Item 1. Business - -----------------
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 March 31, 2000, the Company had total assets of $370.6 million, total deposits of $237.7 million and shareholders' equity of $53.1 million. All references to the Company herein include the Bank where applicable.
The Bank was organized in 1901. The Bank is regulated by the Office of Thrift Supervision ("OTS") and its deposits are insured up to applicable limits under the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Bank also is a member of the Federal Home Loan Bank ("FHLB") System.
The Bank is a community oriented financial institution whose principal business is attracting retail deposits from the general public and using these funds to originate one- to- four family residential mortgage loans and consumer loans within its primary market area. The Bank also actively originates home equity and second mortgage loans. Beginning in 1996, the Bank began supplementing its traditional lending activities with commercial business loans, agricultural loans, and the purchase of dealer-originated automobile contracts.
In addition to its lending activities, the Bank invests excess liquidity in short to long term U.S. Government and government agency securities and mortgage-backed and related securities issued by U.S. Government agencies. Investment securities and mortgage-backed and related securities constituted 32.9% of total assets at March 31, 2000. See "-- Investment Activities."
Market Area
The Bank's primary market area encompasses those regions surrounding its offices in Baker, Grant, Harney, Malheur, Union, Wallowa, Wheeler and Umatilla Counties in Oregon and Payette and Washington Counties in Idaho. The Bank's home office is located in Baker City, Oregon with branches in Ontario, John Day, Burns, Enterprise, La Grande, Island City, Vale, and its newest location Pendleton, Oregon, which opened May 30, 2000.
The principal industries of the market area are agriculture and timber products. The Bank's market area is largely rural, with most of the farms and ranches being relatively small and family owned. The local economies are also dependent on retail trade with lumber, recreation and tourism providing substantial contributions. Major employers in the market area include Confederated Tribes of the Umatilla Indians, Eastern Oregon Correctional Institute, Fleetwood Homes, St. Anthony's Hospital, U.S. Forest Service, Bureau of Land Management, Snake River Correctional Institute, Oregon Department of Transportation, Boise Cascade, Ore-Ida, Grande Ronde Hospital, Holy Rosary Hospital, Powder River Correctional Facility, Treasure Valley Community College, Eastern Oregon University, local school districts and local government.
Lending Activities
General. The Bank's loan portfolio totaled $220.6 million at March 31, 2000, representing 59.5% of total assets at that date. The Bank concentrates its lending activities within its primary market area. Historically, the Bank's primary lending activity has been the origination of one- to- four family residential mortgage loans. To a lesser extent, the Bank makes mortgage loans for the purpose of constructing primarily single-family residences.
As a result of management's desire to diversify its lending portfolio and satisfy local demand for credit, the Bank has significantly increased its origination of agricultural, indirect dealer and commercial business loans since July
1996. Commercial business and agricultural loans primarily include operating lines of credit and term loans for fixed asset acquisitions.
The Bank has also been active in the origination of consumer loans, which primarily consist of home equity loans, secured and unsecured and, to a lesser extent, automobile loans, credit card loans, home improvement loans, mobile home loans and loans secured by savings deposits. More recently, the Bank has expanded its purchase of dealer-originated contracts to include those secured by automobiles, motorcycles, all terrain vehicles and recreational vehicles. During the fiscal year ended March 31, 2000, the Bank purchased $80,000 of dealer originated contracts secured by recreational vehicles.
One- to- Four Family Real Estate Lending. Historically, the Bank has concentrated its lending activities on the origination of loans secured by first mortgages on existing one- to- four family residences located in its primary market area. At March 31, 2000, $127.6 million, or 57.1%, of the Bank's total loan portfolio, consisted of such loans, with an average loan balance of $59,000.
Generally, the Bank's fixed-rate one- to- four family mortgage loans have maturities of 15 to 30 years and are fully amortizing with monthly payments sufficient to repay the total amount of the loan with interest by the end of the loan term. Generally, they are originated under terms, conditions and documentation which permit them to be sold to private investors. The Bank's fixed-rate loans customarily include "due on sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not paid.
At March 31, 2000, $98.6 million, or 44.1%, of the total loans before net items were fixed rate one- to- four family loans and $29.0 million, or 13.0%, were adjustable rate mortgage loans ("ARM loans"). The Bank currently offers an ARM product for its portfolio which adjusts on the anniversary date of the origination based on the one year Treasury constant maturity index. The Bank's ARMs are typically based on a 30-year amortization schedule. The Bank offers discounted ARM loans where the initial interest rate is up to 2.00 percentage points below the prevailing interest rate. The Bank, however, qualifies the borrowers on its ARM loans based on the fully indexed rate. The Bank's current ARM loans do not provide for negative amortization and generally provide for annual and lifetime interest rate adjustment limits of 2.0% and 6.0%, respectively.
At March 31, 2000, $18.7 million, or 27.7% of the Bank's total ARM loans had interest rates that adjusted annually based on the Eleventh District Cost of Funds Index ("COFI"). The COFI is a lagging index which, together with the periodic and overall interest rate caps, may cause the yield on such loans to adjust more slowly than the cost of interest-bearing liabilities especially in a rapidly rising rate environment. In November 1995, the Bank discontinued using the COFI index and began using the one year Treasury constant maturity index.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the Bank's exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by the customer. It is possible that during periods of rising interest rates the risk of default on ARM loans may increase as a result of repricing and the increased payments required by the borrower. In addition, although ARM loans allow the Bank to increase the sensitivity of its asset base to changes in the interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits. Because of these considerations, the Bank has no assurance that yields on ARM loans will be sufficient to offset increases in the Bank's cost of funds. The Bank believes these risks, which have not had a material adverse effect on the Bank to date, generally are less than the risks associated with holding fixed-rate loans in portfolio during a rising interest rate environment.
The Bank requires title insurance insuring the status of its lien on all loans where real estate is the primary source of security. The Bank also requires the maintenance of fire and casualty insurance (and, if appropriate, flood insurance).
The Bank's one- to- four family residential mortgage loans typically do not exceed 80% of the lower of cost or appraised value of the security property. Pursuant to underwriting guidelines adopted by the Bank's Board of Directors, the Bank can lend up to 97% of the lower of cost or appraised value of the property securing a one- to- four family residential loan; however, the Bank obtains private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the security property.
Agricultural Lending. Agriculture is a major industry in the Bank's market area. Subject to market conditions, the Bank intends to continue to emphasize agricultural loans. In 1996, the Bank began originating a significant number of loans to finance agricultural needs. This includes collateral secured agricultural loans for the purchase of farmland and equipment. At March 31, 2000, agricultural loans amounted to $15.7 million, or 7.0%, of the total loan portfolio; $2.4 million of these loans were secured by real estate. The Bank has sought to limit its agricultural lending to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural business cycles, reliable cash flow and a willingness to provide the Bank with the necessary financial reporting.
Agricultural operating loans are made to finance farm operating expenses over the course of a growing season with such loans being typically made in amounts of $500,000 or less. However, the Bank's largest agricultural operating loan had an original commitment of $1.7 million (with $145,000 outstanding at March 31, 2000) which was provided to finance a farming operation that grows mint, grain, and potatoes. This loan was performing in accordance with its terms at March 31, 2000. Agricultural operating loans generally are made as a percentage of the borrower's anticipated income to support budgeted operating expenses. These loans generally are secured by a blanket lien on all crops, livestock, equipment, accounts and products and proceeds thereof. The variables that effect income during the year are pounds of grain and the fluctuating market prices. In the case of crops, consideration is given to projected yields and prices from each commodity. The interest rate is normally adjusted monthly based on the prime rate as published in The Wall Street Journal, plus a negotiated margin of up to 2%. Because such loans are made to finance a farm's or ranch's annual operations, they are written on a one-year review and renewable basis. The renewal is dependent upon prior year's performance and the forthcoming year's projections as well as overall financial strength of the borrower. The Bank carefully monitors these loans and prepares monthly variance reports on income and expenses. To meet the seasonal operating needs of a farm, borrowers may qualify for single payment notes, revolving lines of credit and/or non-revolving lines of credit.
In underwriting agricultural operating loans, the Bank considers the cash flow of the borrower based upon the expected income stream as well as the value of collateral used to secure the loan. Collateral generally consists of cattle or cash crops produced by the farm, such as grains, grass seed, peas, sugar beets, mint, onions, potatoes, corn and alfalfa. In addition to considering cash flow and obtaining a blanket security interest in the farm's cash crop, the Bank may also collateralize an operating loan with the farm's operating equipment, breeding stock, real estate, and federal agricultural program payments to the borrower.
The Bank also originates loans to finance the purchase of farm equipment and will continue to pursue this type of lending in the future. Loans to purchase farm equipment are made for terms of up to seven years. On loans not exceeding five years, fixed rates are established at inception with margins set from 2% to 3.5% above the five-year Treasury Note. On loans in excess of five years, rates are established at inception with margins set from 2% to 3.5% above the five year Treasury Note with adjustments set at three to five years.
Agricultural real estate loans primarily are secured by first liens on farmland and improvements thereon located in the Bank's market area, to service the needs of the Bank's existing customers. The largest such loan totalled $957,000 at March 31, 2000. Loans are generally written in amounts up to 50% to 75% of the tax assessed or appraised value of the property at terms ranging from 10 to 20 years. Such loans have interest rates that generally adjust at least every five years based upon the current five year Treasury Note, plus a negotiated margin up to 3.5%. Fixed rate loans are granted on terms generally not to exceed five years with rates established at inception based on margins set from 2.0% to 3.5% above the current five year Treasury Note. In originating an agricultural real estate loan, the Bank considers the debt service coverage of the borrower's cash flow, the appraised value of the underlying property, the experience and knowledge of the borrower, and the borrower's past performance with the Bank and/or market area.
Payments on an agricultural real estate loan depend, to a large degree, on the results of operation of the related farm entity. The repayment is also subject to both economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times. Such loans are not made to start up businesses but are
generally reserved for profitable operators with substantial equity and proven history. At March 31, 2000, agricultural real estate loans totalled $2.4 million, or 1.1%, of the loan portfolio.
Among the greatest and more common risks to agricultural lending can be weather conditions and disease. This risk can be mitigated through multi- peril crop insurance. Commodity prices also present a risk which may be reduced by the use of set price contracts. Required beginning and projected operating margins provide for reasonable reserves to offset unexpected yield and price deficiencies.
In addition to the above mentioned risks, the Bank also considers management succession, life insurance and business continuation plans.
Construction Lending. On a limited basis, the Bank also offers construction loans to qualified borrowers for construction of single-family residences in the Bank's primary market area. Typically, the Bank limits its construction lending to a local builder for the construction of a single-family dwelling where a permanent purchase commitment has been obtained or individuals are building their primary residences. On a limited basis, the Bank lends to contractors for housing construction where the house is not presold. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. Construction loans generally have a six-month term with only interest being paid during the term of the loan, and convert at the end of six months to permanent financing and are underwritten in accordance with the same standards as the Bank's mortgages on existing properties. Construction loans generally have a maximum loan-to-value ratio of 80%. Borrowers must satisfy all credit requirements which would apply to the Bank's permanent mortgage loan financing for the subject property.
Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the borrower may be required to fund the cost overruns or the Bank may advance funds beyond the amount originally committed to permit completion of the development. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market area and by limiting the aggregate amount of outstanding construction loans. At March 31, 2000, construction loans amounted to $3.6 million, or 1.6%, of the loan portfolio.
Multi-Family and Commercial Real Estate Lending. The multi-family residential loan portfolio consists primarily of loans secured by small apartment buildings and the commercial real estate loan portfolio includes loans to finance the construction or acquisition of small office buildings, retail stores, car dealerships. The largest such loan totalled $632,000 at March 31, 2000. At March 31, 2000, the Bank had $3.0 million of multi-family residential and $14.8 million of commercial real estate loans, all of which amounted to 1.3% and 6.6%, respectively, of the total loan portfolio at such date. Multi-family and commercial real estate loans are generally underwritten with loan-to-value ratios of up to 75% of the lesser of the appraised value or the purchase price of the property. Such loans generally are granted on 15 to 20 year terms on an adjustable rate equal to the five year Treasury Note plus a negotiated margin up to 3 1/2% generally with established floors. On fixed rate loans where terms generally do not exceed ten years, rates are established at inception with margins set from 2.0% to 3.5% above the current five year Treasury Note. Because of the inherent risk involved in this type of lending, the Bank generally limits its multi-family and commercial real estate lending to borrowers within its market area who have proven financial histories.
Multi-family residential and commercial real estate lending entails significant additional risks as compared with single-family residential property lending. Multi-family residential and commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project. These risks can be significantly impacted by supply and demand conditions in the market for office, retail and residential space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to its
market area or to borrowers with which it has had prior experience or who are otherwise well known to the Bank. In addition, in the case of commercial mortgage loans made to a partnership or a corporation, the Bank seeks, whenever possible, to obtain personal guarantees and annual financial statements of the principals of the partnership or corporation. The Bank reviews all significant commercial real estate loans on an annual basis to ensure that the loan meets current underwriting standards. In addition, the Bank underwrites commercial real estate loans at a rate of interest significantly above that carried on the loan at the time of origination to evaluate the borrower's ability to meet principal and interest payments on the loan in the event of upward adjustments to the interest rate on the loan.
Consumer and Other Lending. The Bank originates a variety of consumer loans. Such loans generally have shorter terms to maturity and higher interest rates than mortgage loans. At March 31, 2000, the Bank's consumer loans totaled approximately $44.6 million, or 20.0%, of the Bank's total loans. The Bank's consumer loans consist primarily of home improvement and equity loans, automobile loans, boat and recreational vehicle loans, unsecured loans, credit card loans and deposit account loans. The growth of the consumer loan portfolio in the current year consisted primarily of an increase in the origination of indirect dealer automobile loans, as discussed below.
In recent periods, the Bank has emphasized the origination of consumer loans, and, in particular, automobile loans due to their shorter terms and higher yields than residential mortgage loans. The Bank anticipates that it will continue to be an active originator of automobile and other consumer loans. Factors that may affect the ability of the Bank to increase its originations in this area include the demand for such loans, interest rates and the state of the local and national economy.
The Bank offers open-ended "preferred" lines of credit on either a secured or unsecured basis. Secured lines of credit are generally secured by a second mortgage on the borrower's primary residence. Secured lines of credit have an interest rate that is one to two percentage points above the prime lending rate, as published in The Wall Street Journal, while the rate on unsecured lines is two to three percentage points above this prime lending rate. In both cases, the rate adjusts monthly. The majority of the approved lines of credit at March 31, 2000 were equal to or less than $25,000. The Bank requires repayment of at least 2% of the unpaid principal balance monthly. At March 31, 2000, approved lines of credit totaled $17.0 million, of which $5.5 million was outstanding.
The Bank offers closed-end, fixed-rate home equity loans that are made on the security of primary residences. Loans normally do not exceed 80% of the appraised or tax assessed value of the residence, less the outstanding principal of the first mortgage, and have terms of up to 15 years requiring monthly payments of principal and interest. At March 31, 2000, fixed rate home equity loans and second mortgage loans amounted to $11.6 million, or 5.2%, of total loans.
At March 31, 2000, the Bank's automobile loan portfolio amounted to $21.5 million, or 48.3%, of consumer loans and 9.7% of total loans at such date. Since January 1997, a substantial portion of the Bank's automobile loans have been originated indirectly by a network of approximately 26 automobile dealers located in the Bank's market area and adjacent markets in Oregon and Idaho. Indirect automobile loans accounted for approximately 52.2% of the Bank's total consumer loan originations during the year ended March 31, 2000. The applications for such loans are taken by employees of the dealer, the loans are written on the dealer's contract pursuant to the Bank's underwriting standards using the dealer's loan documents with terms substantially similar to the Bank's. All indirect loans must be approved by specific loan officers of the Bank who have experience with this type of lending. In addition to indirect automobile lending, the Bank also originates automobile loans directly.
The maximum term for the Bank's automobile loans is 72 months with the amount financed based upon a percent of purchase price. The Bank generally requires all borrowers to maintain automobile insurance, including collision, fire and theft, with a maximum allowable deductible and with the Bank listed as loss payee.
At March 31, 2000, unsecured consumer loans amounted to $3.4 million, or 1.5%, of total loans. These loans are made for a maximum of 36 months or less with fixed rates of interest and are offered primarily to existing customers of the Bank.
Since December 1992, the Bank has offered credit card loans through its participation as a VISA card issuer. The Bank does not actively solicit credit card business beyond its customer base and market area and has not engaged in mailing of pre-approved credit cards. The rate currently charged by the Bank on its credit card loans is the prime rate, as published in The Wall Street Journal, plus 7%, and the Bank is permitted to change the interest rate quarterly. Processing of bills and payments is contracted to an outside servicer. At March 31, 2000, the Bank had a commitment to fund an aggregate of $5.3 million of credit card loans, which represented the aggregate credit limit on credit cards, and had $1.0 million of credit card loans outstanding, representing .5% of its total loan portfolio. The Bank intends to continue credit card lending and estimates that at current levels of credit card loans, it makes a small monthly profit net of service expenses and write-offs.
Consumer loans potentially have a greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles and other vehicles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. At March 31, 2000, the Bank had $24,000 in consumer loans accounted for on a nonaccrual basis.
Commercial Business Lending. The Bank originates commercial business loans to small and medium sized businesses in its primary market area. Commercial business loans are generally made to finance the purchase of seasonal inventory needs, new or used equipment, and for short-term working capital. Such loans are generally secured by equipment, accounts receivable and inventory, although commercial business loans are sometimes granted on an unsecured basis. Loans are normally made for terms of five years or less, depending on the purpose of the loan and the collateral. Loans to finance operating expenses are made for one year or less. Interest rates adjust at least annually at a rate equal to the prime rate, as published in The Wall Street Journal, plus a margin of up to 3%. Loans to finance the purchase of equipment are made for terms generally five years or less at a fixed rate established at inception with margins set from 2% to 3.5% above the five-year Treasury Note. Loans in excess of five years are established at inception with margins set from 2% to 3.5% above the five-year Treasury Note with adjustments set at three to five years. At March 31, 2000, the commercial business loans amounted to $13.9 million, or 6.2%, of the total loan portfolio.
At March 31, 2000, the largest outstanding commercial business loan was a $1.2 million operating line of credit to a manufacturing company with a balance of $953,000. Such loan was performing according to its terms at March 31, 2000.
The Bank is an approved Small Business Administration ("SBA") lender and at March 31, 2000, had two SBA loans that totalled $307,000. The Bank also entered into an agreement with the Oregon Economic Development Department in October 1999 to provide loan guarantees on small business loans. As of March 31, 2000, no loans had been made under this program. The Bank intends to continue to originate loans to local businesses within its primary market area using these programs.
The Bank underwrites its commercial business loans on the basis of the borrower's cash flow and ability to service the debt from earnings rather than on the basis of underlying collateral value. The Bank seeks to structure such loans to have more than one source of repayment. The borrower is required to provide the Bank with sufficient information to allow the Bank to make its lending determination. In most instances, this information consists of at least three years of financial statements, tax returns, a statement of projected cash flows, current financial information on any guarantor and any additional information on the collateral. Generally, for loans with balances exceeding $250,000, the Bank requires that borrowers and guarantors provide updated financial information at least annually.
The Bank's commercial business loans may be structured as term loans or as lines of credit. Commercial business term loans are generally made to finance the purchase of fixed assets and have maturities of five years or less. Commercial business lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of between six months and one year.
Commercial business loans are often larger and may involve greater risk than other types of lending. Because payments on such loans are often dependent on successful operation of the business involved, repayment of such loans may be subject to adverse conditions in the economy. The Bank seeks to minimize these risks through its underwriting guidelines, which require that the loan be supported by adequate cash flow of the borrower, profitability of the business, collateral, and personal guarantees of the individuals in the business. In addition, the Bank limits this type of lending to its market area and to borrowers with which it has prior experience or who are otherwise well known to the Bank.
Maturity of Loan Portfolio. The following table sets forth certain information at March 31, 2000, regarding the dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as becoming due within one year. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.
After After One Year 3 Years Within Through Through Over One Year 3 Years 5 Years Five Years Total -------- ------- ------- ---------- ----- (Dollars in thousands) Mortgage loans: One- to- four family....... $ 35 $ 515 $ 1,256 $125,783 $127,589 Multi-family............... -- -- 421 2,568 2,989 Commercial................. 57 120 1,437 13,194 14,808 Agricultural............... -- -- 44 2,376 2,420 Construction............... -- -- -- 3,648 3,648 Land....................... -- 24 49 85 158
Consumer loans: Home equity and second mortgage.................. 100 929 1,244 12,710 14,983 Automobile................. 99 2,707 11,156 7,585 21,547 Credit card................ 22 69 102 833 1,026 Loans secured by deposit accounts................... 140 193 104 15 452 Unsecured.................. 204 346 311 2,553 3,414 Other...................... 63 326 694 2,107 3,190
Commercial business loans... 4,260 1,821 3,842 3,930 13,853 Agricultural loans.......... 7,491 1,341 2,226 2,217 13,275 ------- ------ ------- -------- -------- Total.................. $12,471 $8,391 $22,886 $179,604 $223,352 ======= ====== ======= ======== ========
The following table sets forth the dollar amount of all loans due after March 31, 2001, which have fixed interest rates and have floating or adjustable interest rates.
Fixed Floating or Rates Adjustable Rates ----- ---------------- (In thousands) Mortgage loans: One- to- four family.............. $ 98,572 $28,982 Multi-family..................... 677 2,312 Commercial....................... 5,731 9,020 Agricultural..................... 138 2,282 Construction..................... 2,863 785 Land............................. 158 --
Consumer loans: Home equity and second mortgage.. 11,525 3,358 Automobile....................... 21,448 -- Credit card...................... -- 1,004 Loans secured by deposit accounts........................ 312 -- Unsecured........................ 161 3,049 Other............................ 2,964 163
Commercial business loans......... 6,550 3,043 Agricultural loans................ 3,065 2,719 -------- ------- Total......................... $154,164 $56,717 ======== =======
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of a loan is substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally give the Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. Furthermore, management believes that a significant number of the Bank's residential mortgage loans are outstanding for a period less than their contractual terms because of the transitory nature of many of the borrowers who reside in its primary market area.
Loan Solicitation and Processing. The Bank's lending activities are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Bank's Board of Directors and management. The customary sources of loan originations are realtors, walk-in customers, referrals and existing customers. The Bank also advertises its loan products by radio and newspaper. The Bank does not employ commissioned loan originators.
Mortgage loan applications are initiated, underwritten and preliminarily approved by loan officers before they are recommended for final review and approval. Individual lending limits and credit approval limits are established for branch and loan center personnel up to $175,000. Commercial lenders' and administrative credit approval limits are established up to $750,000 depending on position and lending knowledge. Loans to borrowers with an aggregate borrowing relationship over $750,000 but less than $1.5 million requires approval of a quorum of the Level 1 Executive Loan Committee. The Loan Committee consists of the President/Chief Executive Officer, Executive Vice President, Senior Commercial Credit Manager, Senior Credit Manager, Credit Manager and six Board members. A quorum of the Level 1 committee consists of one of the President/Chief Executive Officer or Executive Vice President; one of the Senior Commercial Credit Managers, Senior Credit Manager, or Credit Manager and two Board members. Loans to borrowers with an aggregate borrowing relationship in excess of $1.5 million but less than $3 million require the approval of the Level 2 Board Loan Committee, which consists of the same members as the Level 1 Executive Loan Committee, but requires one additional board member. Loans to borrowers with an aggregate borrowing relationship exceeding $3 million require approval by the same Level 1 committee, but with two additional board members.
Loan Originations, Sales and Purchases. Historically, the Bank's primary lending activity has been the origination of one- to- four family residential mortgage loans. In recent periods, the Bank has increased its origination of consumer, commercial business and agricultural loans.
During the year ended March 31, 2000, the Bank did not sell a material amount of its loans. At March 31, 2000, the Bank was not servicing any loans for investors.
The following table sets forth total loans originated, purchased, sold and repaid during the periods indicated.
Nine Months Ended Year Ended March 31, March 31, ------------------------------- --------- 2000 1999 1998 1997 ---- ---- ---- ---- (In thousands) Loans originated: Mortgage loans: One- to- four family............ $ 30,112 $ 38,178 $13,718 $ 8,966 Multi-family.................... 1,575 1,736 400 -- Commercial...................... 3,101 4,371 393 -- Construction.................... 6,697 6,713 4,448 2,216 Land............................ 26 155 19 173 Consumer......................... 13,293 11,611 19,122 8,769 Commercial business loans........ 18,076 20,096 7,860 2,346 Agricultural loan................ 28,519 25,800 10,631 6,352 -------- -------- ------- ------- Total loans originated........ 101,399 108,660 56,591 28,822
Loans purchased: One-to four family mortgage...... -- -- 203 183 Dealer-originated automobile contracts....................... 14,533 7,338 5,574 389 Commercial real estate........... -- 366 -- -- -------- -------- ------- ------- Total loans purchased ....... 14,533 7,693 5,777 572
Loans sold: Total whole loans sold.......... -- -- -- 1,149 -------- -------- ------- ------- Total loans sold............. -- -- -- 1,149
Loan principal repayments......... 81,088 84,444 47,411 21,711 -------- -------- ------- ------- Net increase in loans receivable, net.............................. $ 34,844 $ 31,909 $14,957 $ 6,534 ======== ======== ======= =======
Loan Commitments. The Bank issues commitments for loans and lines of credit conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions and are honored for up to 45 days from approval, depending on the type of transaction. At March 31, 2000, the Bank had loan commitments of $39.7 million. See Note 18 of Notes to Consolidated Financial Statements.
Loan Fees. In addition to interest earned on loans, the Bank receives income from fees in connection with loan originations, loan modification, late payments and for miscellaneous service related to its loans. Income from these activities varies from period to period depending upon the volume and type of loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a minimum fee or as a percentage of the amount borrowed. In accordance with applicable accounting procedures, loan origination fees and discount points in excess of loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis. Discounts and premiums on loans purchased are accredited and amortized in the same manner. The Bank recognized $107,000, $248,000 and $184,000 of deferred loan fees during the years ended March 31, 2000, 1999 and 1998, respectively, in connection with loan refinancings, payoffs, sales and ongoing amortization of outstanding loans.
Nonperforming Assets and Delinquencies. Generally, the borrowers are allowed to pay up to the 15th day following the due date before the Bank initiates collection procedures. When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower and seeking the payment.
Contacts are generally made 16 days after the due date. In most cases, delinquencies are cured promptly. If a delinquency continues, additional contact is made through a telephone call by the 20th day. The Bank prefers to work with borrowers to resolve such problems, however, after the 90th day of delinquency, foreclosure or other action is taken in an effort to minimize any potential loss to the Bank.
When loans are contractually 90 days or more delinquent, they are placed on nonaccrual status. Payments to such nonaccrual loans are applied to principal when collection of the loan principal's doubtful. Loans are reinstated to accrual status when current and collectibility of principal and interest is no longer doubtful.
The following table sets forth information with respect to the Bank's nonperforming assets and restructured loans at the dates indicated.
At June At March 31, 30, -------------------------------- -------- 2000 1999 1998 1997 1996 ---- ---- ---- ----- ---- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Mortgage loans: One- to- four family......... $ 131 $ 133 $ 258 $ 167 $ 111 Consumer loans................ 24 5 17 23 52 ----- ----- ----- ----- ----- Total.................... 155 138 275 190 163
Accruing loans which are contractually past due 90 days or more.................. -- -- -- -- -- ----- ----- ----- ----- ----- Total.................... -- -- -- -- --
Total of nonaccrual and 90 days past due loans................ 155 138 275 190 163
Foreclosed real estate......... -- 37 -- -- 13
Other repossessed assets....... 8 -- 313 10 34 ----- ----- ----- ----- ----- Total nonperforming assets $ 163 $ 175 $ 588 $ 200 $ 210 ===== ===== ===== ===== =====
Restructured loans............. $ -- $ -- $ -- $ -- $ -- ----- ----- ----- ----- -----
Nonaccrual and 90 days or more past due loans as a percentage of loans receivable, net...... 0.07% 0.07% 0.18% 0.14% 0.12%
Nonaccrual and 90 days or more past due loans as a percentage of total assets............... 0.04% 0.04% 0.10% 0.09% 0.08%
Nonperforming assets as a percentage of total assets.... 0.04% 0.06% 0.22% 0.10% 0.10%
Loans receivable, net.......... $220,591 $185,747 $153,838 $138,881 $132,347
Total assets................... $370,612 $313,473 $263,224 $204,213 $203,457
An additional $2,000 of interest income would have been recorded for the year ended March 31, 2000, had nonaccruing loans been current in accordance with their original terms.
Real Estate Acquired in Settlement of Loans. See Note 1 of Notes to Consolidated Financial Statements regarding the Bank's accounting for foreclosed real estate. At March 31, 2000, the Bank had no foreclosed real estate.
Asset Classification. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "watch" and monitored by the Bank.
The aggregate amounts of the Bank's classified and watch assets, and of the Bank's general and specific loss allowances at the dates indicated, were as follows:
At March 31, -------------------------------------- 2000 1999 1998 ---- ---- ---- (In thousands)
Loss.............................. $ -- $ 10 $ 15 Doubtful.......................... -- 7 -- Substandard assets................ 1,656 671 568 Watch............................. 8,545 8,438 1,501
General loss allowances........... 1,396 1,218 832 Specific loss allowances.......... -- 10 15
At March 31, 2000, substandard assets consisted of four one- to- four family mortgage loans, four consumer/dealers loans and 13 commercial/ agricultural loans (four borrowers).
At March 31, 2000, watch assets consisted of six one- to- four family mortgage loans, eight consumer/dealer loans and 49 commercial/agricultural loans (27 borrowers).
Allowance for Loan Losses. The Bank has established a systematic methodology for the determination of provisions for loan losses. The methodology is set forth in a formal policy and takes into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual loans.
In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. The Bank increases its allowance for loan losses by charging provisions for loan losses against the Bank's income.
Allowances for losses on specific problem loans and real estate owned are charged to earnings when it is determined that the value of these loans and properties, in the judgement of management, is impaired. In addition to specific reserves, the Bank also maintains general provisions for loan losses based on the evaluation of known and inherent risks in the loan portfolio, including management's continuing analysis of the factors and trends underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The ultimate recovery of such loans is susceptible to future market factors beyond the Bank's control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial
statement. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's valuation allowance on loans and real estate owned. Generally, a provision for losses is charged against income quarterly to maintain the allowance for loan losses.
At March 31, 2000, the Bank had an allowance for loan losses of $1.4 million, which management believes is adequate to absorb losses inherent in the portfolio. Although management is confident that the basis for making the allowance is sound, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Bank's financial condition and results of operations.
The following table sets forth an analysis of the Bank's allowance for possible loan losses for the periods indicated. Year Nine Ended Months Ended June Year Ended March 31, March 31, 30, ---------------------- ------------- ----- 2000 1999 1998 1997 1996 1996 ---- ---- ---- ---- ---- ---- (Dollars in thousands)
Allowance at beginning of period..................... $1,228 $ 847 $725 $541 $455 $455 Provision (credit) for loan ------ ------ ---- ---- ---- ---- losses..................... 178 483 138 216 91 115 Recoveries: Mortgage loans: One- to- four family...... 23 -- 4 -- 9 12 Consumer loans: Credit card............... 7 9 4 4 1 1 Other..................... 2 4 25 3 -- 1 ------ ------ ---- ---- ---- ---- Total recoveries......... 32 13 33 7 10 14 ------ ------ ---- ---- ---- ---- Charge-offs: Mortgage loans: One- to- four family...... -- 4 5 5 -- -- Consumer loans: Credit card............... 37 82 36 26 25 41 Automobile................ 1 15 8 -- -- -- Unsecured................. -- -- -- -- -- -- Other..................... 4 14 -- 8 -- 2 ------ ------ ---- ---- ---- ---- Total charge-offs........ 42 115 49 39 25 43 ------ ------ ---- ---- ---- ---- Net charge-offs.......... 10 102 16 (32) (15) (29) ------ ------ ---- ---- ---- ---- Allowance at end of period................. $1,396 $1,228 $847 $725 $531 $541 ====== ====== ==== ==== ==== ==== Allowance for loan losses as a percentage of total loans outstanding at the end of the period................. 0.63% 0.66% 0.55% 0.52% 0.41% 0.41%
Net charge-offs as a percentage of average loans outstanding during the period.......... 0.00% 0.06% 0.01% 0.03% 0.02% 0.02%
Allowance for loan losses as a percentage of nonperforming loans at end of period..... 900.65% 889.86% 308.07% 381.58% 424.80% 331.90%
Investment Activities
The Bank is permitted under federal law to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the FHLB- Seattle, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, the Bank may also invest a portion of its assets in commercial paper and corporate debt securities. The Bank is required to maintain an investment in FHLB stock. The Bank is also required under federal regulations to maintain a minimum amount of liquid assets. See "REGULATION" herein and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources" in the Annual Report.
Although the Bank generally purchases investment securities with excess liquidity, during the years ended March 31, 2000 and March 31, 1999, the Bank engaged in a leveraging strategy using funds borrowed from the Federal Home Loan Bank to purchase investment securities. Total purchases amounted to $34.9 million and $68.8 million in the years ended March 31, 2000 and 1999, respectively. Purchases were funded by borrowing an additional $26.5 million in the year ended March 31, 2000 and an additional $50.2 million in the year ended March 31, 1999. The Bank's investment securities purchases have generally been limited to U.S. Government and government agency securities with contractual maturities of between one and ten years and mortgage-backed and related securities issued by the Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and Government National Mortgage Association ("GNMA") with maturities of up to 30 years. During the year ended March 31, 1999, the Bank began purchasing AAA rated municipal bonds of various local Oregon governmental units with maturities ranging from 10 to 19 years. Such municipal bonds totalled $10.1 million at March 31, 2000.
At March 31, 2000, the Bank held securities classified as available-for-sale under SFAS 115. There were no trading securities at March 31, 2000. See Note 2 of Notes to Consolidated Financial Statements. Trading of investment securities is not part of the Bank's operating strategy.
The Bank's investment policies generally limit investments to U.S. Government and government agency securities, municipal bonds, certificates of deposits, marketable corporate debt obligations, mortgage-backed and related securities and certain types of mutual funds. The Bank's investment policy does not permit engaging directly in hedging activities or purchasing high risk mortgage derivative products or non-investment grade corporate bonds. Investments are made based on certain considerations, which include the interest rate, yield, settlement date and maturity of the investment, the Bank's liquidity position, and anticipated cash needs and sources (which in turn include outstanding commitments, upcoming maturities, estimated deposits and anticipated loan amortization and repayments). The effect that the proposed investment would have on the Bank's credit and interest rate risk and risk-based capital is also considered.
At March 31, 2000, the Bank did not have any securities (other than U.S. government and agency securities) which had an aggregate book value in excess of 10% of the Bank's shareholders' equity at that date.
The following table sets forth the amortized cost and fair value of the Bank's debt and mortgage-backed and related securities, by accounting classification and by type of security, at the dates indicated.
At March 31, ------------------------------------------------------ 2000 1999 1998 ----------------- ----------------- ----------------- Percent Percent Percent Carrying of Carrying of Carrying of Value(1) Total Value(1) Total Value(1) Total -------- ----- -------- ----- -------- ----- (Dollars in thousands) Held to Maturity: Mortgage-backed and related securities.. $ -- --% $ 9,338 8.67% $12,805 16.46% Total held to maturity -------- ------ ------- ------ ------- ------ securities............ -- -- 9,338 8.67 12,805 16.46
Available for Sale: U.S. Government agency obligations.......... 37,436 30.70 37,965 35.26 37,175 47.78 Mortgage-backed and related securities... 84,615 69.30 60,371 56.07 27,778 35.70 Other................. -- -- -- -- 50 .06 -------- ------ ------- ------ ------- ------ Total available for sale securities.... 122,051 100.00 98,336 91.33 65,003 83.54 -------- ------ ------- ------ ------- ------ Total................. $122,051 100.00% $107,674 100.00% $77,808 100.00% ======== ====== ======== ======= ======= ====== - ----------------- (1) The market value of the Bank's investment portfolio amounted to $122.1 million, $107.8 million and $78.2 million at March 31, 2000, 1999 and 1998, respectively. At March 31, 2000, the market value of the principal components of the Bank's investment securities portfolio was as follows: U.S. Government securities, $39.9 million; mortgage-backed and related securities, $87.4 million.
The following table sets forth the maturities and weighted average yields of the debt and mortgage-backed and related securities in the Bank's investment securities portfolio at March 31, 2000.
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's lending and other investment activities. In addition, the Bank also generates funds internally from loan principal repayments and prepayments and maturing investment securities. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Borrowings from the FHLB-Seattle may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. The Bank also has an overnight credit line with Key Bank amounting to $15.0 million and a $50.0 million reverse repurchase credit line with Merrill Lynch.
Deposit Accounts. A substantial number of the Bank's depositors reside in Oregon. The Bank's deposit products include a broad selection of deposit instruments, including NOW accounts, demand deposit accounts, money market accounts, statement savings accounts and term certificate accounts. Deposit account terms vary with the principal differences being the minimum deposit to open, early withdrawal penalties and the interest rate. The Bank reviews its deposit mix and pricing weekly. The Bank does not utilize brokered deposits, nor has it aggressively sought jumbo certificates of deposit. The Bank has also begun to seek business checking accounts in connection with its community banking activities.
The Bank believes it is competitive in the type of accounts and interest rates it offers on its deposit products. The Bank does not seek to pay the highest interest rates on deposits but a competitive rate. The Bank, in its attempt to be competitive, does not however seeks to pay the highest interest rates in the market areas it serves. The Bank determines the rates paid based on a number of conditions, including rates paid by competitors, rates on U.S. Treasury securities, rates offered on various FHLB-Seattle lending programs, and the deposit growth rate the Bank is seeking to achieve.
In the unlikely event the Bank is liquidated, depositors will be entitled to full payment of their deposit accounts before any payments are made to the Company as the sole stockholder of the Bank.
The following table sets forth information concerning the Bank's time deposits and other interest-bearing deposits at March 31, 2000.
Weighted Average Percentage Interest Minimum of Total Rate Term Category Amount Balance Deposits - ---- ---- -------- ------ ------- -------- (In thousands except minimum balance)
N/A% N/A Non-interest-bearing $ 14,960 10 6.29% 1.36 N/A NOW accounts 36,758 10 15.46 4.14 N/A Money market accounts 50,102 1,000 21.08 2.35 N/A Statement savings accounts 19,425 5 8.17
Certificates of Deposit -----------------------
5.72 3 to 5 years Fixed-term, fixed-rate 19,154 1,000 8.06 4.90 91 day Fixed-term, fixed-rate 1,558 1,000 .66 5.34 182 day Fixed-term, fixed-rate 14,299 1,000 6.01 5.62 1 year Fixed-term, variable-rate 34,456 1,000 14.49 5.44 2 1/2 year Fixed-term, variable-rate 8,378 1,000 3.52 5.99 5 year Fixed-term, variable-rate 2,255 1,000 .95 4.31 18 month Fixed-term, adjustable- rate 1,553 5 .65 5.18 20 month Fixed-term, adjustable-rate 15,750 1,000 6.63 5.25 6 year Fixed-term, adjustable-rate 647 0 .27 5.72 Varies Various term, fixed-rate 1,821 1,000 .77 5.73 Varies Jumbo certificates 16,618 100,000 6.99 -------- ------ TOTAL $237,735 100.00% ======== ======
The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of March 31, 2000. Jumbo certificates of deposit generally have principal amounts of $96,000 or more and have negotiable interest rates.
Certificates Maturity Period of Deposits - --------------- ------------ (In thousands)
Three months or less................. $ 6,304 Over three through six months........ 3,523 Over six through twelve months....... 3,630 Over twelve months................... 3,161 ------- Total............................ $16,618 =======
Time Deposits by Rates. The following table sets forth the amount of time deposits in the Bank categorized by rates at the dates indicated.
At March 31, ------------------------------------ 2000 1999 1998 ---- ---- ---- (In thousands)
2.00 - 3.99%.................... $ -- $ -- $ 229 4.00 - 4.99%.................... 10,028 42,960 23,094 5.00 - 5.99%.................... 81,566 49,460 74,946 6.00 - 6.99%.................... 23,702 6,490 5,390 7.00% and over.................. 1,193 840 1,241 -------- -------- -------- Total........................... $116,489 $ 99,750 $104,900 ======== ======== ========
Deposit Activity. The following table sets forth the deposit activity of the Bank for the periods indicated.
Year Ended March 31, ------------------------------------ 2000 1999 1998 ---- ---- ---- (In thousands)
Beginning balance............... $199,589 $192,735 $179,158 -------- -------- -------- Net (withdrawals) deposits before interest credited...... 29,645 (366) 5,964 Interest credited............... 8,501 7,221 7,613 -------- -------- -------- Net increase (decrease) in deposits................... 38,146 6,855 13,577 -------- -------- -------- Ending balance.................. $237,735 $199,589 $192,735 ======== ======== ========
Borrowings. The Bank utilizes advances from the FHLB-Seattle to supplement its supply of investable funds and to meet deposit withdrawal requirements. The FHLB-Seattle functions as a central reserve bank providing credit for savings associations and certain other member financial institutions. As a member of the FHLB-Seattle, the Bank
is required to own capital stock in the FHLB-Seattle and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities that are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs, all of which have their own interest rate guidelines and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. The Bank is currently authorized to borrow from the FHLB up to an amount equal to 30% of total assets. The Bank may increase the amount of its FHLB advances if loan demand exceeds deposit growth.
During the year ended March 31, 2000, the Bank opened a $15 million overnight line of credit with Key Bank and a $50 million reverse repurchase agreement with Merrill Lynch. Prior to December 1997, the Bank also used retail repurchase agreements due within one day as a source of funds, but discontinued their use in December 1997. See Note 8 of Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding borrowings by the Bank at the end of and during the periods indicated: At or For the Nine Months At or For the Ended Year Ended March 31, March 31, ---------------------------- -------- 2000 1999 1998 1997 ---- ---- ---- ---- (Dollars in thousands) Maximum amount of borrowings outstanding at any month end: Securities sold under agreements to repurchase................... $ -- $ -- $1,473 $1,459 FHLB advances.................... 70,750 50,250 8,000 2,850
Approximate average borrowings outstanding with respect to: Securities sold under agreements to repurchase.................. 67 -- 924 1,396 FHLB advances................... 60,418 17,108 3,024 861
Approximate weighted average rate paid on: Securities sold under agreements to repurchase.................... 5.97% --% 3.55% 3.50% FHLB advances..................... 5.37 5.03 5.85 4.88
Potential Adverse Impact of Changes in Interest Rates
The financial condition and results of operations of the Bank, and of savings institutions in general, are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the regulations of the OTS, the FDIC and the Board of Governors of the Federal Reserve System ("Federal Reserve"). Deposit flows and the cost of funds are influenced by interest rates of competing investments and general market rate conditions. Lending activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and by other factors affecting the supply of housing and the availability of funds.
The Bank's profitability is substantially dependent on its net interest income, which is the difference between the interest income received from its interest-earning assets and the interest expense incurred in connection with its
interest-bearing liabilities. When an institution's interest-bearing liabilities exceed its interest-earning assets which mature within a given period of time, material and prolonged increases in interest rates generally would adversely affect net interest income, while material and prolonged decreases in interest rates generally would have a favorable effect on net interest income. Like most of the savings industry, the interest-earning assets of the Bank have longer effective maturities than its deposits, which largely mature or are subject to repricing within a shorter period of time. As a result, a material and prolonged increase in interest rates generally would adversely affect net interest income, while material and prolonged decreases in interest rates generally would have a more favorable effect on net interest income.
The mismatch between maturities and interest rate sensitivities of balance sheet items results in interest rate risk. The extent of interest rate risk to which the Bank is subject is monitored by management by modeling the change in net portfolio value ("NPV") over a variety of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The calculation is intended to illustrate the change in NPV that will occur in the event of an immediate change in interest rates of at least 200 basis points with no effect given to any steps which management might take to counter the effect of that interest rate movement. At March 31, 2000, there was a $20.6 million, or 55.4%, decrease in the Bank's NPV as a percent of the present value of assets, assuming a 200 basis point increase in interest rates. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability Management and Interest Rate Risk" for a discussion of the NPV methods of analyzing interest rate risk and for an illustration of the effect of an increase in interest rates on the Bank's earnings.
Consequently, the Bank's net interest income could be adversely affected during periods of rising interest rates. Further increases in market rates of interest could have a material adverse effect on the Bank's net interest income. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability Management and Interest Rate Risk.". Furthermore, there has been increased scrutiny by the regulatory agencies as to financial institutions levels of interest rate risk and Pioneer Bank has not been examined by the OTS since it increased its review of this area.
Changes in interest rates can affect the amount of loans originated by an institution, as well as the value of its loans and other interest-earning assets and the resultant ability to realize gains on the sale of such assets. Changes in interest rates also can result in disintermediation, which is the flow of funds away from savings Banks into direct investments, such as U.S. Government and corporate securities, and other investment vehicles which, because of the absence of federal insurance premiums and reserve requirements, generally can pay higher rates of return than savings associations.
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of its deposits. The activities of federal savings institutions are governed by the Home Owners Loan Act and, in certain respects, the Federal Deposit Insurance Act, and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements. In addition, the Bank's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Bank's mortgage documents. The Bank is required to file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to review the Bank's compliance with various regulatory requirements. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate
loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company, the Bank and their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of the Treasury subject to the general oversight of the Secretary of the Treasury. The OTS has extensive authority over the operations of savings associations. Among other functions, the OTS issues and enforces regulations affecting federally insured savings associations and regularly examines these institutions.
All savings associations are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are determined based on the savings association's total assets, including consolidated subsidiaries. The Bank's OTS assessment for the fiscal year ended March 31, 2000 was $103,000.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB are to supervise the FHLBs, to ensure that the FHLBs carry out their housing finance mission, to ensure that the FHLBs remain adequately capitalized and able to raise funds in the capital markets, and to ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Seattle, is required to acquire and hold shares of capital stock in the FHLB-Seattle in an amount equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Seattle. The Bank is in compliance with this requirement with an investment in FHLB-Seattle stock of $3.9 million at March 31, 2000.
Among other benefits, the FHLB provides a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB-Seattle.
Federal Deposit Insurance Corporation. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. The FDIC maintains two separate insurance funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit accounts are insured by the FDIC under the SAIF to the maximum extent permitted by law. As insurer of the Bank's deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations.
Under applicable regulations, the FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period. The capital categories are: (i) well-capitalized, (ii) adequately capitalized, or (iii) undercapitalized. An institution is also placed in one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned with the most well-capitalized, healthy institutions receiving the lowest rates.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF insured institutions and BIF insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This amount is currently equal to about six basis points for each $100 in domestic deposits for SAIF members while BIF insured institutions pay an assessment equal to about 1.50 basis points for each $100 in domestic deposits. These assessments,
which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature in the year 2015.
The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank.
Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. Management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable accounts deposit plus short-term borrowings. This liquidity requirement is currently 4%, but may be changed from time to time by the OTS to any amount within the range of 4% to 10%. Monetary penalties may be imposed for failure to meet liquidity requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory actions against undercapitalized savings associations, the severity of which depends upon the institution's degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." An institution that has a total risk-based capital ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for a savings institution that is "critically undercapitalized." OTS regulations also require that a capital restoration plan be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company in an amount of up to the lesser of 5% of the institution's assets or the amount which would bring the institution into compliance with all capital standards. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS also could take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At March 31, 2000, the Bank was categorized as "well capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that the Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard. Management is aware of no conditions relating to these safety and soundness standards which would require submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test, such assets primarily consist of residential housing related loans and investments. At March 31, 2000, the Bank met the test and its QTL percentage was 86%.
Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "-- Savings and Loan Holding Company Regulations."
Capital Requirements. Federally insured savings associations, such as the Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). At March 31, 2000, the Bank had tangible capital of $52.4 million, or 14.0% of adjusted total assets, which is approximately $46.8 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. At March 31, 2000, the Bank did not have any intangible assets.
The capital standards also require core capital equal to at least 3% to 4% of adjusted total assets, depending on an institution's supervisory rating. Core capital generally consists of tangible capital. At March 31, 2000, the Bank had core capital equal to $52.4 million, or 14.0% of adjusted total assets, which is $41.2 million above the minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to- four family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by FNMA or FHLMC.
On March 31, 2000, the Bank had total risk-based capital of approximately $53.8 million, including $52.4 million in core capital and $1.4 million in qualifying supplementary capital, and risk-weighted assets of $188.9 million, or total capital of 28.5% of risk-weighted assets. This amount was $38.7 million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Company or the Bank may have a substantial adverse effect on their operations and profitability.
Limitations on Capital Distributions. The OTS imposes various restrictions on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. The OTS also prohibits a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result of such action, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with the association's mutual to stock conversion.
The Bank may make a capital distribution without OTS approval provided that the Bank notify the OTS 30 days before it declares the capital distribution and that the following requirements are met: (i) the Bank has a regulatory rating in one of the two top examination categories, (ii) the Bank is not of supervisory concern, and will remain adequately or well capitalized, as defined in the OTS prompt corrective action regulations, following the proposed distribution, and (iii) the distribution does not exceed the Bank's net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid). If the Bank does not meet these stated requirements, it must obtain the prior approval of the OTS before declaring any proposed distributions.
In the event the Bank's capital falls below its regulatory requirements or the OTS notifies it that it is in need of more than normal supervision, the Bank's ability to make capital distributions will be restricted. In addition, no distribution will be made if the Bank is notified by the OTS that a proposed capital distribution would constitute an unsafe and unsound practice, which would otherwise be permitted by the regulation.
Loans to One Borrower. Federal law provides that savings institutions are generally subject to the national bank limit on loans to one borrower. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At March 31, 2000, the Bank's limit on loans to one borrower was $5.9 million. At March 31, 2000, the Bank's largest aggregate loans to one borrower was $3.9 million, which was performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of the Bank include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act ("CRA"), all federally-insured financial institutions have a continuing and affirmative obligation consistent with safe and sound operations to help meet all the credit needs of its delineated community. The CRA does not establish specific lending requirements or programs nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to meet all the credit needs of its delineated community. The CRA requires the federal banking agencies, in connection with regulatory examinations, to assess an institution's record of meeting the credit needs of its delineated community and to take such record into account in evaluating regulatory applications to establish a new branch office that will accept deposits, relocate an existing office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution, among others. The CRA requires public disclosure of an institution's CRA rating. The Bank received a "satisfactory" rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $27,500 per day, or $1.1 million per day in especially egregious cases. Under the FDIA, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Savings and Loan Holding Company Regulations
The Company is a unitary savings and loan company subject to regulatory oversight of the OTS. Accordingly, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to a serious risk to the subsidiary savings association.
Acquisitions. Federal law and OTS regulations issued thereunder generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof. They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary other than in a supervisory acquisition, it would become a multiple savings and loan holding company and the activities of the Bank and any other subsidiaries (other than the Bank or any other SAIF insured savings association) would generally become subject to additional restrictions. There generally are more restrictions on the activities of a multiple savings and loan holding company than on those of a unitary savings and loan holding company. Federal law provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not an insured association shall commence or continue for more than two years after becoming a multiple savings and loan association holding company or subsidiary thereof, any business activity other than: (i) furnishing or performing management services for a subsidiary insured institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary insured institution, (iv) holding or managing properties used or occupied by a subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the OTS by regulation, prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above also must be approved by the OTS prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. If the Bank fails the qualified thrift lender test, within one year the Company must register as, and will become subject to, the significant activity restrictions applicable to bank holding companies. See "-- Federal Regulation of Savings Associations -- Qualified Thrift Lender Test" for information regarding the Bank's qualified thrift lender test.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non-qualifying reserve. Due to the Bank's loss experience, the Bank generally recognized a bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules eliminated the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also required that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Bank has no post-1987 reserves subject to recapture.
For taxable years beginning after December 31, 1995, the Bank's bad debt deduction will be determined under the experience method using a formula based on actual bad debt experience over a period of years. The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend distributions" to the Company, such distributions will be considered to result in distributions from the balance of its bad debt reserve as of December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans ("Excess Distributions"), and an amount based on the Excess Distributions will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, after the Conversion, the Bank makes a "nondividend distribution," then approximately one and one-half times the Excess Distribution would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). See "Regulation" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
Audits. The Bank's federal income tax returns have not been audited within the past five years.
State Taxation
The Bank is subject to an Oregon corporate excise tax at a statutory rate of 6.6% of income. The Bank's state income tax returns have not been audited during the past five years.
Competition
The Bank faces strong competition in its primary market area for the attraction of savings deposits (its primary source of lendable funds) and in the origination of loans. Its most direct competition for savings deposits has historically come from commercial banks, credit unions, other thrifts operating in its market area. As of March 31, 2000, there were nine commercial banks and two other thrifts operating in the Bank's primary market area. Particularly in times of high interest rates, the Bank has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The Bank's competition for loans comes from
commercial banks, thrift institutions, credit unions and mortgage bankers. Such competition for deposits and the origination of loans may limit the Bank's growth in the future.
Subsidiary Activities
The Bank has two subsidiaries, Pioneer Development Corporation ("PDC") and Pioneer Bank Investment Corporation ("PBIC"). PDC's primary interest was to purchase land sale contracts until March 31, 1998. Currently, its primary interest is in servicing those contractors. PBIC's primary interest is to hold the Bank's non-conforming assets. At March 31, 2000, the Bank's equity investment in PDC and PBIC was $2.0 million and $181,000, respectively.
Federal savings associations generally may invest up to 3% of their assets in service corporations, provided that at least one-half of any amount in excess of 1% is used primarily for community, inner-city and community development projects. The Bank's investment in its subsidiaries did not exceed these limits at March 31, 2000.
Personnel
As of March 31, 2000, the Bank had 122 full-time and 21 part-time employees, none of whom is represented by a collective bargaining unit. The Bank believes its relationship with its employees is good.
Executive Officers. The following table sets forth certain information regarding the executive officers of the Company.
Name Age(1) Position - ---- ------ --------
Berniel L. Maughan 57 President and Chief Executive Officer
Zane F. Lockwood 45 Executive Vice President
- ---------------- (1) At March 31, 2000.
Berniel L. Maughan has served as President and Chief Executive Officer of the Company and the Bank since May 25, 2000, replacing Jerry F. Aldape who resigned in January 2000. Mr. Maughan previously served with U.S. Bank, Utah being appointed President and Chief Executive Officer in February 1997, serving the bank until January 1999. Prior to that, Mr. Maughan served in the capacity of Senior Vice President and Regional Manager, and Executive Vice President with U.S. Bank, Oregon from January 1996 to February 1997. Prior to that, he served as Executive Vice President and Manager of the Retail Division of West One Bank, Oregon from November 1993 through December 1995; and as Senior Vice President and Regional Manager, West One Bank, Idaho from August 1986 through November 1993. Mr. Maughan has 32 years of experience in commercial and retail banking, and has been an active member of numerous civic and community organizations.
Zane F. Lockwood has served as the Bank's Executive Vice President since March of 1999 and Senior Vice President from March 1998 to March 1999. Prior to that time, he served as Senior Commercial Lender after joining the Bank in October 1997. Mr. Lockwood was employed by U.S. Bank for over 24 years in various capacities before joining the Bank. During his last ten years with U.S. Bank, he was a team leader in their Regional Business Loan Center located in Pendleton, Oregon. In that position he supervised the commercial and agricultural lending in Union, Baker, Wallowa, Grant and Malheur counties. Mr. Lockwood was very involved in the communities he has resided in having held numerous board memberships, including president of the La Grande/Union County Chamber of Commerce.
Item 2.
Item 2. Properties - -------------------
The following table sets forth certain information regarding the Bank's offices at March 31, 2000, all of which are owned.
Current Approximate Location Year Opened Square Footage Deposits - -------- ----------- -------------- -------- (In thousands) Corporate Office:
2055 First Street 1979 10,700 $ 1,440 Baker City, Oregon 97814
Branch Offices:
Baker City Branch(2) 2000 12,653 67,806 1990 Washington Baker City, Oregon 97814
La Grande Branch 1975 6,758 50,338 1215 Adams Avenue La Grande, Oregon 97850
Ontario Branch 1960 3,700 32,652 225 SW Fourth Avenue Ontario, Oregon 97914
John Day Branch 1973 2,420 15,658 150 West Main Street John Day, Oregon 97845
Burns Branch 1975 3,968 19,950 77 W. Adams Street Burns, Oregon 97720
Enterprise Branch 1976 3,360 22,761 205 West Main Street Enterprise, Oregon 97828
Island City Branch 1997 4,200 18,791 3106 Island Avenue La Grande, Oregon 97850
Vale Branch 1999 3,512 8,339 150 Longfellow Street North Vale, Oregon 97818
Pendleton Branch (1) 2000 3,748 -0- 1701 SW Court Avenue Pendleton, Oregon 97801
- ---------------- (1) The Pendleton Branch office was acquired on May 26, 2000. (2) The Baker City branch and Centralized Lending Center relocated to their new office on April 23, 2000.
The Bank uses the services of an in-house data processing system. At March 31, 2000, the Bank had 13 proprietary automated teller machines, eight of which were located in existing branches. At March 31, 2000, the net book value of the Bank's office properties and the Bank's fixtures, furniture and equipment was $9.9 million or 2.7% of total assets. See Note 6 of the Consolidated Financial Statements in the Annual Report.
Item 3.
Item 3. Legal Proceedings - --------------------------
Periodically, there have been various claims and lawsuits involving the Bank, mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Bank.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 2000.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder - -------------------------------------------------------------------------- Matters -------
The information contained under the section captioned "Stock Listing" on the inside back cover of the Annual Report is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The information contained under the section captioned "SELECTED CONSOLIDATED FINANCIAL DATA" on pages 13 and 14 of the Annual Report is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations ---------------------
The information contained in the section captioned "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" beginning on page 15 of the Annual Report is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------
The information contained in the section captioned "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Market Risk and Asset and Liability Management" on pages 23 and 24 of the Annual Report are incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
(a) Financial Statements Independent Auditors' Reports* Consolidated Balance Sheets as of March 31, 2000 and 1999* Consolidated Statements of Income for the Year Ended March 31, 2000, 1999 and 1998* Consolidated Statements of Shareholders' Equity for the Year Ended March 31, 2000, 1999 and 1998* Consolidated Statements of Cash Flows for the Year Ended March 31, 2000, 1999 and 1998* Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and incorporated herein by reference. All schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related Notes contained in the Annual Report.
(b) Supplementary Data
The information contained in Note 22 to the Consolidated Financial Statements included in the Annual Report is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure --------------------
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The information contained under the section captioned "Proposal I - Election of Directors" contained in the Company's Proxy Statement, and "Part I - -- Business -- Personnel -- Executive Officers" of this report, is incorporated herein by reference. Reference is made to the cover page of this report for information regarding compliance with Section 16(a) of the Exchange Act.
Item 11.
Item 11. Executive Compensation - --------------------------------
The information contained under the sections captioned "Executive Compensation," "Directors' Compensation" and "Benefits" under "Proposal I - Election of Directors" in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by reference to the sections captioned "Proposal I - Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
The information required by this item is incorporated herein by reference to the sections captioned "Proposal I - Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The information set forth under the section captioned "Proposal I - Election of Directors - Certain Transactions with the Bank" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant* 3(b) Bylaws of the Registrant* 10(a) Employment Agreement with Jerry F. Aldape** 10(b) Severance Agreement with Nadine J. Johnson** 10(c) Severance Agreement with William H. 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*** 10(m) Form of Severance Agreement with Marvin L. Sumner 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
Two Current Reports Form 8-K were filed during the year ended March 31, 2000. The first Form 8-K, which was filed on February 8, 2000, announced the resignation of Jerry F. Aldape as President and Chief Executive Officer, effective January 24, 2000. The second Form 8-K, which was filed on March 16, 2000, announced the resignation of Nadine J. Johnson as Chief Financial Officer, effective June 30, 2000.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OREGON TRAIL FINANCIAL CORP.
Date: June 29, 2000 By: /s/ Berniel L. Maughan ---------------------------------------- Berniel L. Maughan President and Chief Executive Officer (Duly Authorized Representative)
Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ---------- ----- ----
/s/ Berniel L. Maughan President and Chief Executive June 29, 2000 - ------------------------- Officer and Director Berniel L. Maughan (Principal Executive Officer)
/s/ Nadine J. Johnson Chief Financial Officer June 29, 2000 - ------------------------- (Principal Financial Officer) Nadine J. Johnson
/s/ Stephen R. Whittemore Chairman of the Board June 29, 2000 - ------------------------- Stephen R. Whittemore
/s/ John Gentry Director June 29, 2000 - ------------------------- John Gentry
/s/ Albert H. Durgan Director June 29, 2000 - ------------------------- Albert H. Durgan
/s/ Edward H. Elms Director June 29, 2000 - ------------------------- Edward H. Elms
/s/ John A. Lienkaemper Director June 29, 2000 - ------------------------- John A. Lienkaemper
/s/ Charles Rouse Director June 29, 2000 - ------------------------- Charles Rouse
EXHIBIT 10(m)
Form of Severance Agreement with Marvin L. Sumner
AGREEMENT ---------
THIS AGREEMENT is made effective as of February 1, 2000 by and between PIONEER BANK, FSB (the "BANK"); OREGON TRAIL FINANCIAL CORP. ("COMPANY"); and MARVIN L. SUMNER ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in the position of Vice President/Senior Commercial Lending Officer of the BANK, a position of substantial responsibility; and
WHEREAS, the BANK wishes to protect his position therewith for the period provided in this Agreement in the event of a Change in Control (as defined herein);
NOW, THEREFORE, in consideration of the foregoing and upon the other terms and conditions herein provided, the parties hereto agree as follows:
1. Term Of Agreement.
The term of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of eighteen (18) full calendar months thereafter. Commencing on the first anniversary date of this Agreement and continuing at each anniversary date thereafter, the Board of Directors of the BANK ("Board") may extend the Agreement for an additional year. The Board will conduct a performance evaluation of EXECUTIVE for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting.
2. Payments to EXECUTIVE Upon Change in Control.
(a) Upon the occurrence of a Change in Control (as herein defined) followed within twelve (12) months of the effective date of the Change in Control by the voluntary or involuntary termination of EXECUTIVE's employment, other than for Cause, as defined in Section 2(c) hereof, the provisions of Section 3 shall apply. For purposes of this Agreement, "voluntary termination" shall be limited to the circumstances in which EXECUTIVE elects to voluntarily terminate his employment within twelve (12) months of the effective date of a Change n Control following any demotion, loss of title, office or significant authority, reduction in his annual compensation or benefits (other than a reduction affecting the Bank's personnel generally), or relocation of his principal place of employment by more than 35 miles from its location immediately prior to the Change in Control.
(b) A "Change in Control" of the COMPANY or the BANK shall be deemed to occur if and when (a) an offeror other than the Corporation purchases shares of the stock of the Corporation or the Bank pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation or the Bank representing twenty-five percent (25%) or more of the combined voting power of the Corporation's or the Bank's then outstanding securities, (c) the membership of the board of directors of the Corporation or the Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four (24) month period (whether commencing before or after the date of adoption of this Agreement) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the Corporation or the Bank approve a merger, consolidation, sale or disposition of all or substantially all of the Corporation's or the Bank's assets, or a plan of partial or complete liquidation.
(c) EXECUTIVE shall not have the right to receive termination benefits pursuant to Section 3 hereof upon Termination for Cause. The term "Termination for Cause" shall mean termination because of EXECUTIVE's intentional failure to perform stated duties, personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of any material provision of this Agreement. In determining incompetence, the act or omissions shall be measured against standards generally prevailing in the savings institution industry. Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to EXECUTIVE and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, EXECUTIVE was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. EXECUTIVE shall not have the right to receive compensation or other benefits for any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve (12) months of the effective date of a Change in Control by the voluntary or involuntary termination of EXECUTIVE's employment other than Termination for Cause, the BANK shall be obligated to pay EXECUTIVE, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay, a sum equal to one and one-half (1.5) times EXECUTIVE's "base amount," within the meaning of Section 280G(b)(3) of the Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made in a lump sum paid within ten (10) days of EXECUTIVE's date of termination.
(b) Upon the occurrence of a Change in Control of the BANK followed within twelve (12) months of the effective date of a Change in Control by EXECUTIVE's voluntary or involuntary termination of employment, other than Termination for Cause, the BANK shall cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the BANK for EXECUTIVE prior to his severance. Such coverage and payments shall cease upon expiration of eighteen (18) months from the date of EXECUTIVE's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the event that the aggregate payments or benefits to be made or afforded to EXECUTIVE under this Section, together with any other payments or benefits received or to be received by EXECUTIVE in connection with a Change in Control, would be deemed to include an "excess parachute payment" under Section 280G of the Code, then at the election of EXECUTIVE, (i) such payments or
benefits shall be payable or provided to EXECUTIVE over the minimum period necessary to reduce the present value of such payments or benefits to an amount which is one dollar ($1.00) less than three (3) times EXECUTIVE's "base amount" under Section 280G(b)(3) of the Code or (ii) the payments or benefits to be provided under this Section 3 shall be reduced to the extent necessary to avoid treatment as an excess parachute payment with the allocation of the reduction among such payments and benefits to be determined by EXECUTIVE.
(d) Any payments made to EXECUTIVE pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C Section 1828(k) and any regulations promulgated thereunder.
4. Effect On Prior Agreement And Existing Benefit Plans
This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the BANK and EXECUTIVE, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that EXECUTIVE is subject to receiving fewer benefits than those available to him without reference to this Agreement, except that the parties agree EXECUTIVE shall not be eligible for severance benefits under the BANK's Employee Severance Compensation Plan.
5. No Attachment
(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of, EXECUTIVE, the COMPANY, the BANK and their respective successors and assigns.
6. Modification And Waiver
(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there by an estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.
7. Required Provisions
(a) The BANK may terminate EXECUTIVE's employment at any time, but any termination by the BANK, other than Termination for Cause, shall not prejudice EXECUTIVE's
right to compensation or other benefits under this Agreement. EXECUTIVE shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 2(c) herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from participating in the conduct of the BANK's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the BANK may, in its discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from participating in the conduct of the BANK's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), all obligations of the BANK under the Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the BANK under the authority contained in Section 13(c) of the FDIA and (ii) by the Director, or his or her designee at the time the Director or such designee approves a supervisory merger to resolve problems related to operation of the BANK or when the BANK is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.
9. Headings For Reference Only
The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Oregon, unless preempted by Federal law as now or hereafter in effect. In the event that any provision of this Agreement conflicts with 12 C.F.R. Section 563.39(b), the latter provision shall prevail.
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within fifty (50) miles from the location of the BANK, in accordance with the rules of the American Arbitration Association then in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the BANK. The COMPANY, however, guarantees all payments and the provision of all amounts and benefits due hereunder to EXECUTIVE and, if such payments are not timely paid or provided by the BANK, such amounts and benefits shall be paid or provided by the COMPANY.
12. Payment Of Legal Fees
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the BANK if EXECUTIVE is successful on the merits pursuant to a legal judgment, arbitration or settlement.
13. Successor To The BANK or the COMPANY
The BANK and the COMPANY shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the BANK or the COMPANY, expressly and unconditionally to assume and agree to perform the BANK's or the COMPANY's obligations under this Agreement, in the same manner and to the same extent that the BANK or the COMPANY would be required to perform if no such succession or assignment had taken place.
14. Signatures
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to be executed and their seal to be affixed hereunto by a duly authorized officer, and EXECUTIVE has signed this Agreement, all as of the date referenced above.
ATTEST PIONEER BANK, FSB
/s/ Zane F. Lockwood /s/ Zane F. Lockwood, Acting Pres/CEO - ----------------------------- ------------------------------------- [SEAL]
ATTEST OREGON TRAIL FINANCIAL CORP.
/s/ Zane F. Lockwood /s/ Zane F. Lockwood, Acting Pres/CEO - ----------------------------- -------------------------------------
[SEAL]
WITNESS:
/s/ Zane F. Lockwood /s/ Marvin L. Sumner - ----------------------------- ------------------------------------- Marvin L. Sumner
EXHIBIT 13
2000 Annual Report to Shareholders
OREGON TRAIL FINANCIAL CORPORATION
Annual Report
The view from here.
Pioneer Bank has been part of the Eastern Oregon landscape for nearly one hundred years. The Bank has maintained its pioneering spirit and commitment to progress, becoming one of the top three banks in each of our market areas for deposit market share.
Dear Shareholders
[picture of Stephen R. Whittemore]
In 1999, Pioneer Bank continued its transition from a well established mutual savings and loan to a progressive savings bank. The tradition of mortgage-based products is still evident in a time when careful tailoring of an additional selection of products and services is being emphasized. The strengths of our heritage are demonstrated daily with the strong relationships within the communities we serve and familiarity of the marketplace and the individuals in it. Customers can be assured of consistency in maintaining traditional services while being given the opportunity for technologically advanced products and services. Since our conversion to stock ownership, significant investments have been made to improve facilities, technology and recruitment and retention of quality employees. Attention has continued to be given at all levels of management to maintaining safe, secure investments. This now positions us to more effectively deliver needed financial services. Significantly, the most dynamic change in the year is our attraction and placement of new leadership. We are pleased to have Berniel Maughan as President and CEO utilizing his broad based commercial banking experience and knowledge of the banking industry, as a whole, to take this company to new levels of performance. As Pioneer Bank continues its evolution, we continue to assess everything we do or do not do by a major test of measurement: Is it in the best interest of our shareholders? To that end, we look forward to the coming years and new markets.
Sincerely,
/s/ Stephen R. Whittemore
Stephen R. Whittemore Chairman, Board of Directors
[picture of Berniel L. Maughan]
We have just ended the decade of the 90's, an era where we have seen many changes and much growth in the economy. With this has come new opportunity, but not without some challenges along the way. Growing concerns of inflation, sparked a sharp rise in interest rates, heavily impacting our margins. The combination of the investment portfolio mix with both rate and maturities, coupled with a variety of existing fixed-rate mortgage loans in our portfolio have provided little flexibility to our opportunity for better earnings. Expenses grew this past year as the Bank invested in facility improvements, positioning for long-term growth. The infrastructure was expanded to allow for additional growth in our markets with consumer, commercial and agricultural loan products and services. The Bank also provided expansion and improvement to product and delivery lines such as internet banking. Our expanded branch network and talented, dedicated employees, coupled with cost-savings technologies, have postured us to be the dominant community bank in the markets we serve. Our customer base and our markets represent a substantial profit potential. To ensure their lasting loyalty, Pioneer Bank's strategy will be to proactively serve existing customers by recognizing their increased needs for new and existing products and by continuing to provide cost-effective delivery methods that maintain our commitment to providing high quality service. The forward strategy for Pioneer Bank will be to boost profitability and market value of the company through restructuring our operating policies, striving for a greater proportion of variable-priced loans to maintain a proper relationship to our variable-rate deposit structure, and improving the return and flexibility from our investment portfolio by taking advantage of shorter average maturities, benefited by higher rates. Expense management will be an important strategy implemented to stimulate earnings and maximize shareholder value. This will be accomplished by a consistent focus on costs, identifying outlays that produce more strategic benefits. Our objective for the future will be to provide banking services to a diverse variety of customers in our markets and to do so in a manner that will maintain and grow our share of business, while retaining quality and improving the profitability of the Bank and return to shareholders. I am pleased to be working with my associates at Pioneer Bank, and am extremely impressed with their dedication and teamwork. I recognize in them a strong commitment to embracing the change process necessary to facilitate the new direction and innovation called for in today's financial marketplace. Building a strong management team to meet the challenges of maintaining quality standards with profitable returns is of the highest priority. Our Directors are dedicated individuals whose interests are aligned with those of our shareholders. Their continued guidance, along with that of our key leadership and management team, will ensure the improved and steady ongoing financial performance needed, that will fulfill our mission of creating stronger shareholder value by delivering superior service to our customers.
Sincerely,
/s/ Berniel L. Maughan
Berniel L. Maughan President and Chief Executive Officer
Expanding our territories.
People and technology are the keys to our deposit and loan growth.
Throughout Pioneer's service territory, people and technology have been the keys to the deposit and loan growth achieved by every branch. Our new online banking service has given customers additional banking options, while our growing ATM network, 24-hour Telebanking and fully staffed branches allow customers easy access to a wider range of services. Relationship banking, onsite local loan decisions, and customized deposit services continue to be central to the Bank's style, making banking with Pioneer "doing business with a friend." Above all, community banking Pioneer style is about people. Encouraging and building our staff through intensive training and strategic hiring has allowed the Bank to become a leader in innovation, and customer service.
[picture]
Where other banks saw obstacles, Pioneer saw opportunity. Vale, Oregon is home to a stable agricultural and growing food products economy; a natural fit for Pioneer's own growing agricultural lending expertise. The new Vale branch building symbolizes the Bank's commitment to Malheur County and attracts new customers in a region where population and wage growth is expected to continue at above state averages over the next few years. The branch itself, located at 150 Longfellow Avenue North in Vale is a 3,512 square foot facility with a staff of seven offering full consumer and business services. The branch also features safe deposit boxes, 24-hour ATM and a two-lane drive up facility.
The new branch symbolized our commitment to Malheur County and attracts new customers.
Unveiling the new Vale branch.
New branch. Familiar territory.
Pioneering style means thinking ahead. In Baker City, we seized opportunity in the form of an available former bank building across the street from the Bank's headquarters and main branch. Moving to this facility will bring greater customer convenience and operational cost savings. With an additional teller window, more safe deposit boxes, easier drive-through access, additional loan-making capacity, and faster teller transactions with updated technology, the 12,000 square foot building delivers improved customer service. The facility's additional space also enables the Bank to bring loan processing functions into one cost-saving, centralized setting.
Our new facility will bring greater customer convenience and operational [picture] cost savings.
The Pendleton branch increases the total population exposure to Pioneer's brand of relationship [picture] banking by 72%.
Fiscal Year 2000 saw the Bank forge ahead with a strategic move into Umatilla County. With the purchase of Western Bank's Pendleton branch facility and accounts, Pioneer opened its ninth branch May 30, 2000 and positioned the Bank to grow in a dynamic adjacent market area. Located in Eastern Oregon's largest county and one of the fastest growing counties in the state, the Pendleton branch increases the total population exposure to Pioneer's brand of relationship banking by 72%, positioning us for growth in one of the state's most vibrant regions.
Breaking new ground.
We understand the business landscape.
When it comes to commercial lending for businesses large and small throughout Eastern Oregon, Pioneer's lending experts walk the walk. In the three years since its inception, the Bank's commercial lending has grown to more than $31 million in business loans supporting a diverse group of growing organizations across the region. This increase also includes a one-year $3.5 million or 29% increase in agriculture loans. It's a winning combination: experienced local lenders working hand in hand with customers who have a business vision. It's a roadmap for business success.
In three years, the Bank's small business lending has grown to more than $31 million.
Our auto dealer center business has nearly doubled during the past year.
Pioneer continues to move forward with product and service innovations like the Auto Dealer Loan Center. New in fiscal year 1998, this auto dealer finance program has nearly doubled during the past year, growing from $9.3 million at March 31, 1999 to $17.4 million at March 31, 2000. It now includes a network of nearly 30 Oregon and Idaho auto dealers representing nearly $20 million in loans. While the program offers a significant new source of income to the Bank, it also allows the Bank to build relationships with dealers and their customers by providing a full range of banking products.
[picture]
Moving Eastern Oregon.
Pioneering a solid future.
We're forging future growth and profitability with leadership, progress, and innovation.
Board of Directors (Standing left to right)
Albert H. Durgan Stephen R. Whittemore Charles H. Rouse [picture] Edward H. Elms John W. Gentry John A. Lienkaemper
Leadership. Progress. Innovation. Just a few key ingredients make a true Pioneer.
FINANCIAL INDEX
Selected Consolidated Financial and Other Data 13
Management's Discussion and Analysis 15
Independent Auditors' Report 26
Consolidated Financial Statements 27
Notes to Consolidated Financial Statements 32
[This page left blank]
Oregon Trail Financial Corp. and Subsidiary Selected Consolidated Financial and Other Data
Financial Condition Data (in thousands)
At March 31, June 30, ------------------------------------------ --------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Total assets $ 370,612 $ 313,473 $ 263,224 $ 204,213 $ 203,457
Loans receivable, net 220,591 185,747 153,838 138,881 132,347 Loans held for sale 0 0 0 428 0 Investment securities held to maturity 3,897 3,221 2,985 2,763 2,609 Investment securities available for sale 37,436 37,965 37,225 15,907 19,950 Mortgage-backed and related securities held for trading 0 0 0 0 2,569 Mortgage-backed and related securities available for sale 84,615 60,371 27,778 19,745 19,451 Mortgage-backed and related securities held to maturity 0 9,338 12,805 15,302 17,011 Cash and cash equivalents 9,261 6,276 20,311 4,976 3,416 Deposits 237,735 199,589 192,734 179,158 176,619 Advances from FHLB 76,750 50,250 0 2,231 4,082 Total shareholders' equity 53,104 60,083 67,301 21,027 20,004 Shares outstanding excluding unearned restricted shares held in ESOP 3,317 3,764 4,346 N/A N/A
Selected Consolidated Financial and Other Data
Other Data At At March 31, June 30, ----------------------------------- ------- 2000 1999 1998 1997 1996 Number of: ------ ------ ------ ------ ------ Real estate loans outstanding 2,298 2,346 2,245 2,381 2,493 Deposit accounts 31,384 28,820 28,781 29,455 30,524 Full-service offices 8 7 7 7 7
At or for the Year At or for Nine Ended At or for the Year Ended Months Ended June Selected Financial March 31, March 31, 30, Ratios ------------------------------- --------------- ------ 2000 1999 1998 1997 1997 1996 1996 ------ ----- ----- ----- ----- ----- ----- Performance Ratios: (3) Return on average assets (4) 0.76% 1.14% 1.25% 0.80% 0.72% 1.06% 1.06% Return on average equity (5) 4.60 4.90 6.65 7.96 7.09 11.67 11.40 Interest rate spread (6) 3.10 3.85 3.73 3.89 3.90 3.45 3.56 Net interest margin (7) 3.89 4.70 4.60 4.37 4.40 3.87 3.97 Average interest- earning assets to average interest- bearing liabilities 122.02 128.10 125.92 112.74 113.20 110.33 110.64 Noninterest expense as a percent of average total assets 2.95 2.96 2.69 3.16 3.31 1.76 2.43 Efficiency ratio (8) 70.37 60.09 55.68 68.77 71.09 56.78 57.80 Dividend payout ratio (9) 42.14 28.95 13.16 N/A N/A N/A N/A
Asset Quality Ratios: Nonaccrual and 90 days or more past due loans as a percent of total loans, net 0.07 0.07 0.18 0.14 0.14 0.10 0.12 Nonperforming assets as a percent of total assets 0.04 0.01 0.22 0.10 0.10 0.06 0.10 Allowance for losses as a percent of gross loans receivable 0.63 0.66 0.55 0.52 0.52 0.41 0.41 Allowance for losses as a percent of nonperforming loans 900.65 889.86 308.07 381.58 381.58 424.80 331.90 Net charge-offs to average outstanding loans 0.00 0.06 0.01 0.02 0.03 0.02 0.02 Capital Ratios: Total equity-to- assets ratio 14.33 19.17 25.57 10.30 10.30 8.68 9.83 Average equity to average assets (10) 16.55 23.27 18.82 10.01 10.14 9.11 9.26
- --------------------- (1) Includes FDIC SAIF assessment of $1.1 million during the nine months and year ended March 31, 1997. (2) Weighted average shares outstanding for fiscal year 1998 included shares from conversion on October 3, 1997 to year end. Earnings per share include only earnings from date of conversion to year end. (3) Annualized, where appropriate for the nine months ended March 31, 1997 and 1996. (4) Net earnings divided by average total assets. (5) Net earnings divided by average equity. (6) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (7) Net interest income as a percentage of average interest-earning assets. (8) Other expenses divided by the sum of net interest income and other income. Efficiency ratio without FDIC SAIF assessment was 56.75% and 57.95% for the nine and twelve months ended March 31, 1997, respectively. (9) Dividends declared per share divided by net income per share. (10) Average total equity divided by average total assets.
Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis and other portions of the report contain certain "forward-looking statements" of Financial Condition and Results of Operations concerning the expected future operations of Oregon Trail Financial Corp. (the "Company"). Management wishes to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward-looking statements" contained in our Annual Report. "Forward-looking statements" are used to describe future plans and strategies, including expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company's market area and the country as a whole, the ability of the Company to control costs and expenses, competitive products and pricing, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.
GENERAL Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto contained in this Annual Report. The Company, an Oregon Corporation, became the unitary savings and loan holding company of Pioneer Bank, a Federal Savings Bank ( the "Bank") upon the Bank's conversion from a federally chartered mutual to a federally chartered stock savings bank (the "Conversion") on October 3, 1997. Accordingly, the Company is primarily engaged in the business of planning, directing and coordinating the business activities of the Bank, the deposits of which are insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Bank conducts business from its main office in Baker City, Oregon and its nine branch offices located in Eastern Oregon. On May 26, 2000 the Bank acquired its ninth branch, the Pendleton branch of Western Bank, a division of Washington Mutual, Inc. Management chose Pendleton as a new location because it is in an adjacent market area and in the Columbia Basin, a more rapidly growing economic region. Pendleton is located in Umatilla County with a county population of approximately 67,000. The Bank operates as a community oriented financial institution devoted to serving the needs of its customers. The Bank's business consists primarily of attracting retail deposits from the general public and using those funds to originate one-to-four family residential and consumer loans in its primary market area. To a lesser but growing extent the Bank also originates agricultural loans, commercial business loans and indirect automobile loans. In the past year the Bank has expanded the origination of indirect automobile loans to 25 dealer relationships and into several adjacent market areas in Idaho and Eastern Oregon. The Bank's results of operations depend primarily on its net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its interest-bearing liabilities, consisting of deposits and Federal Home Loan Bank of Seattle ("FHLB") borrowings. The Bank's net income is also affected by, among other things, fee income, provisions for loan losses, operating expenses and income tax provisions. The Bank's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the attendant actions of the regulatory authorities.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND MARCH 31, 1999 Total assets at March 31, 2000 amounted to $370.6 million compared to $313.5 million at March 31, 1999. The primary reason for the $57.1 million or 18.2% increase in total assets was a $34.9 million increase in net loans receivable and a $14.4 million increase in securities. Loans receivable, net, were $220.6 million at March 31, 2000 compared to $185.7 million at March 31, 1999, an 18.8% increase. A substantial portion of the Bank's loan portfolio is secured by real estate, either as primary or secondary collateral, located in its primary market area. In addition, during the year ended March 31, 2000 there was a continuing trend in the growth of the consumer, commercial business and agricultural loans as the Bank emphasized the origination of loans with shorter maturities for asset and liability management purposes. Total consumer loans increased $9.3 million or 26.4% from $35.3 million at March 31, 1999 to $44.6 million at fiscal year end 2000, primarily due to the purchase of $14.5 million of indirect automobile loans. The indirect automobile dealer program has been very successful with ten dealers joining the program during fiscal 2000, bringing total dealer relationships to 25. The total indirect portfolio increased to $17.4 million at March 31, 2000 with delinquencies of only .34% of total loans. Consumer loans other than indirect automobile loans
increased $1.2 million from March 31, 1999 to March 31, 2000. Commercial business loans increased $1.8 million or 15.1% from $12.0 million to $13.9 million, while commercial real estate loans increased $1.1 million or 8.0%, from $13.7 million to $14.8 million. The development of the agricultural loan portfolio including agricultural real estate loans continued with a $3.7 million or 30.6% increase for the year from $12.0 million at March 31, 1999 to $15.7 million at March 31, 2000. Management continued its efforts to balance the interest rate risk of a fixed rate portfolio of primarily long term real estate loans, with the fulfillment of local demand for shorter term agricultural, commercial business and indirect automobile dealer loans. There is greater credit risk associated with these types of loans than with traditional residential mortgage lending. However, mortgage loans on one-to-four family dwellings increased $18.5 million or 17.0% from $109.1 million at March 31, 1999 to $127.6 million at March 31, 2000. Residential mortgage loans as a percentage of total gross loans receivable decreased from 58.0% at March 31, 1999 to 57.1% at March 31, 2000. Cash and cash equivalents were $9.3 million at March 31, 2000 compared to $6.3 million at March 31, 1999. The $3.0 million increase was primarily the result of a change in float requirements with correspondent banks. Available-for-sale securities were $122.1 million at March 31, 2000 compared to $98.3 million at March 31, 1999, an increase of $23.8 million or 24.2%. The increase was primarily due to the purchase of approximately $28.3 million of U.S. government agency mortgage-backed and related securities, $5.4 million of U.S. government agency obligations and $1.3 million of AAA rated municipal bonds of various local Oregon governmental units. In addition, effective April 1, 1999, in accordance with Statement of Financial Accounting Standards ("SFAS") 133, Accounting for Derivative Instruments and Hedging Activities, $9.3 million of securities classified as held-to-maturity at March 31, 1999 were reclassified to available-for- sale. The transfer was recorded as a direct increase to other comprehensive income of $111,000 (net of income tax of $69,000). See Note 1 of Notes to Consolidated Financial Statements. The purchases and the transfer of held-to-maturity securities were partially offset by $5.0 million of U.S. government securities called by the issuer due to a lower interest rate environment, principal pay-downs of $10.4 million on U.S. government agency mortgage-backed and related securities and by an increase of $5.1 million in the unrealized holding losses on securities available for sale. Premises and equipment, net, increased to $9.9 million at March 31, 2000 from $7.8 million at March 31, 1999 primarily as a result of the completion of the Vale branch office in October 1999 with a total cost of approximately $1.0 million, construction in process on the new Baker branch office of approximately $1.5 million and purchases of technological equipment and software of approximately $500,000. The new Baker branch was occupied in April 2000 and also includes space for the central lending staff. The increases were partially offset by the sale of $200,000 of land in August 1999 at a gain of $173,000 and depreciation expense of $686,000. Total deposits were $237.7 million at March 31, 2000, compared to $199.6 million at March 31, 1999. Management attributes the $38.1 million increase primarily to successful efforts to attract core deposits, i.e. statement savings accounts and checking accounts, which grew $21.4 million or 21.4%. Efforts to grow deposits were aided by consolidation of larger banks in the Bank's marketplace and the Bank's commitment to personal customer service enhanced by technological advances. As large national banks have consolidated and reduced staff at branches in the Bank's marketplace, many customers have demonstrated their preference for personalized customer service by moving their banking relationships to the Bank. The Bank has also been able to attract the core deposits of its new agricultural and commercial lending clients and has offered very competitive certificate of deposit rates during the past year. The Bank had $76.8 million in outstanding advances from the FHLB at March 31, 2000 compared to $50.3 million at March 31, 1999. The increase in borrowings was used to fund net loan growth of $34.9 million as well as the net growth in the investment portfolio of $14.4 million. Total shareholders' equity decreased to $53.1 million at March 31, 2000 from $60.1 million at March 31, 1999 primarily due to the repurchase of 534,228 of the Company's common stock at an average price of $11.90 per share totaling $6.4 million. Shares repurchased were retired. Cash dividends paid on the common stock of $1.1 million also decreased total shareholders' equity, as did the $3.2 million decrease in the market valuation of securities net of taxes. The decreases were partially offset by net income of $2.6 million, a $612,000 increase due to the release of Employee Stock Ownership Plan (the "ESOP") shares and $373,000 due to the accrual of Management Recognition and Development Plan (the "MRDP") shares which vest ratably over a five to six year period.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 Net Income. Net income was $2.6 million for the year ended March 31, 2000 compared to $3.2 million for the year ended March 31, 1999. The 18.8% decrease resulted primarily from an increase in non-interest (other) expense of $1.9 million partially offset by a $504,000 increase in noninterest income, a $305,000 decrease in the loan loss provision, a $254,000 increase in net interest income and a $325,000 decrease in the provision for income taxes. Net Interest Income. Net interest income increased 2.4% to $12.8 million for the year ended March 31, 2000 from $12.5 million for the year ended March 31, 1999. Interest income increased 18.9% to $24.5 million for the year ended March 31, 2000 compared to $20.6 million for the same period ended March 31, 1999. The increase was primarily due to increases in earning assets, as loans outstanding increased $34.9 million and investments increased $14.4 million. Interest expense
increased 45.7% from $8.1 million for the year ended March 31, 1999 to $11.8 million for the year ended March 31, 2000. The increase is primarily due to an increase of $42.5 million in average outstanding FHLB advances for the year ended March 31, 2000 compared to March 31, 1999 which resulted in an increase of $2.4 million in interest expense related to the advances. The average cost of FHLB advances increased from 5.03% for the year ended March 31, 1999 to 5.37% for the year ended March 31, 2000, as a result of the increase in short term interest rates. During the fiscal year ended March 31, 2000, the Federal Reserve Open Market Committee increased the Fed Funds rate five times, beginning in July 1999 and ending in March 2000 for a total increase of 1.25%. Interest expense on deposits increased only $1.3 million year over year while the average balance of deposits increased $29.5 million. The average balance of lower costing core deposits consisting of statement savings, checking and money market accounts increased $20.1 million while the average balance of certificates of deposit increased only $9.4 million. Even with the rising short term interest rates, the average cost of deposits increased only slightly from 4.00% for the year ended March 31, 1999 to 4.07% for the year ended March 31, 2000, primarily as a result of the positive change in the deposit mix. The interest rate spread decreased to 3.10% for the year ended March 31, 2000 from 3.65% for the year ended March 31, 1999. The decrease is attributed to a 25 basis point decrease in the yield on the Bank's loan portfolio and a 99 basis point decrease in the yield on the investment securities portfolio, as well as a 38 basis point increase in the cost of FHLB advances. Provision for Loan Losses. The provision 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 of the collateral and guarantees securing the loans. See Note 1 of Notes to Consolidated Financial Statements. The provision for loan losses was $178,000 for the year ended March 31, 2000 compared to $483,000 for the same period in 1999. In the year ended March 31, 1999 management deemed a greater provision necessary due to a very high percentage of growth in agricultural, commercial business and consumer loans, which are inherently riskier than one-to-four family mortgage loans. Although the same categories of loans experienced strong growth in the year ended March 31, 2000, a larger base of more seasoned loans existed in those categories at the beginning of the year, and accordingly, the growth was not as significant to the total loan portfolio as in the prior year. Management believes the allowance for loan losses is adequate at March 31, 2000. Other Income. Other income was $1.6 million for the year ended March 31, 2000, compared to $1.1 million for the year ended March 31, 1999. This 45.5% increase resulted primarily from increased core deposit fees and fees related to lending activities, as well as a $173,000 gain on the sale of land. Other Expenses. Other expenses were $10.1 million for the year ended March 31, 2000 compared to $8.2 million for the year ended March 31, 1999. The increase from the prior year was primarily due to a $1.2 million increase in compensation and benefits expense. Increases in this area were due to an increase of $184,000 in non-cash expense related to the MRDP, partially offset by an $111,000 decrease in non-cash expense related to the ESOP when compared to the prior year. (See Note 1 and Note 12 of Notes to Consolidated Financial Statements.) Total non-cash compensation expense related to stock based compensation and benefits amounted to $985,000 for the year. These expenses, when incurred, result in an increase in expense and an increase in shareholder equity rather than a cash outlay. Additional increases in other expense related to increased compensation and benefits expense of $1.1 million due to an increase in the number of employees and regular salary increases as well as severance paid to the Chief Executive Officer who resigned in January 2000. Depreciation expense increased $193,000 due to additional buildings and other capital expenditures. For the year ended March 31, 2000 compared to the year ended March 31, 1999, other expense changes included a $271,000 increase in supplies, postage and telephone expense, primarily due to increased core deposit accounts, providing telephone service to the new centralized lending center, supplies for an increased number of employees, and a general increase in business activity associated with loan and deposit growth. Occupancy and equipment maintenance expense increased $159,000 due to the new branch building in Vale, the placement of additional ATM's in new locations, and maintenance of technological upgrades, as well as general increases in utilities and other expense levels. Customer accounts expense for servicing deposit accounts increased $134,000 due to the growth in deposit accounts. Income Taxes. The provision for income taxes was $1.5 million for the year ended March 31, 2000 compared to $1.8 million for the year ended March 31, 1999 decreasing the effective tax rate from 36.3% for the prior year to 36.1% for the current year. The decrease in the effective tax rate was due to an increase of $290,000 of tax-exempt interest earned on Oregon municipal bonds. In the prior year the effective tax rate was decreased to 36.3% due to a $125,000 rebate received from the State of Oregon because the statutory rate paid on taxable income for the year ended March 31, 1998 was reduced from 6.6% to 3.3% by legislative action in the final quarter of the fiscal year ended March 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1999 AND 1998 Net Income. Net income was $3.2 million for the year ended March 31, 1999 compared to $3.0 million for the year ended March 31, 1998. This 3.9% increase resulted primarily from an increase in net interest income of $1.8 million and a $52,000 increase in non interest income partially offset by a $345,000 increase in the loan loss provision and a $1.6 million increase in non interest expense. Net Interest Income. Net interest income increased 16.8% to $12.5 million for the year ended March 31, 1999 from $10.7 million for the year ended March 31, 1998. Interest income increased 11.4% to $20.6 million for the year ended March 31, 1999 compared to $18.5 million for the same period ended March 31, 1998. The increase was primarily due to increases in earning assets as loans outstanding increased $31.9 million and investments increased $29.9 million. Interest expense increased 3.8% from $7.8 million for the year ended March 31, 1998 to $8.1 million for the year ended March 31, 1999. The increase was relatively small as a result of a change in the mix of deposits used to fund interest-earning assets with core deposits increasing $12.0 million from the prior year. Such deposits have a lower interest cost than time deposits. The average cost of deposits decreased from 4.22% for the year ended March 31, 1998 to 4.00% for the year ended March 31, 1999, primarily as a result of a higher average balance of lower cost core deposits compared to higher cost time deposits. As of March 31, 1999 the Bank had been able to maintain its deposit base without resorting to aggressive deposit pricing. The average rate paid on FHLB advances decreased from 5.85% for the year ended March 31, 1998 to 5.03% for the year ended March 31, 1999, as a result of the decline in short term interest rates. The interest rate spread decreased to 3.65% for the year ended March 31, 1999 from 3.73% for the year ended March 31, 1998. The decrease is attributed to a 31 basis point decrease in the yield on the Bank's loan portfolio and a 29 basis point decrease in the yield on the mortgage-backed securities portfolio, partially offset by the decrease in the cost of deposits. Provision for Loan Losses. The provision 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 of the collateral and guarantees securing the loans. See Note 1 of Notes to Consolidated Financial Statements. The provision for loan losses was $483,000 for the year ended March 31, 1999 compared to $138,000 for the same period in 1998. This increase was primarily attributable to the growth of the loan portfolio, particularly in agricultural, commercial business and consumer loans, which are inherently riskier than one-to-four family mortgage loans. Other Income. Other income was $1.1 million for the year ended March 31, 1999, compared to $1.0 million for the year ended March 31, 1998. This 10.0% increase resulted primarily from increased core deposit fees and fees related to lending activities. Other Expenses. Other expenses were $8.2 million for the year ended March 31, 1999 compared to $6.5 million for the year ended March 31, 1998. The increase from the prior year was primarily due to an $884,000 increase in compensation and benefits expense. Increases in this area were due to an additional $252,000 of expense related to the ESOP (See Note 1 and Note 12 of Notes to Consolidated Financial Statements) when compared to the prior year. An increase of $189,000 was due to a non-cash expense related to the MRDP. Total non-cash compensation expense related to stock based compensation and benefits amounted to $912,000 for the year. These expenses, when incurred, result in an increase in expense and an increase in shareholder equity rather than a cash outlay. Additional increases in other expense related to increased compensation and benefits expense of $443,000 due to an increase in the number of employees and regular salary increases. Depreciation expense increased $93,000 due to additional buildings and other capital expenditures. Advertising expense increased $210,000 due to increased advertising on radio and in local newspapers and increased costs associated with shareholder communication. For the year ended March 31, 1999 compared to the year ended March 31, 1998, other expense fluctuations included a $67,000 increase in supplies, postage and telephone expense, primarily due to increased core deposit accounts and upgrading of several telephone systems, as well as a general increase in business activities. Occupancy and equipment maintenance expense increased $76,000 due to the new branch building in Burns and the placement of additional ATM's in new locations, as well as general increases in janitorial and other expense levels. Other expenses increased $232,000 primarily due to increased staff training efforts and moving costs associated with new employees. Income Taxes. The provision for income taxes was $1.8 million for the year ended March 31, 1999 compared to $2.0 million for the year ended March 31, 1998 decreasing the effective tax rate from 40.0% for the prior year to 36.3% for the current year. The decrease in the effective tax rate was due to a $125,000 rebate received from the State of Oregon because the statutory rate paid on fiscal year end March 31, 1998 income was reduced from 6.6% to 3.3%. Legislative action to reduce the rate did not occur until well after March 31, 1998, and accordingly, the credit was taken in the year ended March 31, 1999. Tax expense was also reduced in 1999 because of the tax-exempt interest earned on the $8.8 million of municipal bonds purchased.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COSTS The following table sets forth certain information for the periods indicated regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily balances for the years ended March 31, 2000 and March 31, 1999. For other years presented average balances are derived from monthly balances. Management does not believe that the use of month-end balances instead of daily balances has caused any material inconsistencies in the information presented. Certain month-end balances were adjusted to approximate daily balances for the months of September 1997 through November 1997 due to the cash position and investment activity related to the $45.7 million of net proceeds from the stock conversion and the over subscription proceeds of $78.0 million.
The following table sets forth the effects of changing rates and volumes on net interest income of the Bank. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (iii) the net change attributable to the combined impact of volume and rate; and (iv) the total change (the sum of the prior columns).
Year Ended March 31, 2000 Year Ended March 31, 1999 Compared to Year Ended Compared to Year Ended March 31, 1999 March 31, 1998 Increase (Decrease) Due to Increase (Decrease) Due to ---------------------------- ---------------------------- Rate/Volume Rate/ Rate/ Analysis Rate Volume Volume Total Rate Volume Volume Total (Dollars in ---- ------ ------ ----- ---- ------ ------ ----- Thousands)
Interest-earning assets: Loans receiv- able (1) $ (421) $3,158 $ (96) $ 2,641 $(453) $1,923 $ (59) $1,411 Mortgage-backed and related securities (17) 1,412 (6) 1,389 (111) 1,252 (56) 1,085 Investment securities (312) 446 (62) 72 229 (247) (23) (41) FHLB stock (18) 23 (2) 3 (3) 17 - 14 Federal funds sold and overnight interest-bearing deposits (133) (44) 38 (139) (352) (129) 83 (398) ------ ------ ----- ------- ------ ------ ----- ----- Total net change in income on interest-earning assets (901) 4,995 (128) 3,966 (690) 2,816 (55) 2,071 ------ ------ ----- ------- ------ ------ ----- ------ Interest-bearing liabilities: Passbook accounts (65) (48) 5 (108) (54) (155) 9 (200) Money market accounts 144 731 131 1,006 4 197 1 202 NOW accounts (75) 27 (4) (52) (61) 85 (11) 13 Certificate accounts (20) 495 (2) 473 (145) (285) 5 (425) Securities sold under agreements to repurchase - - 4 4 (34) (34) 34 (34) FHLB advances 65 2,138 186 2,389 (25) 824 (115) 684 ------ ------ ----- ------- ------ ------ ----- ------ Total net change in expense on interest-bearing liabilities 49 3,343 320 3,712 (315) 632 (77) 240 ------ ------ ----- ------- ------ ------ ----- ------ Net change in net interest income $ 950 $1,652 $(448) $ 254 $ (375) $2,184 $ 22 $1,831 ====== ======= ===== ======= ====== ====== ===== ======
- ----------------- (1) Does not include interest on loans 90 days or more past due. Includes loans originated for sale.
YEAR 2000 ISSUES The Year 2000 issue existed because many computer systems and applications used two-digit fields to designate a year. As the century date change occurred, date-sensitive systems could have recognized the Year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 could have caused systems to fail or to process financial and operational information incorrectly. The Bank systematically addressed the Year 2000 issue beginning with the establishment of a committee in 1997. As a result of management's efforts, the Year 2000 issue did not present any operational problems for the Bank as the century date change occurred. Management is cognizant that other dates may present problems as the Year 2000 progresses and has established systems and procedures to detect them as they may arise. The total cost of systems renovations related to the Year 2000 issue approximated $385,000.
MARKET RISK AND ASSET AND LIABILITY MANAGEMENT Market risk is the risk of loss from adverse changes in market prices and rates. The Bank's market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Bank manages other risks, such as credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Bank's financial condition and results of operations. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Bank's business activities. The Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Bank's interest-earning assets by originating for its portfolio an increasing proportion of loans with interest rates subject to periodic adjustment to market conditions (including commercial business, agricultural and consumer loans). In the year ended March 31, 2000, however, the change in the loan mix was not sufficient to mitigate the effects of the increase in short term interest rates as the prime rate increased by 1.25% during the period July 1999 to March 2000. The Bank relies on retail deposits as its primary source of funds. Management believes retail deposits and in particular core deposits (checking and passbook savings accounts), compared to brokered deposits, reduce the effects of interest rate risk. The Bank promotes transaction accounts and management was successful in attempts to change the deposit mix during the year ended March 31, 2000 by increasing core deposits to 51.0% of total deposits at March 31, 2000 compared to 50% of total deposits at March 31, 1999. However, an increased reliance upon short term advances from the FHLB more than offset the positive effects of increased core deposits. At March 31, 2000 the Bank had $64.3 million in fixed rate advances due within one year. The effect of the rising rates coupled with short-term advances and primarily a fixed rate loan and investment portfolio combined to greatly increase the Bank's interest rate risk in the year ended March 31, 2000. The Bank's primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is performed for the Bank by the FHLB. The modeling process is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The interest rate sensitivity analysis performed by the FHLB for the Bank incorporates end of period rate, balance and maturity data compiled by the Bank's management using various levels of aggregation of that data. The following table is provided by the FHLB and sets forth the change in the Bank's net portfolio value ("NPV") at March 31, 2000, based on FHLB assumptions, that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management might take to counteract that change. NPV is defined as the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities plus the present values of net expected cash inflows from existing off-balance sheet contracts.
Estimated Change in Basis Point ("bp") Net Portfolio Value Change in Rates (Dollars in Thousands)
400 $(39,594) (106.62)% 300 (30,150) (81.19) 200 (20,574) (55.40) 100 (10,515) (28.32) -0- -0- -0- -100 8,421 22.68 -200 14,224 38.30 -300 16,099 43.35 -400 17,589 47.37
The above table illustrates, for example, that an instantaneous 200 basis point increase in market interest rates at March 31, 2000 would reduce the Bank's NPV by approximately $20.6 million, or 55.4% at that date. Certain assumptions utilized by the FHLB in assessing the interest rate risk of savings associations within its region were utilized in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. In the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. The model assumes a parallel change in rates, whereas actual market interest rates would not necessarily react in a parallel manner. Further, call provisions of certain securities, which shorten the actual term to maturity if exercised, are not taken into account in the model. The following table presents the Bank's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair value at March 31, 2000. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments.
LIQUIDITY AND CAPITAL RESOURCES The Bank's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, maturing securities and FHLB advances. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows, mortgage prepayments and maturing securities, cash flows and anticipated maturities of mortgage-backed bonds and agency securities are greatly influenced by general interest rates, economic conditions and competition. The Bank must maintain an adequate level of liquidity to ensure sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2000 cash and cash equivalents totaled $9.3 million or 2.5% of total assets. The Bank also maintained an uncommitted credit facility with the FHLB which provided for immediately available advances up to an aggregate amount of $111.2 million, under which $76.8 million in advances were outstanding at March 31, 2000. In addition to the FHLB credit facility, at March 31, 2000 the Bank had a $50.0 million reverse repurchase line of credit available with Merrill Lynch and a $15.0 million overnight line of credit with Key Bank. At March 31, 2000 the Bank could also have used the Federal Reserve discount window if all other liquidity sources had been exhausted. Office of Thrift Supervision regulations require savings institutions to maintain an average balance of liquid assets (cash and eligible investments) equal to at least 4.0% of the average daily balance of its net withdrawable deposits and short-term borrowings. The Bank's liquidity ratio at March 31, 2000 was 9.9%. The Bank's primary investing activity is the origination of one-to-four family mortgage loans within its primary market area. During the years ended March 31, 2000, 1999 and 1998 the Bank originated $30.1 million, $38.8 million, and $21.8 million of such loans, respectively. At March 31, 2000, the Bank had commitments to extend credit totaling $39.7 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2000 totaled $90.9 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Office of Thrift Supervision regulations require the Bank to maintain specific amounts of regulatory capital. As of March 31, 2000, the Bank complied with all regulatory capital requirements as of that date with tangible, core and total capital ratios of 14.0%, 14.0% and 28.5%, respectively. See Note 16 of Notes of Consolidated Financial Statements.
EFFECT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Independent Auditors' Report
To the Board of Directors Oregon Trail Financial Corp. and Subsidiary Baker City, Oregon
We have audited the accompanying consolidated balance sheets of Oregon Trail Financial Corp. and Subsidiary (the "Company", formerly known as Pioneer Bank, a Federal Savings Bank, prior to the October 3, 1997 conversion discussed in Note 11) as of March 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oregon Trail Financial Corp. and Subsidiary as of March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Portland, Oregon May 3, 2000
Oregon Trail Financial Corp. and Subsidiary Consolidated Balance Sheets March 31, 2000 and 1999 (In thousands, except share data)
Assets 2000 1999 ---- ---- Cash and due from banks $1,673 $1,756 Interest-bearing deposits 7,588 4,520 -------- -------- Total cash and cash equivalents 9,261 6,276 Securities: Investment securities available for sale, at fair value (amortized cost of $39,937 and $38,249) 37,436 37,965 Mortgage-backed and related securities available for sale, at fair value (amortized cost of $87,436 and $60,278) 84,615 60,371 Mortgage-backed and related securities held to maturity, at amortized cost (fair value of zero and $9,518) - 9,338 Loans receivable, net of allowance for loan losses of $1,396 and $1,228 220,591 185,747 Accrued interest receivable 2,452 2,012 Premises and equipment, net 9,902 7,825 Stock in FHLB of Seattle, at cost 3,897 3,221 Real estate owned - 37 Net deferred tax asset 1,507 - Other assets 951 681 -------- -------- TOTAL ASSETS $370,612 $313,473 ======== ======== Liabilities and shareholders' equity LIABILITIES: Deposits: Interest-bearing $106,285 $88,245 Noninterest-bearing 14,961 11,594 Time certificates 116,489 99,750 -------- -------- Total deposits 237,735 199,589
Accrued expenses and other liabilities 2,333 2,399 Advances from FHLB of Seattle 76,750 50,250 Net deferred tax liability - 455 Advances from borrowers for taxes and insurance 690 697 -------- -------- Total liabilities 317,508 253,390 -------- -------- COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 8,000,000 shares authorized; March 31, 2000, 4,694,875 issued, 3,317,006 outstanding; March 31, 1999, 4,694,875 issued, 3,763,564 outstanding 36 42 Additional paid-in capital 31,743 38,357 Retained earnings (substantially restricted) 27,759 26,206 Unearned shares issued to the ESOP (2,415) (2,951) Unearned shares issued to the MRDP (740) (1,453) Accumulated other comprehensive loss (3,279) (118) -------- -------- Total shareholders' equity 53,104 60,083 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $370,612 $313,473 ======== ======== See Notes to Consolidated Financial Statements.
Oregon Trail Financial Corp. and Subsidiary Consolidated Statements of Income Years Ended March 31, 2000, 1999 and 1998 (In thousands, except share data)
2000 1999 1998 INTEREST INCOME: ------- ------- ------- Interest and fees on loans receivable $16,709 $14,072 $12,661 Securities: Mortgage-backed and related securities 5,208 3,819 2,734 U.S. government and government agencies and other 2,392 2,455 2,894 FHLB of Seattle dividends 239 236 222 ------- ------- ------- Total interest income 24,548 20,582 18,511 ------- ------- ------- INTEREST EXPENSE: Deposits 8,526 7,203 7,613 Securities sold under agreements to repurchase 4 - 34 FHLB of Seattle advances 3,246 861 177 ------- ------- ------- Total interest expense 11,776 8,064 7,824 ------- ------- ------- Net interest income 12,772 12,518 10,687
PROVISION FOR LOAN LOSSES 178 483 138 ------- ------- ------- Net interest income after provision for loan losses 12,594 12,035 10,549 ------- ------- ------- NONINTEREST INCOME: Service charges on deposit accounts 1,088 757 687 Loan servicing fees 284 294 244 Other income 230 47 115 ------- ------- ------- Total noninterest income 1,602 1,098 1,046 ------- ------- ------- NONINTEREST EXPENSE: Employee compensation and benefits 6,022 4,862 3,978 Supplies, postage, and telephone 850 579 512 Depreciation 686 493 400 Occupancy and equipment 618 459 383 Customer accounts 426 292 274 Advertising 449 442 232 Professional fees 267 295 213 FDIC insurance premium 103 120 133 Other 694 640 408 ------- ------- ------- Total noninterest expense 10,115 8,182 6,533 ------- ------- ------- Income before income taxes 4,081 4,951 5,062
PROVISION FOR INCOME TAXES 1,472 1,797 2,026 ------- ------- ------- NET INCOME $2,609 $3,154 $3,036 ====== ====== ====== Basic earnings per share $0.74 $0.78 $0.38 Diluted earnings per share $0.70 $0.76 $0.38 Weighted average common shares outstanding: Basic 3,546,873 4,065,423 4,326,066 Diluted 3,723,600 4,159,540 4,326,066 See Notes to Consolidated Financial Statements.
Oregon Trail Financial Corp. and Subsidiary Consolidated Statements of Cash Flows Years Ended March 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,609 $ 3,154 $ 3,036 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 686 493 400 Compensation expense related to ESOP 612 723 471 Compensation expense related to MRDP 373 189 - Amortization of deferred loan fees, net (107) (248) (184) Provision for loan losses 178 483 138 Deferred income taxes (264) (60) 41 Amortization and accretion of premiums and discounts on investments and loans purchased 191 (319) (126) Federal Home Loan Bank of Seattle dividends (239) (236) (222) Gain on sale of real estate owned (22) (11) - (Gain) Loss on sale of premises and equipment (158) 4 (48) Change in assets and liabilities: Trading securities Loans held for sale - 428 Accrued interest receivable (440) (336) (351) Other assets (6) 30 (466) Accrued expenses and other liabilities (66) 1,140 621 -------- -------- -------- Net cash provided by operating activities 3,347 5,006 3,738 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Loan originations (101,399) (108,660) (56,591) Loan principal repayments 80,611 84,090 47,175 Loans purchased (14,533) (7,693) (5,777) Proceeds from maturity of securities available for sale 5,027 25,223 77,427 Principal repayments of securities available for sale 13,362 8,916 2,986 Purchase of securities available for sale (37,939) (68,781) (108,049) Principal repayments of securities held to maturity - 3,533 2,545 Purchase of securities held to maturity (437) - (33) Purchase of premises and equipment (2,990) (2,898) (1,511) Proceeds from sale of premises and equipment 385 153 225 Proceeds from sale of real estate owned 324 340 - -------- -------- -------- Net cash used in investing activities (57,589) (65,777) (41,603) -------- -------- -------- (Continued)
Oregon Trail Financial Corp. and Subsidiary Consolidated Statements of Cash Flows Years Ended March 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits, net of withdrawals $ 38,146 $ 6,855 $ 13,577 Decrease in securities sold under agreements to repurchase - - (1,431) Change in advances from borrowers for taxes and insurance (7) (92) 98 Proceeds from FHLB of Seattle advances 938,208 127,950 41,600 Repayment of FHLB of Seattle advances (911,708) (77,700) (42,400) Proceeds from issuance of common stock, net of conversion expenses - - 123,779 Repayment of stock over subscription - - (78,050) Funding provided to ESOP for purchase of common stock - - (3,756) Payment of cash dividend (1,056) (916) (217) Stock repurchase (6,356) (9,361) - -------- -------- --------
Net cash provided by financing activities 57,227 46,736 53,200 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,985 (14,035) 15,335
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,276 20,311 4,976 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,261 $ 6,276 $ 20,311 ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest on deposits and other borrowings $ 3,275 $ 903 $ 308 Income taxes 1,385 2,409 2,192 Noncash investing activities: Transfer of loans to foreclosed real estate 264 51 313 Unrealized gain (loss) on securities available for sale, net of tax (3,161) (1,007) 1,011
See Notes to Consolidated Financial Statements.
Oregon Trail Financial Corp. and Subsidiary Notes to Consolidated Financial Statements Years Ended March 31, 2000, 1999 and 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The consolidated financial statements include the accounts of Oregon Trail Financial Corp. and its wholly-owned subsidiary, Pioneer Bank, a Federal Savings Bank (the "Bank"), collectively (the "Company"). Oregon Trail Financial Corp. became the holding company of the Bank upon conversion of the Bank from a federally-chartered mutual savings and loan association to a federally-chartered capital stock savings and loan association on October 3, 1997. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.
Nature of Operations - The Company is engaged in the business of accepting savings and demand deposits and providing mortgage, consumer, and commercial loans, and to a lesser extent, agricultural loans to its customers in Eastern Oregon.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions. These assumptions result in estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all cash on hand and due from banks, all interest-bearing deposits held at domestic banks, and investment securities with an original term to maturity of three months or less to be cash equivalents.
Securities - The Company accounts for securities in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities are classified as held to maturity where the Company has the ability and positive intent to hold them to maturity. Securities held to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts to maturity. Securities bought and held principally for the purpose of sale in the near term are classified as trading securities and are carried at fair value. There were no trading securities at March 31, 2000 and 1999. Securities not classified as trading, or as held to maturity, are classified as available for sale. Unrealized holding gains and losses on securities available for sale are excluded from earnings and are reported net of tax as a separate component of equity until realized. These unrealized holding gains and losses net of tax are also included as a component of comprehensive income. Unrealized losses on securities resulting from an other than temporary decline in fair value are recognized in earnings when incurred. Realized and unrealized gains and losses are determined using the specific identification method.
Federal Home Loan Bank Stock - The Company's investment in Federal Home Loan Bank of Seattle ("FHLB") stock is carried at cost, which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specified percentages of its outstanding mortgages, total assets or FHLB advances. At March 31, 2000, the Company's minimum investment requirement was approximately $3,387,000. The Company may request redemption at par value of any stock in excess of the amount the Company is required to hold. Stock redemptions are granted at the discretion of the FHLB.
Loans Receivable - Loans are stated at unpaid principal less net deferred loan origination fees. Interest income on loans is recognized based on the principal and the stated interest rates and includes the amortization of net deferred loan origination fees based on the level yield method over the contractual life of the loans adjusted on a prospective basis for prepayments and delinquencies. Net deferred loan origination fees on loans held for sale are recognized in earnings when sold. Recognition of interest income is discontinued and accrued interest is reversed when a loan is placed on nonaccrual status. A loan is generally placed on nonaccrual status when the loan becomes contractually past due more than 90 days. Delinquent interest on loans past due 90 days or more is charged off or an allowance is established by a charge to income equal to all interest previously accrued. Interest payments received on nonaccrual loans are applied to principal if collection of principal is doubtful. Loans are removed from nonaccrual status only when the loan is deemed current and collectibility of principal and interest is no longer doubtful.
Loans Held for Sale - To mitigate interest rate sensitivity, from time to time certain fixed rate loans are identified as held for sale in the secondary market. Accordingly, such loans are classified as held for sale in the consolidated balance sheets and are carried at the lower of aggregate cost or net realizable value. At March 31, 2000 and 1999, there were no loans held for sale.
Allowance for Loan Losses - Allowances for losses on specific problem loans and real estate owned are charged to earnings when it is determined that the value of these loans and properties, in the judgment of management, is impaired. In addition to specific reserves, the Company also maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The reserve is an estimate based upon factors and trends identified by management at the time financial statements are prepared. The ultimate recovery of loans is susceptible to future market factors beyond the Company's control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. The Company accounts for impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. These statements address the disclosure requirements and allocations of the allowance for loan losses for certain impaired loans. A loan within the scope of these statements is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Smaller balance homogeneous loans, including single family residential and consumer loans, are excluded from the scope of this statement. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, impairment is measured at current fair value of the collateral, reduced by estimated selling costs. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and premium or discount), loan impairment is recognized by establishing or adjusting an allocation of the allowance for loan losses. The Company generally considers these loans on a nonaccrual status to be impaired. SFAS No. 114, as amended, does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. At March 31, 2000 and 1999, respectively, the Company had no loans deemed to be impaired as defined by SFAS No. 114.
Real Estate Owned - Real estate acquired through foreclosure is stated at the lower of cost (principal balance of the former mortgage loan plus costs of obtaining title and possession) or estimated fair value at the time of foreclosure less estimated selling costs. Costs of development and improvement of property are capitalized, and holding costs and market adjustments are charged to expense as incurred.
Premises and Equipment are stated at cost less accumulated depreciation. Depreciation is recognized on the straight-line method over the estimated useful lives of the assets ranging from 3 to 40 years. Major renewals and betterments are capitalized and repairs are expensed. Gains or losses from disposals of premises and equipment are reflected in other noninterest expenses.
Income Taxes - The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting For Income Taxes, which requires the use of the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Employee Stock Ownership Plan - The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 93-6, Employer's Accounting for Employee Stock Ownership Plans. Accordingly, the shares held by the ESOP are reported as unearned shares issued to the employee stock ownership plan in the balance sheet. As shares are committed to be released, compensation expense is recorded equal to the then current market price of the shares, and the shares become outstanding for earnings per share calculations. The Company is allocating the shares ratably over a seven-year period beginning with the first allocation on December 31, 1997.
Management Recognition and Development Plan - The Company sponsors a Management Recognition and Development Plan ("MRDP"). The MRDP is accounted for in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and a modification of Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. The plan authorizes the grant of common stock shares to certain officers and directors, which vest over a five to six year period in equal installments. The Company recognizes compensation expense based on the fair value of the common stock at the grant date, as granted shares become vested. Granted MRDP shares that have not yet vested are considered to be contingently issuable shares and are only included in diluted earnings per share. When the MRDP shares vest, they are included in basic earnings per share.
Stock-Based Compensation - The Company accounts for stock compensation using the intrinsic value method as prescribed in Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under the intrinsic value based method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of stock at grant date over the amount an employee must pay to acquire the stock. Stock options granted by the Company have no intrinsic value at the grant date and, under APB No. 25, there is no compensation expense to be recorded. SFAS No. 123 encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The fair value approach measures compensation costs based on factors such as the term of the option, the market price at grant date, and the option exercise price, with expense recognized over the vesting period. See Note 15 for the pro forma effect on net income and earnings per share as if the fair value method had been used.
Operating Segments - The Company has only one operating segment as defined by SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information.
Recently Issued/Adopted 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 on April 1, 1999. The transfer was recorded as a direct increase to other comprehensive income of $111,000 (net of income tax of $69,000), which was recorded in the first quarter of fiscal year 2000.
2. SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available for sale and held to maturity at March 31, 2000 and 1999 are summarized as follows (in thousands):
Gross Gross Un- Un- March 31, 2000 Amortized realized realized Fair Cost Gains Losses Value Available for sale: --------- -------- -------- ----- U.S. government and government agency obligations: Maturing after one year through five years $ 520 $ - $ (6) $ 514 Maturing after five years through ten years 23,427 10 (1,235) 22,202 Maturing after ten years 15,990 - (1,270) 14,720 --------- ----- ------- -------- 39,937 10 (2,511) 37,436 --------- ----- ------- -------- Mortgage-backed and related securities: GNMA maturing after one year through five years 165 - (3) 162 GNMA maturing after five years through ten years 67 3 - 70 GNMA maturing after ten years 41,461 426 (1,242) 40,645 FHLMC maturing after ten years 23,626 1 (1,084) 22,543 FNMA maturing after ten years 22,117 10 (932) 21,195 --------- ----- ------- -------- 87,436 440 (3,261) 84,615 --------- ----- ------- -------- Total available for sale $ 127,373 $ 450 $(5,772) $122,051 ========= ===== ======= ========
March 31, 1999
Available for sale: U.S. government and government agency obligations: Maturing after one year through five years $ 5,027 $ 16 $ - $ 5,043 Maturing after five years through ten years 19,404 17 (188) 19,233 Maturing after ten years 13,818 10 (139) 13,689 --------- ----- ------- -------- 38,249 43 (327) 37,965 --------- ----- ------- -------- Mortgage-backed and related securities: GNMA maturing after one year through five years 221 2 - 223 GNMA maturing after five years through ten years 4 - - 4 GNMA maturing after ten years 22,840 490 (202) 23,128 FHLMC maturing after ten years 18,757 3 (229) 18,531 FNMA maturing after ten years 18,456 113 (84) 18,485 --------- ----- ------- -------- 60,278 608 (515) 60,371 --------- ----- ------- -------- Total available for sale $ 98,527 $ 651 $ (842) $ 98,336
========= ===== ======= ======== Held to maturity: Mortgage-backed and related securities: GNMA maturing after ten years $ 8,230 $ 171 $ - $ 8,401 FNMA maturing after ten years 839 1 - 840 FHLMC maturing after ten years 269 8 - 277 --------- ----- ------- -------- Total held to maturity $ 9,338 $ 180 $ - $ 9,518 ========= ===== ======= ========
Expected maturities of mortgage-backed and related securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
Investments and mortgage-backed and related securities totaling $59,377,000 and $33,815,000 were pledged against public funds and other deposits at March 31, 2000 and 1999, respectively.
3. LOANS RECEIVABLE
March 31, ----------------------- Loans receivable are summarized as follows 2000 1999 (in thousands): ---------- ----------
Mortgage loans: One-to-four family $ 127,589 $ 109,089 Multi-family 2,989 2,810 Commercial 14,808 13,703 Agricultural 2,420 2,240 Construction 3,648 2,825 Land 158 330 ---------- ---------- Total mortgage loans 151,612 130,997 ---------- ---------- Consumer loans: Unsecured 3,414 2,836 Home equity and second mortgage 14,983 16,262 Auto loans 21,547 11,843 Credit card 1,026 949 Loans secured by savings deposits 452 416 Other secured 3,190 2,985 ---------- ---------- Total consumer loans 44,612 35,291 ---------- ---------- Commercial loans: Business 13,853 12,031 Agricultural 13,275 9,781 ---------- ---------- Total commercial loans 27,128 21,812 ---------- ---------- Total loans 223,352 188,100
Less: Net deferred loan fees 1,365 1,125 Allowance for loan losses 1,396 1,228 ---------- ---------- Total loans receivable, net $ 220,591 $ 185,747 ========== ==========
The weighted average interest rate on loans at March 31, 2000 and 1999 was 8.03% and 7.92%, respectively.
Allowance for loan loss activity is summarized as follows for the years ended March 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998 -------- ------- ------- Balance, beginning of year $ 1,228 $ 847 $ 725 Provision for loan losses 178 483 138 Charge-offs (42) (115) (49) Recoveries 32 13 33 -------- ------- ------- $ 1,396 $ 1,228 $ 847 ======== ======= =======
Nonaccrual loans were $155,000 and $138,000 at March 31, 2000 and 1999, respectively. Interest income that would have been recorded under the original terms of nonaccrual loans totaled $8,000 for the year ended March 31, 2000 and $7,000 for the years ended March 31, 1999 and 1998.
4. TRANSACTIONS WITH AFFILIATES
Loans - Certain directors and executive officers of the Company are customers of, and have had transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to loans receivable from directors and executive officers of the Company for the years ended March 31, 2000, 1999, and 1998 is summarized as follows (in thousands):
2000 1999 1998 -------- ------- ------- Beginning balance $ 1,362 $ 576 $ 326 Additions 132 928 491 Reductions (278) (142) (241) -------- ------- ------- Ending balance $ 1,216 $ 1,362 $ 576 ======== ======= =======
At March 31, 2000, all loans to directors and executive officers of the Company were current.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
March 31, ----------------------- 2000 1999 ---------- ----------
Loans receivable $ 1,316 $ 1,086 Mortgage-backed and related securities 505 391 U.S. government and government agencies 631 535 ---------- ----------
$ 2,452 $ 2,012 ========== ==========
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
March 31, ----------------------- 2000 1999 ---------- ----------
Land $ 967 $ 836 Land held for development - 200 Buildings and improvements 6,838 5,633 Furniture, fixtures and equipment 3,601 3,202 Construction in process 1,602 676 ---------- ----------
13,008 10,547 Less accumulated depreciation 3,106 2,722 ---------- ---------- $ 9,902 $ 7,825 ========== ==========
7. DEPOSITS
Deposits at March 31 are summarized as follows (dollars in thousands):
2000 1999 -------------------------- ------------------------ Weighted Weighted Average Average Interest Interest Rate Balance Percent Rate Balance Percent
Non-interest bearing -% $ 14,961 6.29% -% $ 11,594 5.81% NOW checking 1.25 36,758 15.46 1.36 36,676 18.38 Passbook savings accounts 2.35 19,425 8.17 2.35 21,083 10.56 Money market deposit 4.22 50,102 21.08 4.14 30,486 15.27 Time certificates 5.53 116,489 49.00 5.15 99,750 49.98 ---- -------- ------ ---- -------- ------ 3.98 $237,735 100.00% 3.70% $199,589 100.00% ==== ======== ====== ==== ======== ======
At March 31, 2000, time certificate maturities are as follows (in thousands):
Within one year $ 90,932 One year to two years 11,541 Two years to three years 7,070 Three years to four years 1,498 Four years to five years 4,030 Thereafter 1,418 --------- $ 116,489 =========
The aggregate amount of time certificates with a minimum denomination of $100,000 was $28,544,000 and $20,021,000 at March 31, 2000 and 1999, respectively. Deposit accounts in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation ("FDIC"). Interest expense on deposits is summarized as follows for the years ended March 31, 2000, 1999, and 1998 (dollars in thousands):
2000 1999 1998 -------- ------- ------- NOW checking $ 480 $ 532 $ 519 Passbook savings accounts 472 579 779 Money market deposit 1,922 889 687 Time certificates 5,652 5,203 5,628 -------- ------- ------- $ 8,526 $ 7,203 $ 7,613 ======== ======= =======
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is summarized as follows (in thousands):
2000 1999 ------- ------- Average balance $ 67 $ - Maximum month end balance - - Average interest rate at year end N/A N/A
The average balance is computed on a daily average method. During the year, the Company established a $50 million line of credit with Merrill Lynch. The line was used for one borrowing of $3.5 million for seven days. There were no amounts outstanding at any month end. The Company maintains control of the securities pledged as collateral.
9. FHLB BORROWINGS
The Bank has entered into borrowing arrangements with the FHLB to borrow funds under a short-term cash management advance program and long-term loan agreements. All borrowings are secured by stock of, and cash deposits in, the FHLB. Additionally, mortgage loans receivable and securities issued, insured, or guaranteed by the U.S. Government or agencies thereof are pledged as security for the loans.
At March 31, 2000, FHLB advances were scheduled to mature as follows (dollars in thousands):
Adjustable Fixed Rate Advances Rate Advances Total Advances -------------- -------------- ---------------- Rate* Amount Rate* Amount Rate* Amount
Due in less than one year N/A $ - 6.06% $64,250 6.06% $ 64,250 One to two years N/A - 4.93 5,000 4.93 5,000 Four to five years N/A - 5.24 7,500 5.24 7,500 ---- ------ ---- ------- ---- -------- N/A $ - 5.91% $76,750 5.91% $ 76,750 ==== ====== ==== ======= ==== ======== * Weighted average interest rate
The maximum and average outstanding balances and average interest rates on advances from the FHLB were as follows for the years ended March 31, 2000, 1999 and 1998 (dollars in thousands):
2000 1999 1998 -------- -------- ------- Maximum outstanding at any month end $ 76,750 $ 50,250 $ 8,000 Daily average outstanding 60,418 17,108 3,024 Weighted average interest rates: Annual 5.37% 5.03% 5.85% End of year 5.91% 5.15% N/A Interest expense during the year $ 3,246 $ 861 $ 177
10. INCOME TAXES
A reconciliation of the tax provision based on statutory corporate tax rates and the provision shown in the accompanying consolidated statements of income for the years ended March 31, 2000, 1999 and 1998 is summarized as follows (dollars in thousands):
2000 1999 1998 Amount Percent Amount Percent Amount Percent --------------- --------------- -------------- Federal income taxes at statutory rate $ 1,388 34.0% $ 1,683 34.0% $1,721 34.0% State income taxes at statutory rate, net of related federal tax effect 180 4.4 218 4.4 223 4.4 Other, net (96) (2.3) (104) (2.1) 82 1.6 ------- ---- ------- ---- ------ ---- $ 1,472 36.1% $ 1,797 36.3% $2,026 40.0% ======= ==== ======= ==== ====== ====
Provision (benefit) for income taxes for the years ended March 31, 2000, 1999 and 1998 is summarized as follows (in thousands):
2000 1999 1998 -------- ------- ------- Current: Federal $ 1,436 $ 1,538 $ 1,643 State 300 319 342 -------- ------- -------
Total current 1,736 1,857 1,985 -------- ------- ------- Deferred: Federal (219) (50) 34 State (45) (10) 7 -------- ------- ------- Total deferred (264) (60) 41 -------- ------- ------- Total provision for income taxes $ 1,472 $ 1,797 $ 2,026 ======== ======= =======
The components of net deferred income assets and liabilities at March 31, 2000 and 1999 are summarized as follows (in thousands):
2000 1999 ------- ------- Deferred tax assets: Deferred loan fees $ 319 $ 150 Allowance for loan losses 549 464 Vacation accrual 114 118 Unrealized losses on securities available for sale 1,851 123 Other 151 65 ------- ------- Total deferred tax assets 2,984 920 ------- ------- Deferred tax liabilities: FHLB stock dividends (1,045) ( 897) Accumulated depreciation (117) ( 180) Other (106) - Tax bad debt reserve in excess of base-year reserve (209) ( 298) ------- ------- Total deferred tax liabilities (1,477) ( 1,375) ------- ------- Net deferred tax asset (liability) $ 1,507 $ ( 455) ======= =======
For the fiscal year ended June 30, 1996 and years prior, the Company determined bad debt expense deducted from taxable income based on 8% of taxable income before such deduction or based on the experience method as provided by the Internal Revenue Code ("IRC"). In August 1996, the provision in the IRC allowing the 8% of taxable income deduction was repealed. Accordingly, the Company is required to use the experience method to record bad debt expense, and must also recapture the excess reserve accumulated from use of the 8% method ratably over a six-taxable-year period for all years subsequent to 1987. The income tax provision from 1987 to 1996 included an amount for the tax effect of such reserves. At March 31, 2000, the Company had recaptured approximately $1,038,000 of bad debt deductions taken in prior periods. At March 31, 2000, remaining bad debt deductions to be recaptured approximated $515,000.
As a result of the bad debt deductions taken in years prior to 1988, retained earnings include accumulated earnings of approximately $2,500,000, on which federal income taxes have not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income taxes may be imposed at the then prevailing corporate tax rates. The Company does not contemplate that such amounts will be used for any purpose which would create a federal income tax liability; therefore, no provision has been made.
11. SHAREHOLDERS' EQUITY
Oregon Trail Financing Corp. ("OTFC") was incorporated under Oregon law in June 1997 to acquire and hold all of the outstanding capital stock of the Bank, as part of the Bank's conversion from a federally chartered mutual savings and loan association. In connection with the conversion, which was consummated on October 3, 1997, OTFC issued and sold 4,694,875 shares of common stock including the shares allocated to the ESOP (par value of $.01 per share) at a price of $10.00 per share for net total proceeds of $45,729,000 after conversion expenses of $1,220,000. OTFC retained one-half of the net proceeds and used the remaining net proceeds to purchase the newly issued capital stock of the Bank. The net conversion proceeds of $45,729,000 were held in withdrawable accounts at the Bank at September 30, 1997. Since, among other things, all required regulatory approvals to consummate the conversion were received prior to September 30, 1997, the conversion has been accounted for as being effective as of September 30, 1997. The oversubscription proceeds of $78,050,000 were refunded, with accrued interest on October 3, 1997.
At the time of conversion, the Company established a liquidation account in an amount equal to its retained earnings as of March 31, 1997, the date of the latest balance sheet used in the final conversion prospectus. The liquidation account will be maintained for the benefit of eligible withdrawable account holders who have maintained their deposit accounts in the Bank after conversion. In the event of a complete liquidation of the Bank (and only in such event), eligible depositors who have continued to maintain accounts will be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to common stock. The Bank may not declare or pay cash dividends if the effect thereof would reduce its regulatory capital below the amount required for the liquidation account.
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 was completed by August 27, 1998. The shares were purchased at a weighted average price of $15.51. In October 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 which was completed in February 1999. The shares were purchased at a weighted average price of $13.14. The repurchase programs resulted in a 636,205 reduction of shares outstanding and reduced equity by $9.4 million. The shares were used 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.
In March 1999, the Company received a non-objection response from the OTS to a request to repurchase 5%, or 210,666, of its outstanding shares. The repurchase was completed in May and June 1999 at a weighted average price of $13.03 per share. In September 1999, the Company received another non- objection response from the OTS to a request to repurchase 5%, or 199,785, of its outstanding shares. The repurchase was completed in November 1999 at a weighted average price of $12.03 per share. In December 1999, the Company made a special application to the OTS for an exception to policy to be allowed to repurchase another 5%, or 179,005, of its outstanding shares. Approval was received on February 24, 2000. As of March 31, 2000, 123,777 shares had been repurchased under the program at a weighted average price per share of $11.18. During the year ended March 31, 2000, the repurchase programs resulted in a 534,228 reduction of shares outstanding and reduced equity by $6.4 million.
12. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
As part of the conversion discussed in Note 11, an ESOP was established for all employees. The ESOP borrowed $3,756,000 from the Company and used the funds to purchase 375,590 shares of the common stock of the Company issued in the conversion. The loan will be repaid by the Bank over a seven-year period. The loan had an outstanding balance of $2,658,000 and $3,123,000 at March 31, 2000 and 1999, respectively, at an interest rate of 8.5%. The shares included in the ESOP are held in a suspense account and released to participants quarterly over a seven-year period. Compensation expense is recognized to the extent of the fair value of shares committed to be released. The Company recorded compensation expense related to the ESOP of $612,000, $723,000, and $471,000 during the years ended March 31, 2000, 1999, and 1998, respectively.
ESOP share activity is summarized in the following table:
Committed to Unreleased be Released ESOP Shares Shares ----------- ------
Balance, April 1, 1997 - - Issuance October 3, 1997 375,590 - 1998 release (26,828) 26,828 -------- -------- Balance, March 31, 1998 348,762 26,828 1999 release (53,656) 53,656 -------- -------- Balance, March 31, 1999 295,106 80,484 2000 release (53,656) 53,656 -------- -------- Balance, March 31, 2000 241,450 134,140 ======== ========
13. MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN ("MRDP")
In May 1998, the Board of Directors approved an MRDP for the benefit of officers and non-employee directors which authorizes the grant of 187,795 common stock shares. Shareholders approved the plan in July 1998. On October 8, 1998, 147,322 shares were granted to eligible participants covered under the plan at a share price of $11.15. Those eligible to receive benefits under the MRDP are determined by members of a committee appointed by the Board of Directors of the Company. MRDP awards vest ratably over a five- to six-year period beginning on October 8, 1999 (the first anniversary of the effective date of the MRDP) or upon the participant's death or disability. The Company recognizes compensation expense based on the fair value of the common stock on the grant date in accordance with the vesting schedule during the years in which the shares are payable. Compensation expense for the years ended March 31, 2000 and 1999 was $373,000 and $189,000, respectively. During the year ended March 31, 2000, 36,871 of the shares granted on October 8, 1998 were forfeited. On October 8, 1999, an additional 6,350 shares were granted to eligible participants under the plan at a share price of $11.18.
14. EARNINGS PER SHARE ("EPS")
EPS is computed in accordance with SFAS No. 128, Earnings Per Share. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period, without considering any dilutive items. 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 Plan and stock options granted under the stock option plan. Shares held by the Company's ESOP that are committed for release are included in the basic and diluted EPS calculations. The following is a summary of the effect of dilutive securities in weighted average number of shares (denominator) for the basic and diluted EPS calculations for the years ended March 31, 2000, 1999, and 1998. There are no resulting adjustments to net earnings:
2000 1999 1998 --------- --------- --------- Weighted average common shares outstanding-basic 3,546,873 4,065,423 4,326,066 Effect of dilutive securities on number of shares: MRDP shares 127,596 70,635 - Stock options 49,131 23,482 - --------- --------- --------- Total dilutive securities 176,727 94,117 -
Weighted average common shares outstanding-assuming dilution 3,723,600 4,159,540 4,326,066
15. STOCK OPTION PLAN
In May 1998, the Board of Directors approved a stock option plan for officers, directors, and employees, which authorizes the granting of stock options. Shareholders approved the Plan in July 1998. The maximum number of shares which may be issued under this plan is 469,488 with a maximum term of ten years for each option from the date of grant. The initial 356,500 stock options were granted on October 8, 1998 at the fair value of the common stock on that date ($11.15), and at March 31, 2000 had a
weighted average remaining contractual life of 8.5 years. On October 8, 1999, an additional 5,047 stock options were granted at the fair value of the common stock on that date ($11.18) and at March 31, 2000 had a weighted average remaining contractual life of 9.5 years. All awards vest in equal installments over a five- to six- year period. Unvested options become immediately exercisable in the event of death or disability.
Stock option activity is summarized as follows:
Weighted Average Number of Exercise Shares Price -------- -------- Outstanding, April 1, 1998 - $ -
Granted 356,500 11.15 -------- --------
Outstanding, March 31, 1999 356,500 11.15
Granted 5,047 11.18 Canceled (80,551) 11.15 -------- -------- Outstanding, March 31, 2000 280,996 11.15 ======== ========
Additional Stock Plan Information As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB No. 25 and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements.
SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal year 1999. 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.
The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for the October 1999 grant:
Risk-free interest rate 5.95% Expected dividend 2.61% Expected lives, in years 5.0 Expected volatility 19%
The estimated weighted average grant-date fair value of options granted during fiscal year 1999 was $4.85 per share and for options granted during fiscal year 2000 was $2.39 per share. Had compensation cost for these awards been determined in accordance with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts for the years ended March 31, 2000 and 1999 (dollars in thousands):
2000 1999 ------ ------ Net income: As reported $2,609 $3,154 Pro forma 2,534 3,057
Earnings per common share - basic: As reported $0.74 $0.78 Pro forma 0.71 0.75
Earnings per common share - diluted: As reported $0.70 $0.76 Pro forma 0.68 0.73
16. REGULATORY MATTERS AND CAPITAL REQUIREMENTS
Regulatory Capital - The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk weighted assets, of Core I capital to total assets, and tangible capital to tangible assets (set forth in the table below). Management believes that the Bank meets all capital adequacy requirements to which it is subject as of March 31, 2000.
As of March 31, 2000, the most recent notification from OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events, since the notification, that management believes have changed the Bank's category.
The Bank's actual and required capital amounts and ratios are presented in the table below (dollars in thousands):
Categorized as "Well Capitalized" For Capital Under Prompt Adequacy Corrective As of March 31, 2000 Actual Purposes Action Provision --------------- --------------- ---------------- Amount Ratio Amount Ratio Amount Ratio Total Capital (To risk weighted assets) $ 53,812 28.5% $ 15,114 8.0% $ 18,892 10.0%
Tier I Capital (To risk weighted assets) $ 52,416 27.7% N/A N/A $ 11,335 6.0%
Core Capital (To total assets) $ 52,416 14.0% $ 14,934 4.0% $ 18,667 5.0%
Tangible Capital (To tangible assets) $ 52,416 14.0% $ 5,600 1.5% N/A N/A
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%
Core Capital (To total 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
The following table is a reconciliation of the Bank's capital, calculated according to generally accepted accounting principles, to regulatory tangible and risk-based capital at March 31, 2000 (in thousands):
Equity $ 49,316 Unrealized securities gains 3,279 Equity of non-includable subsidiaries (179) ---------- Tangible capital 52,416 General valuation allowance 1,396 ---------- Total capital $ 53,812 ==========
At periodic intervals, the OTS and the FDIC routinely examine the Bank as part of their legally prescribed oversight of the thrift industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. A future examination by the OTS or the FDIC could include a review of certain transactions or other amounts reported in the Bank's 2000, 1999, and 1998 financial statements. In view of the uncertain regulatory environment in which the Bank operates, the extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the accompanying financial statements cannot presently be determined.
17. EMPLOYEE BENEFIT PLAN
The Company sponsors a contributory defined contribution plan pursuant to Section 401(k) of the IRC covering substantially all employees. Under the plan, the Company made contributions limited to 3.33% for the years ended March 31, 2000 and 1999 and 6.67% for the year ended March 31, 1998 of participating employees' salaries. Contributions and plan administration expenses aggregated to $100,000, $88,000, and $92,000 for the years ended March 31, 2000, 1999, and 1998, respectively.
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is a party to certain financial instruments with off-balance sheet risk to meet the financing needs of customers. Commitments to extend credit were $39,741,000 and $31,619,000 at March 31, 2000 and 1999, respectively, which include fixed rate loan commitments of $3,333,000 and $1,414,000 at March 31, 2000 and 1999, respectively. The ranges of interest rates for these loan commitments are 6.625% to 15.75% and 6.0% to 14.75% at March 31, 2000 and 1999, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates creditworthiness on an individual customer basis.
The Bank originates residential real estate loans and, to a lesser extent, commercial, agriculture, and consumer loans. Greater than 75% of all loans in the Bank's portfolio are secured by properties located in communities of Eastern Oregon.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of carrying value and estimated fair value of financial instruments is summarized as follows (in thousands):
March 31, 2000 March 31, 1999 -------------------- -------------------- Carrying Carrying Value Fair Value Value Fair Value Financial assets: Cash and cash equivalents $ 9,261 $ 9,261 $ 6,276 $ 6,276 Securities 122,051 122,051 107,674 107,854 Loans receivable, net of allowance for loan losses 220,591 216,008 185,747 189,930 FHLB stock 3,897 3,897 3,221 3,221
Financial liabilities: Demand and savings deposits 121,246 121,246 99,839 99,839 Time certificates of deposit 116,489 116,425 99,750 99,965 FHLB advances 76,750 76,750 50,250 50,250
Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The above estimates of fair value are not necessarily representative of amounts that could be realized in actual market transactions, nor of the underlying value of the Company. Changes in the following methodologies and assumptions could significantly affect the estimates.
Financial Assets - The estimated fair value approximates the carrying value of cash and cash equivalents. For securities, the fair value is based on quoted market prices. The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made. The fair value of FHLB stock approximates the carrying amount.
Financial Liabilities - The estimated fair value of demand and savings deposits and FHLB advances approximates carrying amounts. The fair value of time certificates of deposit is estimated by discounting the future cash flows using current rates offered on similar instruments. The value of long-term relationships with depositors is not reflected.
Off-Balance Sheet Financial Instruments - Commitments to extend credit represent all off-balance-sheet financial instruments. The fair value of these commitments is not significant. See Note 18 to the consolidated financial statements.
20. DIRECTORS' PENSION PLAN
The Company established a director emeritus plan (the "Plan") effective February 25, 1997. The purpose of the Plan is to reward and retain directors of experience and ability in key positions of responsibility by providing such directors with a benefit upon their retirement from the Board of Directors, as compensation for their past services to the Bank and as an incentive to perform such services in the future. The Plan is funded through current operations and no assets are specifically identified to fund future benefit payments.
Following are disclosures related to the Plan (in thousands):
2000 1999 --------- ---------- Change in benefit obligation: Benefit obligation, beginning of year $ 313 $ 330 Service cost 8 8 Interest cost 23 23 Benefits paid (41) (48) --------- ---------- Benefit obligation, end of year $ 303 $ 313 ========= ==========
Unrecognized prior service cost $ 281 $ 304 ========= ==========
Weighted average assumption - discount rate 7% 7% ========= ==========
Components of net periodic benefit cost: Service cost $ 8 $ 8 Interest cost 23 23 Amortization of prior service cost 22 22 --------- ---------- Net periodic benefit cost $ 53 $ 53 ========= ==========
21. PARENT COMPANY FINANCIAL INFORMATION
The Parent company financial information at March 31, 2000 and 1999 is as follows (in thousands):
2000 1999 --------- ---------- Assets: Cash $ 823 $ 6,198 Investment in subsidiary 49,316 50,383 Other assets 3,054 3,502 --------- ---------- Total $ 53,193 $ 60,083 ========= ========== Liabilities and Shareholders' Equity: Other liabilities $ 89 $ - Shareholders' equity 53,104 60,083 --------- ---------- Total $ 53,193 $ 60,083 ========= ==========
The statements of income for the years ended March 31, 2000, 1999, and 1998 are as follows (in thousands):
2000 1999 1998 --------- --------- --------- Other income: Equity in undistributed income of subsidiary $ 3,015 $ 3,239 $ 1,987 Interest on loan to ESOP - 288 154 --------- --------- --------- Subtotal 3,015 3,527 2,141
Other expense: Interest and other 651 426 282 Income tax benefit (245) (53) (49) --------- --------- --------- Net income $ 2,609 $ 3,154 $ 1,908 ========= ========= =========
The statements of cash flows for the year ended March 31, 2000, 1999 and 1998 are as follows (in thousands):
2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income $ 2,609 $ 3,154 $ 1,908 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed income of subsidiary (3,015) (3,239) (1,987) Compensation expense related to ESOP 612 723 471 Compensation expense related to MRDP 373 189 - Change in assets and liabilities: Other assets 448 398 (3,900) Other liabilities 89 (27) 76 Income tax accrual - - (49) --------- --------- --------- Net cash provided by (used in) operating activities 1,116 1,198 (3,481) --------- --------- --------- Cash flows from investing activities - Investment in subsidiary 921 (94) (22,904) --------- --------- --------- Cash flows from financing activities: Proceeds from stock oversubscription - - 78,050 Repayment of stock oversubscription - - (78,050) Proceeds from issuance stock - - 45,729 Repurchase of common stock (6,356) (9,361) - Payment of cash dividend (1,056) (916) (217) Funding provided to ESOP for purchase of common stock - - (3,756) --------- --------- --------- Net cash provided by (used in) financing activities (7,412) (10,277) 41,756 --------- --------- --------- Net increase (decrease) in cash (5,375) (9,173) 15,371
Cash: Beginning of year 6,198 15,371 - --------- --------- --------- End of year $ 823 $ 6,198 $ 15,371 ========= ========= =========
22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Year ended March 31, 2000 (in thousands, except share data):
June 30 September 30 December 31 March 31 ------- ------------ ----------- -------- Total interest income $ 5,621 $ 6,026 $ 6,360 $ 6,541 Total interest expense 2,523 2,810 3,123 3,320 ------- ------- ------- -------- Net interest income 3,098 3,216 3,237 3,221 Provision for loan losses 71 59 (12) 60 ------- ------- ------- -------- Net interest income after provision 3,027 3,157 3,249 3,161 Noninterest income 342 523 406 331 Noninterest expense 2,343 2,477 2,658 2,637 ------- ------- ------- -------- Income before income taxes 1,026 1,203 997 855 Provision for income taxes 388 431 355 298 ------- ------- ------- -------- Net income $ 638 $ 772 $ 642 $ 557 ======= ======= ======= ========
Basic earnings per share $ 0.17 $ 0.22 $ 0.18 $ 0.17
Diluted earnings per share $ 0.16 $ 0.20 $ 0.18 $ 0.16
Year ended March 31, 1999 (in thousands, except share data):
June 30 September 30 December 31 March 31 ------- ------------ ----------- -------- Total interest income $ 4,786 $ 4,923 $ 5,540 $ 5,332 Total interest expense 1,817 1,812 2,155 2,279 ------- ------- ------- -------- Net interest income 2,969 3,111 3,385 3,053 Provision for loan losses 86 111 82 205 ------- ------- ------- -------- Net interest income after provision 2,883 3,000 3,303 2,848
Noninterest income 238 245 301 313 Noninterest expense 1,794 1,871 2,037 2,479 ------- ------- ------- -------- Income before income taxes 1,327 1,374 1,567 682 Provision for income taxes 551 544 616 86 ------- ------- ------- -------- Net income $ 776 $ 830 $ 951 $ 596 ======= ======= ======= ======== Basic earnings per share $ 0.18 $ 0.20 $ 0.24 $ 0.16
Diluted earnings per share $ 0.18 $ 0.20 $ 0.23 $ 0.15
Corporate Information
Corporate Headquarters: 2055 First Street PO Box 846 Baker City, OR 97814 541.523.6327
Subsidiaries Pioneer Bank, a FSB
Transfer Agent and Registrar Registrar &Transfer Company 10 Commerce Drive Cranford, NJ 07016
Independent Public Accountants and Auditors Deloitte &Touche LLP 3900 US Bancorp Tower 111 S.W. Fifth Avenue Portland, OR 97204
Special Counsel Breyer & Associates, PC 1100 New York Avenue N.W. Suite 700 East Washington, DC 20005-3934
Annual Meeting of Stockholders 10:00 a.m., Tuesday, August 8, 2000 Quality Inn 810 Campbell Street Baker City, OR 97814
Executive Officers Berniel Maughan, President and CEO Zane F. Lockwood, Executive Vice President
Investor Relations Berniel Maughan, President and CEO Zane F. Lockwood, Executive Vice President
Investor Information
A copy of the Form 10-k, including consolidated financial statements, as filed with the Securities and Exchange Commission, will be furnished without charge to stockholders as of the record date for voting at the annual meeting of stockholders upon written request to the Secretary, Oregon Trail Financial Corp., 2055 First Street, PO Box 846, Baker City, Oregon 97814.
Board of Directors
Stephen R. Whittemore Chairman of the Board Owner, BesTruss, Inc. and Partner, Wallowa Lake Tramway, Inc.
John W. Gentry President and General Manager, Gentry Ford Sales, Inc.
John A. Lienkaemper Consultant and U.S. Safety Coordinator, The Loewen Group
Albert H. Durgan Retired President, Pioneer Bank
Edward H. Elms Owner, P&E Distributing
Charles H. Rouse Sears Authorized Dealer and Property Developer
Stock Listing
Oregon Trail Financial Corp. common stock is traded over-the-counter on the Nasdaq National Market under the symbol "OTFC." Stockholders of record at March 31, 2000 totaled 972. This total does not reflect the number of persons or entities who hold stock in nominee or "street" name through various brokerage firms. The following table shows the reported high and low sale prices of the Company's common stock and declared dividends for each quarter since the initial offering on October 3, 1997.
Sale Price --------------- Dividends High Low Declared - ----------------------------------------------------- Fiscal 2000 First quarter 13 3/8 12 3/8 $0.06 Second quarter 12 7/8 11 $0.075 Third quarter 12 1/8 9 7/8 $0.08 Fourth quarter 10 3/8 8 1/2 $0.08
Fiscal 1999 First quarter 18 15 3/4 $0.05 Second quarter 16 11 $0.05 Third quarter 14 1/8 11 $0.06 Fourth quarter 13 1/4 12 1/16 $0.06
Fiscal 1998 Initial offering price -- 10 -- Third quarter 17 3/8 15 1/2 -- Fourth quarter 18 1/2 16 $0.05
Do business with a friend.
www.pioneerbankfsb.com
OREGON ADMINISTRATIVE BURNS BRANCH TRAIL OFFICES 524 W. Monroe Street FINANCIAL CORP. 2055 First Street Burns, Oregon 97720 Baker City, Oregon 97814 541.573.2121 541.523.6327 ENTERPRISE BRANCH BAKER CITY BRANCH 205 W. Main Street 1990 Washington Avenue Enterprise, Oregon 97828 Baker City, Oregon 97814 541.426.4529 541.523.5884 ISLAND CITY LA GRANDE BRANCH BRANCH 3106 Island Avenue 1215 Adams Avenue La Grande, Oregon 97850 La Grande, Oregon 97850 541.963.2200 541.963.4126 VALE BRANCH ONTARIO BRANCH 150 Longfellow Street N. 225 S.W. Fourth Avenue Vale, Oregon 97918 Ontario, Oregon 97914 541.473.3831 541.889.3154 PENDLETON BRANCH JOHN DAY BRANCH 1701 SW Court 150 W. Main Street Pendleton, Oregon 97801 John Day, Oregon 97845 541.276.1000 541.575.0257
Exhibit 21
Subsidiaries of Registrant
Percentage Jurisdiction or Subsidiary (1) Owned State of Incorporation - -------------- ----- ----------------------
Pioneer Bank, A Federal Savings Bank 100% United States Pioneer Development Corporation(2) 100% Oregon Pioneer Bank Investment Corporation(2) 100% Oregon
- ------------------ (1) The operations of the Company's subsidiary are included in the Company's consolidated financial statements. (2) Wholly-owned subsidiary of Pioneer Bank, A Federal Savings Bank.
Exhibit 23
Consent of Deloitte & Touche LLP
[Letterhead of Deloitte & Touche LLP]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos. 333-67541 and 333-37427 of Oregon Trail Financial Corp. on Form S-8, of our report dated May 3, 2000, appearing in the Annual Report on Form 10-K of Oregon Trail Financial Corp. for the year ended March 31, 2000.
/s/ Deloitte & Touche LLP
Portland, Oregon June 28, 2000