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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26556
OREGON TRAIL FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Oregon 91-1829481
- ------------------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer or
incorporation organization Identification Number)
2055 First Street, Baker City, Oregon 97814
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 523-6327
-------------------
Securities registered pursuant to Section 12(b) of the Act: None
-------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
Par value $.01
per share
-------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [ X ]
As of October 25, 2002, there were issued and outstanding 3,090,827
shares of the Registrant's Common Stock. The Registrant's voting common stock
is traded and listed on the Nasdaq National Market under the symbol "OTFC."
OREGON TRAIL FINANCIAL CORP.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page
Consolidated Balance Sheets 2
as of September 30, 2002 and March 31, 2002
Consolidated Statements of Income for the Three and Six 3
Months Ended September 30, 2002 and 2001
Consolidated Statements of Shareholders' Equity
for the Six Months Ended September 30, 2002 and for
the Year Ended March 31, 2002 4
Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2002 and 2001 5 - 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 - 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16 - 17
Signature Page 18
CEO/CFO Certifications 19 - 21
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 and MARCH 31, 2002
($ in thousands)
September 30 March 31
ASSETS 2002 2002
------------ --------
Cash and cash equivalents (including interest
earning accounts of $8,035 and $6,070) $ 10,099 $ 7,795
Securities:
Available for sale, at fair value (amortized cost:
$98,974 and $91,959) 102,552 92,419
Loans receivable, net of allowance for loan
losses of $2,322 and $2,280 252,157 265,863
Accrued interest receivable 2,381 2,308
Premises and equipment, net 9,079 9,466
Stock in Federal Home Loan Bank of Seattle
("FHLB"), at cost 6,506 6,315
Real estate owned and other repossessed assets 148 58
Other assets 14,185 14,142
--------- ---------
TOTAL ASSETS $ 397,107 $ 398,366
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Interest-bearing $ 119,439 $ 114,859
Noninterest-bearing 24,795 21,878
Time certificates 112,018 119,341
--------- ---------
Total deposits 256,252 256,078
Accrued expenses and other liabilities 2,103 2,311
Advances from FHLB 79,600 87,100
Net deferred tax liability 1,574 17
Advances from borrowers for taxes and insurance 45 37
--------- ---------
Total liabilities 339,574 345,543
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; September 30, 2002, 4,725,984 issued,
2,886,551 outstanding; March 31, 2002, 4,694,875
issued, 2,854,548 outstanding; 31 31
Additional paid-in capital 23,298 22,965
Retained earnings (substantially restricted) 34,063 32,042
Unearned shares issued to the Employee Stock
Ownership Plan ("ESOP") (1,073) (1,341)
Unearned shares issued to the Management Recognition
and Development Plan ("MRDP") (1,087) (1,253)
Accumulated other comprehensive income 2,301 379
--------- ---------
Total shareholders' equity 57,533 52,823
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 397,107 $ 398,366
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(2)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
($ in thousands, except per share data)
3 MOS ENDED 3 MOS ENDED 6 MOS ENDED 6 MOS ENDED
30-Sep-02 30-Sep-01 30-Sep-02 30-Sep-01
INTEREST INCOME:
Interest and fees on loans receivable $4,905 $6,063 $9,914 $11,696
Securities:
Mortgage-backed and related securities 1,202 794 2,356 1,908
U.S. government and government agencies 247 359 504 769
Other interest and dividends 97 106 191 197
---------- ---------- ---------- ----------
Total interest income 6,451 7,322 12,965 14,570
INTEREST EXPENSE:
Deposits 1,410 2,202 2,975 4,733
FHLB advances 995 1,243 1,983 2,497
---------- ---------- ---------- ----------
Total interest expense 2,405 3,445 4,958 7,230
Net interest income 4,046 3,877 8,007 7,340
Provision for loan losses 105 24 248 342
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 3,941 3,853 7,759 6,998
NON-INTEREST INCOME:
Service charges on deposit accounts 478 438 963 880
Loan servicing fees 151 147 338 277
Realized gain on securities - - - 310
Other income 170 138 348 275
---------- ---------- ---------- ----------
Total non-interest income 799 723 1,649 1,742
NON-INTEREST EXPENSE:
Employee compensation and benefits 1,680 1,519 3,313 3,013
Supplies, postage, and telephone 218 216 444 431
Depreciation 200 219 403 439
Occupancy and equipment 191 170 367 344
FDIC insurance premium 11 10 22 22
Customer accounts 96 125 246 282
Advertising 41 16 82 43
Professional fees 201 414 354 709
Other 157 29 274 167
---------- ---------- ---------- ----------
Total non-interest expense 2,795 2,718 5,505 5,450
Income before income taxes 1,945 1,858 3,903 3,290
Provision for income taxes 670 525 1,302 883
---------- ---------- ---------- ----------
NET INCOME $1,275 $1,333 $2,601 $2,407
========== ========== ========== ==========
Basic earnings per share $0.44 $0.40 $0.91 $0.73
========== ========== ========== ==========
Weighted average number of
shares outstanding 2,878,530 3,297,376 2,870,901 3,315,431
Diluted earnings per share $0.42 $0.39 $0.85 $0.70
========== ========== ========== ==========
Weighted average number of
dilutive shares 3,066,863 3,412,580 3,047,003 3,424,556
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(3)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002 AND THE YEAR ENDED MARCH 31, 2002
(UNAUDITED)
($ in thousands)
Unearned Unearned
Shares Shares
Issued Issued to
to Management Accumulated
Employee Recognition Other
Stock and Compre- Compre-
Additional Owner- Develop- hensive hensive
Common Stock Paid-in Retained ship ment Income Income
Shares Amount Capital Earnings Plan Plan (Loss) (Loss) Total
------ ------ ------- -------- ----- ----- ---- ------ -----
Balance, April 1,
2001 3,325,757 $36 $30,972 $28,374 ($1,878) ($515) $817 $57,806
Net income - - - 4,915 - - $4,915 - 4,915
Cash dividends paid - - - (1,247) - - - - (1,247)
Stock repurchased
and retired (574,587) (6) (9,672) - - - - - (9,678)
Earned ESOP shares 53,656 - 339 - 537 - - - 876
Earned MRDP shares 29,380 - - - - 318 - - 318
New MRDP shares
granted - - 1,056 - - (1,056) - - -
Exercise of stock
options 20,342 1 270 - - - - - 271
Net unrealized loss
on securities avail-
able for sale of
$236(net of tax
benefit of $148)
less reclassifica-
tion adjustment for
net gains included
in net income of
$202 (net of tax
expense of $126) (438) (438) (438)
------
Comprehensive income - - - - - - $4,477 - -
--------- ---- ------- ------- ------- ------- ====== ------ -------
Balance, March 31,
2002 2,854,548 $31 $22,965 $32,042 ($1,341) ($1,253) $379 $52,823
Net income - - - 2,601 - - 2,601 - 2,601
Cash dividends paid - - - (580) - - - - (580)
Earned ESOP shares 26,828 - 260 - 268 - - - 528
Earned MRDP shares - - - - - 166 - - 166
Exercise of stock
options 5,175 - 73 - - - - - 73
Net unrealized gain
on securities
available for sale
of $3,118 (net of
tax expense of
$1,196) - - - - - - 1,922 1,922 1,922
------
Comprehensive income - - - - - - $4,523 - -
Balance, September --------- ---- ------- ------- ------- ------- ====== ------ -------
30, 2002 2,886,551 $31 $23,298 $34,063 ($1,073) ($1,087) $2,301 $57,533
========= ==== ======= ======= ======= ======= ====== =======
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(4)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
($ in thousands)
30-Sep-02 30-Sep-01
CASH FLOWS FROM OPERATING ACTIVITIES --------- ---------
Net income $ 2,601 $ 2,407
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 403 439
Compensation expense related to ESOP 528 449
Compensation expense related to MRDP 166 152
Amortization of deferred loan fees (147) (195)
Provision for loan losses 248 342
Amortization and accretion of premiums and
discounts on investments and loans purchased 187 (126)
FHLB dividends (191) (197)
Gain on sale of real estate owned - (11)
Gain on sale of loans (97) (49)
Loss on sale of premises and equipment 9 1
Changes in assets and liabilities:
Accrued interest receivable (73) (249)
Other assets (133) (317)
Accrued expenses and other liabilities 152 329
--------- ---------
Net cash provided by operating activities 3,653 2,975
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations (52,640) (56,581)
Loan principal repayments 68,040 58,351
Loans purchased (8,192) (47,654)
Loans sold 6,327 3,891
Principal repayments of securities available
for sale 10,012 9,162
Purchase of securities available for sale (17,047) -
Proceeds from sale of securities available for sale - 24,132
Purchases of stock in FHLB - (1,267)
Purchases of premises and equipment (26) (166)
Proceeds from sales of premises and equipment 1 33
--------- ---------
Net cash provided by(used in) investing activities 6,475 (10,099)
--------- ---------
(Continued)
(5)
30-Sep-02 30-Sep-01
CASH FLOWS FROM FINANCING ACTIVITIES ---------- ---------
Net increase(decrease) in deposits $ 174 ($2,127)
Change in advances from borrowers for taxes
and insurance 9 13
Proceeds from borrowings from FHLB 292,250 431,585
Payments of borrowings from FHLB (299,750) (419,835)
Payment of cash dividends (580) (698)
Stock options excercised 73 33
Stock repurchased and retired - (5,081)
--------- ---------
Net cash provided by(used in) financing activities (7,824) 3,890
--------- ---------
Net increase(decrease) in cash 2,304 (3,234)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,795 10,581
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,099 $ 7,347
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and other borrowings $ 4,857 $ 7,077
Income taxes 1,708 965
Noncash investing activities:
Unrealized gain(loss) on securities available
for sale, net of tax 1,922 (247)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
(6)
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair presentation
of Oregon Trail Financial Corp.'s and its subsidiary's, Pioneer Bank, a
Federal Savings Bank (the "Bank") (together, the "Company"), financial
condition as of September 30, 2002 and March 31, 2002, the results of their
operations for the three and six months ended September 30, 2002 and 2001 and
their cash flows for the six months ended September 30, 2002 and 2001. All
adjustments are of a normal recurring nature. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended March 31, 2002. The results of
operations for the three and six months ended September 30, 2002 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be
reported in a financial statement that is displayed in equal prominence with
the other financial statements and to disclose as a part of shareholders'
equity accumulated other comprehensive income. Comprehensive income is
defined as the change in equity during a period from transactions and other
events from nonowner sources. Comprehensive income is the total of net income
and other comprehensive income, which for the Company is comprised entirely of
unrealized gains and losses on securities available for sale, net of tax.
3. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Six Months Ended
September 30, 2002
(In thousands)
--------------
Balance, beginning of period $ 2,280
Charge-offs (221)
Recoveries 15
Provision for loan losses 248
-------
Balance, end of period $ 2,322
=======
(7)
4. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at September 30, 2002 consisted of 15 fixed-rate term advances
and one variable rate advance varying in length from one day to 335 months
totaling $79.6 million from the FHLB of Seattle. The advances are
collateralized in aggregate as provided for in the Advances Security and
Deposit Agreement with the FHLB by certain mortgages or deeds of trust,
government agency securities and cash on deposit with the FHLB. Scheduled
maturities of advances from the FHLB were as follows at September 30, 2002:
Due in less than one year:
- --------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- --------------------------------------------------------
$52,600,000 1.82% - 7.22% 4.47%
Due within one to five years:
- -----------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- --------------------------------------------------------
$17,000,000 2.42% - 7.03% 5.67%
Due in greater than five years:
- -------------------------------
Amount Range of Interest Weighted Average
Rates Interest Rate
- --------------------------------------------------------
$10,000,000 7.10% - 7.12% 7.11%
5. EARNINGS PER SHARE
Shares held by the Company's ESOP that are committed for release are
considered common stock equivalents and are included in weighted average
shares outstanding (denominator) for the calculation of basic and diluted
Earnings Per Share ("EPS"). Diluted EPS is computed using the treasury stock
method, giving effect to potential additional common shares that were
outstanding during the period. Potential dilutive common shares include
shares of restricted stock awarded but not released under the Company's MRDP
and stock options granted under the Stock Option Plan. Following is a summary
of the effect of dilutive securities in weighted average number of shares
(denominator) for the basic and diluted EPS calculations. There are no
resulting adjustments to net earnings.
(8)
For the Three Months Ended For the Six Months Ended
September 30, September 30,
-------------------------- ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Weighted average common
shares outstanding-
basic 2,878,530 3,297,376 2,870,901 3,315,431
Effect of Dilutive
Securities on Number
of Shares:
MRDP shares 27,357 99,455 23,369 91,223
Stock Options 160,977 15,749 152,733 17,902
--------- --------- --------- ---------
Total Dilutive Securities 188,334 115,204 176,102 109,125
--------- --------- --------- ---------
Weighted average common
shares outstanding -
with dilution 3,066,863 3,412,580 3,047,003 3,424,556
========= ========= ========= =========
7. REGULATORY CAPITAL
The Company is not subject to separate regulatory capital requirements.
The following table illustrates the Bank's compliance with currently
applicable regulatory capital requirements at September 30, 2002 and March 31,
2002.
As of September 30, 2002:
Categorized as
"Well Capitalized"
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provision
(In Thousands) (In Thousands) (In Thousands)
-------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
As of Sept. 30, 2002:
Total Capital:
(To Risk Weighted
Assets) $ 45,469 18.3% $ 19,917 8.0% $ 24,897 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 43,148 17.3 N/A N/A 14,938 6.0
Tier I Capital:
(To Tangible Assets) 43,148 11.0 15,647 4.0 19,558 5.0
Tangible Capital:
(To Tangible Assets)
43,148 11.0 5,868 1.5 N/A N/A
As of March 31, 2002:
Categorized as
"Well Capitalized"
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provision
(In Thousands) (In Thousands) (In Thousands)
-------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2002:
Total Capital:
(To Risk Weighted
Assets) $ 42,583 16.3% $ 20,939 8.0% $ 26,174 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 40,303 15.4 N/A N/A 15,704 6.0
Tier I Capital:
(To Tangible
Assets) 40,303 10.2 15,823 4.0 19,778 5.0
Tangible Capital:
(To Tangible Assets) 40,303 10.2 5,934 1.5 N/A N/A
(9)
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Examples of costs covered
by the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. Management does not believe that
the adoption of this statement will have a material effect on the Company's
consolidated financial statements.
In October 2002, FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." This statement provides guidance on the accounting
for the acquisition of a financial institution, applies to all acquisitions
except those between two or more mutual enterprises. The provisions of this
statement states that the excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired in a
business combination represents goodwill that should be accounted for under
SFAS 142, "Goodwill and Other Intangible Assets." Financial institutions
meeting conditions outlined in SFAS 147 will be required to restate previously
issued financial statements. Management does not believe that the adoption of
this statement will have a material effect on the Company's consolidated
financial statements.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking
statements." The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protection of such safe harbor with respect to all such forward-looking
statements. These forward-looking statements, which are included in
Management's Discussion and Analysis, describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States
of America in preparation of the Company's Consolidated Financial Statements.
The preparation of these financial statements requires management to use
assumptions, judgment and estimates. Management evaluates its use of these
assumptions, judgments and estimates on an ongoing basis. Estimates are based
on current
(10)
economic and business conditions in our market area. Management believes that
the judgments, estimates and assumptions used in the preparation of the
Company's Consolidated Financial Statements are appropriate given the factual
circumstances at the time of preparation. The use of judgments, estimates and
assumptions, however, could result in material differences in our results of
operation and financial condition. The Company has determined that its most
critical accounting policy is the determination of its provision for loan
losses. See additional discussion under "Changes in Financial Condition" in
this section.
General
The Company, an Oregon corporation, was organized on June 9, 1997 for the
purpose of becoming the holding company for the Bank upon the Bank's
conversion from a federal mutual to a federal stock savings bank
("Conversion"). The Conversion was completed on October 3, 1997. At
September 30, 2002, the Company had total assets of $397.1 million, total
deposits of $256.3 million and shareholders' equity of $57.5 million. The
Company is currently not engaged in any business activity other than holding
the stock of the Bank. Accordingly, the information set forth in this report,
including the consolidated financial statements and related data, relates
primarily to the Bank. All references to the Company herein include the Bank
where applicable.
The Bank was organized in 1901. It is regulated by the OTS and its deposits
are insured up to applicable limits under the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the FHLB of Seattle, conducting its business through
nine office facilities, with its headquarters located in Baker City, Oregon.
The primary market areas of the Bank are the counties of Wallowa, Union,
Baker, Malheur, Harney, Grant and Umatilla in Eastern Oregon.
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, consumer and
commercial loans within its primary market area. At September 30, 2002,
one-to-four family residential mortgage loans totaled $112.4 million, or 44.2%
of total loans receivable. 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.
As a result of these activities, at September 30, 2002 the Company had
agricultural loans of $18.3 million, commercial business loans of $21.5
million, commercial real estate loans of $42.8 million, agricultural real
estate loans of $4.3 million, and automobile loans of $27.6 million (including
$24.2 million of purchased dealer-originated contracts).
Net interest income, which is the difference between interest and dividend
income on interest-earning assets, primarily loans and investment securities,
and interest expense on interest-bearing deposits and borrowings, is the major
source of income for the Company. Because the Company depends primarily on
net interest income for its earnings, the focus of management is to create and
implement strategies that will provide stable, positive spreads between the
yield on interest-earning assets and the cost of interest-bearing liabilities.
Such strategies include increasing the origination of commercial and
agricultural loans with rates that are adjustable. To a lesser degree, the
net earnings of the Company rely on the level of its non-interest income. The
Company is focusing on growing its fee income and controlling its non-interest
expense.
(11)
CHANGES IN FINANCIAL CONDITION
Comparison of Financial Condition at March 31, 2002 and September 30, 2002
Total assets decreased $1.3 million, or 0.3%, from $398.4 million at March 31,
2002, to $397.1 million at September 30, 2002. Cash and cash equivalents
increased $2.3 million, or 29.6%, from $7.8 million at March 31, 2002 to $10.1
million at September 30, 2002. The increase in cash and cash equivalents was
due, in part, to the low interest rate environment which contributed to higher
than normal levels of loan repayments. Securities increased $10.2 million, or
11.0%, from $92.4 million at March 31, 2002 to $102.6 at September 30, 2002.
The increase in securities was primarily attributable to a $10.2 million
increase in collateralized mortgage-backed obligations which were purchased to
replace run-off in the residential loan portfolio. Gross loans decreased by
$13.7 million, or 5.2%, during the first six months of fiscal 2003 from $265.9
million at March 31, 2002 to $252.2 million at September 30, 2002. The
decrease in loans was caused by the selling of newly originated conforming
residential mortgage loans, a majority of which were refinances of portfolio
loans, as well as significant levels of prepayments from a pool of commercial
real estate loans acquired in the first quarter of fiscal 2001. At September
30, 2002 residential mortgage loans totaled $112.4 million, a $9.5 million
decrease from the $121.9 million at March 31, 2002. At September 30, 2002
purchased commercial real estate loans totaled $22.2 million, a $5.4 million
decrease from the $27.6 million at March 31, 2002. Partially offsetting the
decreases in real estate loans were increases in agricultural operating loans
of $2.1 million, home equity loans and consumer lines of credit of $930,000,
commercial loan participations of $831,000, and agricultural real estate loans
of $769,000. The net increases in consumer, business and agricultural loans
is reflective of management's strategy to increase the proportion of these
loans relative to the total loan portfolio while decreasing the concentration
in conforming real estate loans.
Total liabilities decreased $6.0 million, or 1.7%, from $345.5 million at
March 31, 2002 to $339.6 million at September 30, 2002. Total deposits
increased to $256.3 million, or 0.1%, at September 30, 2002 from $256.1
million at March 31, 2002. Non-interest checking accounts increased $2.9
million, or 13.3%, during the first six months ended September 31, 2002 to
$24.8 million from $21.9 million at March 31, 2002. During the six months
ended September 310, 2002, interest bearing checking accounts increased $1.6
million, or 4.4%, to $37.4 million, savings accounts increased $1.8 million,
or 9.9%, to $20.2 million, and money market accounts increased $1.2 million,
or 1.9%, to $61.9 million. Partially offsetting the growth in transaction
accounts was a $7.3 million, or 6.1%, decrease in certificate of deposits for
the six months ended September 30, 2002. The increase in transaction and
savings deposits, which at September 30, 2002 represented 56.3% of total
deposits, reflects management's continued efforts to increase the Company's
reliance on lower cost deposits while decreasing its dependence on higher
costing borrowings and certificates of deposits. Borrowings decreased $7.5
million, or 8.6%, from $87.1 million at March 31, 2002 to $79.6 million at
September 30, 2002.
Total shareholders' equity increased $4.7 million, or 8.9%, from $52.8 million
at March 31, 2002 to $57.5 million at September 30, 2002. The increase in
equity reflected a $2.0 million increase in retained earnings and a $1.9
million increase in unrealized gains on security investments. The Company has
acquired 98,500 shares related to a 5% stock repurchase program announced in
November 2001. Since converting to stock form, the Company has repurchased
1,818,095 shares, or 38.7%, of its common shares initially outstanding.
(12)
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and Six Months Ended
September 30, 2002 and 2001
General. Net income for the quarter ended September 30, 2002 was $1.3
million, or $0.42 per diluted share, compared to net income of $1.3 million,
or $0.39 per diluted share for the quarter ended September 30, 2001.
Comparing the quarters ended September 30, 2002 and 2001, the most recent
quarter had $169,000 of additional net interest income and $76,000 of
additional non-interest income which was partially offset by $81,000 of
additional provision for loan losses, $77,000 of additional non-interest
expense and $145,000 of additional provision for income taxes. While net
income remained relatively unchanged quarter to quarter, earnings per diluted
share increased by $0.03, or 7.7%, to $0.42 in connection with the share
repurchases that took place during the six months ended December 31, 2001.
Interest Income. Interest income for the quarter ended September 30, 2002 was
$6.5 million compared to $7.3 million for the quarter ended September 30,
2001, a decrease of $871,000, or 11.9%. The decrease in interest income was a
result of a 75 basis point decrease in the yield on average interest earning
assets from 7.79% to 7.04% and a $9.2 million decrease in average interest
earning assets from $375.8 million to $366.6 million for the quarters ended
September 30, 2001 and 2002 respectively. The decrease in the yield on
average interest earning assets was caused by a lower interest rate
environment and a $39.4 million, or 13.4%, reduction in average loans
outstanding (that refinanced and were replaced by lower yielding securities).
Interest income for the six months ended September 30, 2002 was $13.0 million
compared to $14.6 million for the six months ended September 30, 2001, a
decrease of $1.6 million, or 11.0%. The decrease in interest income was a
result of a 72 basis point decrease in the yield on average interest earning
assets from 7.78% to 7.06% and a $7.4 million decrease in average interest
earning assets from $374.6 million to $367.2 million for the six month periods
ended September 30, 2001 and 2002 respectively. The decrease in the yield on
average interest earning assets was caused by a lower interest rate
environment and a $25.1 million, or 8.9%, reduction in average loans
outstanding (that refinanced and were replaced by lower yielding securities).
Interest Expense. Interest expense for the quarter ended September 30, 2002
was $2.4 million compared to $3.4 million for the quarter ended September 30,
2001, a decrease of $1.0 million, or 30.2%. The decrease in interest expense
was a result of a 117 basis point decrease in the cost of average interest
bearing liabilities from 4.05% to 2.88% and a $6.3 million decrease in average
interest bearing liabilities from $340.4 million to $334.1 million for the
quarters ended September 30, 2001 and 2002, respectively. The decrease in the
cost of average interest bearing liabilities was primarily caused by a lower
interest rate environment and to a lesser extent growth in transaction
accounts which are a lower costing source of funds.
Interest expense for the six months ended September 30, 2002 was $5.0 million
compared to $7.2 million for the six months ended September 30, 2001, a
decrease of $2.2 million, or 31.4%. The decrease in interest expense was a
result of a 130 basis point decrease in the cost of average interest bearing
liabilities from 4.25% to 2.95% and a $3.7 million decrease in average
interest bearing liabilities from $340.1 million to $336.4 million for the six
month periods ended September 30, 2001 and 2002, respectively. The decrease
in the cost of average interest bearing
(13)
liabilities was primarily caused by a lower interest rate environment and, to
a lesser extent, growth in transaction accounts, which are a lower costing
source of funds.
Net Interest Margin. The net interest margin increased 29 basis points from
4.13% for the quarter ended September 30, 2001 to 4.42% for the same period in
2002, and increased 44 basis points from 3.91% for the six months ended
September 30, 2001 to 4.35% for the comparable period ended September 30,
2002. The increases in net interest margin for the periods compared above are
primarily a result of the Bank's liabilities repricing faster than the
interest earning assets in the recent declining interest rate environment.
Provision For Loan Losses. During the quarter ended September 30, 2002 the
provision for loan losses was $105,000 compared to $24,000 for the quarter
ended September 30, 2001, an increase of $81,000. Generally, the provision
for loan losses for the quarter ended September 30, 2002 reflects losses on
dealer contracts and a modest increase in classified loans. During the six
months ended September 30, 2002 the provision for loan losses was $248,000
compared to $342,000 for the six months ended September 30, 2001, a decrease
of $94,000. The decrease in the provision for loan losses for the six months
ended September 30, 2002 generally reflects negative loan growth in the most
recent six month period compared to the strong loan growth that occurred in
the six months ended September 30, 2001. During the six months ended
September 30, 2002 loans decreased by $26.7 million due to sales and payoffs
on residential and commercial real estate loans. During the six months ended
September 30, 2001, net loans increased by $41.8 million due primarily to the
purchase of a $38.1 million commercial real estate loan pool.
Non-Interest Income. Non-interest income increased $76,000, or 10.5%, for the
quarter ended September 30, 2002 to $799,000 from $723,000 for the comparable
period a year earlier. The increase in non-interest income was primarily
attributable to a $33,000 increase in demand deposit service changes, and a
$50,000 reduction in losses taken on the sale of repossessed property.
Service charges on demand deposits have been increasing due to the growth in
accounts that has occurred over the past year.
Non-interest income decreased $93,000, or 5.4%, for the six months ended
September 30, 2002 to $1.6 million from $1.7 million for the comparable period
a year earlier. Excluding a $310,000 gain on sale of investments for the six
months ended September 30, 2001, non-interest income increased $217,000, or
15.0%, to $1.6 million for the six months ended September 30, 2002 from $1.4
million for the comparable period a year earlier. The increase in
non-interest income was principally attributable to $54,000 increase in gain
on sale of conforming loans, and an $83,000 increase in the deposit product
fees and a $101,000 decrease in losses taken on the sale of repossessed
property. Loan fees have increased due to higher loan volumes and attractive
refinancing opportunities, while deposit product fees have been increasing in
connection with the growth in accounts that has occurred over the past year.
Non-Interest Expense. Non-interest expense increased $77,000, or 2.8%, from
the $2.7 million for the three months ended September 30, 2001 to $2.8 million
for the three months ended September 30, 2002. The increase in non-interest
expense was primarily attributable to a $88,000, or 8.9%, increase in salary
expense, a $58,000, or 30.4%, increase in ESOP expense, a net $15,000, or
4.3%, increase in all other compensation related expenses, and a $61,000, or
91.5% increase in advertising, public relations and promotional expense.
Partially offsetting the
(14)
increased expenses was a $206,000, or 66.1%, decrease in legal services from
$312,000 for the quarter ended September 30, 2001 to $106,000 for the quarter
ended September 30, 2002.
Non-interest expense increased $55,000, or 1.0%, from the $5.5 million for the
six months ended September 30, 2001 to $5.5 million for the six months ended
September 30, 2002. The increase in non-interest expense was primarily
attributable to a $128,000, or 6.5%, increase in salary expense, a $112,000,
or 30.1%, increase in ESOP expense, a net $60,000, or 8.8%, increase in all
other compensation related expenses, and a $93,000, or 75.1% increase in
advertising, public relations and promotional expense. Partially offsetting
the increased expenses was a $405,000, or 70.3%, decrease in legal services
from $576,000 for the six months ended September 30, 2001 to $171,000 for the
six months ended September 30, 2002.
The increases in salary expenses are due to customary increases in employee
pay as well as a minimal increase in employees year over year. The increases
in ESOP expenses are due to a higher stock price in the current periods, which
creates increased expense when compared to a lower stock price in the same
periods last year. The reduction in legal fees for the current periods was
due, in part, to the settlement of various lawsuits with a significant
shareholder. Additionally, legal fees were higher in the prior year due to
the legal advice the Company utilized during the contested proxy contest of
2001.
Income taxes. The income tax expense was $670,000 for the quarter ended
September 30, 2002 compared to $525,000 for the comparable period in 2001.
The Company's effective tax rates for the quarters ended September 30, 2002
and 2001 were 34.4% and 28.3%, respectively. The increase in income tax
expense was attributable to a higher effective tax rate and increased pretax
earnings. The effective tax rate increased in connection with the rising
price of the Company's stock and its effect on the Company's ESOP expense
deductibility for tax purposes.
The income tax expense was $1.3 million for the six months ended September 30,
2002 compared to $883,000 for the comparable period in 2001. The Company's
effective tax rates for the six months ended September 30, 2002 and 2001 were
33.4% and 26.8%, respectively. The increase in income tax expense was
attributable to a higher effective tax rate and increased pretax earnings.
The effective tax rate increased in connection with the rising price of the
Company's stock and its effect on the Company's ESOP expense deductibility for
tax purposes.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
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.
The Bank has taken steps to decrease its interest rate risk by better matching
maturities of its balance sheet items. During the six months ended September
30, 2002, there was no material change in the market risk disclosures included
in the Company's Form 10-K for the year ended March 31, 2002.
(15)
Item 4.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation
of the Company's disclosure controls and procedures (as defined in
Section 13(a)- 14(c) of the Securities and Exchange Act of 1934
(the "Act")) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer, Chief
Financial Officer and several other members of the Company's
senior management within the 90-day period preceding the filing
date of this quarterly report. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended September 30,
2002, the Company did not make any significant changes in, nor
take any corrective actions regarding, its internal controls or
other factors that could significantly affect these controls.
PART II - OTHER INFORMATION
Item 1. 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 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's Annual Meeting of Stockholders ("Meeting") was held
on August 28, 2002. The results of the vote on the matters
presented at the Meeting were as follows:
1. The following individuals were elected as directors for three
year terms:
Vote For Vote Withheld
--------- -------------
Albert H. Durgan 2,413,593 385,243
Edward H. Elms 2,399,538 399,298
The directors whose terms continued and the years their terms
expire are as follows: Stephen R. Whittemore (2003), Charles
H. Rouse (2003), John Gentry (2004), and Kevin D. Padrick
(2004).
(16)
2. The appointment of the Company's auditors, Deloitte & Touche
LLP, as Independent auditors for the fiscal year ending March
31, 2003 was approved by stockholders by the following vote:
Broker
Non-
For 2,577,147; Against 217,809; Abstain 3,880; Votes 0
--------- ------- ----- ---
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant (1)
3(b) Bylaws of the Registrant (1)
3(c) Amendment to Bylaws of the Registrant (2)
10(a) Amended Employment Agreement with Berniel Maughan (3)
10(b) Amended Employment Agreement with Zane F. Lockwood (3)
10(c) Employment Agreement with Jonathan P. McCreary (7)
10(d) Amended Employee Severance Compensation Plan (4)
10(e) Pioneer Bank, a Federal Savings Bank 401(k) Plan (1)
10(f) Pioneer Bank Director Emeritus Plan (1)
10(g) 1998 Stock Option Plan (5)
10(h) August 21, 2001 Amendment to 1998 Stock Option Plan (6)
10(i) January 30, 2002 Amendment to 1998 Stock Option Plan (7)
10(j) 1998 Management Recognition and Development Plan (5)
10(k) August 21, 2001 Amendment to 1998 Management Recognition
and Development Plan (6)
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (333-30051), as amended.
(2) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended December 31, 2000.
(3) Incorporated by reference to the Registrant's Form 10-Q/A for the quarter
ended December 31, 2000.
(4) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended June 30, 2000.
(5) Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders.
(6) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 2001.
(7) Incorporated by reference to the Registrant's Form 10-K for the year
ended March 31, 2002.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 2002.
(17)
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OREGON TRAIL FINANCIAL CORP.
Date: November 14, 2002 By:/s/ Berniel L. Maughan
-----------------------------
Berniel L. Maughan, President and
Chief Executive Officer
Date: November 14, 2002 By:/s/ Jon McCreary
------------------------------
Jon McCreary, Chief Financial
Officer
(18)
CERTIFICATIONS
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Berniel L. Maughan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oregon Trail
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors and material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Berniel L. Maughan
------------------------------
Berniel L. Maughan
President and Chief Executive Officer
(19)
CERTIFICATIONS
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Jonathan P. McCreary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oregon Trail
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors and material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Jonathan P. McCreary
------------------------------
Jonathan P. McCreary
Chief Financial Officer
(20)
EXHIBIT 99.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF OREGON TRAIL FINANCIAL CORP.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on
Form 10-Q, that:
1. the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities and Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the Company's financial condition and results
of operations.
/s/ Berniel L. Maughan /s/ Jon P. McCreary
- ------------------------- ---------------------------
Berniel L. Maughan Jon P. McCreary
President and Chief Executive Officer Chief Financial Officer
Dated: November 8, 2002
(21)