SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
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
incorporation 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 Section 12(g) of the Act:
Common Stock. Par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
As of January 31, 1998, there were issued 4,188,536 shares of the
Registrant's Common Stock. The Registrant's voting common stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"OTFC".
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OREGON TRAIL FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information
Item I. Financial Statements (Unaudited) Page
Consolidated Balance Sheets 2
as of December 31, 1998 and March 31, 1998
Consolidated Statements of Income; For the Three and Nine 3
Months Ended December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity
(For the Nine Months Ended December 31, 1998 and for
the Year Ended March 31, 1998). 4
Consolidated Statements of Cash Flows (For the
Nine Months Ended December 31, 1998 and 1997) 5 - 6
Notes to Consolidated Financial Statements 7 - 12
Item II Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 19
Item III. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
(1)
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OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 and MARCH 31,
(UNAUDITED)
($ in thousands)
December 31, March 31,
ASSETS 1998 1998
Cash (including interest earning accounts of -------- --------
$7,229 and $18,667) $8,937 $20,311
Securities:
Available for sale, at fair value (amortized cost:
$91,635 and $63,566) 92,144 65,003
Held to maturity, at amortized cost (fair value:
$10,180 and $13,225) 10,056 12,805
Loans receivable, net of allowance for loan
losses of $1,072 and $847 179,229 153,838
Accrued interest receivable 1,812 1,676
Premises and equipment, net 7,314 5,582
Stock in Federal Home Loan Bank of Seattle, at cost 3,161 2,985
Real estate owned 0 313
Other assets 544 711
-------- --------
TOTAL ASSETS $303,197 $263,224
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Interest-bearing $86,175 $79,187
Noninterest-bearing 13,862 8,647
Time certificates 98,292 104,900
------- -------
Total deposits 198,329 192,734
Advances from Federal Home Loan Bank of Seattle 40,500 0
Accrued expenses and other liabilities 2,640 2,400
Advances from borrowers for taxes and insurance 176 789
------- -------
Total liabilities 241,645 195,923
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 December 31, 1998, 4,694,875 issued,
3,880,016 outstanding; March 31, 1998, 4,694,875
issued, 4,346,113 outstanding 43 47
Additional paid-in capital 39,976 45,885
Retained earnings (substantially restricted) 25,848 23,968
Unearned shares issued to the Employee Stock
Ownership Plan (3,085) (3,488)
Unearned shares issued to the Management Recognition
and Development Plan (1,547) 0
Unrealized gain on securities available for sale 317 889
-------- --------
Total shareholders' equity 61,552 67,301
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $303,197 $263,224
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(2)
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OREGON TRAIL FINANCIAL CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
($ in thousands except per share data)
3 Mos 3 Mos 9 Mos 9 Mos
Ended Ended Ended Ended
31-Dec-98 31-Dec-97 31-Dec-98 31-Dec-97
--------- --------- --------- ---------
INTEREST INCOME:
Interest and fees on loans receivable $3,589 $3,225 $10,449 $9,452
Securities:
Mortgage-backed and related securities 1,091 677 2,600 1,983
U.S. government and government agencies 785 669 1,947 1,474
Other interest and dividends 75 466 253 797
-------- -------- -------- --------
Total interest income 5,540 5,037 15,249 13,706
INTEREST EXPENSE:
Deposits 1,818 1,849 5,432 5,799
Securities sold under agreements to
repurchase 0 11 0 34
Federal Home Loan Bank of Seattle advances 337 11 352 162
-------- -------- -------- --------
Total interest expense 2,155 1,871 5,784 5,995
Net interest income 3,385 3,166 9,465 7,711
Provision for loan losses 82 45 277 119
Net interest income after provision -------- -------- -------- --------
for loan losses 3,303 3,121 9,188 7,592
NONINTEREST INCOME:
Service charges on deposit accounts 185 190 530 526
Loan servicing fees 107 61 259 201
Other Income (expense) 9 (6) (5) 44
-------- -------- -------- --------
Total noninterest income 301 245 784 771
NONINTEREST EXPENSE:
Employee compensation and benefits 1,252 1,100 3,370 2,692
Supplies, postage, and telephone 129 120 390 345
Depreciation 128 100 357 290
Occupancy and equipment 110 109 336 281
FDIC insurance premium 29 29 90 85
Customer account 71 76 210 212
Advertising 107 68 316 192
Professional fees 72 43 192 111
Other 139 93 443 290
-------- -------- -------- --------
Total noninterest expense 2,037 1,738 5,704 4,498
Income before income taxes 1,567 1,628 4,268 3,865
Provision for income taxes 616 714 1,711 1,574
-------- -------- -------- --------
NET INCOME $ 951 $ 914 $ 2,557 $ 2,291
======== ======== ======== ========
Basic Earnings per share $0.24 $0.21 $0.62 $0.53
Weighted Average Number of
Shares Outstanding 3,930,501 4,319,431 4,149,459 4,319,370
Diluted Earnings per share $0.23 $0.21 $0.61 $0.53
Weighted Average Number of
Dilutive Shares 4,111,864 4,319,431 4,210,133 4,319,370
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(3)
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OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND THE YEAR ENDED MARCH 31, 1998
(UNAUDITED)
($ in thousands)
Unearned Unearned
Shares Shares
Issued to Issued to Unrealized
Employee Management Gain(Loss)
Additional Stock Recognition & on Securities
Common Stock Paid-in Retained Ownership Development Available
Shares Amount Capital Earnings Trust Plan For Sale Total
------ ------ ------- -------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997 $21,149 $0 ($122) $21,027
Net income 3,036 3,036
Cash dividends paid (217) (217)
Issuance of common
stock, net 4,694,875 $47 $45,682 45,729
Unearned ESOP shares (375,590) ($3,756) (3,756)
Earned ESOP shares 26,828 203 268 471
Change in unrealized
gain on securities
available for
sale, net of tax 1,011 1,011
--------- --- ------- ------- ------- ------- ------ -------
Balance, March 31, 1998 4,346,113 47 45,885 23,968 (3,488) 0 889 67,301
Net income 2,557 2,557
Cash dividends paid (677) (677)
Earned ESOP shares 40,242 147 403 550
Stock repurchased (506,339) (5) (7,697) (7,702)
Unearned MRDP shares 1 1,641 (1,641) 1
Earned MRDP shares 94 94
Change in unrealized
gain on securities
available for sale,
net of tax (572) (572)
--------- --- ------- ------- ------- ------- ------ -------
Balance, December 31,
1998 3,880,016 $43 $39,976 $25,848 ($3,085) ($1,547) $ 317 $61,552
========= === ======= ======= ======= ======= ====== =======
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
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OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
($ in thousands)
31-Dec-98 31-Dec-97
CASH FLOWS FROM OPERATING ACTIVITIES --------- ---------
Net income $2,557 $2,291
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES;
Depreciation 357 290
Amortization/accretion of premiums/discounts
on investments (450) (33)
Amortization of deferred loan fees, net (208) (172)
Provision for loan losses 277 120
Deferred taxes 356 (576)
Accretion of discounts on loans purchased (20) (12)
Federal Home Loan Bank of Seattle dividends (176) (166)
Compensation expense related to ESOP benefit 550 233
Compensation expense related to MRDP benefit 95 0
Other 3 (35)
CHANGES IN ASSETS AND LIABILITIES
Loans held for sale 0 428
Accrued interest receivable (136) (501)
Prepaid and other assets 167 (55)
Accrued expenses and other liabilities 240 1,488
------- -------
Net cash provided by operating activities 3,612 3,300
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (64,223) (42,357)
Loan principal repayments 43,436 35,244
Loans purchased (4,653) (4,073)
Purchase of securities available for sale (58,897) (105,526)
Maturity of securities available for sale 25,200 63,279
Purchase of securities held to maturity 0 (30)
Principal repayments of securities available
for sale 5,834 2,029
Principal repayments of securities held to
maturity 2,992 1,830
Proceeds from sales of real estate owned 313 0
Proceeds from sales of premises and equipment 148 248
Purchases of premises and equipment (2,241) (1,157)
------- -------
Net cash used in investing activities (52,091) (50,513)
------- -------
(5)
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Net cash used in investing activities (52,091) (50,513)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits, net of withdrawals $5,595 $8,342
Decrease in securities sold under agreements
to repurchase 0 (1,431)
Change in advances from borrowers for taxes
and insurance (613) (477)
Proceeds from Federal Home Loan Bank of Seattle
advances 83,050 26,750
Repayment of Federal Home Loan Bank of Seattle
advances (42,550) (27,550)
Proceeds from issuance of common stock, net of
conversion 0 123,779
Repayment of excess stock subscription 0 (78,050)
Funding provided to ESOP for purchase of common
stock 0 (3,756)
Payment of cash dividend (677) 0
Repurchase of stock (7,702) 0
------- -------
Net cash provided by in financing activities 37,103 47,607
------- -------
Net increase (decrease) in cash (11,376) 394
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,311 4,975
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $8,935 $5,369
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and other borrowings $5,475 $5,879
Income taxes 1,951 1,475
Noncash investing activities:
Unrealized gain(loss) on securities available for
sale, net of tax (572) (934)
The accompanying notes area an integral part of these unaudited consolidated
financial statements.
(6)
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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 December 31,
1998 and March 31, 1998, the results of operations for the three and nine
months ended December 31, 1998 and 1997 and the cash flows for the nine months
ended December 31, 1998 and 1997. 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, 1998. The
results of operations for the three and nine months ended December 31, 1998 are
not necessarily indicative of the results which may be expected for the entire
fiscal year.
2. REORGANIZATION
On October 3, 1997, Pioneer Bank, A Federal Savings Bank, (the "Bank")
completed a mutual-to-stock conversion. The Company sold 4,694,875 shares of
common stock at $10 per share, 8% or 375,590 of which shares were purchased by
an Employee Stock Ownership Plan (the "ESOP"). Proceeds from the sale were
recorded as $46,949 of Common Stock at $.01 par value and $45,681,982 of Paid
in Capital. The Common Stock and Paid in Capital at December 31, 1998 are
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. RECENTLY ADOPTED/ISSUED ACCOUNTING PRONOUNCEMENTS
Comprehensive Income. Statement of Financial Accounting ("SFAS") No. 130,
"Reporting Comprehensive Income," issued in July 1997, establishes standards
for reporting and presentation of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. It requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is presented with the same prominence as
other financial statements. SFAS No. 130 requires that companies (I) classify
items of other comprehensive income by their nature in a financial statement
and (ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial condition. SFAS No. 130 is effective
(7)
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for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comprehensive purposes
are required.
Effective April 1, 1998, the Company adopted SFAS No. 130. Comprehensive
income was $182,000 and $1.1 million for the three months ended December 31,
1998 and 1997, respectively. Comprehensive income was $2.0 million and $3.2
million for the nine months ended December 31, 1998 and 1997, respectively. The
difference between comprehensive income and net income is due to changes in
unrealized gains (losses) on available for sale securities net of tax.
Segment Disclosures. In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of Business Enterprise." The new standard becomes effective for the
Company's fiscal year ending March 31, 1999, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. The adoption of provisions of SFAS No. 131 is not expected to
have a material impact on the Company.
4. ALLOWANCE FOR LOAN LOSSES
December 31, 1998 March 31, 1998
(In Thousands) (In Thousands)
--------------------- ------------------
Balance, beginning of
period $ 847 $ 725
Charge-offs (64) (49)
Recoveries 12 33
Provision for loan losses 277 138
--------------------- ------------------
Balance, end of period $ 1,072 $ 847
===================== ==================
Amounts presented are for the year ended March 31, 1998 and for the nine months
ended December 31, 1998.
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at December 31, 1998 consisted of nine term advances varying in
length from seven days to five years totaling $25.5 million and an overnight
advance of $15.0 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. The
Company had no borrowings from the FHLB at March 31,1998. Scheduled maturities
of advances from the FHLB were as follows at December 31, 1998:
(8)
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Due in less than one year:
- --------------------------
Amount Range of Interest Weighted
Rates Average
Interest
Rate
- ----------------------------------------------------
$25,000,000 4.62% - 5.38% 5.14%
Due within one to five years:
Amount Range of Interest Weighted
Rates Average
Interest
Rate
- ----------------------------------------------------
$15,500,000 4.75% - 5.29% 5.07%
6. EARNINGS PER SHARE
SFAS No. 128 "Earnings Per Share", adopted effective December 31, 1997,
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. It replaces the presentation of primary EPS with a presentation of basic
EPS and requires the dual presentation of basic and diluted EPS on the face of
the income statement. 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 diluted 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 For the Nine Months ended
December 31, December 31,
1998 1997 1998 1997
- -------------------------------------------------------------------------------
Weighted average
common shares 3,930,501 4,319,431 4,149,459 4,319,370
outstanding - basic
Effect of Dilutive
Securities on Number
of Shares:
MRDP shares 136,113 0 45,536 0
- ------------------------------------------------------------------------------
Stock Options 45,250 0 15,138 0
- ------------------------------------------------------------------------------
Total Dilutive 181,363 0 60,674 0
Securities
- ------------------------------------------------------------------------------
Weighted average
common shares
outstanding - with 4,111,864 4,319,431 4,210,133 4,319,370
dilution
(9)
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7. STOCK OPTIONS
In May 1998, the Board of Directors adopted a Stock Option Plan ("Stock
Plan") for the benefit of certain employees and directors. The Stock Plan was
approved by the Company's shareholders on August 4, 1998. The maximum number of
common shares which may be issued under the Stock Plan is 469,488 shares with a
maximum term of ten years for each option from the date of grant. The initial
awards were granted on October 8, 1998 at the fair value of the common stock on
that date ($11.15). All initial awards vest in equal installments over a four
or five year period from the grant date and expire during October 2008.
Unvested options become immediately exercisable in the event of death or
disability.
Option activity under the Stock Plan is as follows:
Weighted
Number of Average
Shares Exercise Price
- --------------------------------------------------------------------------
Outstanding, September 30, 1998 - -
- --------------------------------------------------------------------------
Granted 356,500 $11.15
- --------------------------------------------------------------------------
Exercised - -
- --------------------------------------------------------------------------
Canceled - -
- --------------------------------------------------------------------------
Outstanding, December 31, 1998 356,500 $11.15
At December 31, 1998, 112,988 shares were available for future grants under the
Stock Plan.
Additional information regarding options outstanding as of December 31, 1998 is
as follows:
Weighted Avg.
Range of Options Options Remaining
Exercise Prices Outstanding Exercisable Contractual Life
- --------------------------------------------------------------------------
$11.15 356,500 - 9.8
Additional Stock Plan Information:
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, Accounting for
Stock Issued to Employees and its related interpretations. Accordingly no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation requires the disclosure
of pro forma net income and earnings per share had the Company adopted the fair
value method at the Plans inception. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
(10)
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The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions:
October 1998 Grant
- --------------------------------------------------------------------------
Risk free interest rates 4.85%
- --------------------------------------------------------------------------
Expected dividend 1.75%
- --------------------------------------------------------------------------
Expected lives, in years 5.3
- --------------------------------------------------------------------------
Expected volatility 113.19%
- --------------------------------------------------------------------------
The weighted average grant-date fair value of options granted during fiscal
year 1999 was $4.82. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. Had
compensation cost for these awards been determined with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
Three Months Ended
December 31,
1998
($ in thousands except per
share data)
- --------------------------------------------------------
Net Earnings:
As reported $ 951
Pro forma 890
Earnings per common share - basic:
As reported .24
Pro forma .23
Earnings per common share - fully diluted:
As reported .23
Pro forma .22
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 December 31, 1998 and March 31, 1998.
(11)
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As of December 31, 1998:
Categorized as
Actual For "Well Capitalized"
(In Capital Under Prompt
Thousands) Adequacy Corrective Action
Purposes Provision
(In Thousands) (In Thousands)
---------- -------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, $50,659 32.93% $12,308 8.0% $15,385 10.0%
1998:
Total Capital:
(To Risk Weighted
Assets)
Tier I Capital: 49,587 32.23 N/A N/A 9,231 6.0
(To Risk Weighted
Assets)
Tier I Capital: 49,587 16.39 12,099 4.0 15,124 5.0
(To Tangible
Assets)
Tangible Capital: 49,587 16.39 4,537 1.5 N/A N/A
(To Tangible
Assets)
As of March 31, 1998
Categorized as
Actual For "Well Capitalized"
(In Capital Under Prompt
Thousands) Adequacy Corrective Action
Purposes Provision
(In Thousands) (In Thousands)
---------- -------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, $47,768 37.5% $10,180 8.0% $12,725 10.0%
1998:
Total Capital:
(To Risk
Weighted Assets)
Tier I Capital: 46,921 36.9 N/A N/A 7,635 6.0
(To Risk
Weighted Assets)
Tier I Capital: 46,921 17.9 10,462 4.0 13,122 5.0
(To Tangible
Assets)
Tangible Capital: 46,921 17.9 3,923 1.5 N/A N/A
(To Tangible
Assets)
9. SHAREHOLDERS' EQUITY
In August 1998, the Company received approval from the Office of Thrift
Supervision ("OTS") to repurchase 9%, or 422,539, of its outstanding shares.
The repurchase program was begun on August 13, 1998 and completed by August 27,
1998. It was recorded as a $4,225 reduction in common stock and a $6,550,989
reduction in paid in capital. The shares were purchased at an average price of
$15.51. The shares were repurchased in order to fund the MRDP and the Employee
Stock Option Plan. These plans were approved by shareholders in August 1998 and
were implemented in October 1998.
On October 19, 1998 the Company received a non-objection response from the OTS
to a request to repurchase an additional 5%, or 213,666, of its outstanding
shares. As of December 31, 1998, the Company had repurchased 83,800 shares
under this program at an average price of $13.69. The repurchase resulted in an
$800 reduction in common stock and a $1,146,000 reduction in paid-in-capital.
(12)
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ITEM 111.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking statement's".
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this
statement for the express purpose of availing itself of the protection of such
safe harbor with respect to all of such forward-looking statements. These
forward-looking statements, which are included in Management's Discussion and
Analysis, describe future plans or strategies and include the Company's
expectations of future financial results. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. The Company's ability to predict results or the
effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, the general economic
climate in the Company's market area and the country as a whole, loan
delinquency rates, and changes in federal and state regulation. These factors
should be considered in evaluating the forward-looking statements, and undue
reliance should not be placed on such statements.
General
The Bank is regulated by the 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
seven office facilities, with the headquarters located in Baker City, Oregon.
The primary market areas of the Bank are the counties of Wallowa, Union, Baker,
Malheur, Harney and Grant in Eastern Oregon. On February 3, 1999 the Company
filed an application with the OTS to open a branch in Vale, Oregon located in
Malheur County.
As a traditional, community-oriented savings bank, the Bank focuses on customer
service within its principal market area. The Bank's primary market activity is
attracting deposits from the general public and using those and other available
sources of funds to originate permanent residential one-to-four family real
estate loans within its market area and, to a lesser extent, loans on
commercial property and multi-family dwellings. At December 31, 1998, one to
four family residential mortgage loans totaled $107.3 million, or 59.5% of
total loans receivable. The Bank began supplementing its traditional lending
activities in 1996 with the development of commercial business loans,
agricultural loans and the purchase of dealer-originated automobile contracts.
The Bank has hired experienced commercial lending officers familiar with the
Bank's primary market area in an attempt to develop commercial business and
agricultural lending and to expand the purchase of dealer-originated automobile
contracts. As a result of these activities at December 31, 1998 the Bank had
agricultural loans of $11.5 million, commercial business loans of $13.7million,
commercial real estate loans of $8.9 million, and automobile loans of $9.9
million (including $7.7 million of purchased dealer-originated contracts).
Net interest income, which is the difference between interest and dividend
income on interest-
(13)
<PAGE>
<PAGE>
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 the Company's management is to create and implement
strategies that will provide stable, positive spreads between the yield on
interest-earning assets and the cost of interest-bearing liabilities. Such
strategies include increasing the origination of commercial and agricultural
loans with rates that are adjustable based upon the Wall Street Journal prime
rate. Commercial and agricultural loans outstanding totaled $6.0 million and
$5.0 million, respectively at March 31, 1998 and increased to $13.7 million and
$11.5 million respectively at December 31, 1998. The Bank has also increased
origination of shorter term consumer loans, increasing auto loans from $5.7
million at March 31, 1998 to $9.9 million for the three months ended December
31, 1998.
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. For the three months ended December 31, 1998, the
Bank recognized additional employee compensation and benefit expenses
associated with the ESOP amounting to approximately $164,000 related to the
release of 1/28th of the 375,590 ESOP shares. Shares were valued at $12.25, the
closing price of the Company's stock on December 31, 1998. The release of the
shares resulted in a reduction of $134,000 in unearned ESOP shares and an
increase of $30,000 in additional paid-in Capital. The implementation of the
MRDP in October 1998 resulted in recognition of additional employee
compensation and benefit expense of $95,000 for the quarter. Based upon shares
granted as of October 8, 1998 and related vesting schedules the actual
aggregate amount of this new expense will approximate $190,000 in fiscal year
1999, and $379,000 for fiscal years 2000, 2001, and 2002. The expense for
fiscal year 2003 is estimated at $252,000 and $64,000 for fiscal year 2004.
Estimates of expense are based upon the average market price of $11.15 per
share on the date of grant. Approximately 40,000 shares remain in the plan and
have not been granted. Accordingly, the actual aggregate amount of any new
expense related to the uncommitted shares cannot be currently predicted because
generally accepted accounting principals require that such expense be based on
the fair market value of the shares of common stock when the remaining shares
are granted.
Year 2000
Data Processing for the Bank is done in-house primarily on an AS400 IBM
computer. In December 1997 the Company converted to new core software which was
purchased at a cost of approximately $250,000. The software purchased is used
to process all savings, loan and related general ledger transactions. The
vendor has given assurance that their software is Year 2000 compliant and that
no problems will arise from the turn of the century. The Bank has joined a User
Group which began testing the Jack Henry system in September 1998. Testing will
continue through the first quarter of calendar year 1999. Initial test results
have been forwarded to the Bank for evaluation and the Bank is now in the
process of reviewing. As of January 31, 1999, the results have been
satisfactory. The Bank has also subscribed to a third party independent review
of the User Group testing, by McGladrey & Pullen, LLP. The Bank anticipates
that further tests will be successful based upon representations received from
the vendor.
(14)
<PAGE>
<PAGE>
However, in the event that testing the Jack Henry system is not successful, the
Bank's contingency plan is to pursue conversion to a third party service
bureau. In addition to the core software, the Bank uses various personal
computer software products, some of which are already Year 2000 compliant.
Others are being monitored and the Bank is proactively communicating with
vendors to determine their course of action to become fully compliant. The Bank
anticipates replacing some computer hardware related to Year 2000 compliance
with an approximate cost of $80,000 over the next 12 months. The entire cost of
the Year 2000 compliance project is estimated at approximately $375,000 which
includes awareness, assessment, renovation, validation and implementation. Of
this total estimate $270,000 has been spent to date.
Changes in Financial Condition
At December 31, 1998, the consolidated assets of the Company totaled $303.2
million, an increase of $40.0 million, or 15.2%, from $263.2 million at March
31, 1998. The primary reason for the increase was a $25.4 million increase in
net loans receivable and a $27.1 million increase in securities available for
sale. These increases were partially offset by an $11.4 million decrease in
cash and cash equivalents and a $2.7 million decrease in securities held to
maturity. Approximately $6.8 million of the decrease in cash was due to the
maturity of a short-term deposit in April 1998.
Net loans receivable increased by $25.4 million, or 16.5%, to $179.2 million at
December 31, 1998 compared to $153.8 million at March 31, 1998. 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 and other repossessed
assets, decreased $54,000 from $588,000 at March 31, 1998 to $534,000 at
December 31, 1998, primarily due to the sale of approximately $300,000 of real
estate owned at a gain of $12,000. The decrease in real estate owned was
partially offset by the addition of $258,000 of residential mortgage loans to
nonaccrual status in the current year. There was no real estate owned at
December 31, 1998 compared to $313,000 at March 31, 1998. Nonperforming assets
were .18% of total assets at December 31, 1998, compared to .22% at March 31,
1998. The allowance for loan losses was 202% of nonperforming loans at December
31, 1998, compared to 308% at March 31, 1998.
Investment securities increased $24.4 million, from $77.8 million at March 31,
1998 to $102.2 million at December 31, 1998. The increase included the purchase
of $42.8 million of fixed rate government agency mortgage backed securities,
$3.5 million of government agency medium term notes and $7.0 million of AAA
rated municipal bonds of several Oregon municipalities. These increases were
partially offset by $20.2 million of government agency medium term notes that
were either called or matured and $6.5 million of principal payments on
government agency mortgage backed securities.
Deposits increased $5.6 million or 2.9%, from $192.7 million at March 31, 1998
to $198.3 million at December 31, 1998. The increase is primarily attributable
to an increase of $12.2 million in checking and savings core deposits offset by
a decrease of $6.6 million in short term certificates of deposit. Other
liabilities increased only $240,000. Advances from borrowers for taxes and
insurance decreased $613,000 from $789,000 at March 31, 1998 to $176,000 at
(15)
<PAGE>
<PAGE>
December 31, 1998. Taxes are paid annually in November and accordingly, such
deposits increase ratably from December to November when the taxes are paid.
The Bank had $40.5 million in advances from the FHLB at December 31, 1998.
There were no such advances at March 31, 1998. The increased borrowings were
used to fund the loan growth and investment purchases.
Total shareholders' equity decreased $5.7 million to $61.6 million at December
31, 1998 from $67.3 million at March 31, 1998. The decrease is primarily due to
the repurchase of 9% or 422,539 of outstanding shares in August 1998 and an
additional 83,800 during November and December 1998. The repurchases reduced
common stock by $5,000 and paid in capital by $7.7 million. The Company
received a non-objection response to its October 7, 1998 request to the OTS to
repurchase 5% of the then outstanding shares or 213,666 shares. The 83,800
shares repurchased in the third quarter are a portion of that 5%. The decrease
in equity due to stock repurchases was partially offset by earnings for the
nine month period ended December 31, 1998 of $2.6 million. The release of
3/28th of the 375,590 ESOP shares during the nine month period ended December
31, 1998 increased equity by $550,000 and dividends paid of $677,000 offset
this increase. The tax effected decrease in market value of securities
available for sale accounted for $572,000 of the remaining decrease.
Results of Operations
Comparison of Nine Months Ended December 31, 1998 and 1997
General. The increase in net income of $266,000 was primarily due to an
increase in net interest income partially offset by increased non-interest
expense. Net interest income increased $1.8 million, or 22.7%, comparing the
nine month period ended December 31, 1998 to the same period in the prior year.
Interest income increased $1.5 million while interest expense decreased
$211,000. Non-interest income increased $13,000 while the provision for loan
losses increased $158,000. Non-interest expense increased $1.2 million, and
income taxes increased $137,000. This resulted in net income increasing by
$266,000, or 11.6% for the nine months ended December 31, 1998.
Interest Income. The increase of $1.5 million in interest income was generated
by an additional $28.5 million in average interest earning assets for the nine
months ended December 31, 1998 compared to the same period in 1997. The
increase in average interest earning assets was primarily due to increases in
the average loan portfolio of $19.1 million and the average investment
portfolio of $13.5 million.
The average yield on interest earning assets decreased from 7.93% for the nine
months ending December 31, 1997 to 7.84% for the same period in the current
year. The decrease in the average yield was primarily due to the $13.5 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. In addition, there was a significant amount of
mortgage refinance activity whereby mortgage loans were refinanced with larger
balances at lower rates.
(16)
<PAGE>
<PAGE>
Interest Expense. Interest expense on savings deposits decreased by $367,000
for the nine months ended December 31, 1998 compared to the same period of
1997. Average deposits decreased by $9.4 million for the same period. The
average interest paid on deposits declined six basis points from 3.87% for the
nine months ended December 31, 1997 to 3.81% for the same period in1998. The
cost of deposits declined primarily due to an increased balance of lower
costing core deposits in the deposit mix.
Provision for Loan Losses. The provision for loan losses was $120,000 and net
charge-offs amounted to $21,000 during the nine months ended December 31, 1997
compared to a provision for loan losses of $278,000 and net charge-offs of
$53,000 for the nine month period ended December 31, 1998. The provision was
increased primarily in response to portfolio growth, especially in commercial,
agricultural and consumer loans, and additionally due to net charge-offs. At
December 31, 1998, the allowance for loan losses was equal to 202% of non-
performing loans compared to 308% at March 31, 1998. The decrease in the
coverage ratio at December 31, 1998 was the result of an increase in non-
performing loans from $275,000 at March 31, 1998 to $532,000 at December 31,
1998 due to an increase in past due residential mortgage loans.
Non-Interest Income. Non-interest income increased $13,000, or 1.7%, to
$784,000 for the nine months ended December 31, 1998 from $771,000 for the same
period in the prior year. Prior year results included a $51,000 gain on sale of
a branch building located in La Grande, Oregon. An increase of $58,000 in
commercial and agricultural loan fees in the current year attributed to the
level non-interest income year over year.
Non-Interest Expense. Non-interest expense increased $1.2 million, or 26.8% to
$5.7 million for the nine months ended December 31, 1998, from $4.5 million for
the comparable period in 1997. The increase is primarily attributable to an
increase in employee compensation and benefits of $678,000. Non-cash ESOP
expense of $338,000 related to the release of 3/28th of the ESOP shares during
the nine months ended December 31, 1998 was included in compensation expense as
well as $95,000 of non cash expense related to the MRDP. The remaining increase
was due to staff additions, salary increases and an increase in the cost of
employee benefits which includes health insurance. The remaining $528,000 of
increased non-interest expense included a $124,000 increase in advertising
expense due to stockholder communications such as the annual report, proxy
statement and increased newspaper and radio advertising. Other expense
increased $153,000 due to the increase in core deposit accounts, loan growth
and extensive employee training efforts. Supplies, postage and telephone
increased $45,000 due to regular price increases and the addition of more and
newer efficient phone lines to outlying branches. Depreciation increased
$67,000 due to the purchase of capitalized technology upgrades. Finally,
professional fees increased $81,000 due to more extensive use of attorneys and
auditors as a public company.
Income Taxes. The provision for income taxes increased $137,000 for the nine
months ended December 31, 1998 compared with the same period in the prior year.
The increase was attributable to a higher level of net income before taxes.
(17)
<PAGE>
<PAGE>
Results of Operations
Comparison of Three Months Ended December 31, 1998 and 1998
General. Net income increased $37,000 from $914,000 for the three months ended
December 31, 1997 to $951,000 for the three months ended December 31, 1998.
This increase was primarily attributable to increased net interest income of
$219,000 and increased non-interest income of $56,000 partially offset by an
increase of $299,000 in non-interest expense. A decrease of $98,000 in the tax
provision also contributed to increased net income.
Interest Income. Additional interest income generated by the $29.4 million
increase in average interest earning assets contributed to an increase of
$503,000 in interest income for the three months ended December 31, 1998
compared to the same period in 1997. The average yield on interest earning
assets decreased from 8.03% for the three months ended December 31, 1997 to
7.90% for the three months ended December 31, 1998. The decrease in yield is
partially due to the call or maturity of $9.5 million of government agency
securities during the quarter ended December 31, 1998 which were partially
replaced by $4.5 million of lower yielding AAA rated municipal securities.
Although these bonds are lower yielding, certain tax advantages are gained in
holding them. In addition to the agency bonds called, mortgage loans were
refinanced with larger balances at lower yields.
Interest Expense. Interest expense on savings deposits decreased $31,000 for
the three months ended December 31, 1998 as compared to the same period in1997
even though the average balance of deposits increased $8.4 million. The
decreased expense is due to an increased balance of lower costing core deposits
in the deposit mix. The Bank has also been aggressive in lowering CD rates as
interest rates trend downward. Interest expense on borrowings from the FHLB of
Seattle increased $326,000 due to the higher average balance outstanding during
the quarter.
Provision for Loan Losses. The provision for loan losses was $82,000 and net
charge-offs amounted to $21,000 during the three months ended December 31, 1998
compared to a $46,000 provision and $2,000 of net charge-offs during the three
months ended December 31, 1997. The provision was increased during the quarter
ended December 31, 1998 primarily in response to portfolio growth especially in
commercial, agricultural and consumer loans, and also due to net charge-offs.
Non-Interest Income. Non-interest income increased $56,000, or 22.9%, to
$301,000 for the three months ended December 31, 1998 from $245,000 for the
three months ended December 31, 1997 primarily due to a $46,000 increase in
loan fees related to commercial and agricultural loans.
Non-Interest Expense. Non-interest expense increased $299,000, or 17.2%, to
$2.0 million for the three months ended December 31, 1998 from $1.7 million in
the comparable period in 1997. The increase is primarily attributable to
$152,000 of increased compensation and benefits expense. Of the increase,
$95,000 is due to the ratable vesting of shares granted October 8, 1998 under
the MRDP, the remainder is due to staff increases, normal salary increases and
increased employee benefit expense. Advertising expense increased $39,000 due
(18)
<PAGE>
<PAGE>
to increased radio and newspaper advertising. Professional fees increased
$29,000 due to legal fees. An increase of $46,000 in other expenses is
attributable to employee training and relocation of new employees to the Bank's
market area as well as increased expenses related to checking account and loan
growth. Depreciation increased $28,000 due to the purchase of capitalized
technology upgrades.
Income Taxes. The provision for income taxes decreased $98,000 for the three
months ended December 31, 1998 compared with the same period in the prior year.
The decrease was attributable to a change in the tax treatment of ESOP
compensation expense which is not entirely deductible for taxes in the current
year or future periods.
Item No. 3 Quantitative and Qualitative Disclosures about Market Risk
During the quarter ended December 31, 1998, there was no material change in the
market risk disclosures included in the Company's Form 10-K for the year ended
March 31, 1998.
(19)
<PAGE>
<PAGE>
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.
(20)
<PAGE>
<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: February 12, 1999 By: /s/Jerry F. Aldape
----------------------------------
Jerry F. Aldape, President and
Chief Executive Officer
Date: February 12, 1999 By: /s/Nadine J. Johnson
----------------------------------
Nadine J. Johnson, Chief Financial
Officer
(21)
<PAGE>
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