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 September 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 (I.R.S. Employer or organization
incorporation Identification Number)
2055 First Street, Baker City, Oregon 97814
- ------------------------------------- ----------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (541) 523-6327
----------------
Securities registered pursuant to Section 12(b) of the Act: None
----------------
Securities registered pursuant to Section 12(g)
of the Act: Common Stock. Par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
As of October 31, 1999, there were issued and outstanding 3,580,093
shares of the Registrant's Common Stock. The Registrant's voting common stock
is traded and listed on the Nasdaq National Market under the symbol "OTFC".
<PAGE>
OREGON TRAIL FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information
Item I. Financial Statements (Unaudited) Page
Consolidated Balance Sheets 2
as of September 30, 1999 and March 31, 1999
Consolidated Statements of Income; For the Three and Six 3
Months Ended September 30, 1999 and 1998
Consolidated Statements of Shareholders' Equity
(For the Six Months Ended September 30, 1999 and for
the Year Ended March 31, 1999). 4
Consolidated Statements of Cash Flows (For the
Six Months Ended September 30, 1999 and 1998) 5-6
Notes to Consolidated Financial Statements 7-10
Item II. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-19
Item III. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE>
OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30,1999 and MARCH 31, 1999
(UNAUDITED)
($ in thousands except share data)
September 30, March 31,
1999 1999
ASSETS ------------- ---------
Cash and due from banks (including
interest earning accounts of $4,000 and $4,520 $6,286 $6,276
Securities:
Available for sale, at fair value (amortized cost:
$123,564 and $98,527) 119,908 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 $1,370 and $1,228 211,096 185,747
Accrued interest receivable 2,624 2,012
Premises and equipment, net 8,865 7,825
Stock in Federal Home Loan Bank of Seattle, at cost 3,340 3,221
Real estate owned and other repossessed assets 84 37
Net deferred tax asset 869 0
Other assets 1,111 681
-------- --------
TOTAL ASSETS $354,183 $313,473
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Interest-bearing $105,434 $88,245
Noninterest-bearing 16,264 11,594
Time certificates 106,713 99,750
-------- --------
Total deposits 228,411 199,589
Advances from Federal Home Loan Bank of Seattle 62,550 50,250
Accrued expenses and other liabilities 4,843 2,399
Net deferred tax liability 0 455
Advances from borrowers for taxes and insurance 1,747 697
-------- --------
Total liabilities 297,551 253,390
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 September 30, 1999, 4,694,875 issued,
3,580,093 outstanding; March 31, 1999, 4,694,875
issued, 3,763,564 outstanding 40 42
Additional paid-in capital 35,683 38,357
Retained earnings (substantially restricted) 27,108 26,206
Unearned shares issued to the Employee Stock
Ownership Plan (2,683) (2,951)
Unearned shares issued to the Management Recognition
and Development Plan (1,263) (1,453)
Accumulated other comprehensive income (loss) (2,253) (118)
-------- --------
Total shareholders' equity 56,632 60,083
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $354,183 $313,473
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(2)
<PAGE>
OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
($ in thousands except per share data)
3 Mos Ended 3 Mos Ended 6 Mos Ended 6 Mos Ended
30-Sep-99 30-Sep-98 30-Sep-99 30-Sep-98
INTEREST INCOME ----------- ----------- ----------- -----------
Interest and fees
on loans receivable $4,131 $3,546 $8,001 $6,860
Securities:
Mortgage-backed and
related securities 1,218 773 2,325 1,509
U.S. government and
government agencies 617 545 1,202 1,225
Federal Home Loan Bank
of Seattle dividends 60 59 119 115
--------- --------- --------- ---------
Total interest income 6,026 4,923 11,647 9,709
INTEREST EXPENSE:
Deposits 2,052 1,797 3,934 3,614
Federal Home Loan Bank
of Seattle advances 758 15 1,399 15
--------- --------- --------- ---------
Total interest expense 2,810 1,812 5,333 3,629
Net interest income 3,216 3,111 6,314 6,080
PROVISION FOR LOAN
LOSSES 59 111 130 196
--------- --------- --------- ---------
Net interest income
after provision for
loan losses 3,157 3,000 6,184 5,884
NONINTEREST INCOME:
Service charges on
deposit accounts 285 191 527 345
Loan servicing fees 82 71 170 152
Other Income (expense) 156 (17) 168 (14)
--------- --------- --------- ---------
Total noninterest income 523 245 865 483
NONINTEREST EXPENSE:
Employee compensation
and benefits 1,485 1,060 2,889 2,118
Supplies, postage,
and telephone 219 136 409 261
Depreciation 155 117 310 229
Occupancy and equipment 154 125 285 226
FDIC insurance premium 29 30 59 61
Customer accounts 106 65 179 139
Advertising 105 124 247 209
Professional fees 52 66 94 120
Other 172 148 348 303
--------- --------- --------- ---------
Total noninterest
expense 2,477 1,871 4,820 3,666
Income before
income taxes 1,203 1,374 2,229 2,701
PROVISION FOR INCOME
TAXES 431 544 819 1,095
--------- --------- --------- ---------
NET INCOME $772 $830 $1,410 $1,606
========= ========= ========= =========
Basic Earnings
per share $0.22 $0.20 $0.39 $0.38
Diluted Earnings $0.20 $0.20 $0.37 $0.38
per share
Weighted average
Common shares
outstanding:
Basic 3,579,454 4,160,528 3,648,040 4,252,886
Diluted 3,775,753 4,160,528 3,844,339 4,252,886
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(3)
<PAGE>
<TABLE>
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEAR ENDED MARCH 31, 1999
(UNAUDITED)
($ in thousands except share data)
Unearned
Shares
Unearned Issued to
Shares Management Accumu-
Issued to Recogni- lated
Employee tion Other
Stock and Compre- Compre-
Additional Owner- Develop- hensive hensive
Common Stock Paid-In Retained ship ment Income Income
Shares Amount Capital Earnings Trust Plan (Loss) (Loss) Total
------ ------ ------- -------- ----- ---- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 1,410 $1,410 1,410
Cash dividends
paid (508) (508)
Stock
repurchased (210,299) (2) (2,740) (2,742)
Earned ESOP
shares 26,828 66 268 334
Earned MRDP shares 190 190
Unrealized loss
on securities
available for
sale, net of tax (2,135) (2,135) (2,135)
------
Comprehensive income ($725)
--------- --- ------- ------- ------- ------- ====== ------- -------
Balance,
September
30, 1999 3,580,093 $40 $35,683 $27,108 ($2,683) ($1,263) ($2,253) $56,632
========= === ======= ======= ======= ======= ======= =======
(4)
</TABLE>
<PAGE>
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30,1999 AND 1998
(UNAUDITED)
($ in thousands)
30-Sep-99 30-Sep-98
CASH FLOWS FROM OPERATING ACTIVITIES --------- ---------
Net income $1,410 $1,606
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 310 229
Compensation expense related to ESOP 334 386
Compensation expense related to MRDP 190 0
Amortization of deferred loan fees, net (119) (98)
Provision for loan losses 130 196
Amortization/accretion of premiums/discounts
on investments and loans purchased 104 (68)
Federal Home Loan Bank of Seattle dividends (119) (115)
(Gain) loss on sale of real estate owned (16) 0
(Gain) loss on sale of premises and equipment 6 0
Changes in assets and liabilities:
Accrued interest receivable (612) (74)
Other assets (430) 142
Accrued expenses and other liabilities 2,444 12,051
--------- ---------
Net cash provided by operating activities 3,632 14,255
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (75,109) (39,544)
Loan principal repayments 55,344 29,477
Loans purchased (5,739) (3,163)
Purchase of securities available for sale (27,036) (29,198)
Proceeds from maturity of securities available for
sale 5,004 15,687
Principal repayments of securities available for sale 6,294 2,458
Principal repayments of securities held to maturity 0 2,249
Proceeds from sales of real estate owned 53 189
Proceeds from sales of premises and equipment 209 0
Purchases of premises and equipment (1,565) (1,054)
--------- ---------
Net cash used in investing activities (42,545) (22,899)
--------- ---------
(5)
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits, net of withdrawals 28,822 ($4,455)
Change in advances from borrowers for taxes and
insurance 1,050 1,056
Proceeds from Federal Home Loan Bank of Seattle
advances 131,500 17,800
Repayment of Federal Home Loan Bank of Seattle
advances (119,200) (10,300)
Payment of cash dividend (508) (433)
Stock repurchase (2,742) (6,555)
--------- ---------
Net cash provided by (used in) financing activities 38,922 (2,887)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10 (11,531)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,276 20,311
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,286 $8,780
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and other borrowings $1,760 $3,721
Income taxes 810 1,376
Noncash investing activities:
Transfer of loans to foreclosed real estate
and other repossessed assets 84 0
Unrealized gain (loss) on securities available
for sale, net of tax (2,135) 197
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(6)
<PAGE>
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
September 30, 1999 and March 31, 1999, and the results of its operations for
the three and six months ended September 30, 1999 and 1998 and of cash flows
for the six months ended September 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 and six months
ended September 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 September 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 and all
earnings since the conversion.
The primary business of the Company is overseeing the operations of the
Bank. Accordingly, the information presented herein relates primarily to the
Bank.
3. COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be
reported in a financial statement that is displayed in equal prominence with
the other financial statements and to disclose as a part of shareholders'
equity accumulated other comprehensive income. Comprehensive income is
defined as the change in equity during a period from transactions and other
events from nonowner sources.
(7)
<PAGE>
Comprehensive income is the total of net income and other comprehensive
income, which for the Company is comprised entirely of unrealized gains and
losses on securities available for sale.
4. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows for the year
ended March 31, 1999 and for six months ended September 30, 1999:
September 30, 1999 March 31, 1999
(in thousands) (in thousands)
------------------ --------------
Balance, beginning of
period $ 1,228 $ 847
Charge-offs (19) (115)
Recoveries 31 13
Provision for loan losses 130 483
------------------ ---------------
Balance, end of period $ 1,370 $1,228
================== ===============
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at September 30, 1999 consisted of nineteen term advances
varying in length from one day to 48 months totaling $62.6 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 September 30, 1999:
Due in less than one year:
- --------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- --------------------------------------------------------
$47,050,000 4.62% - 5.45% 5.32%
Due within one to five years:
- -----------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- --------------------------------------------------------
$15,500,000 4.75% - 5.29% 5.07%
(8)
<PAGE>
6. SHAREHOLDERS' EQUITY
In May 1999, the Company received a non-objection response from the
Office of Thrift Supervision ("OTS") to a request to repurchase 5% of its
outstanding shares, or 210,299 shares. The Company completed the repurchased
under this program on July 29, 1999 at an average price of $13.03. The
repurchase resulted in a $2,103 reduction in common stock and a $2,740,000
reduction in paid-in-capital. Shares repurchased in this program have been
retired.
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 Management Recognition
Development Plan ("MRDP") and stock options granted under the Stock Option
Plan. Following is a summary of the effect of dilutive securities in weighted
average number of shares (denominator) for the basic and diluted EPS
calculations. There are no resulting adjustments to net earnings.
For the Three For the Six
Months Ended Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------
Weighted average common shares
outstanding - basic 3,579,454 4,160,528 3,648,040 4,252,886
- -----------------------------------------------------------------------------
Effect of Dilutive Securities on
Number of Shares:
- -----------------------------------------------------------------------------
MRDP shares 147,322 0 147,322 0
- -----------------------------------------------------------------------------
Stock Options 48,977 0 48,977 0
- -----------------------------------------------------------------------------
Total Dilutive Securities 196,299 0 196,299 0
- -----------------------------------------------------------------------------
Weighted average common shares
outstanding - with dilution 3,775,753 4,160,528 3,844,339 4,252,886
- -----------------------------------------------------------------------------
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 September 30, 1999 and March 31,
1999.
(9)
<PAGE>
As of September 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 Sept. 30, 1999:
Total Capital:
(To Risk Weighted
Assets) $ 53,200 29.1% $ 14,605 8.0% $ 18,256 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 51,830 28.4 N/A N/A 10,953 6.0
Tier I Capital:
(To Tangible
Assets) 51,830 14.6 14,237 4.0 17,796 5.0
Tangible Capital:
(To Tangible
Assets) 51,830 14.6 5,339 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)
<PAGE>
ITEM II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking
statements". The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protection of such safe harbor with respect to all of such forward-looking
statements. These forward-looking statements, which are included in
Management's Discussion and Analysis, describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors that could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
General
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 September 30, 1999, the Company had
total assets of $354.2 million, total deposits of $228.4 million and
shareholders' equity of $56.6 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. The grand opening of the new permanent
facility in Vale was celebrated October 15, 1999. Online banking services
including bill payment are available through the Bank's transactional website
www.pioneerbankfsb.com.
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
(11)
<PAGE>
the general public and using those and other available sources of funds to
originate permanent residential one-to-four family real estate loans within
its market area and, to a lesser extent, loans on commercial property and
multi-family dwellings. At September 30, 1999, one to four family residential
mortgage loans totaled $123.5 million, or 58.1% of total loans receivable.
The Company began supplementing its traditional lending activities in 1996
with the development of commercial business loans, agricultural loans and the
purchase of dealer-originated automobile contracts. The Company has hired
experienced commercial lending officers familiar with its primary market area
in an attempt to develop commercial business and agricultural lending and to
expand the purchase of dealer-originated automobile contracts. As a result of
these activities at September 30, 1999 the Company had agricultural loans of
$17.4 million, commercial business loans of $14.4 million, commercial real
estate loans of $16.1 million, and automobile loans of $15.8 million
(including $12.3 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 $30.5 million and $17.4
million respectively at September 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 $15.8 million at September 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
Company established a committee in 1997 to address Year 2000 issues. The
committee consists of executive management and technical staff and reports to
the Board of Directors on a monthly basis. The committee has conducted a
comprehensive review of its computer systems and equipment to identify
applications that could be affected by Year 2000 issues and has implemented a
plan designed to ensure that all software used in connection with the
Company's business will function correctly with dates past 1999. In
conducting its review, the committee used the OTS Year 2000 checklist and the
Federal Financial Institutions Examination Council ("FFIEC") guidelines for
Year
(12)
<PAGE>
2000 project management. These guidelines identify the five steps for Year
2000 conversion programs.
The first step is the Awareness Phase in which the Company defined the Year
2000 problem and established a Year 2000 program team and strategy. The
Company 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 Company is done in-house primarily on an AS/400 IBM
computer. In December 1997, the Company 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
Company 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 Company uses various personal computer
software products, the majority of which are already Year 2000 compliant.
Others are being monitored and the Company is proactively communicating with
vendors to determine their course of action to become fully compliant. The
Company 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 Company 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 was 100% complete as of June 30, 1999.
The final phase, the Implementation Phase, was complete at September 30, 1999.
Systems successfully tested were considered Year 2000 compliant. All personal
computers and related software have been tested for Year 2000 compliance. As
of March 31, 1999, all of the Company's mission critical personal computers
and software were Year 2000 compliant. The Company'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.
(13)
<PAGE>
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. Structured walk
through and checklist tests were completed in September 1999. To assist
customers in understanding Year 2000 issues and to inform them of the
Company's readiness plan, brochures regarding Year 2000 preparedness have been
distributed to all customers. Another mailing is anticipated before the end
of the calendar year. The contingency plan was completed at September 30,
1999.
In addition to the Year 2000 preparations described above, the Company has
required that its lending personnel ascertain loan customer awareness and
intent to timely achieve Year 2000 compliance. The Company's credit risk
associated with borrowers may increase to the extent borrowers fail to
adequately address Year 2000 issues.
The Company 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 September 30, 1999, the consolidated assets of the Company totaled $354.2
million, an increase of $40.7 million, or 13.0%, from $313.5 million at March
31, 1999. The primary reason for the increase was a $25.4 million increase in
net loans receivable and a $12.2 million increase in securities. The increase
in assets was funded by a $28.8 million increase in deposits and a $12.3
million increase in FHLB borrowings.
Net loans receivable increased by $25.4 million, or 13.6%, to $211.1 million
at September 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 $207,000 from $175,000 at March 31, 1999
to $382,000 at September 30, 1999, primarily due to an increase of $159,000 in
nonaccrual loans from $138,000 at March 31, 1999 to $297,000 at September 30,
1999 and an increase of $34,000 in Real Estate Owned from $37,000 at March 31,
1999 to $71,000 at September 30, 1999. Nonperforming assets were .11% of
total assets at September 30, 1999 and .06% of total assets at March 31,
1999. The allowance for loan losses was 461% of nonperforming loans at
September 30, 1999, compared to 890% at March 31, 1999.
Investment securities increased $12.2 million, from $107.7 million at March
31, 1999 to $119.9 million at September 30, 1999. The increase included the
purchase of $21.2 million of fixed rate government agency mortgage backed
securities, $4.5 million of government agency medium term notes and $1.3
million of AAA rated municipal bonds of several Oregon municipalities. These
increases were offset by $5.0 million of government agency medium term notes
that were either called or matured, $6.3 million of principal repayments on
government agency mortgage backed securities and a $3.5 million decrease in
market value. During the
(14)
<PAGE>
six month period $9.3 million of securities held to maturity were reclassified
to available for sale as allowed under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
Deposits increased $28.8 million or 14.4%, from $199.6 million at March 31,
1999 to $228.4 million at September 30, 1999. The increase is attributable to
an increase of $21.9 million in checking and savings core deposits and $6.9
million in certificates of deposit ("CD"). The Company conducted an
aggressive deposit campaign from March 15, 1999 to May 15, 1999. A feature of
the campaign was a special 20-month CD to lengthen the term of deposits past
January 1, 2000. Approximately $14.0 million was received in the 20 month CD
during the campaign. Other featured deposits were the money market checking
and the 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. The new branch in Vale, which opened May 3, 1999, had
$4.3 million in deposits at September 30, 1999. Other liabilities increased
$2.4 million due to a September 30, 1999 accrual for securities purchased in
September but not settled until October. Advances from borrowers for taxes and
insurance increased $1.1 million from $697,000 at March 31, 1999 to $1.7
million at September 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 $62.6 million in advances from the FHLB at
September 30, 1999 compared to $50.3 million at March 31, 1999. The increased
borrowings were used to fund loan growth and investment purchases. The
Company had net deferred tax liabilities at March 31, 1999 of $455,000
compared to net deferred tax assets of $869,000 at September 1999. The change
of $1.3 million is attributable to the tax effect of the market valuation of
securities available for sale.
Total shareholders' equity decreased $3.5 million to $56.6 million at
September 30, 1999 from $60.1 million at March 31, 1999. The decrease is
primarily due to the repurchase of 210,299 of outstanding shares from May
through July 1999 at a total cost of $2.7 million. The repurchase reduced
common stock by $2,000 and paid in capital by $2.7 million. Shares repurchased
during the six month period ended September 30, 1999 were retired. Cash
dividends paid of $508,000 also reduced shareholders' equity as did the $2.1
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 $1.4 million.
Results of Operations
Comparison of Six Months Ended September 30, 1999 and 1998
General. The decrease in net income of $196,000 was primarily due to an
increase in non- interest expense partially offset by increased non-interest
income and increased net interest income. Non-interest income increased
$382,000, or 79.1%, comparing the six-month period ended September 30, 1999 to
the same period in the prior year. Net interest income increased $234,000, or
3.8% while interest income increased $1.9 million, or 20.0%, and interest
expense increased $1.7 million, or 47.0%. The provision for loan losses
decreased $66,000, or 33.7%. Non-interest expense increased $1.2 million, or
31.5%, and income taxes decreased $276,000, or 25.2%. This resulted in net
income decreasing by $196,000, or 12.2%, for the six months ended September
30, 1999 compared to the same period in 1998.
(15)
<PAGE>
Interest Income. The increase of $1.9 million in interest income was
generated by an additional $69.5 million in average interest earning assets
for the six months ended September 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 $38.8 million and the average
investment portfolio of $33.7 million.
The average yield on interest earning assets decreased from 7.81% for the six
months ending September 30, 1998 to 7.34% for the same period in the current
year. The decrease in the average yield was primarily due to the $33.7
million increase in the average balance of investments, comprised of medium
term government agency notes and fixed rate government agency mortgage backed
securities yielding at a lower rate. The increase in the average balance also
included $8.7 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
U.S. 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 six months ended September 30, 1999 than in the same period ended
September 30, 1998, even though the prime rate increased 50 basis points in
the period June 1999 to September 1999. In addition, there was a significant
amount of mortgage refinance activity during the time between the six months
ended September 1998 and the six months ended September 1999.
Interest Expense. Interest expense on savings deposits increased $320,000 for
the six months ended September 30, 1999 compared to the same period of 1998.
Average deposits increased by $26.9 million for the same period. The average
interest paid on deposits declined 17 basis points from 3.85% for the six
months ended September 30, 1999 to 3.68% for the same period in 1999. The
cost of deposits declined primarily due to an increased balance of lower
costing core deposits in the deposit mix. The cost of all funds including
Federal Home Loan Bank ("FHLB") borrowings increased by eleven basis points
from 3.86% for the six months ended September 30, 1998 to 3.97% for the same
period in 1999. The reason for the increase was a $54.3 million increase in
the average balance of FHLB borrowings. The average cost of FHLB borrowings
for the six-month period ending September 30, 1999 was 5.11%. The increased
borrowings were used to fund increases in average interest earning assets.
Provisions for Loan Losses. The provision for loan losses was $130,000 and
net recoveries amounted to $12,000 during the six months ended September 30,
1999 compared to a provision for loan losses of $196,000 and net charge offs
of $32,000 for the six-month period ended September 30, 1998. The allowance
for loan losses totaled $1.4 million or .64% of total loans at September 30,
1999 compared to $1.2 million or .66% of total loans at March 31, 1999. The
provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to levels considered by management as adequate to
provide for known and inherent risks in the loan portfolio, including
management's continuing analysis of factors underlying the quality of the loan
portfolio. These factors include changes in portfolio size and composition,
actual loan loss experience, current and anticipated economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value
(16)
<PAGE>
of the collateral and guarantees securing the loans. Considering the
aforementioned factors, management deemed the allowance for loan losses
adequate at September 30, 1999.
Non-Interest Income. Non-interest income increased $382,000, or 79.1%, for
the six months ended September 30, 1999 to $865,000 compared to $483,000 for
the same period in the prior year. The primary reason for the increase was a
$173,000 gain on sale of investment real estate. In addition, income from
deposit accounts increased $182,000, or 52.8%, due to strong growth in core
deposits as well as an improved fee schedule.
Non-Interest Expense. Non-interest expense increased $1.2 million, or 31.5%,
to $4.8 million for the six months ended September 30, 1999, from $3.7 million
for the comparable period in 1998. The increase is primarily attributable to
an increase in employee compensation and benefits expense of $771,000. The
Company's MRDP began on October 8, 1999 and, accordingly, $190,000 of non-cash
compensation expense related to the plan was included in the six months ended
September 30, 1999. The remaining increase was due to staff additions, salary
increases and an increase in the cost of employee benefits that includes
health insurance. Staff additions were primarily to facilitate current and
planned expansion. The remaining $383,000 of increased non-interest expense
included a $59,000 increase in occupancy and equipment expense due to the
addition of one branch and the purchase of software upgrades for personal
computers that are expensed as purchased. Similarly, depreciation expense
increased $81,000 due to the addition of technological upgrades and the
completion of the new Burns branch in October 1998. Expenses related to
customer accounts increased $40,000 due to the growth in core deposit
accounts. Other expense increased $45,000 primarily due to employee moving
expenses. Supplies, postage and telephone expenses increased $148,000 due to
forms purchased in the first quarter related to the new centralized proof
process, the addition of new and more efficient phone lines to outlying
branches and additional postage for statement mailings to an increased number
of accounts.
Income Taxes. The provision for income taxes decreased $276,000 for the six
months ended September 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.
Comparison of Three Months Ended September 30, 1999 and 1998
General. The decrease in net income of $58,000 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
$105,000, or 3.4%, comparing the three-month period ended September 30, 1999
to the same period in the prior year. Interest income increased $1.1 million
while interest expense increased $998,000. Non-interest income increased
$278,000 while the provision for loan losses decreased $52,000. Non-interest
expense increased $606,000, and income taxes decreased $113,000. This
resulted in net income decreasing by $58,000, or 7.0% for the three months
ended September 30, 1999 compared to the same period in 1998.
Interest Income. The increase of $1.1 million in interest income was
generated by an additional $78.8 million in average interest earning assets
for the three months ended September 30, 1999 compared to the same period in
1998. The increase in average interest earning assets was
(17)
<PAGE>
primarily due to increases in the average loan portfolio of $41.3 million and
the average investment portfolio of $36.1 million.
The average yield on interest earning assets decreased from 7.90% for the
three months ending September 30, 1998 to 7.35% for the same period in the
current year. The decrease in the average yield was primarily due to the
$36.1 million increase in the average balance of investments, mostly medium
term government agency notes and fixed rate government agency mortgage backed
securities yielding at a lower rate. The increase in the average balance
included $7.9 million of AAA rated municipal bonds of Oregon municipalities.
The yield on these bonds is typically much lower before taxes due to the tax
benefits derived from holding the bonds. When these tax benefits are
considered the "tax equivalent" yield is typically comparable 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 even though the prime rate
increased 50 basis points in the period June 1999 to September 1999. 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 $255,000
for the three months ended September 30, 1999 compared to the same period of
1998. Average deposits increased by $35.7 million for the same period. The
average interest paid on deposits declined15 basis points from 3.83% for the
three months ended September 30, 1998 to 3.68% for the same period in1999.
The cost of deposits declined primarily due to an increased balance of lower
costing core deposits. The cost of all funds including FHLB borrowings
increased by 16 basis points from 3.84% for the quarter ended September 30,
1998 to 4.00% for the same period in 1999. The reason for the increase was a
$57.0 million increase in the average balance of FHLB borrowings which are at
a higher cost than deposits. The average cost of borrowings for the quarter
ended September 30, 1999 was 5.20%.
Provision for Loan Losses. The provision for loan losses was $59,000 and net
charge offs amounted to $13,000 during the three months ended September 30,
1999 compared to a provision for loan losses of $111,000 and net charge-offs
of $28,000 for the three-month period ended September 30, 1998. At September
30, 1999, the allowance for loan losses was equal to 461% of non-performing
loans compared to 890% at March 31, 1999. The decrease in the coverage ratio
at September 30, 1999 was the result of an increase in non-performing loans
from $138,000 at March 31, 1999 to $297,000 at September 30, 1999. The
provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to levels considered by management as adequate to
provide for known and inherent risks in the loan portfolio, including
management's continuing analysis of factors underlying the quality of the loan
portfolio. These factors include changes in portfolio size and comparison,
actual loan loss experience, current and anticipated economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans. The allowance for loan losses
totaled $1.4 million or .64% of total loans at September 30, 1999 compared to
$1.2 million or .66% of total loans at March 31, 1999. Management deemed the
allowance adequate at September 30, 1999.
(18)
<PAGE>
Non-Interest Income. Non-interest income increased $278,000, or 113%, to
$523,000 for the three months ended September 30, 1999 from $245,000 for the
same period in the prior year. The primary reason for the increase was a
$173,000 gain on sale of investment real estate. In addition, income from
deposit accounts increased $94,000 due to strong growth in core deposits as
well as an improved fee schedule.
Non-Interest Expense. Non-interest expense increased $606,000, or 32.4% to
$2.5 million for the three months ended September 30, 1999, from $1.9 million
for the comparable period in 1998. The increase is primarily attributable to
an increase in employee compensation and benefits of $425,000. The Company's
MRDP began on October 8, 1999 and, accordingly, $95,000 of non-cash
compensation expense related to the plan was included in the quarter ended
September 30, 1999. The remaining increase was due to staff additions, salary
increases and an increase in the cost of employee benefits that includes
health insurance. Staff additions were primarily to facilitate planned
expansion. The remaining $181,000 of increased non- interest expense included
a $29,000 increase in occupancy and equipment expense due to a branch addition
and the purchase of personal computer software and upgrades. Similarly,
depreciation expense increased $38,000 due to the addition of technological
upgrades and the completion of the new Burns branch in October 1998. Customer
account expense increased $41,000 due to the increase in core deposit accounts
and loan growth. Supplies, postage and telephone increased $83,000 due to the
addition of new and more efficient phone lines to outlying branches, an
increase in transaction volume requiring more paper supplies and additional
postage for statement mailings to an increased number of accounts.
Income Taxes. The provision for income taxes decreased $113,000 for the
three months ended September 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 September 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.
(19)
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Bank is involved in various claims and legal actions arising in
the normal course of business. Management believes that these
proceedings will not result in a material loss to the Bank.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Jerry F. Aldape**
10(b) Severance Agreement with Nadine J. Johnson**
10(c) Severance Agreement with William H. Winegar**
10(d) Employment Agreement with Zane Lockwood****
10(e) Severance Agreement with Thomas F. Bennett****
10(f) Severance Agreement with Jerry Kincaid****
10(g) Employee Severance Compensation Plan**
10(h) Pioneer Bank, a Federal Savings Bank Employee Stock Ownership
Plan**
10(i) Pioneer Bank, a Federal Savings Bank 401(k) Plan*
10(j) Pioneer Bank Director Emeritus Plan***
10(k) 1998 Stock Option Plan***
10(l) 1998 Management Recognition and Development Plan***
21 Subsidiaries of the Registrant****
27 Financial Data Schedule
- ----------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (333- 30051), as amended.
** Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1997.
*** Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1998
Annual Meeting of Shareholders.
**** Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1998.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended
September 30, 1999.
(20)
<PAGE>
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: November 8, 1999 By: /s/ Jerry F. Aldape
-------------------------------
Jerry F. Aldape, President and
Chief Executive Officer
Date: November 8, 1999 By: /s/ Nadine J. Johnson
-----------------------------------
Nadine J. Johnson, Chief Financial
Officer
(21)
<PAGE>
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