agency
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mortgage backed securities yielding at a lower rate. The increase in the
average balance included $8.5 million of AAA rated municipal bonds of Oregon
municipalities. The yield on these bonds is typically much lower before taxes
due to the tax benefits derived from holding the bonds. When these tax
benefits are considered the "tax equivalent" yield is typically comparable or
better than US Government agency medium term notes. The decrease in average
yield was also due to the prime rate decline of 75 basis points from June 30,
1998 to April 1, 1999. Loans adjustable based upon the prime rate were at a
lower rate in the quarter just ended than in the year ago quarter. In
addition, there was a significant amount of mortgage refinance activity in the
time period between the two quarters. Mortgage loans and higher yielding
consumer loans were refinanced at lower rates.
Interest Expense. Interest expense on savings deposits increased by $65,000
for the three months ended June 30, 1999 compared to the same period of 1998.
Average deposits increased by $17.9 million for the same period. The average
interest paid on deposits declined twenty basis points from 3.87% for the six
months ended June 30, 1998 to 3.67% for the same period in1999. The cost of
deposits declined primarily due to an increased balance of lower costing core
deposits.
Provision for Loan Losses. The provision for loan losses was $71,000 and net
recoveries amounted to $25,000 during the three months ended June 30, 1999
compared to a provision for loan losses of $86,000 and net charge-offs of
$5,000 for the three-month period ended June 30, 1998. The provision was
increased primarily in response to portfolio growth, especially in commercial,
agricultural and consumer loans. At June 30, 1999, the allowance for loan
losses was equal to 1,151% of non-performing loans compared to 890% at March
31, 1999. The increase in the coverage ratio at June 30, 1999 was the result
of a decrease in non-performing loans from $138,000 at March 31, 1999 to
$115,000 at June 30, 1999, as well as the increased allowance.
Non-Interest Income. Non-interest income increased $104,000, or 43.7%, to
$342,000 for the three months ended June 30, 1999 from $238,000 for the same
period in the prior year. Income from deposit accounts increased $88,000 due
to strong growth in core deposits as well as an improved fee schedule.
Non-Interest Expense. Non-interest expense increased $549,000, or 30.6% to
$2.3 million for the three months ended June 30, 1999, from $1.8 million for
the comparable period in 1998. The increase is primarily attributable to an
increase in employee compensation and benefits of $346,000. Non-cash MRDP
expense of $95,000 during the three months ended June 30, 1999 was included in
compensation expense and was not in the prior year period. The remaining
increase was due to staff additions, salary increases and an increase in the
cost of employee benefits which includes health insurance. Staff additions
were primarily to facilitate planned expansion. The remaining $203,000 of
increased non-interest expense included a $57,000 increase in advertising
expense due to increased newspaper and radio advertising associated with the
recent deposit campaign. Other expense increased $22,000 due to the increase
in core deposit accounts and loan growth. Supplies, postage and telephone
increased $65,000 due to the new forms required for the centralization of the
proof process, which occurred in December 1998, and the
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addition of new and more efficient phone lines to outlying branches.
Depreciation increased $43,000 due to the purchase of capitalized technology
upgrades.
Income Taxes. The provision for income taxes decreased $163,000 for the three
months ended June 30, 1999 compared with the same period in the prior year.
The decrease was attributable to a lower level of net income before taxes as
well as interest income earned on municipal bonds which is not entirely
included in federal taxable income.
Item No. III
Quantitative and Qualitative Disclosures about Market Risk
During the quarter ended June 30, 1999, there was no material change in the
market risk disclosures included in the Company's Form 10-K for the year ended
March 31, 1999.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is involved in various claims and legal actions arising
in the normal course of business. Management believes that these
proceedings will not result in a material loss to the Company.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Jerry F. Aldape**
10(b) Severance Agreement with Nadine J. Johnson**
10(c) Severance Agreement with William H. Winegar**
10(d) Employment Agreement with Zane Lockwood****
10(e) Severance Agreement with Thomas F. Bennett****
10(f) Severance Agreement with Jerry Kincaid****
10(g) Employee Severance Compensation Plan**
10(h) Pioneer Bank, a Federal Savings Bank Employee Stock
Ownership Plan**
10(i) Pioneer Bank, a Federal Savings Bank 401(k) Plan*
10(j) Pioneer Bank Director Emeritus Plan***
10(k) 1998 Stock Option Plan***
10(l) 1998 Management Recognition and Development Plan***
13 Annual Report to Shareholders****
21 Subsidiaries of the Registrant****
23 Consent of Independent Auditors****
27 Financial Data Schedule
99 Former Independent Auditor's 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.
**** Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1998.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1998.
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SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OREGON TRAIL FINANCIAL CORP.
Date: August 9, 1999 By: /s/ Jerry F. Aldape
---------------------------------------
Jerry F. Aldape, President and
Chief Executive Officer
Date: August 9, 1999 By: /s/ Nadine J. Johnson
---------------------------------------
Nadine J. Johnson, Chief Financial
Officer
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